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Judgment
K. Raviraja Pandian, J.—The above writ petition is filed against the judgment dated 12.11.1999 made in Tax Case Revision No.3667 of
1997 on the file of the Tamil Nadu Taxation Special Tribunal.
The point for consideration in the present case is, whether there is any inter-State sale in respect of the materials utilised in retreading and
recapping of the tyres, which retreading activity commenced and was completed in the State of Tamil Nadu, in pursuance of a contract entered
into outside the State by the petitioner with customers residing out side the State of Tamil Nadu.
The facts, which form the basis for the dispute, are as follows:
The petitioner is a registered dealer under the Tamil Nadu General Sales Tax Act, 1959 (hereinafter referred to as ""the Act"") and the Central Sales
Tax Act, 1959 (hereinafter referred to as ""the Central Act""). For the assessment year 1987-88, the first respondent, Assessing Authority brought
to assessment 70 percent of the total receipts amounting to Rs.58,58,716.97ps at 5% after allowing an exemption of 30 percent towards labour
charges amounted to Rs.17,57,615/-. The said amount was brought to tax u/s 3B of the Act as works contract by rejecting the exemption claimed
by the petitioner on the ground that pursuant to a contract entered into outside the State, the worn out tyres were entrusted to the petitioner by the
customers outside the State of Tamil Nadu for the purpose of retreading and after completing retreading and recapping, the retreaded tyres were
actually delivered to the customers in other States and therefore the transactions involved inter-State movement of goods and in such
circumstances, the transactions have to be treated as inter-State works contract, not liable to tax under the Tamil Nadu General Sales Tax Act,
1959. This view was confirmed by the first Appellate Authority. The Second Appellate Authority, the Appellate Tribunal also non-suited the
petitioner for its claim of exemption by observing that, admittedly, the actual works of retreading took place within the State of Tamil Nadu. Simply
because the used or worn-out tyres were received from other States and after treading, these retreaded tyres were again sent back to the
customers residing in other States, the works contract did not cease to be a transaction under the Tamil Nadu General Sales Tax Act and therefore
the turnover relating to works contract for retreading and recapping of tyres was liable to be treated as a taxable turnover under the State Act.
Since the Tribunal remanded the turnover relating to re-rubberising for fixing the correct taxable turnover by following the instructions given by the
Commissioner of Commercial Taxes in Act Cell-I, 127106/89, dated 23.10.1989 in consequences of a decision of the Supreme Court in Builders
Association of India and Others Vs. Union of India (UOI) and Others, , the Appellate Tribunal remanded the turnover relating to works contract
also to the assessing authority to fix the taxable turnover by following the above said instructions.
The petitioner further carried the matter on revision before the Tamil Nadu Taxation Special Tribunal. The Special Tribunal also rejected the
claim of the petitioner by holding that there was deemed sale of material consumed or used in the manufacture of retreaded tyres in Tamil Nadu
and therefore, u/s 3B of the Act, tax has to be levied on the material used in retreading job as local sale in Tamil Nadu. The material used in
retreading work did not occasion movement of goods to Kerala. Only retreaded tyres were sent to Kerala after completing the contract of
retreading. The charge was claimed for retreading work only. There was no sale of retreaded tyres as such in the present case and therefore the
movement of the retreaded tyres did not involve any sale of goods so as to constitute any inter-State sale falling u/s 3 of the Central Sales Tax Act.
In fact, no tax was levied on the retreaded tyres and that tax has been levied on the inputs or materials used in the retreading job work. The
correctness of the said judgment is now put in issue in the present writ petition.
Mr. N. Shri Prakash, learned counsel appearing for the petitioner has contended that the worn out tyres were collected from Kerala and they
were repaired, retreaded, transported and delivered to a specified place in Kerala in pursuance of contract entered into in Kerala and therefore the
entire transaction is nothing but inter-State works contract inasmuch as the contract in question involve movement of goods in the course of inter-
State trade and commerce. No tax could be collected u/s 3B of the Act. Even after the expanded definition of the sale, consequent upon the 46th
amendment incorporating deemed sale in Article 366(29-A) of the Constitution, the State derived power to tax sale or purchase under Entry 54 of
List II of 7th Schedule to the Constitution and this entry is subject to entry 92A of List I and therefore the works contract involving retreading
within Tamil Nadu is subject to the legislation of Parliament. In respect of inter-State works contract, only Parliament has got power to legislate
and in the absence of any central legislation in respect of inter-State works contract at the relevant point of time, the transactions have to be
exempted both under the Local Act and the Central Act. It is his further contention that Section 3B of the Act is subject to Article 286 of the
Constitution of India and Sections 3,4 and 5 of the Central Sales Tax Act and the learned counsel concluded that taking into consideration the
totality of the transaction i.e., the contract entered into in Kerala between the parties, the transactions are nothing but inter-State works contract
and not exigible to tax under the State enactment.
On the other hand, the learned Special Government Pleader Mr. Ayyasami appearing on behalf of the respondents State contended that the
actual work of retreading took place within the State of Tamil Nadu and therefore the turnover has rightly been assessed u/s 3B of the Act.
Further, the order of remand was made for the purpose of computing turnover in the light of the decision of the Supreme Court in Builders
Association of India and Others Vs. Union of India (UOI) and Others, and by following the instructions of the Commissioner of Commercial Taxes
and in such circumstances, no exception could be taken to the order of the authorities, which has been confirmed by the Special Tribunal.
We have considered the rival contentions of the parties.
In order to resolve the dispute involved in the case on hand, it is necessary to refer to relevant provisions of the Constitution as well as the State
enactment.
Article 366(29A)(b) of the Constitution of India reads as follows:
In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them,
that is to say-
......
(29A) ""tax on the sale or purchase of goods"" includes -
.....
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract"".
Section 2(n) of the Tamil Nadu General Sales Tax Act reads as follows:
Sale"" with all its grammatical variations and cognate expressions means every transfer of the property in goods (other than by way of a mortgage,
hypothecation, charge or pledge) by one person to another in the course of business for cash, deferred payment or other valuable consideration
and includes-
(i) ...
(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
....
and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or
supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made"".
Explanation (3) - (a) The sale or purchase of goods shall be deemed, for the purposes of this Act, to have taken place in the State, wherever the
contract of sale or purchase might have been made, if the goods are within the State -
(i) in the case of specific or ascertained goods, at the time the contract of sale or purchase is made; and
(ii) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale or purchase by the seller or by the
purchaser, whether the assent of the other party is prior or subsequent to such appropriation.
Section 3B of the Act, which is more relevant to the case, reads as follows:
3-B:Levy of tax on the transfer of goods involved in works contract. - (1) Notwithstanding anything contained in sub-sections (2-A), (2-B), (3),
(4), (7) and (8) of section 3, or section 7-A, but subject to the other provisions of this Act including the provisions of sub-section (1) of section 3,
every dealer referred to in item (vi) of clause (g) of section 2 shall pay, for each year, a tax on his taxable turnover of transfer of property in goods
involved in the execution of works contract at the rates mentioned in sub-section (2) of section 3 or, as the case may be, in section 4.
Explanation - Where any works contract involves more than one item of work, the rate of tax shall be determined separately for each such item of
work.
(2) The taxable turnover of the dealer of transfer of property involved in the execution of works contract shall, on and from the 26th day of June
1986, be arrived at after deducting the following amounts from the total turnover of that dealer:-
(a) all amounts involved in respect of goods involved in the execution of works contract in the course of export of the goods out of the territory of
India, or in the course of import of the goods into the territory of India or in the course of inter-State trade or commerce;
(b) all amounts for which any goods specified in the First Schedule or Second Schedule, are purchased from registered dealers liable to pay tax
under this Act and used in the execution of works contract in the same form in which such goods were purchased;
(c) all amounts relating to the sale of any goods involved in the execution of works contract which are specifically exempted from tax under any of
the provisions of the Act;
(d) all amounts paid to the sub-contractors as consideration for execution of works contract whether wholly or partly;
Provided that no such deduction shall be allowed unless the dealer claiming deduction, produces proof that the sub-contractor is a registered
dealer liable to pay tax under this Act and that the turnover of such amounts is included in the return filed by such sub-contractor; and
(e) all amounts towards ""labour charges and other like charges"" not involving any transfer of property in goods, actually incurred in connection with
the execution of works contract, or such amounts calculated at the rate specified in column (3) of the Table below, if they are not ascertainable
from the books of accounts maintained and produced by a dealer before the assessing authority.
.....
As per the above provisions, the works contract transactions are liable to tax with effect from 26.6.1986 in respect of the transfer of property
in goods (whether as goods or in some other form) involved in the execution of a works contract. The Constitutional validity of Section 3B of the
Act has been upheld by this Court in LARSON AND TOUBRO LIMITED VS. STATE OF TAMIL NADU AND ANOTHER reported in 88
STC 289. Section 3B(2)(a) exempts goods involved in the execution of works contract in the course of export of the goods out of the territory of
India, or in the course of import of the goods into the territory of India or in the course of inter-State trade or commerce. Thus, the constitutional
restriction on the State under Article 286 of the Constitution of India and Sections 3, 4 and 5 of the Central Act and also the restrictions
contemplated in Sections 14 and 15 of the Central Act have been duly taken note of while enacting Section 3B of the Act.
The very same contention in abstract, that the deemed sale resulting from the transfer of property in goods involved in the execution of works
contract could never be a sale in the course of inter-State trade or commerce and it cannot be an outside sale or a sale in the course of import
since the transfer of property in goods takes place only at the stage when the goods are incorporated in the works and that could take place only in
the State where the work is required to be executed, had been raised before the Supreme Court as raised in the present case. The Supreme Court
in GANNON DUNKERLEY & CO. AND OTHERS VS. STATE OF RAJASTHAN AND OTHERS reported in 88 STC 204, after
considering the rival contentions raised by the State and the assessee therein, has observed as follows:
We do not propose to go into this controversy because the question whether a deemed sale resulting from transfer of property in goods involved
in the execution of a particular works contract amounts to a sale in the course of inter-State trade or commerce u/s 3 of the Central Sales Tax Act
or an outside sale u/s 4 of the Central Sales Tax Act or a sale in the course of import u/s 5 of the Central Sales Tax Act has to be decided in the
light of the particular terms of the works contract and it cannot be decided in the abstract. As at present advised, we are not in a position to say
that in no case, can there be a sale in the course of inter-State trade or commerce or an outside sale or a sale in the course of import in respect of a
deemed sale resulting from transfer of property in goods involved in the execution of a works contract falling within the ambit of sub-clause (b) of
clause (29-A) of article 366 of the Constitution.
Hence, it is necessary to consider the terms of the contract.
Now, let us take into consideration of the relevant contract. A typical order form- one dated 20.11.1987 reads as follows:
ORDER FORM No. 0379
Customer Address Dated: 20.11.87
The Manager
Malanmallay Tea Estate,
Vandiperiyar-685 533.
To
M/s. Sundaram Industries Limited, Kochadai,
Madurai-625 016.
Dear Sirs,
Please retread the following tyres and send per TVS to (station) Vandiperiyar and the Railway/Lorry receipt and the connected documents through
direct. In case we do not retire the bill and clear the goods within 30 days, you are at liberty to recall the goods and sell by auction or private sale
on our account and realise the loss and expenses from us.
- - - - - - - - - - - - - - - - - - - - - - - -
Sl. No. Make & Size Tyre Number Charges Remarks
- - - - - - - - - - - - - - - - - - - - - - - -
825 x 20 MD 7050041UM - Org.
- - - - - - - - - - - - - - - - - - - - - - - -
Registration TNGST No.406684/70-71 Central
RC.No.11146/73-74
- - - - - - - - - - - - - - - - - - - - - - - -
Conditions:
If tyres require any repair job, either in the side wall or shoulder area, the Job can be done at party''s risk only and without guarantee. Repair
charges extra (s). Whether it is found that extra work is involved in processing tyre for retreading due to its special size and dimensions, the
company will take it up as a special job and charge extra for processing of such tyre. 3. Prices are subject to change without notice.
I/We have perused the conditions of the contract stated on the reverse of this order from and agree thereto.
Agent''s Name & Address:
CS Prathap
Sd/xxx
Vandiperiyar
Signature.
From the above contract, it is clear that the petitioner was contracted to receive the worn out tyres from outside the State customers'', retread it
and send it back to the customers'' outside the State. The movement of the goods is linked inextricably with the work of retreading. In the contract,
although there was no contract of sale for the materials, because of the fiction, a deemed sale has taken place for the purpose of imposition of sales
tax. The effect of the fiction was as though the parties to the contract had in fact entered into a contract to sell and buy materials necessary for
carrying out the retreading work. The logical conclusion which the fiction had to be taken to was that the parties to the contract wanted the
materials used for carrying out the retreading work to be in fact sent to the destination of the customers and the materials in fact moved to the
destination of the customers. This factum has been totally lost sight of by the statutory authorities as well as the Tribunal. The authorities are in error
in not allowing the fiction to reach its logical conclusion, but abruptly stopped at the stage of finding out where the goods were passed on, and did
not proceeded further. There was a deemed sale and the deemed sale was effected in pursuance of a contract, which occasioned the movement of
goods and which is in the course of inter-State trade or commerce. Therefore we are of the view that the turnover arising out of the transaction
could not be brought to tax because of the restriction imposed by Article 286 of the Constitution of India.
Further, Section 3B(2)(a) of the Act contemplated deduction of the amount involved in respect of the goods, which are involved in the execution of
works contract in the course of inter-State trade or commerce. If there was such a inter-State works contract, the amount involved in respect of
the goods, which were involved in the execution of such works contract were to be deducted. The works contract entered into by the petitioner
was a works contract in the course of inter-State trade or commerce in spite of the fact that the actual work of retreading has been commenced
and completed in the State of Tamil Nadu since the retreading and recapping had a direct and intimate relation to the movement of the goods from
Tamil Nadu to Kerala and as such, the assessees are entitled to the deduction as provided by section 3B(2)(a) of the Act. The situs of the sale or
deemed sale, which was taken as sole criteria for levying tax u/s 3B in respect of the transaction covered in the present case by the lower
authorities is also not correct in law. So far as the sales in the course of inter-State trade or commerce are concerned, the position is well-settled
that the situs of the sale or purchase is wholly irrelevant as regards its inter-State character. The location or the situs of the sale in sales tax
legislation of the State would, therefore, have no bearing on the chargeability of tax on sales in the course of inter-State trade or commerce since
they fall outside the field of legislative competence of the State Legislatures and will have to be excluded while assessing the tax liability under the
State Legislation (vide Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, . Hence, the lower authorities are in error in
projecting the situs of sale for imposing the tax liability on the petitioner. The Special Tribunal referred to certain observations of the Supreme
Court in Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, and came to the conclusion that the deemed sale
contemplated in Section 2(n) of the Act took place at Madurai at the time of incorporation of the goods in the works contract. We are not in
agreement with the conclusion so arrived at for the reason that those observations were made by the Supreme Court in the context of measure of
tax to be levied on the goods involved in the execution of works contract, in the sense, the value of the goods, which could constitute the measure
for the levy of tax and had observed to be the value of the goods at the time of incorporation of the goods in the works contract and not the cost of
acquisition of goods by the contractor. The above observation of the Supreme Court cannot be taken to conclude as held by the Special Tribunal,
that there was deemed sale within the state of Tamil Nadu notwithstanding the nature of transaction involved in the case on hand.
The Supreme Court in the case of Sahney Steel and Press Works Limited and Another Vs. Commercial Tax Officer and Others, , after
referring the case of ENGLISH ELECTRIC COMPANY OF INDIA LTD. VS. DEPUTY COMMERCIAL TAX OFFICER reported in
(1976) 38 STC 475, observed as follows:
this Court held that when the movement of the goods from one State to another is an incident of the contract it is a sale in the course of inter-State
sale, and it does not matter which is the State in which property in the goods passes. What is decisive is whether the sale is one which occasions
the movement of goods from one State to another.
The Supreme Court in that case further observed that
The law was clarified in Union of India (UOI) and Another Vs. K.G. Khosla and Co. Ltd. and Others, , where this Court observed that a sale
would be an inter-State sale even if the contract of sale does not itself provide for the movement of goods from one State to another, provided,
however, that such movement was the result of a covenant in the contract of sale or was an incident of that contract.
In the light of the above decision of the Supreme Court, if we consider the contract, as extracted above, the contract is emanated from
Vandiperiyar i.e., outside the State of Tamil Nadu for retreading of the tyres and the retreaded tyres were required to be, and were sent back to
the customers outside the State after retreading.
In the case of DEPUTY COMMISSIONER OF SALES TAX (LAW), BOARD OF REVENUE (TAXES), ERNAKULAM VS.
SUNDARAM INDUSTRIES LTD. reported in (1988) 68 STC 235, the respondent therein undertook a contract to build bus bodies on chasis
to be supplied by the Kerala State Road Transport Corporation. The bodies were to be constructed at the respondent''s workshop at Madurai
and delivered at Trivandrum. Upon completion of the bodies, debit notes were raised at Madurai and forwarded to the respondent at Trivandrum,
upon which bills were prepared and forwarded to the K.S.R.T.C. at Trivandrum. Upon completion of the work at Madurai, a certificate of
ownership was issued by the K.S.R.T.C. in respect of each completed bus for transportation from Madurai to Trivandrum. Payment was to be
effected only after final inspection by the K.S.R.T.C. after delivery at Trivandrum. The assessing authority brought to tax an amount of about
Rs.34.4 lakhs representing sale proceeds of bus bodies supplied by the respondent to the K.S.R.T.C., and also an amount of about RS.2.9 lakhs
paid as cess to the Rubber Board in relation to purchase of raw rubber by the respondent. The Tribunal upheld the order of the Deputy
Commissioner (Appeals) who had held that sales tax was not exigible on either of the two amounts. The Kerala High Court held that
the goods despatched from Madurai to the respondent at Trivandrum were not meant to be sold in the open market, but were despatched
specifically against orders placed by the K.S.R.T.C. and with reference to the chasis supplied. Each chasis together with the body was identifiable
by the engine number. This clearly showed that the goods moved from Madurai pursuant to and as a result of the contract between the parties and
as an incident of that contract. In the circumstances, the sale of bus bodies to the K.S.R.T.C. was effected by the respondent for and on behalf of
its principal office at Madurai in the course of inter-State trade, and the turnover in respect of these transactions could not be brought to tax under
the Kerala General sales Tax Act, 1963.
In the decision rendered in the case of COMMISSIONER OF SALES TAX, DELHI VS. MOTORADES reported in 89 STC 542, the
respondent - dealer carried on the business of operating an automobile workshop and service station at Delhi, and also sold auto parts. It sold auto
parts to different departments of the Governments of Himachal Pradesh and Haryana. These Departments used to send their vehicles to Delhi and
the requisite parts would be fitted therein and then the vehicles would go back to Himachal Pradesh or Haryana. The price for the parts fitted was
received only after the vehicles reached the respective States and the auto parts fitted therein had been approved by the respective purchasing
departments. The bills were made out in the names of the department of the respective State Governments. The question before the court was
whether the sales were in the course of inter-State trade. The Delhi High Court held as follows:
The fact that the goods had to be approved by the departments outside Delhi clearly indicated that the movement of goods from Delhi to States
outside Delhi was incidental to the sale, even if not directly related to it. This was a case of a verbal contract as a result of which auto parts were
fixed in the vehicles and those vehicles went back to their respective States and the price was received only after the auto parts which were
supplied had been approved by the purchasers. Therefore, there was a movement of goods from Delhi to outside the State and this movement had
been occasioned by the sale which was effected by the dealer. The movement of goods was incidental to the sale and was also an implied term of
the sale. Therefore, the Tribunal was right in coming to the conclusion that the sales in question were inter-State sales.
The Karnataka High Court, in identical set of facts as in the present case, in the case of ELGI TYRES & TREAD LTD. VS. DEPUTY
COMMISSIONER OF COMMERCIAL TAXES (ASSTMS) VII, BANGALORE AND OTHERS reported in (2000) 120 STC 261 has held
that the transactions are inter-State transactions and not exigible to tax. The facts of the case, which are almost similar to the facts of the case on
hand, in the sense, that the assessee in that case, Elgi Tyres undertook a contract for retreading of tyres from Andhra Pradesh State Road
Transport Corporation. For the assessment year 1990-91, the assessing authority granted exemption of the works contract turnover considering it
to be inter-State transaction. The Joint Commissioner of Commercial Taxes exercised the revisional power and modified the same. That was
confirmed by the Tribunal by taking a view that retreading of tyres amounts to deemed sale within the State u/s 5B of the Karnataka Sales Tax
Act, 1957 read with entry 24 of the Sixth Schedule to the Act. Section 5-B of the Karnataka General Sales Tax Act is comparable to Section 3B
of the Tamil Nadu General Sales Tax Act. On revision, the High Court held that:
it was not established that the property was transferred in the State of Karnataka. The retreading was done on the tyres of APSRTC in
Karnataka, but that fact would not be sufficient to come to the conclusion that the property is transferred to APSRTC in Karnataka. The contract
which has been entered into was for retreading the tyres and sending them to APSRTC, Andhra Pradesh from Karnataka after retreading. The
movement of goods is so linked that it cannot be disassociated except at the violation of the contract. There may be other stipulations in the
contract like inspection of the goods, etc., but they cannot convert an inter-State sale into a local sale. The main point to be seen is the movement
of goods in pursuance of the contract of sale from one State to another. The movement must be the incident of the contract. Fixing of rubber over
the tyres of APSRTC though passes the property in goods on the theory of accretion to the movable property is only one part of the contract on
the basis of which it has to be considered as works contract. But the other part of the contract stipulates movement of goods from one State to
another and hence both being integral part of contract it has to be considered an inter-State sale of works contract which is not liable to tax under
the Central Sales Tax Act and on which the provision of the Karnataka Sales Tax Act cannot be applied. The Tribunal erred in coming to the
conclusion that it was a works contract within the State of Karnataka liable to tax under entry 24 of the Sixth Schedule to Karnataka sales Tax Act
read with section 5B thereof, since the contract itself contemplated movement of such deemed sale from the State of Karnataka to Andhra
Pradesh.
The view taken by the Karnataka High Court would accord to the view taken by us in the present case, wherein also the customers outside the
State of Tamil Nadu have entered into a contract with the petitioner herein for retreading their worn out tyres within the State of Tamil Nadu and
sending them back to the customers'' place outside the State of Tamil Nadu. This contract is in two parts, one for retreading the tyres, which is
inextricably connected with the other part of the contract i.e., movement of the tyres from the State of Tamil Nadu to Kerala, being integral part of
the contract, it has to be considered as inter-State works contract, which is totally exempted under clause (2) (a) of Section 3B of the Tamil Nadu
General sales Tax Act.
In view of the fore-going discussion, we are of the view that the statutory authorities as well as the Special Tribunal have committed error in
bisecting the contract and coming to the conclusion that the goods passed on in Tamil Nadu and as such the value of the goods are taxable u/s 3B
of the Tamil Nadu General Sales Tax Act as works contract within the State of Tamil Nadu.
Hence, the orders of the statutory authorities culminating with the judgment of the Tribunal are hereby set aside. The writ Petition is allowed.
However, there is no order as to costs.