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VAT – State legislature does not have competence to tax goods imported into State solely for purpose of execution of works contract: HC

2019-TIOL-1736-HC-ALL-VAT

IN THE HIGH COURT OF ALLAHABAD

Sales/Trade Tax Revision No. 4 of 2007

M/s CENTRODORSTROY

Vs

COMMISSIONER OF TRADE TAX
UP, LUCKNOW

Saumitra Dayal Singh, J

Dated: August 06, 2019

Appellant Rep by: Shubham Agrawal & Bharat Ji Agarwal
Responden Rep by: 
SC

UP Trade Tax Act – Section 3F(2)(b) – Central Sales Tax Act – Sections 3, 4 & 5

Keywords – Execution of works contract – Sale of goods

THE assessee-company was awarded a contract by the NHAI for four laning and strengthening of the existing two lane sections of highways. With the consent of the NHAI, the assessee was allowed to procure the material for execution of such contract from one M/s Mukand Ltd. The assessee disclosed an agreement between the two parties. Perusal of the contract revealed that M/s Mukand Ltd was authorized and engaged to procure material in the quantities and specifications made by the assessee for execution of the contracts. Such arrangement was evidenced by dispatch of various quantites of the Cement & Bitumen from different places outside the State of U.P. through separate invoices raised by manufacturer of those goods. On assessment, the benefit u/s 3,4 & 5 of the Central Sales Tax Act 1956 was denied to the assessee. On appeal, the Tribunal allowed only partial relief to the assessee.

On hearing the revision petition, the High Court held that,

Whether the mandate of Section 3F(2)(b)(i) entails that the amount of sale value of goods covered u/s 3, 4 & 5 of the CST Act, are to be excluded from the value of works contract, during assessment under the UP Trade Tax Act – YES: HC

Whether it is trite law that the state legislature does not have the legislative competence to tax goods imported into the State solely for the purpose of execution of works contract – YES: HC

++ under Section 3-F(2)(b)(i) read with Section 3-F(1)(b) of the U.P. Act, it is the statutory mandate that the amount representing the sales value of goods covered by Sections 3, 4 and 5 of the Central Act have to be necessarily excluded from the value of the works contract for the purposes of subjecting the same to assessment under the U.P. Act. That principle is a reflection of the law laid down by the Supreme Court in Gannon Dunkerley and Co. Vs. State of Rajasthan and it is wholly consistent with the same. Therefore, the benefit that was being claimed by the assessee was not by way of exemption but a claim depending on the jurisdictional issue i.e. the state legislature did not have the legislative competence to impose tax on goods being imported to the State solely for the purpose of execution of the works contract;

++ once it is established by whatever evidence, that the movement of goods was occasioned from outside the State solely for the purposes of execution of the works contract, the provision of Section 3-F(2)(b)(i) of the U.P. Act would come into play on it’s own. No further condition as contemplated by the Tribunal exists and, therefore, the assessee could not be required to establish from the terms of the works contract that the individual goods had been specified therein. Nor there would exist any stipulation to take permission of the contractee or to apprise the contractee with respect to each import made by it. Insofar as the present case is concerned, the assessee set up its claim on the basis of the agreements dated 12.3.2001 executed in its favour of NHAI awarding the works contract; letter dated 9.2.2001 issued by NHAI approving the procurement of goods by the assessee through M/s Mukand Ltd. for the purposes of execution of works contract; agreement for supply of material dated 19.05.2001 executed between the assessee and M/s Mukand Ltd. as also the individual invoices and documents pertaining to each transaction to establish that the movement of all goods had been occasioned solely for the purpose of execution of works contract. In that regard, the assessee also claims to have set up an alternative plea that the original movement is not treated to be one occasioned by a pre-existing works contract. Then, there was a sale in the course of transit of goods by endorsement;

++ such plea does not appear to have been considered by the Tribunal to any extent and the Tribunal appears to have rejected the claim on over simplistic and erroneous reasoning that the assessee had not informed NHAI about the goods that were applied to the execution of the works contract. Such reasoning and the further observations with respect to absence of specific stipulations in the written contract are found to be extraneous to the issue. Accordingly, the order of the Tribunal dated 19.9.2006 cannot be sustained and the same is set aside.

Assessee’s revision petition allowed

Case followed –

Gannon Dunkerley and Co. Vs. State of Rajasthan 2002-TIOL-103-SC-CT-CB

JUDGEMENT

Per: Saumitra Dayal Singh:

1. The present revision has been filed by the assessee against the order of the Trade Tax Tribunal, Allahabad dated 19.9.2006 in second appeal no. 192 of 2006 for A.Y. 2002-03 (U.P.). By that order, the Tribunal has partly allowed the second appeal filed by the assessee. However, the benefit of Sections 3, 4 and 5 of the Central Sales Tax Act, 1956 (hereinafter referred to as the Central Act) with respect to purchase of cement and bitumen for the purposes of execution of works contract awarded to the assessee by National Highways Authority of India has been declined.

2. Heard Sri Shubham Agarwal, learned counsel for applicant-assessee and Sri B.K. Pandey, learned Standing Counsel for revenue.

3. The revision has been admitted without reference to any specific question of law. However, it has been pressed on the following question of law:

“Whether in view of Section 3-F(2)(b) of the U.P. Trade Tax Act, 1948 (hereinafter referred to as the U.P. Act), the assessee could have been deprived benefit of Sections 3, 4 and 5 of the Central Act with respect to the turnover of cement and bitumen, though entire quantity of those goods had been purchased in the course of inter-state trade, solely for the purpose of execution of works contract inside the State?”

4. First, reference has been made to the contract awarded by the National Highways Authority of India (NHAI) in favour of the present applicant-M/s Centrodorstroy, Joint Stock Company, registered in Russia. The contract is stated to be evidenced by the document dated 12.3.2001 with respect to four laning and strengthening of the existing two lane sections between 38 kms and 115 kms on NH-2. It has been referred to as Construction Package IIC. Another similar contract was awarded to the assessee on 12.3.2001 with respect to four laning of existing two lane sections between 245 kms and 317 kms on NH-2, referred to as Construction Package III-C.

5. Next, it has been submitted, with the consent of NHAI, the assessee was allowed to procure the material for execution of the aforesaid contract from M/s Mukand Ltd., another company incorporated inside the country. Pursuant to such no objection, the assessee further discloses an agreement (for supply of material against the aforesaid two contracts being Construction Package II-C and Construction Package III-C), which have been described as agreement for supply of material, executed on 19.5.2001 between the assessee-M/s Centrodorstroy and M/s Mukand Ltd. Perusal of those contracts reveal that M/s Mukand Ltd. had been authorized and engaged to procure material in the quantities and specifications made by the assessee for execution of the aforesaid two contracts.

6. The aforesaid arrangement is further disclosed to have been given effect to, by dispatch of various quantities of cement and bitument from different places outside the State of U.P. through separate invoices raised by manufacturer of those goods such as M/s Birla Corporation Ltd., Satna and M/s Prism Cement Ltd., Satna to “M/s Centrodorstroy A/C M/s Mukand Ltd.” at different places. By way of example, the copies of the original Invoice raised by the manufacturer of cement, excise invoice, goods receipt and import declaration form have been annexed with the present revision application. Also, it has been shown that by way of abundant caution, endorsement was also made by M/s Mukand Ltd. on the goods receipt to establish sale of goods in transit in favour of the assessee.

7. Thus, it has been submitted, the entire quantities of the goods had been procured from M/s Mukand Ltd. under the pre-existing written contract to supply such goods to the assessee only for the purpose of execution of works contract awarded to it by NHAI. In such circumstances, the sale of cement and bitument was clearly an inter-state sale performed for the purpose of execution of the works contract awarded to the assessee. Thus, it has been submitted, the benefit of Section 3 and Section 6(2) of the Central Act was clearly applicable.

8. Referring to the findings of the Tribunal, it is then submitted, the Tribunal has applied wrong principle and denied the benefit claimed by the assessee on the reasoning that before the assessee applied the goods to the works contract awarded to it, it did not inform NHAI about such facts. That reasoning of the Tribunal is claimed to be wholly extraneous and irrelevant to the dispute involved in the present case. Similarly, the conclusion drawn in the assessment proceedings of M/s Mukand Ltd. is stated to be wholly extraneous, inasmuch as the fact that the assessing authority of M/s Mukand Ltd., may have drawn an inference that the goods had been purchased by M/s Mukand Ltd., would have no binding effect on the present assessee, who was not a party in those proceedings.

9. Reliance has been placed on the decision of learned single Judge of this Court in Commissioner of Trade Tax Vs. S/s. Indian Railway Construction Company, Agra, (2005 UPTC 984), to submit that the principle to be applied was whether the goods in question had moved from outside the State of U.P. to be applied to the works contract awarded to the assessee or whether those goods had actually been applied to that contract alone. The fact that there was no contract stipulation in the present case, such as had been taken note of in paragraph no. 13 of the report in Indian Railway Construction Company (supra) would not defeat the statutory claim arising in view of the language of Sections 3, 4 and 5 of the Central Act.

10. Learned counsel for the assessee would contend that the fact that the language of the particular contract had also been taken note of in the aforesaid case only indicates and reflects an additional reasoning given by the Court, in the facts of that case. However, the principle of law that governs such case, is contained in the decision of the Supreme Court in Gannon Dunkerley and Co. Vs. State of Rajasthan, (1993) UPTC 416 = 2002-TIOL-103-SC-CT-CB.

11. On the other hand, learned Standing Counsel would contend that though the principle laid down by Supreme Court in Gannon Dunkerley (supra) may never be disputed, however, the benefit of Sections 3, 4 and 5 of the Central Act would have been available only if the assessee had been able to establish from the terms of contract that the individual goods that had been procured through M/s Mukand Ltd. were such as could only be applied against the works contract awarded to it. In absence of such stipulation, the fact that those goods had actually been applied to the contract would not give rise to the claim under Section 3 or Section 6(2) of the Central Act. In that regard, learned Standing Counsel has placed reliance on paragraph no. 13 of the decision of this Court in Indian Railway Construction Company (supra) to show that even in that case, it was the governing conditions of the written contract between the parties that led this Court to grant relief of acceptance of the claim.

12. Having heard learned counsel for the parties and having perused the record, under Section 3-F(2)(b)(i) read with Section 3-F(1)(b) of the U.P. Act, it is the statutory mandate that the amount representing the sales value of goods covered by Sections 3, 4 and 5 of the Central Act have to be necessarily excluded from the value of the works contract for the purposes of subjecting the same to assessment under the U.P. Act. That principle is a reflection of the law laid down by the Supreme Court in Gannon Dunkerley (supra) and it is wholly consistent with the same. Therefore, the benefit that was being claimed by the assessee was not by way of exemption but a claim depending on the jurisdictional issue i.e. the state legislature did not have the legislative competence to impose tax on goods being imported to the State solely for the purpose of execution of the works contract.

13. Once it is established by whatever evidence, that the movement of goods was occasioned from outside the State solely for the purposes of execution of the works contract, the provision of Section 3-F(2)(b)(i) of the U.P. Act would come into play on it’s own. No further condition as contemplated by the Tribunal exists and, therefore, the assessee could not be required to establish from the terms of the works contract that the individual goods had been specified therein. Nor there would exist any stipulation to take permission of the contractee or to apprise the contractee with respect to each import made by it. Insofar as the present case is concerned, the assessee set up its claim on the basis of the agreements dated 12.3.2001 executed in its favour of NHAI awarding the works contract; letter dated 9.2.2001 issued by NHAI approving the procurement of goods by the assessee through M/s Mukand Ltd. for the purposes of execution of works contract; agreement for supply of material dated 19.05.2001 executed between the assessee and M/s Mukand Ltd. as also the individual invoices and documents pertaining to each transaction to establish that the movement of all goods had been occasioned solely for the purpose of execution of works contract. In that regard, the assessee also claims to have set up an alternative plea that the original movement is not treated to be one occasioned by a pre-existing works contract. Then, there was a sale in the course of transit of goods by endorsement.

14. The aforesaid plea does not appear to have been considered by the Tribunal to any extent and the Tribunal appears to have rejected the claim on over simplistic and erroneous reasoning that the assessee had not informed NHAI about the goods that were applied to the execution of the works contract.

15. The aforesaid reasoning and the further observations with respect to absence of specific stipulations in the written contract are found to be extraneous to the issue.

16. Accordingly, the order of the Tribunal dated 19.9.2006 cannot be sustained and the same is set aside. In absence of specific findings being recorded as to whether the movement of goods from outside the State had been occasioned by the pre-existing works contract executed by the assessee, the question law (as framed above) has to be left unanswered at this stage.

17. In view of the fact that none of the authorities appear to made that application of mind, the matter is remitted to the assessing authority, as suggested by learned counsel for the applicant-assessee, to pass appropriate orders, in light of the observations made above. The above exercise may be completed as expeditiously as possible, preferably within a period of three months from the date of production of certified copy of this order.

18. With the aforesaid observations, the revision stands disposed of.

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