Common Order:
Ramesh Ranganathan, J.
1. M/s. Larsen and Toubro Ltd, Hyderabad filed W.P. Nos.23034 and 22960 of 2007, W.P. No.8122 and 9016 of 2008, W.P. Nos.8006 and 15121 of 2009, W.P. No.8955 of 2010, W.P. Nos.10711 and 23689 of 2011, W.P. No.6834 of 2012, W.P. No.39431 of 2013 and W.P. No.14457 of 2014. Alstom Projects India Ltd filed W.P. Nos.4763 and 12745 of 2009, and W.P. No.26994 of 2011. M/s. Siemens Ltd, Hyderabad filed W.P. Nos.16857, 16909 and 16945 of 2009, W.P. No. 25776 of 2010, W.P. No.8664 of 2013 and W.P. No.14192 of 2014. BGR Energy Systems Ltd, Nellore filed W.P. No.19516 of 2009.
All the petitioners have executed turnkey projects for different customers. They claimed that the goods supplied by them, for being used in the turnkey projects, were subsequent sales exempt from tax under Section 6(2) of the CST Act, import sales under Section 5(2) of the CST Act, and the respondents lacked jurisdiction to subject these transactions to tax under the AP VAT Act treating them as intra-state sales. On their claim being negatived by the assessing/revisional authorities they have invoked the certiorari jurisdiction of this Court. It would suffice to note the contents of the assessment order passed in W.P. No.8006 of 2009 as illustrative of the orders impugned in these Writ Petitions.
The petitioner in W.P. No.8006 of 2009, M/s. Larsen and Toubro Ltd, is a company registered under the Companies Act with its registered office at Mumbai. It has various branches, among others, at Hyderabad also. It is engaged in the execution of Engineering, Procurement and Construction (EPC) Works Contracts on a turnkey basis, and is a registered dealer both under the AP VAT Act and the CST Act. For the tax period 01.04.2005 to 31.03.2006, the petitioner claimed exemption on a turnover of Rs.373,28,65,393 as sales effected in the course of inter-state trade and commerce under Section 6(2) of the CST Act, and sales in the course of import under Section 5(2) of the CST Act. The exemption claimed by the petitioner related to six contracts awarded in their favour by Konaseema EPS Oakwell Power Ltd (hereinafter referred to as Konaseema) and Vemagiri Power Generation Limited (hereinafter referred to Vemagiri).
In the assessment order dated 12.03.2009, the assessing authority noted that the petitioner (Larson and Toubro) had, during the financial year 2005-06, entered into six supply contracts, two of which were with Konaseema and Vemagiri; placing reliance on certain clauses in the agreement, the petitioner had stated that they were required to deliver the goods as agreed upon mutually, and the contractees had also agreed to provide necessary certificates/forms for claiming tax exemption; the goods involved were subjected to pre-despatch inspection, and testing of the equipment by the contractee i.e. Konaseema; in the light of these terms and conditions, they had arranged the transactions by way of a sale falling under Section 3(b) r/w. Section 6(2) of the CST Act claiming exemption towards sale in transit in the case of Konaseema, and as a sale falling under Section 3 of the CST Act or sale in the course of import in the case of Vemagiri; with regards transit-sales, they had contended that, while the goods were in the course of inter-state movement, the documents of title to the goods were transferred in favour of Konaseema which, in turn, took delivery of the goods; with regards import sales, they claimed to have placed orders on approved dealers outside the country; while the goods were consigned to them, the bills of lading ie, the documents of title to the goods were endorsed in favour of Vemagiri which, in turn, had cleared the goods from customs paying all the duties; they had filed specimen copies of the documents such as copies of the bills issued by the ex-state seller, foreign seller, copies of LR/bill of lading, copies of the bills raised by the petitioner, customs clearance documents etc; and they contended that these transactions were in the nature of inter-state sale transactions, and sales in the course of import, covered by Section 3(b) read with Section 6(2) and Section 5(2) of the CST Act and were exempt from levy of tax.
In the impugned assessment order the assessing authority observed that, in the show-cause notice, he had opined that there were two independent transactions “ one between the foreign seller in favour of the contractor, and the second set of transaction between the contractor and the contractee; the petitioner had refuted this contention contending that the goods had moved from outside the State specifically for the purpose of compliance of the supply contract and, therefore, the movement had an inextricable link with the ultimate sale; the petitioner had opposed the view that there cannot be a sale in transit in a works contract, placing reliance on Larsen and Toubro Limited v. Commissioner of Commercial Taxes ((2003) 132 STC 272 (AP) (DB)); and they had also placed reliance on MMTC of India Ltd. v. Sales Tax Officer ((1998) 111 STC 434 = AIR 1999 SC 121 = (1998) 7 SCC 19 (SC)) in respect of High Sea Sales falling under Section 5(2) of the CST Act.
After extracting Sections 3(b) and 5(2) of the CST Act, the assessing authority held that these provisions refer to a salewhich is effected by transfer of documents of title while the goods are under movement from one State to another (Section 3(b)), and while the goods are imported into the territory of India (Section 5(2); the goods involved in these transactions were subject to inspection by the contractee, which could also be rejected at the contractor's cost; it is only after satisfactory acceptance by the contractee that the material would be delivered duly endorsing the documents of title to the goods; in State of Gujarat v. Chem-Dyes Corporation ((1991) 83 STC 488 (Gujarat High Court) (DB)), the Gujarat High Court had held that during the period, i.e at the time of endorsement of documents of title to the goods, what was in-existence was an agreement to sell', and Section 3(b) did not apply; in the present case, one of the conditions of the sale is that the goods are subject to inspection by the contractee/purchaser; the impugned transactions were, therefore, required to be treated as intra-state sales; the contract between the petitioner and Konaseema was to build, own and operate a combined cycle electric power plant; the petitioner was required to design, engineer, manufacture, test and supply the material ex-works; however, by a separate agreement, the petitioner was required to engineer, design, procure, and construct the civil and structural works based on the data provided by the owner and erect, install, start up, test and commission the owners equipment issued to contractor, as free issueby the owner as per the written instructions, if any, of various suppliers; thus the intention of the contractee was to build, own and operate a combined cycle electric power plant; this work had been entrusted to the petitioner which had not only supplied the material required for executing the above work, but had also executed such work; thus, intrinsically, it was a works contract awarded to the petitioner duly splitting it into a supply contract and a labour contract; the intention of both the contractor and contractee was to execute a works contract though it was split into two; these contracts were not entrusted to two separate contractors, but to the petitioner alone; in the case of Vemagiri the agreement, dealing with the contractors obligations, specifically provided that the contractor had the experience, skill and resources to perform the works; thus the intention of both the contractor and the contractee was to execute a work, where the transfer of property takes place not as chattel qua chattel, but on the theory of accretion; in such a case, it is impermissible to split such contracts into a supply and labour contract; the nature of the contract was that of a works contract which the petitioner had conveniently split into two contracts “ one of which was as a supply contract wherein they claimed exemption under Section 3(b) and Section 6(2) of the CST Act; the other contract was designed as a labour contract or a works contract as it related only to erection/installation etc., by deploying its labour, and no material was involved therein; the petitioner had claimed exemption on a portion of this also; thus by splitting the works contract, one into a supply contract and the other into a labour contract, the petitioner had claimed exemption on the entire value of the contract running into crores of rupees; tax planning could only be within the framework of law; after the 46th amendment to the Constitution of India, the States had been conferred the power to levy tax on works contract; even thereafter the concept of transfer of property in the goods, involved in the execution of a works contract, by theory of accretion, did not loose its significance; even if a contract is indivisible, and is a composite one, it has to be split up into the value of goods and labour and other services; both goods and labour put together make a works contract; and the value of the goods had to be arrived at for the purpose of levy of tax under the A.P VAT Act.
The assessing authority also examined the question whether there can be a sale in transit, or a sale in the course of import, in a transaction of works contract. He held that, from the nature of the contracts awarded, it could be seen that the petitioner was required to supply the goods as per the supply contract; they were also required to execute the works themselves; the intention of both the contractor and the contractee was completion of the works involving supply of goods as well as labour; therefore the transaction related to a works contract; in such an event, the transfer of property in goods would take place, on the theory of accretion, when the goods are incorporated into the property of the contractee; this would happen only if the petitioner is the owner of the goods sought to be incorporated in the works; by arranging its affairs, camouflaging such deemed sale as in the nature of sales falling under Sections 3(b), 6(2) and 5(2) of the CST Act, the petitioner does not cease to be the owner of the goods sought to be incorporated in the works; unless the contractor is the owner of the goods, by the time of incorporation in a composite contract, he cannot execute such a contract; the transactions under Sections 3(b), 6(2) and 5(2) of the CST Act do not fit within the concept of a works contract; a works contract is a conglomerate of both goods and labour inseparably; splitting of the value of the goods is only artificial, and is for the purpose of levy of tax; in the present case, the petitioner themselves furnished the value of the goods separately, making it easy for the assessing authority to arrive at the taxable turnover; the intention of the parties is important in deciding the nature of the transaction, but not how the documentation is made; the intention of both the petitioner and the contractee is to execute works at Konaseema and Vemagiri respectively; in order to avoid the brunt of taxation, the petitioner had created tailor made documents in order to claim exemption under Sections 3(b), 6(2) and 5(2) of the CST Act; the sale of goods, involved in a works contract, is concluded only after the said goods are incorporated/merged/fused with the property of the contractee; the petitioner had split the contract into supply of goods, and erection and installation, only to make it tailor made to suit Sections 3(b), 6(2) and 5(2) of the CST Act, and nothing else; the transactions must, therefore, be treated as intra-state deemed sale of goods involved in a works contract; MMTC of India Ltd. (Supra) was a case of normal sale, in the course of import, where the property was transferred chattel qua chattel; in the present case, the impugned transactions are transactions of works contract where such transfer of property takes place on the theory of accretion, i.e. after the goods get merged/fused with the property of the contractee; as property in the goods is transferred only after its installation and erection, such a deemed sale is complete only after such installation and the like; the ratio of the decision in MMTC of India Ltd. (Supra) has no application to the facts of the present case; and the reasoning of the Gujarat High Court, in Chem-Dyes Corporation (Supra), is more appropriate than the reasoning given in the judgment of the A.P. High Court in Larsen and Toubro Limited (Supra). The assessing authority preferred to follow the judgment in Chem-Dyes Corporation (Supra), and expressed his inability to accept the decision in Larsen and Toubro Limited (Supra) on the ground that it was not logical.
Elaborate submissions were put forth by Sri S.R. Ashok, Sri N. Venkataraman, and Sri S. Ravi, Learned Senior Counsel and Sri S. Dwarakanath, Learned Counsel appearing on behalf of the petitioners. While Sri P. Balaji Varma, and Sri S. Suribabu, Learned Special Standing Counsel for Commercial Taxes, put forth their submissions, a substantial part of the arguments was advanced, on behalf of the revenue, by Sri K. Vivek Reddy, Learned Special Counsel. Written arguments were submitted, on behalf of the petitioners, by Sri A.K. Jaiswal, Sri S. Dwarakanath, Sri T. Vinod Kumar, Sri Ch. Pushyam Kiran and Sri Priyadarshan Reddy. Written submissions were filed, on behalf of the revenue, by Sri K. Vivek Reddy. It is convenient to examine the elaborate submissions, urged by Learned Counsel on either side, under different heads.
I. PRELIMINARY OBJECTIONS:
(I). DOES EXISTENCE OF A STATUTORY REMEDY OF APPEAL UNDER THE A.P. VAT ACT REQUIRE THIS COURT TO REFRAIN FROM EXERCISING JURISDICTION UNDER ARTICLE 226 OF THE CONSTITUTION OF INDIA?
It is contended, on behalf of the revenue, that the A.P. VAT Act prescribes an appellate mechanism to challenge the revisional and assessment orders; adjudication of questions of fact, involved in these Writ Petitions, may be appropriately undertaken through the appellate process, and not in a Writ Petition; and the scope of the Writ Petition is limited more so when a Writ of Certiorari is sought. Reliance is placed in this regard on State of Goa v. Laukoplast (India) Ltd. (AIR 1997 SC 1875 = (1997) 4 SCC 82); Titaghur Paper Mills Co. Ltd. v. State of Orissa ((1983) 142 ITR 663: (AIR 1983 SC 603); CIT v. Chhabil Dass Agarwal ((2014) 1 SCC 603); Nivedita Sharmav. Cellular Operators Assn. of India ((2011) 4 SCC 337); Thansingh Nathmal v. Supt. of Taxes (AIR 1964 SC 1419); Carl Still G.M.B.H.v. State of Bihar (AIR 1961 SC 1615 ); State of Bombayv. United Motors (India) Ltd (1953 SCR 1069); Himmatlal Harilal Mehta v. State of Madhya Pradesh (1954 SCR 1122); Bengal Immunity Co. Ltd. v. State of Bihar (AIR 1955 SC 661); Mafatlal Industries Ltd. v. Union of India ((1997) 5 SCC 536); Chhabil Dass Agarwal (Supra); G. Veerappa Pillai v. Raman and Raman Ltd. (AIR 1952 SC 192); CCE v. Dunlop India Ltd. ((1985) 1 SCC 260); Ramendra Kishore Biswas v. State of Tripura ((1999) 1 SCC 472); Shivgonda Anna Patil v. State of Maharashtra ((1999) 3 SCC 5); C.A. Abraham v. ITO (AIR 1961 SC 609); Titaghur Paper Mills Co. Ltd. (Supra); Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath and Sons ((1999) Supp (2) SCC 312); Whirlpool Corpn. v. Registrar of Trade Marks ((1998) 8 SCC 1); Tin Plate Co. of India Ltd.v. State of Bihar ((1998) 8 SCC 272); Sheela Devi v. Jaspal Singh ((1999) 1 SCC 209); Punjab National Bank v. O.C. Krishnan ((2001) 6 SCC 569); Union of Indiav. Guwahati Carbon Ltd. ((2012) 11 SCC 651); Munshi Ram v. Municipal Committee, Chheharta ((1979) 3 SCC 83); and Chhabil Dass Agarwal (Supra)).
Relying on Chhabil Dass Agarwal (Supra); State of U.P.v. Mohd. Nooh (AIR 1958 SC 86); Titaghur Paper Mills Co. Ltd. (Supra);Harbanslal Sahnia v. Indian Oil Corpn. Ltd. ((2003) 2 SCC 107); State of H.P. v. Gujarat Ambuja Cement Ltd. ((2005) 6 SCC 499); Chhabil Dass Agarwal (Supra); K.S. Rashid and Sonv. Income Tax Investigation Commission (AIR 1954 SC 207); Sangram Singh v. Election Tribunal (AIR 1955 SC 425); Union of India v. T.R. Varma (AIR 1957 SC 882); Mohd. Nooh (Supra); K.S. Venkataraman and Co. (P) Ltd. v. State of Madras (AIR 1966 SC 1089); N.T. Veluswami Thevar v. G. Raja Nainar (AIR 1959 SC 422); Municipal Council, Khuraiv. Kamal Kumar (AIR 1965 SC 1321); Siliguri Municipality v. Amalendu Das ((1984) 2 SCC 436); S.T. Muthusami v. K. Natarajan ((1988)n 1 SCC 572); Rajasthan SRTC v. Krishna Kant ((1995) 5 SCC 75); Kerala SEB v. Kurien E. Kalathil ((2000) 6 SCC 293); A. Venkatasubbiah Naidu v. S. Chellappan ((2000) 7 SCC 695); L.L. Sudhakar Reddy v. State of A.P. ((2001) 6 SCC 634); Shri Sant Sadguru Janardan Swami (Moingiri Maharaj) Sahakari Dugdha Utpadak Sanstha v. State of Maharashtra ((2001) 8 SCC 509); Pratap Singh v. State of Haryana ((2002) 7 SCC 484); GKN Driveshafts (India) Ltd. v. ITO ((2003) 1 SCC 72);and Gujarat Ambuja Cement (Supra)) it is contended, on behalf of the petitioners, that it is within the discretion of the High Court to grant relief under Article 226 despite the existence of an alternative remedy; the assessing authority has not drawn any factual adverse inference after examining various documents, and the evidence to the transaction; there is no disputable questions of fact; the jurisdictional error, committed by the respondent authorities, is on account of misappreciation of the law and the statutory provisions; the levy is without jurisdiction, without authority of law and in flagrant violation of Article 286, and Sections 3, 4 and 5 of the CST Act; the taxing authorities have assumed jurisdiction to levy tax though none existed; this Court admitted the Writ Petitions way back in the years 2009 and 2011; and it is not open to the State, at this length of time, to raise the dispute of an alternate remedy to non-suit the petitioners.
In Bharat Heavy Electricals Ltd. v. Union of India ((1996) 4 SCC 230), Ashok Leyland Ltd. v. Union of India ((1997) 9 SCC 10), Rapti Commission Agency v. State of U.P., ((2006) 6 SCC 522), Zunaid Enterprises v. State of M.P., ((2012) 4 SCC 211), the Supreme Court and, in Kalpana Glass Fibre Pvt. Ltd. v. State of Orissa ((2013) 57 VST 357), the Orissa High Court Division benchheld that the question whether a particular sale is an inter-State sale or an intra-State sale, and whether the contract of sale is in respect of specific or ascertained goods, or whether it is in respect of unascertained or future goods, are essentially questions of fact, more appropriately a mixed question of fact and law, and the factual aspects should have been asked to be dealt with by the authorities.
The orders, under challenge in these Writ Petitions, are either assessment or revisional orders passed by the concerned authorities exercising jurisdiction under the AP VAT Act. This Court has been called upon, by Learned Counsel on either side, to mainly examine whether the impugned orders are without jurisdiction. The enquiry, in these Writ Petitions, is confined to an examination of the material placed before the assessing and the revisional authorities on the parameters applicable to certiorari proceedings. This Court is conscious, and need not be reminded, that the statutory system of appeals is more effective and more convenient than an application for certiorari as an appeal can be disposed of where the issue is a matter of law or fact, whereas an application for certiorari is limited to cases where the issue is a matter of law appearing on the face of the order ie where the decision is liable to be upset as it is made without jurisdiction or in consequence of an error of law.
An application for certiorari has this advantage that it is speedier and cheaper than the other methods. (Reg v. Hillington, London Borough Council ((1974) 1 QB 720); Gujarat Ambuja Cement Ltd (Supra); Hanson v. Church Commissioner ((1978) 0 QB 823)).A writ of certiorari can be issued for correcting errors of jurisdiction such as in cases where orders are passed without jurisdiction, or is in excess of it, or as a result of failure to exercise jurisdiction or where, in exercise of jurisdiction conferred on it, the Court or Tribunal acts illegally or improperly. The jurisdiction to issue a writ of certiorari is supervisory and not appellate. An error of law which is apparent on the face of the record can be corrected by a writ, but not an error of fact, however grave it may appear to be. The adequacy or sufficiency of evidence, and the inference of fact to be drawn therefrom cannot be agitated in certiorari proceedings. (Syed Yakoob v. K.S. Radhakrishnan [AIR 1964 SC 477]).
If the tribunal has erroneously refused to admit admissible and material evidence, or has erroneously admitted inadmissible evidence, or if a finding of fact is based on no evidence, it would be an error of law which can be corrected by a writ of certiorari. Where the conclusion of law by the tribunal is based on an obvious mis-interpretation of the relevant statutory provisions, or in ignorance of it or even in disregard of it or is expressly founded on reasons which are wrong in law, the said conclusion can be corrected by a writ of certiorari. Whether or not an error is an error of law, and an error of law which is apparent on the face of the record, must always depend upon the facts and circumstances of each case, and upon the nature and scope of the legal provisions which is alleged to have been misconstrued or contravened. (Syed Yakoob [Supra]).
It must also be borne in mind that the rule of exclusion of the writ jurisdiction, in view of the existence of an alternative remedy, is not a rule of compulsion. (Harbans Lal Sahnia [Supra]; Gujarat Ambuja Cement [Supra]). When, on undisputed facts, the taxing authorities are shown to have assumed jurisdiction which they do not possess, a writ petition can be entertained. (Gujarat Ambuja Cement [Supra]). Some exceptions to the rule of alternative remedy have been recognized i.e. where the statutory authority has not acted in accordance with the provisions of the enactment or in defiance of the fundamental principles of judicial procedure etc. (Chhabil Dass Agarwal [Supra]).
The existence of an alternative remedy is merely a factor to be considered, and would not impinge upon the jurisdiction of the High Court to deal with the matter itself if it is in a position to do so on the basis of the affidavits filed. (S.J.S. Business Enterprises (P) Ltd. v. State of Bihar [(2004) 7 SCC 166]). If the High Court has entertained a petition, despite availability of an alternative remedy, and has heard the parties on merits it would, ordinarily, not be justified in dismissing the Writ Petition on the ground of non-exhaustion of the statutory remedies unless it finds that factual disputes are involved, and it would not be desirable to deal with them in a writ petition. (L. Hirday Narain v. Income Tax Officer, Bareilly [(1970) 2 SCC 355]; Gujarat Ambuja Cement Ltd [Supra]). These writ petitions were admitted several years ago, and elaborate submissions were put forth by Learned Counsel on either side not only on the effect of the contractual provisions, but also on the scope of Sections 3(a), 3(b), 4, 5(2), 6(2) and 9 of the CST Act. Despite reminding us of the limited scope of judicial review, Sri K. Vivek Reddy, Learned Special Counsel, has himself addressed us on issues which travel far beyond the findings recorded in the impugned orders.
It is necessary, in this context, to note the contention, urged on behalf of the petitioners, that the judgment in Larsen and Toubro Limited [Supra]squarely applies to the facts of the present batch of cases, the S.L.P. preferred by the revenue against the said judgment was dismissed, a similar view was taken in State of Andhra Pradesh v. Usha Breco Ltd, Calcutta [(2001) 121 STC 621 (AP High Court) (DB)] and in State of Andhra Pradesh v. Dwaraka Prasad Radhe Ramalal [Judgment in TRC Nos.75 of 2000 and batch dated 09.07.2003]), in the light of the direct binding judgment in Larsen and Toubro Limited [Supra], the finding recorded by the assessing authority that the decision of the Gujarat High Court, in Chem-Dyes Corporation [Supra], is more logical and should be followed, is an abuse of the judicial process, and the judgments of the jurisdictional High Court are binding on the lower authority as held by the Supreme Court in East India Commercial Co. Ltd. v. Collector of Customs [AIR 1962 SC 1893] and Union of India v. Kamalakshi Finance Corporation Ltd. [1992 Supp (1) SCC 443= AIR 1992 SC 711].
It was also contended, on behalf of the petitioners, that the assessing and revisional authorities had ignored the orders of the Sales Tax Appellate Tribunal that similar transactions could not be subject to tax under the AP VAT Act, even though the Supreme Court, in Union of India v. Ramlakshmi Finance Corporation Ltd. [1992 Supp (1) SCC 443], had held that judicial discipline require that the orders of the Tribunal and higher appellate authorities should be followed unreservedly by the subordinate authorities; several new contentions were urged across the bar by Sri K. Vivek Reddy, Learned Counsel for the revenue, which were not dealt with in the impugned orders; the scope of the Writ Petition has been sought to be enlarged which is impermissible as held in British India Steam Navigation Co. Ltd. v. Shanmughavilas Cashew Industries [(1990) 3 SCC 481]; the assessing/revisional authorities have picked some clauses in some of the contracts, and have applied it to all the contracts which were subjected to assessment, contrary to the law declared in Siemens Ltd. v. State of Kerala [(2001) 122 STC 1]; the burden lies upon the Commercial Tax Officer to prove that a turnover is liable to tax (Hyderabad Deccan Cigarette Factory v. State of A.P. [(1966) 17 STC 624 (SC)]; and, as held in TELCO Ltd. v. Assistant Commissioner of Commercial Taxes [(1970) 26 STC 354 (SC)]), the assessing authority is bound to examine each individual transaction. The aforesaid objections, put forth on behalf of the petitioners, may well justify the impugned orders being set aside, and the matters being remanded to the concerned authorities to pass orders afresh on merits.
While the petitioners have not availed the statutory remedy of appeal, the assessing/revisional authorities have also chosen to ignore or by-pass the judgments of the Division Bench of this Court (which is the jurisdictional High Court) and have, instead, placed reliance on judgments of other High Courts. As larger issues regarding the scope of certain provisions of the CST Act arise for consideration, we have examined all the issues raised both on behalf of the petitioners and the respondents, even though they may not have been dealt with in the impugned orders, as a quietus must be given to the oft recurring questions regarding the jurisdiction of the authorities to subject similar transactions to tax under the AP VAT Act. While doing so, we have been careful to limit our scrutiny within the parameters applicable to certiorari proceedings. We see no reason, therefore, to now relegate the petitioners to the statutory remedy of appeals under the provisions of the AP VAT Act.
II. ARE THE SUBJECT CONTRACTS DIVISIBLE OR INDIVISIBLE CONTRACTS?
It is submitted, on behalf of the petitioners, that the assessing authority has integrated two divisible separate contracts as a composite indivisible contract drawing an adverse legal inference that the contracting parties are one and the same; courts have recognized dual capacities between the same contracting parties; it is open to the petitioner to sell goods in transit or as high sea sales, and to secure the same back as free supplies or as an agent or as a bailee, and execute the installation and commissioning work; it is for the contracting parties to design their contracts - either as divisible or indivisible; courts/tribunals cannot substitute or rewrite contracts; it is only if, in reality, the contracting parties execute an indivisible works contract, and the property actually passes at the time of accretion or incorporation, can splitting up of the contracts, into sale and service contracts, be construed a camouflage; a contract cannot be re-characterized based on the strength of a possible tax treatment; the subject contracts are divisible in nature;though not all contracts contain a cross-fall breach clause, such a clause has been ascribed to all the contracts in a sweeping manner; a cross-fall breach clause only ensures redressal measures being taken by way of a claim for damages, and neither encumbers nor restores title; this clause is of discharge of service obligations, and does not postpone passage of title to the goods; normally the bidding documents, for participating in the contract, require one entity to apply for both the supply and erection parts; award of the contract depends upon the lowest price for both supply and erection contracts; from the point of view of the buyer it is considered as one indivisible works contract; these conditions are prescribed in government contracts as per government policy, and are not relevant for taxation of goods; some of the contracts are negotiated contracts, no bidding took place and no bidding documents exist; and the effort of the assessing authority, to call the contracts indivisible works contracts, though they are not, is of no consequence since an indivisible contract is also divisible by legal fiction.
Sri K. Vivek Reddy, Learned Counsel for the respondent, would submit that the assessing/revisional authorities have held that, even though the petitioners had entered into supply and erection contracts, it constituted a composite contract i.e. an indivisible works contract; in arriving at this finding, they had reviewed the contracts, evidence, documents and the nature of the work done by the petitioners, in particular, on (a) the presence of a cross fall breach clause in the contracts in various manifestations; (b) the contractual clauses, and the description of the documents, itself show that the petitioner was executing one work; (c) the intention between the parties is only to execute the work with the material supplied by the contractor; (d) the rights of the dealer (supplier) over the property in the goods and the risk due to injury and loss to the goods, remains with the supplier till the commissioning of the turnkey project; (e) the assessee remains the owner of the goods till termination of its movement; and (f) the property in the goods is transferred to the employer only at the time of accretion; if the clauses in both the contracts are inter-linked, and are closely related to each other, the fact that they are embodied in two instruments does not alter the nature of the contract; the subject contracts are indivisible works contracts wherein title passes only upon incorporation; all the subject supply contracts not only provide a schedule for supply but also stipulate a schedule for erection; prohibition of assignment also shows that it is an indivisible works contract; the supply contracts (as opposed to the erection contracts) contemplate a certification clause for the entire work, and not just the supply component; the stipulation, as to the use of goods in the supply contract, shows that the goods are to be used for erection; in the supply contract, the seller is entitled for payment only when the goods, that were supplied, are successfully put to use ie upon successful erection; the presence of a cross fall breach clause in the supply contracts show that the supply and erection contract is an indivisible works contract; all the subject contracts have a cross fall breach clause in various manifestations; the bidding document is the source document, and forms the basis for the supply and erection contracts; the bidding document, for the Siemens-RINL contract, reveals that the employer contemplated only one work i.e., a turnkey project for which the supply and erection contracts have been executed; it is a condition of the bidding document that the parties, to the supply and erection contract, must be the same; the bidders had to quote one price for the entire project including supply and erection; and the petitioners are not in the business of supplying articles, but in executing turnkey projects.
For convenience sake the petitioners shall, hereinafter, be referred to as the contractor; the person, from whom the contractor purchased the goods, as the supplier; and the person, for whom the goods were purchased and incorporated in the works, as the owner.The submission, made on behalf of the petitioners, is that the subject contracts are two independent contracts - one for supply and the other for erection, and the bailment ?/ free issues clauses in the contracts show that, after the goods are sold by the petitioner - contractor to the owner, the owner then issues the very same material as free issues to the petitioner-contractor for being used in the erection and installation of the plant. The contention of the respondents, however, is that the contract is, in effect, an indivisible contract and, while they are styled as two contracts i.e., supply and erection contracts, they are, in fact, one composite indivisible contract.
Prior to the 46th amendment to the Constitution, an indivisible contract would have disabled the revenue from subjecting the goods, which formed part of the turnkey project, to tax as a turnkey project is immovable property, and does not constitute goods (movable/chattel). It is because of the legal fiction, created by Article 366-29(A)(b), that an indivisible contract can be fictionally divided into two contracts, one for sale of the goods used in the erection and installation of the project, and the other for work and services; and to tax the deemed sale of goods involved in the execution of such a contract.
In effect, the submission of the revenue is that these two contracts (supply contract and erection contract) should be treated as a single indivisible contract; and thereafter, by legal fiction under Article 366-29(A)(b), it should again be divided into two contracts one for sale of goods, and the other for labour and services. Why should the suppy and erection contracts be integrated, only for it to be again divided by legal fiction? Would it make any difference if the subject contracts were treated as two separate contracts at the inception, instead of treating them as one, and then fictionally dividing them into two? While the purpose sought to be achieved thereby is not spelt out, we understand the submission of Sri K. Vivek Reddy, Learned Counsel for the respondent, to be that, if it is a single indivisible contract, the property in the goods would pass to the owner on its incorporation in the works, the sale of such goods would not take place during the course of its movement from one State to another, and the petitioners would thereby be disentitled from claiming exemption under Section 6(2) of the CST Act. Secondly, as the transfer of property in the goods would take place on its incorporation in the works, and as the work is executed within the State, transfer of title to the goods would take place within the State; and such a sale would an intra-state sale liable to tax under the A.P. VAT Act. If these submissions of Sri K. Vivek Reddy, Learned Counsel for the revenue were to merit acceptance, then the measure of tax, even if it be an inter-state sale, would be the value of the goods at the stage of its incorporation in the works, which would include not only the value of the goods at the time of its delivery within the State, but also the expenditure incurred in relation thereto till its incorporation in the works which, as held in Gannon Dunkerly and Co. v. State of Rajastan [(1993) 1 SCC 364] would also include the profit element.
It is necessary, therefore, to examine whether the subject contracts are two separate independent contracts or they are, in reality, one composite indivisible contract disguised as two independent contracts-one for suppy of goods and other for services rendered for installation and erection of the turnkey project. Where parties enter into distinct and separate contracts, one for the transfer of material for monetary consideration, and the other for payment of remuneration for services and for work done, there are, ordinarily, two agreements, though there is a single instrument embodying them. (State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., [1959 SCR 379= AIR 1958 SC 560]).In such cases the transaction would not be one and indivisible, but would fall into two separate agreements. (Hindustan Aeronautics Ltd. v. State of Karnataka [(1984) 55 STC 314 (SC)]; State of Himachal Pradesh v. Associated Hotels of India Ltd., [(1972) 29 STC 474 = AIR 1972 SC 1131]) (five judges). If there are two independent contracts, namely, purchase of the components from a dealer, it would be a contract for sale and similarly, if a separate contract is entered into for installation, that would be a contract for labour and service. (Kone Elevator India (P) Ltd. v. State of T.N. [(2014) 7 SCC 1]).
A composite contract, for supply and installation, should be treated as a works contract as it is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel. (Kone Elevator India (P) Ltd. [Supra]).A 'works contract' is an "entire and indivisible" works contract for the construction/execution of a turnkey project to specifications where the person executing the work is entitled to receive the total price (Thomson Press (I) Ltd. v. State of Haryana [(1996) 100 STC 417 (PandH HC)]). While examining the exercise of divisibility, the dominant intention behind such a contract, namely, whether it was for sale of goods or for services, is rendered otiose or immaterial. (State of Karnataka v. Pro Lab [(2015) 78 VST 451 (SC)];Larsen and Toubro Ltd. v. State of Karnataka [(2013) 65 VST 1 (SC)]). The dominant nature test or overwhelming component test or the degree of labour and service test are no longer applicable. (Kone Elevator India (P) Ltd. [Supra]; Larsen and Toubro Ltd. [Supra]). It is open to the taxing authorities to tax that part of the contract which relates to the sale of goods. (Banarsi Das Bhanot v. State of M.P., [AIR 1958 SC 909]; Gannon Dunkerly (I) [Supra]). The contracts, which are the subject matter of all these Writ Petitions, are all works contracts as they involve both supply of material, and rendering services in connection with the work of erection and installation of the plant.
In L.S. Chandramouli and Company v. The State of Madras [(1966) 18 STC 325 (Madras)(DB)], the Division Bench of the Madras High Court held that there was nothing wrong in the same person holding two different capacities, one as an agent of a non-resident principal and the other as proprietor of his own business. This judgment was referred to with approval by the Supreme Court in Karnataka PawnbrokersAssn. v. State of Karnataka [(1998) 7 SCC 707]. In State of Karnataka v. Bangalore Soft Drinks P. Ltd. [(2000) 117 STC 413 (SC)], the Supreme Court held that the terms of the contract indicated that the respondent had a dual role to play - one as seller of the goods and the other as that of a transporter or the carrier of the goods. The same person can, no doubt, play a dual role and, merely because both the contracts are entrusted to the same person, two separate and independent contracts would not become a single indivisible contract. Turn-key projects, however, stand on a different footing.
In turn-key projects, more particularly of the kind involved in this batch of Writ Petitions, the same person has been entrusted with the responsibility of procuring material, and of erection and installation of equipment. While in-built safeguards are provided in all the contracts to ensure quality of the material, and effective performance of the erection contract, the supply contracts, in substance, do not absolve the petitioners-contractors of their obligations of erection and installation of equipment after the goods are sold by them to the owner. The petitioners-contractorsobligations, under both the supply and erection contracts, cease only after the turn-key project becomes operational, and after final payment is made both for supply of material and for erection and installation of equipment. While a dual role is not impermissible in execution of turnkey projects, its relevance, in determining whether or not the subject contracts are indivisible works contracts, is insignificant. While we see no reason to burden this judgment with a reference to all the relevant clauses in each of the agreements, it is useful to note some of them.
Payment under clause 4.2.2 of the Alstom “ GVK and Alstom “ Goutami supply contract is conditional on performance acceptance under the services contract. Clause 14.4 of the Alstom - GVK and the Alstom “ Gautami Supply Contract stipulates that, if the services contract is terminated by the owner, the owner shall have the right to terminate the supply contract. Likewise Clause 15.4 of the erection contract between Alstom “ GVK and Alstom “ Goutami enables the employer to terminate the erection contract if the supply contract has been terminated. Para 1.1 (v) of Appendix “ B thereof provides for 5% of the price of supplies to be made on the occurrence of the provisional performance acceptance of the facility in accordance with Clause 4.2.2 of the agreement.
Clause 14.2.1(c) of the L and T - Konaseema Supply Contract enables the supply contract to be terminated by the owner in the event of termination of the owner's other contracts (erection contract). Clause 1.3 of Appendix “ I provides for payment for supplies, and for discharge of the obligations to supply, after test of the material at the facility site. Clause 1.4 of Appendix-B provides for part payment for the supply to be made on issuance a site test certificate i.e., after completion of erection.
Appendix-H of the L and T “ Vemagiri supply agreement stipulates that 5% of the price shall be paid on successful test for the identified packages as per the pricing and technical specifications; 5% of the price on provisional acceptance; and 5% of the price on final acceptance. Provisional acceptance is defined under the supply agreement to mean the achievement of provisional acceptance as defined in the civil works and erection agreement, and in accordance with the terms thereof. It is evident, therefore, that 10% of the payment under the supply agreement is required to be made only after provisional and final acceptance as stipulated under the erection agreement.
The aforesaid clauses show that termination of the supply contract would enable the employer to terminate the erection contract and vice-versa. In Indure Ltd. v. CTO [(2010) 9 SCC 461], the bidder was required to quote a lump sum price in its proposal for the entire scope of the work covered under the bid documents. The total contract was agreed to be divided into two separate contracts, (i) supply contract, and (ii) erection contract, with a cross-fall breach clause wherein breach of either of the contracts entitled the employer/owner/contractee (NTPC) to cancel the other contract also. NTPC awarded two contracts to Indure Ltd. for performing the work of erection of the plant on a turnkey basis. The Supreme Court, in Indure Ltd [Supra], held that, even though two contracts were entered into between the parties, it was only one contract for the reason that NTPC kept a right with it with regard to the cross-fall breach clause, meaning thereby that default in one contract would tantamount to default in another, and the whole contract was liable to be cancelled.
Existence of a cross-fall breach clause, or a clause which enables the owner to terminate the supply contract for breach of the erection contract and vice-versa, would mean that, while the contracts are ostensibly two separate contracts “ one for supply of material and the other for rendering works and services, they are, in fact, one single indivisible contract. The goods supplied to the owner, under the supply contracts, are tailor made goods, and cannot be bought off the shelf. Such goods cannot, ordinarily, be sold to another except for its use in turnkey projects of a similar nature. The petitioners have been entrusted with the work mainly for their expertise in erection and installation of plants in the execution of turn-key projects. As they were entrusted with the work of erection and installation, the petitioners-contractors have also been entrusted with the task of procuring material therefor. The functions relating to the supply of material, and rendering services of erection and installation, are integrally connected and are inter-dependent.
In some of these cases, the contractors were required to submit a single bid both for supply of material, and for erection and installation of equipment for the turn-key project. Clause 3.2 of the letter of award of the work issued by Power Grid Corporation of India Ltd ( Power Grid for short) to Siemens Limited stipulates that the contract shall be construed as a single source responsibility contract, and any breach in any part of the contract shall be treated as a breach of the entire contract. Clause 2.3 of the Seimens “ Power Grid agreement stipulates that the work, under the letter of Award, shall be performed by the Contractor strictly in line with the bidding documents.Clause 2.3(ii) of the Siemens - Power Grid Supply Contract stipulates that breach, under the erection contract, would automatically be deemed as a breach of the supply contract and any such breach or occurrence would give Power Grid the right to terminate the erection contract and the supply contract. An identical clause is found in clause 2.3(ii) of the Siemens - Power Grid erection contract also. Clause 3.3 of the Siemens “ Power Grid supply contract stipulates that the total ex-works prices for the items are on a lumpsum/lot/set basis. Clause 6.1(iii)(c) of the supply contract stipulates that 10% of the ex-works price component shall be paid on successful completion of erection, testing and commissioning of the sub-station and issuance of taking over certificate. The Siemens - Power Grid supply contract also prescribes an implementation schedule not only for supply but also for erection, testing and commissioning of the power plant.
The tender notice issued by the Rashtriya Ispat Nigam Limited (RINL) shows that both supply and erection fall within the scope of the very same work. Clause 5.1 of the bidding document of RINL stipulates that the work comprises of design and engineering, manufacture and supply of plant and equipment, erection work, testing, start-up and commissioning etc. Clause 4.1 prohibits the contractor from transferring or assigning the contract or any part thereof without the written consent of the employer. The correspondence between Siemens and RINL shows that the subject composite work was awarded to Siemens Limited for a lumpsum amount. Clause 23.2 of the bidding document stipulates that the prices to be quoted are intended to provide for all works duly and properly completed in accordance with the General Conditions of Contract and Special Conditions of Contract, if any, and are required to include the cost of delivery of the equipment. Clause 23.2.2 stipulates that payment against supplies would be released only on receipt and acceptance of material as per payment terms referred to in the General Conditions. Article 8 of the Seimens “ RINL agreement stipulates that, in consideration of the payment to be made by the customer (owner) to the contractor, the contractor covenants with the customer to design, manufacture and supply the plant and equipment as per the contract specification and other documents of the contract. A consolidated price is stipulated as the total contract price combining the contract prices of the individual agreements. It is evident that, while the form of the contracts indicate that they are two separate contracts, in substance they are one single indivisible works contract for supply of material and for erection and installation of equipment. Existence of a bailment clause or a free issues clause does not alter the situation.
Reliance placed by the petitioners on Larsen and Toubro Ltd. [Supra]is misplaced. Mere general observations, or casual expressions of the Court, are of no avail.(Girnar Traders v. State of Maharashtra [(2011) 3 SCC 1]). A decision, which is neither founded on reasons nor it proceeds on a consideration of an issue, cannot be deemed to have binding effect. (Jaisri Sahu v. Rajdewan Dubey [AIR 1962 SC 83]; Municipal Corporation of Delhi v. Gurnam Kaur [(1989)1 SCC 101]; B. Shama Rao v. Union Territory of Pondicherry [AIR 1967 SC 1480]; State of U.P. v. Synthetics and Chemicals [(1991)4 SCC 139]). A judgment delivered without argument, without reference to the relevant provisions of the Act, and without any citation of authority need not be followed. (Gurnam Kaur [Supra]). A mere direction of the Court without considering the legal position is not binding. (Vishnu Dutt Sharma v. Manju Sharma [(2009) 6 SCC 379]). The view, if any, expressed without analysing the statutory provision cannot be treated as a precedent. (N. Bhargavan Pillai v. State of Kerala [(2004) 13 SCC 217]). Passing observations in a judgment without any argument and without reason do not form part of the ratio, and cannot be treated as having the weight of authority. (Gurnam Kaur [Supra]; Bengal Club Ltd. v. Susanta Kumar Chowdhury [AIR 2003 Calcutta 96]). The conclusion of the Division bench, in Larson and Toubro Ltd1, that the contracts before it was a divisible contract is not preceded by any reasons, and is not a declaration of law. The opinion expressed in the said judgment is without an analysis of the relevant contractual provisions or judicial precedents, and is not a precedent binding on a co-ordinate bench.
Placing reliance on Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [(2005) 11 SCC 314] and Akshaya Restaurant v. P. Anjanappa [1995 Supp (2) SCC 303] Sri N. Venkataraman, Learned Senior Counsel, would submit that, in para 29 of their writ affidavit, the petitioner (LandT) had inadvertently stated that the contracts are composite indivisible contracts whereas in the very same affidavit, in every other place, there is a consistent plea that the contracts are divisible contracts of sale and erection; the petitioner has filed an affidavit on 24.12.2014 bringing to the notice of this Court this inadvertent error; and this affidavit may be taken on record, the error condoned, and the plea deleted.
On the other hand, relying on Nagindas Ramdas v. Dalpatram Ichharam [(1974) 1 SCC 342]; Bishwanath Prasad v. Dwarka Prasad [(1974) 1 SCC 78]; Viswalakshmi Sasidharan v. Branch Manager, Syndicate Bank [(1997) 10 SCC 73]; Gautam Sarup v. Leela Jetly [(2008) 7 SCC 85]; Heeralal v. Kalyan Mal [(1998) 1 SCC 278]; Modi Spinning and Weaving Mills Company Ltd. v. Ladha Ram and Co.[(1976) 4 SCC 320]; Steel Authority of India v. Union of India [(2006) 12 SCC 233]; Union of India v. Pramod Gupta (Dead)by Lrs. [(2005) 12 SCC 1]); Nichhalbhai Vallabhai v. Jawantlal Zinabha [AIR 1966 SC 997]; L. J. Leach and Co. Ltd. v. Jardine Skinner and Co [AIR 1957 SC 357]; and Vimal Chand Ghevarchand Jain v. Ramakant Eknath Jadoo [(2009) 5 SCC 713], Sri K. Vivek Reddy, Learned Special Counsel, would submit that the petitioners cannot resile from their categorical admissions that the subject contract is an indivisible works contract; L and T has admitted in its Writ Petition that the contract between the petitioner and owner is an indivisible works contract; the averments in the Writ Affidavit cannot be treated as an inadvertent or a typographical error; the statement made by the petitioner is an admission; and admission in pleadings stand on a higher pedestal than evidentiary admissions. As we have held that the subject contracts are indivisible contracts, it is unnecessary for us to examine the effect of the admission, by L and T in their pleadings, that the contract is an indivisible contract.
III. DOES THE SALE OF GOODS BY THE PETITIONER-CONTRACTORS TO THE OWNERS FALL WITHIN THE AMBIT OF SECTION 6(2) OF THE CST ACT?
(i). SECTION 6(2) OF THE CST ACT: ITS SCOPE:
It is contended, on behalf of the petitioners, that the assessment order does not dispute that the contracts envisage supply of goods from outside the State of Andhra Pradesh either as inter-state sale or transit sale or import sale or that a transit sale had taken place during the movement of goods; the contractual conditions relating to site test, performance guarantee or cross fall breach do not encumber or delay or defer the transfer of title to the goods till the stage of incorporation or accretion; it is the transferred goods, or the goods sold, which are given back to the supplier as free issues which are used in erection and installation to meet the performance and the liquidated damages test; failure does not defer or postpone transfer of title, and only obligates re-performance or recovery of damages from the contractor; in the present case, the goods were sold in transit by way of endorsement, and after securing necessary statutory forms, raising sales invoices and concluding the sale before termination of movement; the inter-state transactions are transit sales eligible for exemption under Section 6(2) of the CST Act; the sale transactions are sales effected in transit during movement of the goods; appropriation of the goods to the contract took place, even before movement of the goods, at the place of manufacturer itself; and the goods, both in fact and in law, belong to the contractee only.
The contracts, which are the subject matter of these Writ Petitions, broadly envisage purchase of goods/material by the contractor from the identified suppliers referred to in the contract; the material so purchased to be inspected by the owner prior to its transportation from the State where the goods are manufactured; and, thereafter, for the goods to be transported by the contractor to the work site of the owner in the other State where it is to be used in the erection and installation of the turnkey project. These goods are tailor made for being utilised exclusively for the turnkey project.
These contracts are, basically, in two parts “ the first relating to supply of material and the second to erection and installation of equipment. The supply contract refers to the suppliers of material from whom the contractor is required to purchase the goods. After the goods are purchased from these pre-identified suppliers, most of whom are dealers outside the State, the goods are then transported by the contractor from outside the State to the State of Andhra Pradesh (now the States of Telangana and Andhra Pradesh). The supply contract stipulates that the contractor should purchase the goods from the identified suppliers outside the state on which tax is paid by the contractor under Section 3(a) of the CST Act; after purchasing the goods from the supplier, the contractor is contractually bound to sell the goods to the owner, during transit, by endorsement of the lorry receipts. While the goods are purchased by the contractor from the supplier at a lower price, the very same goods are sold by the contractor to the owner at a higher price. No tax is paid on the sale of goods by the petitioner-contractor to the owner. The petitioners state that the goods purchased by them, from suppliers outside the State, was subjected to tax under Section 3(a) of the CST Act, and claim that the goods sold by them to the owner is a transit sale exempt from tax under Section 6(2) of the CST Act. By this arrangement under the supply contracts ?, which requires the contractor to purchase the prescribed goods from identified suppliers outside the State, and to sell the very same goods at a higher price to the owner by endorsement on the LRs when the goods are in transit, the tax paid is lower than what would have been paid if the price, at which the contractor sold the goods to the owner, is taken as the value of the goods sold in the course of inter-state trade and commerce. While it is not in dispute that, by this contractual arrangement between the contractor and the owner, there is a loss of revenue to the public exchequer, the contention, urged on behalf of the petitioners, is that the parties to the agreement are entitled to arrange their affairs in a manner which would result in a lower tax burden on them.
It is no doubt true that every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the tax gatherers may be of his ingenuity, he cannot be compelled to pay an increased tax. (IRC v. Duke of Westminster [1936 AC 1]; Union of India v. Azadi Bachao Andolan [(2004) 10 SCC 1]). Tax planning is not illegitimate. Every transaction or arrangement which is permissible under the law, and which has the effect of reducing the tax burden of the assessee, need not be looked upon with disfavour (Azadi Bachao Andolan [Supra]; M.V. Valliappan v. ITO [(1988) 170 ITR 278 (Madras HC) (DB)]) or viewed with suspicion, or be treated as a device for avoidance of tax irrespective of the legitimacy or the genuineness of the act. (Banyan and Berry v. CIT [(1996) 222 ITR 831 (Gujarat HC)(DB]; Azadi Bachao Andolan [Supra]).
While tax planning may be legitimate, provided it is within the framework of the law, colourable devices cannot be a part of tax planning, and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay taxes honestly without resorting to subterfuge. (Mc Dowell v. CTO [(1985) 3 SCC 230]; Banyan and Berry [Supra]; Azadi Bachao Andolan [Supra]; CIT v. A. Raman and Co. [AIR 1968 SC 49]).
While parties cannot be compelled to enter into agreements in a manner which would generate higher tax revenue, levy of tax, on transactions embodied in a document, would depend upon the meaning and content of the language used in accordance with the ordinary rules of construction. (C.I.T. v. Motors and General Stores (P) Ltd [AIR 1968 SC 200 = (1967) 66 ITR 692) (SC)]). The name given to a transaction by the contracting parties does not, necessarily, decide the nature of the transaction. The question always is what is the real character of the transaction, not what the parties call it. (Commissioners of Inland Revenue v. Wesleyan and General Assurance Society [30 TC II]; Motors and General Stores (P) Ltd [Supra]). The Court must examine the substance of the contract, and not be swayed by its form. In drawing a distinction between the form and substance of the arrangement, the Court cannot brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties, and decide the question of taxability or non-taxability upon the footing that the rights and liabilities of the parties are different from what in law they are. (Motors and General Stores (P) Ltd [Supra]; Duke of Westminster case [(1935) 19 TC 490]). The taxing authority is not restricted merely to the letter of the document. He must enquire into the true nature of the transaction after examining the relevant materials, and should ascertain whether it partakes the nature of the transaction which the statute renders taxable. He is, in ascertaining the true nature of the contract, also entitled to consider how the contract was performed. (Carl Still G.M.B.H. [Supra]).Bearing these aspects in mind let us now examine the scope of Sections 3(a), 3(b) and 6(2) of the CST Act to ascertain whether the subject contracts fall within its ambit.
Principles are formulated, under Chapter II of the CST Act, for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce or outside a State or in the course of import or export. Section 3, in Chapter II, explains when a sale or purchase of goods is said to take place in the course of inter-State trade or commerce. It creates a legal fiction, and requires a sale or purchase of goods to be deemed to take place in the course of inter-state trade or commerce only if it falls within clauses (a) and(b) thereof. Within Section 3(b) are sales in which property in the goods passes during movement of the goods from one State to another by transfer of documents of title thereto, whereas Section 3(a) covers sales, other than those included in clause (b), in which the movement of goods from one State to another is under the contract of sale, and property in the goods passes in either States. A sale which takes place under Section 3(a) stands excluded from the purview of Section 3(b) and vice versa. In respect of an inter-State sale, tax is leviable only once, and that indicates that the two clauses of Section 3 are mutually exclusive.The dividing line between sales under Section 3(a) and those falling under Section 3(b) is that, in the former, the movement is under the contract whereas, in the latter, the contract comes into existence only after commencement and before termination of the inter-State movement of the goods. An inter-State sale is governed under Section 3(b), if it is effected by transfer of documents of title after such movement has started, and before the goods are actually delivered. (TISCO v. S.R. Sarkar [AIR 1961 SC 65 = (1960) 11 STC 655]; AandG Projects and Technologies Ltd v. State of Karnataka [(2009) 2 SCC 326]).
For a sale to fall under Section 3(b), the sale must be effected by the transfer of documents of title to the goods. The transfer of documents, contemplated by Section 3(b), is a transfer which, in law, amounts to delivery of the goods. Transfer of documents either by endorsement or delivery completes the transfer of title but, in the absence of an indication to that effect in the statute, the place where the documents are transferred is not necessarily the place of the sale. (S.R. Sarkar [Supra]). Transfer of documents of title may be effected by handing them over. An endorsement to that effect on the documents is one mode of proving the fact. (The Dy. Commissioner of Commercial Tax, Madurai Division, Madurai v. A.R.S. Thirumeninatha Nadar Firm, Tuticorin [(1968) 21 STC 184) (Madras HC) (DB)]). A railway/lorry receipt is a document of title to the goods and, for all purposes, represents the goods. When the railway/lorry receipt is handed over to the consignee on payment, the property in the goods is transferred. (Commissioner of Income-Tax, Madhya Pradesh and Bhopal, Nagpur v. Bhopal Textiles Ltd., Bhopal [AIR 1961 SC 426]; Bharat and Co. v. Trade Tax Officer [(2005) 6 SCC 796]).
Where the property in the goods has passed, either before the movement has commenced or after the movement from one State to another has ceased, the sale will not fall within clause (b). A sale effected by transfer of documents of title after commencement of movement and before its conclusion, as defined by the two terminii set out in Explanation (1) of Section 3, and no other sale, will be regarded as an inter-State sale under Section 3(b). (S.R. Sarkar [Supra]).The reference to two States in Section 3(b) makes it clear that termination of the journey of the goods takes place when the goods land in the importing State. If the documents of title are transferred after the goods have landed, all sales thereafter are intra-State sales. (Arjun Dass Gupta and Bros v. Commissioner of Sales Tax, Delhi Administration, Vikash Bhawan, New Delhi [(1980) 45 STC 52) (Delhi High Court) (DB)]).
The ingredients of Section 6(2) of the CST Act are (1) there must be a sale of goods in the course of inter-state trade or commerce; (2) the sale (a) has either occasioned movement of such goods from one state to another (ie a Section 3(a) sale) or (b) has been effected by a transfer of documents of title to such goods during their movement from one state to another (ie a Section 3(b) sale); (3) there is a subsequent sale during such movement (ie when the goods are in movement, pursuant to a Section 3(a) or a Section 3(b) sale, the very same goods are again sold); (4) the subsequent sale is effected by a transfer of documents of title to such goods (ie the very same goods which have commenced movement from one State, pursuant to a Section 3(a) or a Section 3(b) sale, but have not yet completed its movement in the other State, are again sold during their movement (transit) by effecting transfer of documents of its title); (5) the sale of goods is to a registered dealer; (6) the goods are of the description referred to in Section 8(3) of the CST Act; (7) if these ingredients are satisfied then the subsequent sale is exempt from tax under the CST Act; (8) such a subsequent sale (ie the subsequent sale referred to in Section 6(2)) shall not be exempt from tax under Section 6(2) unless the dealer, effecting the subsequent sale, furnishes to the prescribed authority (a) the E-I or E-II certificate from the registered dealer from whom the goods were purchased by him (in terms of Rule 12(4) of the CST (Registration and Turnover) Rules, 1957; and (b) a C or D form/certificate (in terms of Rule 12(1) of the 1957 Rules) from the registered dealer to whom the subsequent sale was made by him (ie the purchaser of the goods under the first sale becomes the vendor (seller) of the goods in the second (subsequent) sale); and (9) the certificates, referred to at point 8(a) and 8(b) above, are furnished in the prescribed manner within the prescribed time.
Section 6(1) envisages payment of tax on all sales effected in the course of inter-state trade or commerce and, in effect, provides for a multi-point or multi-stage taxation regime for the inter-state sale of goods. Section 6(1) is subject to the other provisions of the CST Act. Section 6(2), which contains a non-obstante clause, has been introduced to avoid the cascading effect of multiple taxation. (AandG Projects and Technologies Ltd. [Supra]). In view of the non-obstante clause, the provisions of Section 6(2) prevail over Section 6(1) of the CST Act and all subsequent sale of goods (i.e., the second sale onwards), during their movement from one state to another, are exempt from tax. It is only with a view to ensure free and unhindered movement of goods from one state to another that the first inter-state sale, be it under Section 3(a) or under Section 3(b), is alone subject to tax and all subsequent sales, effected during the movement of such goods from one State to another, are exempt from tax under Section 6(2) of the CST Act.
(ii) SHOULD THE SUBSEQUENT SALE, TO BE EXEMPT UNDER SECTION 6(2), HAVE THE CHARACTERISTICS OF AN INTER-STATE SALE UNDER SECTION 3(b) OF THE CST ACT?
It is contended, on behalf of the petitioners, that a transit sale, exempt under Section 6(2), is not a Section 3(b) sale for the following reasons: (a) a transit sale is necessarily a second or a subsequent sale, whereas a Section 3(b) sale is a first sale; (b) more importantly, since a transit sale is only a second sale or a subsequent sale, it would necessarily be preceded by a first sale; therefore, a Section 6(2) sale cannot be construed as a Section 3(b) sale; the purpose of reference to Section 3(b) along with Section 6(2) is limited; both a Section 3(b) sale and a Section 6(2) sale take place during movement of goods in transit, and by way of transfer of documents of title during their movement; because of this similarity, Explanation I to Section 3 is also read into Section 6(2); the taxing power, and the jurisdictional competence to tax, in the case of sales falling under Section 3(a) and Section 3(b), and the second or the subsequent sale which are not exempt under Section 6(2), are not given to the same States; the stark dissimilarities are a Section 3(b) sale is a first sale whereas a Section 6(2) sale is a second or a subsequent sale; and the power to tax the transactions by the respective States are also not the same.
It is contended, on behalf of the revenue, that a sale ceases to be a sale exempt under Section 6(2) if the following occur: (a) if the title passes on delivery, the sale cannot be a transit-sale because title is passing after movement; (b) if title passes ex-works, the sale cannot be a transit sale since title passes prior to movement (refer: definition of Ex “Works in Black's Law Dictionary, 8th Edn. at Page 626); (c) if title passes upon delivery to the carrier, it cannot be a transit sale since title passes prior to movement; (d) if title passes only upon full payment, it is not a transit sale as title does not pass during movement; (e) if there is a pre-determined sale, or a pre-determined buyer, prior to movement it cannot be a transit sale; (f) if payment is upon successful erection, it is not a transit sale since title passes only after movement is complete; (g) if the property passes after a certificate is issued by the owner, it cannot be a transit sale because title passes after movement; and (h) a sale after inspection cannot be a transit sale as title passes only after delivery; the second inter-state sale has, necessarily, to be a Section 3(b) sale because the language used in Section 6(2), to describe the second inter-state sale, is the same as in Section 3(b); it is not, and cannot be treated, as a third category of inter-state sale; and the CST Act contemplates only two categories of inter-state sales ie either a Section 3(a) or a Section 3(b) sale.
In order to attract Section 6(2), it is essential that the sale must be a subsequent inter-State sale and should be preceded by a prior inter-State sale. (AandG Projects and Technologies Ltd. [Supra]). The use of the word subsequent means that the sale, on which exemption is claimed under Section 6(2) of the CST Act, must be preceded by an earlier inter-state sale. The words such goods', used in the second limb of Section 6(2), refer to the goods in the first limb which are the goods sold during the course of inter-state trade or commerce either under Section 3(a) or under Section 3(b). The words during such movementin Section 6(2) suggest that the goods are in movement i.e the goods have commenced movement in one State, but have not completed its movement in the other State.The movement of goods is deemed to commence at the time of delivery of the goods to, and terminate at the time when delivery is taken from, the carrier. (Sundaram Industries v. State of Tamil Nadu [(1992) 86 STC 554 (Madras HC)(DB)]. The requirement of the subsequent sale being effected by transfer of documents of title, and not by physical delivery thereof, indicates that the subsequent sale must have been effected after the goods have commenced movement in one State but have not yet been delivered in the other State.
Similar to a Section 3(b) sale, where sale of goods is effected by a transfer of documents of title to such goods during their movement from one State to another, the subsequent sale under Section 6(2) must also take place during such movement ie during their movement from one State to another. Like a Section 3(b) sale, the subsequent sale under Section 6(2) must also be effected by way of a transfer of documents of title to such goods. The words during their movementare used both in Section 3(b) and the first limb of Section 6(2). The words such movementin the second limb of Section 6(2) can only mean during the movement of goods as referred to in the first limb of Section 6(2), more so as both the first and the second limb of Section 6(2) require the sale to be effected by transfer of documents of title to such goods during their movement from one State to another. Where the legislature uses the same word or phrase in similar contexts, in different parts of the same Section or Statute, there is a presumption that the word is used in the same sense throughout, and to intend it in each place to bear the same meaning. (Courtauld v. Legh [(1869) LR 4 Exch 26]; Black-Clawson v. Papierwerke [(1975) 1 ALL ER 847]; Farrell v. Alexander [(1976) 2 ALL ER 721]). Ordinarily, a word or expression used at several places in one enactment should be assigned the same meaning so as to avoid a head-on clash between two meanings assigned to the same word or expression occurring at two places in the same enactment. It should not be lightly assumed that Parliament had given with one hand what it took away with the other ?. (Central Bank of India v. Ravindra [(2002) 1 SCC 367]; Farrell115; Madras Electric Supply Corporation Ltd (In Liquidation) v. Boarland (Inspector of Taxes) [(1955) 1 All ER 753]).
It is, at all events, reasonable to presume that the same meaning is implied by the use of the same expression in every part of an Act. (CIT v. Venkateswara Hatcheries (P) Ltd., [AIR 1999 SC 1225 = (1999) 3 SCC 632]; Shamrao Vishnu Parulekar v. Distt. Magistrate, Thana [AIR 1957 SC 23]; Maxwell's Interpretation of Statutes, Edn. 10, p. 522), unless the context suggests otherwise, (Suresh Chand v. Gulam Chisti [AIR 1990 SC 897 = (1990) 1 SCC 593]; Raghubans Narain Singh v. U.P. Government [AIR 1967 SC 465 = (1967) 1 SCR 489] or there is something repugnant in the context, (Bhogilal Chunilal Pandya v. State of Bombay [AIR 1959 SC 356 = 1959 Supp (1) SCR 310]), and is a guide which must yield to indications of a contrary intention. (Payne (Inspector of Taxes) v. Barratt Developments (Luton) Ltd [(1985) 1 All ER 257]). There is nothing in the context of either Section 3(b) or Section 6(2) which indicates a contrary intention. Consequently it is only a contract of sale which comes into existence when the goods are in movement, pursuant to an earlier inter-state sale either under Section 3(a) or 3(b), which would fall within the ambit of Section 6(2) of the CST Act.
The subsequent sale, exempt under Section 6(2), has a reference only to a sale made during such movement ?. In other words, the second or subsequent sale has to be one which falls under Section 3(b) of the CST Act. (Mitsubishi Corporation India P. Ltd. v. VAT Officer (Delhi) [(2010) 34 VST 417 (Delhi HC) (DB)]). It must have been effected before the journey of the goods ends or before the goods reach their destination, and must fall within Section 3(b). (Voltas Ltd. v. State of Orissa [(2008) 15 VST 401 (Orissa HC) (DB)]; G.E.T. Power Pvt. Ltd. v. State of Odisha [(2012) 50 VST 363 (Orissa HC) (DB)]).The conditions discernible from Section 6(2) are that, while the first sale can be either a Section 3(a) or a Section 3(b) sale, the second or subsequent sale has to be a Section 3(b) sale (Mitsubishi Corporation India P. Ltd. [Supra]) ie it must necessarily have all the other characteristics of a Section 3(b) sale. Like a Section 3(b) sale, a sale under Section 6(2) also takes place during the movement of goods from one State to another. Again like a Section 3(b) sale the subsequent sale, which is exempt under Section 6(2), is also effected by transfer of document of title during the movement of goods from one State to another. While the situs of a Section 3(a) sale can either be in the State from where the goods move or in the State where the goods are delivered, both a Section 3(b) and a subsequent sale exempt under Section 6(2) can only take place when the goods are in movement from one State to another. A contract of sale entered into either before commencement of movement in the first State, or after completion of movement of the goods in the second State, can neither be a Section 3(b) sale nor a subsequent sale exempt under Section 6(2) of the CST Act.
(iii) IS THE LAW DECLARED BY THE SUPREME COURT, IN A and G PROJECTS and TECHNOLOGIES LTD. V. STATE OF KARNATAKA BINDING ON THIS COURT?
In AandG Projects and Technologies Ltd. [Supra], the appellant contended that there were three sales, the second and the third sales were subsequent sales, and they were exempt from tax under Section 6(2) of the CST Act; this argument of the appellant stood rejected by the assessing authority who held that the appellant's turnover fell under Section 3(a) of the CST Act, all the three sales were Section 3(a) sales, and consequently the appellant was not entitled to exemption under Section 6(2) of the CST Act. Relying on the proviso to Section 9(1) of the CST Act, the assessing authority held that the State of Karnataka was competent to levy tax. It is in this context that the Supreme Court held:-
.Analysing Section 6(2), it is clear that sub-section (2) has been introduced in Section 6 in order to avoid cascading effect of multiple taxation. A subsequent sale falling under sub-section (2), which satisfies the conditions mentioned in the proviso thereto, is exempt from tax as the first sale has been subjected to tax under sub-section (1) of Section 6 of the CST Act, 1956. Thus, in order to attract Section 6(2), it is essential that the sale concerned must be a subsequent inter-State sale effected by transfer of documents of title to the goods during the movement of the goods from one State to another and it must be preceded by a prior inter-State sale. It is only then that Section 6(2) may be attracted in order to make such subsequent sale exempt from levy of sales tax. However, the proviso to sub-section (2) of Section 6 prescribes further conditions and it is only on fulfilment of those conditions that the subsequent sale stands exempted. If those conditions are not satisfied, then notwithstanding the fact that the sale is a subsequent sale, the exemption would not be admissible to such subsequent sales. This is the scheme of Section 6 of the CST Act, 1956 . (emphasis supplied).
It is contended, on behalf of the petitioners, that the Supreme Court in AandG Project and Technologies [Supra]was neither dealing with transactions under Section 3(b) nor under Section 6(2), but only under Section 3(a); while a general analysis of Section 6(2) of the CST Act was made therein, the Supreme Court neither stated that a Section 6(2) sale is a Section 3(b) sale nor has it concluded that a contract should emerge subsequent to movement for a sale to qualify as a transit sale i.e., as a Section 6(2) sale; when it refers to emergence of a contract subsequent to movement, the Supreme Court has identified this condition only for a Section 3(b) sale, and not a Section 6(2) sale; and there is nothing in the judgment to show that the sale, under Section 3(b), cannot have a predetermined customer.
It is no doubt true that the Supreme Court, in AandG Projects and Technologies Ltd [Supra], proceeded on the premise that all the three sales were Section 3(a) sales. Nevertheless the scope of Section 6(2) of the CST Act was considered therein. Once a Judgment is rendered by the Supreme Court, it should not be contended later that a particular point was not raised or considered by the learned Judges or that it is open to the High Court to re-consider the same. (Delhi Cloth General Mills v. Shambunadh [MANU/SC/0225/1977: (1978) ILLJ 1 SC]; Government of A.P. v. N. Chowdary [1993(2) A.P.L.J. 479 = 1993(3) ALT 391]).
Even if the scope of Section 6(2) of the CST Act was not in issue in AandG Projects and Technologies Ltd [Supra], it is nonetheless binding as the High Court is bound even by the obiter-dicta of the Supreme Court. An obiter dictum', as distinguished from a ratio decidendi, is an observation by the Court on a legal question suggested in a case before it, but not arising in such manner as to require a decision. (State of Haryana v. Ranbir [(2006) 5 SCC 167];ADM, Jabalpur v. Shivakant Shukla [(1976) 2 SCC 521]; Girnar Traders76; Divisional Controller, KSRTCv. Mahadeva Shetty [(2003) 7 SCC 197 = 2003 SCC (Cri) 1722]; Director of Settlements, A.P.v. M.R. Apparao [(2002) 4 SCC 638]). Obiter dicta of the Supreme Court is binding upon other courts in the country (Sanjay Dutt v. State through CBI, Bombay [(1994) 5 SCC 402])in the absence of a direct pronouncement on that question elsewhere by the Supreme Court (Oriental Insurance Co. Ltd. v. Meena Variyal [(2007) 5 SCC 428]), and is entitled to considerable weight.(CIT v. Vazir Sultan and Sons [(1959 Supp (2) SCR 375= AIR 1959 S.C. 814]).We must express our inability to agree with the submission, urged on behalf of the petitioners, that the scope of Section 6(2), as analysed therein, need not be followed.
(iv) CAN A CONTRACT OF SALE OF FUTURE GOODS FALL WITHIN THE AMBIT OF SECTION 6(2) OF THE CST ACT?
It is contended on behalf of the revenue that, in view of Section 4(2)(b) of the CST Act, if the appropriation of future goods of a contract of sale takes place in the respondent State, the respondent is entitled to levy tax thereupon as the sale is deemed to take place within the State; the goods which form the subject matter of the Supply Contracts are future goods and not specific goods; the title to future goods passes only upon unconditional appropriation; the determination of passing of title in future goods has to be decided with reference to Section 23 of the Sale of Goods Act, 1930 ( 1930 Act for short); and reliance placed by the petitioner on Section 20 of the 1930 Act is misplaced.
Section 4 of the CST Act is subject to the provisions of Section 3 thereof. The question, whether a sale is an inter-State sale or not, must be answered with reference to, and on the basis of, Section 3 alone. Section 4 is not relevant to the said question. (Bharat Heavy Electricals Ltd. [Supra]).If the transaction of sale satisfies the requirement of Section 3(a) or Section 3(b) it is deemed to be a sale of goods in the course of inter-State trade or commerce and, by virtue of Articles 269 and 286 of the Constitution, is beyond the legislative competence of a State legislature to tax. (State of A.P. v. National Thermal Power Corpn. Ltd., [(2002) 5 SCC 203]; S.R. Sarkar [Supra]; 20th Century Finance Corpn. Ltd v. State of Maharashtra [(2000) 6 SCC 12]). Section 4(2)(b) of the CST Act is similar to Section 23 of the Sale of Goods Act.While Section 4(2)(b) of the CST Act deems sale of unascertained or future goods to take place within a State, at the time of its appropriation to the contract of Sale by the sellSer or the buyer, it is evident from Section 4(1) that the deeming provision in Section 4(2) is subject to the provisions contained in Section 3 of the CST Act. If the sale of goods falls within the ambit of Section 3 of the CST Act, it would then be an inter-state sale notwithstanding that, in terms of Section 4(2)(b), the unascertained goods were appropriated to the contract of sale within the territorial limits of the State where the goods were delivered.
The 1930 Act classifies goods into three categories (i) specific goods (ii) future goods, and (iii) unascertained goods. Specific goods and future goods are defined in Section 2(6) and 2(14) of the 1930 Act. Section 20 of the 1930 Act is applicable only to specific goods. The goods, which are the subject matter of these contracts, are future goods as they were required to be purchased by the petitioner-contractor only after the contract was entered into. Section 20 of the 1930 Act applies only if there is an unconditional contract for sale. In these Writ Petitions the contracts of sale, which purport to effect the present sale of future goods ?, are merely agreements to sell, and not a Sale (Section 6(3) of the 1930 Act). Section 20 stipulates that the time for payment of price can be postponed. The petitioners supply contracts do not postpone payment, but payment thereunder is itself conditional on successful erection. Section 23 of the 1930 Act relates to the sale of unascertained goods and its appropriation. Thereunder title, with respect to future goods, passes on fulfilment of the following conditions (a) the goods must be in a deliverable state, (b) the goods must be unconditionally appropriated to the contract, and (c) there must be assent of the buyer if the appropriation is by the seller. The phrase deliverable state has been defined in Section 2(3) of the 1930 Act to mean buyer under the contract is bound to take delivery ?. For sale of future goods to happen, during the course of transit, all the aforesaid events should take place during the course of movement; if any of these events occur before or after movement, the title does not pass during movement and, therefore, the sale ceases to be a transit sale.Future goods are goods which come into existence after the contract of sale is entered into, and only thereafter can it be moved from one State to another. A contract of sale of future goods would invariably be entered into prior to commencement of movement.
Sale of unascertained goods can also take place after its delivery in the other State when the contract requires the buyer to ascertain and, thereafter, to buy the goods. When the movement of the goods starts, pursuant to a sale, they shed the character of either unascertained goods or future goods. Sale of goods, by transfer of documents of title during its movement from one State to another, can only be the sale of specific or ascertained goods(Balabhagas Hulaschand v. State of Orissa [(1976) 2 SCC 44= (1976) 37 STC 207]). It is only a contract of sale of specific goods which can be effected by transfer of documents of title during its movement, and not a sale of future goods.
Reliance is placed, on behalf of the petitioners, on State of Tamil Nadu v. Bombay Metal Depot [(1978) 41 STC 140 (Madras HC) (DB)]; and State of Karnataka v. ECE Industries Ltd [(2006) 144 STC 605 (Karnataka High Court) (DB)] wherein it was held that where the description of the goods is clear and the goods, sent in conformity with the description, have been accepted by the purchaser on the basis that they confirm to the description, there is ascertainment and appropriation of the goods to the contract; where the goods are ascertainable, and goods of that description are despatched, then the goods so despatched can be taken as appropriated to the contract unconditionally; and the circumstance that the purchaser has a right of rejection does not postpone the transfer of property in the goods. We must express our inability to agree with the declaration of law in the aforesaid judgments as the Supreme Court, in Salar Jung Sugar Mills Ltd. v. State of Mysore [AIR 1972 SC 87], held that unascertained goods are distinct from specific or ascertained goods, in the sense that future goods include goods not yet in existence, or goods in existence but not yet acquired by the seller; future goods, for the purposes of passing of property, can never be specific; future goods, if and when sufficiently identified, may be specific goods; goods to be manufactured by the seller are future goods; under Section 23 of the Sale of Goods Act, when there is a contract of sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained; where there is a contract for the sale of unascertained or future goods by description, the property in the goods passes to the buyer only when the goods of that description, and in a deliverable state, are unconditionally appropriated to the contract; and it is this unconditional appropriation which would pass the property. In National Thermal Power Corpn. Ltd., [Supra]; and 20th Century Finance Corporation Ltd. [Supra] the Supreme Court held that, where the goods are not in existence, such transactions may be effected by the delivery of the goods in which case the taxable event would be on the delivery of goods.
In the present batch of Writ Petitions the contracts were entered into, between the owner and the petitioner-contractor, prior to an order being placed by the petitioner-contractor on suppliers outside the State for supply of the goods required for installation and erection of the project within the State of A.P. (now Telangana and A.P.); the supply contracts, between the contractor and the owner, were for the sale of future goods which were required to be manufactured by the suppliers, identified in the contract, on an order being placed on them by the petitioner-contractors in terms of the contract entered into between the contractor and the owner. As the subject contracts provide for sale of future goods, they could not have been, and were not, entered into when the goods were in movement from one State to another. A contract for the sale of future goods can neither be a Section 3(b) sale nor a subsequent sale exempt from tax under Section 6(2) of the CST Act. As the subject contracts provide for the sale of future goods, the said contracts cannot be said to have arisen after commencement of movement of the goods i.e., during the movement of the goods from one State to another. It cannot, therefore, be a subsequent sale exempt from tax under Section 6(2) of the CST Act.
It is, however, contended on behalf of the petitioners that the subject contracts are merely agreements to sell which, in turn, provides for the sale of goods when it is in transit from one State to another. Before a transaction can be considered as a sale, there must be a transfer of property in goods for, without such a transfer, there cannot be any sale. (Commissioner of Sales Tax, M.P. v. Purshottam Premji [(1970) 2 SCC 287]).The word 'goods' in the definition of 'sale' in a Sales Tax Act must be interpreted according to its definition therein, and not according to the definition in Section 2(7) of the Sale of Goods Act. (Commissioner of Sales Tax, Eastern Division, Nagpur v. Husenali Adamji and Co. [(1959) 10 STC 297 (SC)]).Section 2(d) of the CST Act defines goods to include all materials, articles, commodities and all other kinds of actionable claims. Section 2(g) of the CST Act, after its substitution by Act No.20 of 2002 w.e.f. 11.05.2002, is an inclusive decision. The main part of Section 2(g), (other than the inclusive part), is similar to the pre-amended Section 2(g) and defines a sale to mean any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration.
A transaction of sale is subject to tax under the CST Act on the completion of the sale. A mere contract of sale is not a sale within the definition of "sale" in Section 2 (g) thereof. (TELCO Ltd. [Supra]; S. R. Sarkar [Supra]; Ben Gorm Nilgiri Plantations Co., Conoor v. Sales Tax Officer, Special Circle, Ernakulam [(1964) 7 SCR 706 = AIR 1964 SC 1752]). In Chem-Dyes Corporation [Supra], the Division bench of the Gujarat High Court held that one of the conditions for applicability of Section 3(b) is "sale" of goods, and not an agreement to sell; and both the conditions should be satisfied - sale as well as transfer of documents of title to the goods - during their movement from one State to another.
Without expressing any opinion on the merits of the submission we shall proceed on the premise that the subject contracts, which provide for the sale of future goods, is an agreement to sell and the sale of goods took place subsequent thereto. It is necessary, therefore, to ascertain whether the sale of goods, by the petitioner-contractor to the owner, took place when the goods were in movement from one State to another, for it is only then can such a sale fall within the ambit of Section 6(2) of the CST Act. While examining the contractual provisions in this light, it must be borne in mind that Courts and tribunals cannot rewrite contracts (LIC of India v. S. Sindhu [(2006) 5 SCC 258]) and must read the agreement as it is. The contract must be read as a whole and not be dissected, by taking out a part. (Shin Satellite Public Co. Ltd. v. Jain Studios Ltd. [(2006) 2 SCC 628]). It is the substance of the contract document/s, and not merely the form, which has to be looked into. (Hindustan Shipyard Ltd. v. State of A.P. [(2000) 6 SCC 579]).
It is the case of the petitioners that, in terms of the transit-sale clause in the contract (for instance clause 5.3.2 of the LandT - Konaseema contract), the sale of goods took place during transit by effecting transfer of documents of title to the goods. Article 5.3.2 (ii) of the LandT - Konaseema contract stipulates that the sales tax, included in the contract price stated in Article 5.1, includes central sales tax, leviable on the sale transaction between the supplier and his sub-supplier/vendors situated outside Andhra Pradesh @ 4% on equipment and materials, sale of which to the Owner will be effected by the Supplier by endorsing the documents while the goods are in transit under Section 6(2) of the CST Act; the sale to the Supplier, having taken place in the course of inter-state trade or commerce, the sale by the Supplier to the Owner shall similarly be deemed to have taken place in the course of inter-state trade or commerce; and necessary concessional sales tax forms shall be furnished by the Owner to the Supplier.
The aforesaid clause, and similar clauses in other supply agreements, cannot be read in isolation or out of context. It is necessary to read the contract as a whole to ascertain whether the parties, in fact, intended to transfer title to the goods during its movement from one state to another, or after the goods have landed and have been utilized or incorporated in the works of the owner, bearing in mind that, in the orders impugned in these Writ Petitions, the respondent-authorities have held that it does not.
The petitioners rely on the transit insurance clauses, the liquidated damages clauses, and the bailment/free issues clauses in the subject contracts in support of their submission that the sale of goods, by the petitioners-contractors to the owners, is only when the goods were in movement from one State to another. It is necessary, therefore, to examine these contractual provisions.
(v) TRANSIT INSURANCE:
It is contended, on behalf of the petitioners, that, unless the goods are sold and title in the goods vest with the owner, there is no obligation on the owner to take and cover the goods under insurance policies especially transit insurance, the cost of which is wholly borne by the owner.
Article 13.1 of the LandT - Konaseema contract stipulates that from notice to proceed date, until the issuance of the site test certificate for the equipment, the Owner (Konaseema) shall take a combined insurance for transit, erection, and all risks; and the supplier and its sub-suppliers will be mentioned as a co-insured in the policy to the extent of marine transit and third party liability insurance. Clause 8.1.1 of the Seimens “ Power Grid agreement stipulates that all the equipment and materials, being supplied by Seimens Ltd, shall be kept completely insured by them at their cost from the time of despatch from their works, upto the completion of erection, testing and commissioning at site, and taking over of the sub-stations by POWER GRID in accordance with the Contract.
Ownership of the property is not relevant in so far as insurance of the goods is concerned. It is not necessary that the person, insuring the interest, must be the owner of the property. There may be insurance to cover the interest of others. (Escorts JCB Ltd. v. CCE [(2003) 1 SCC 281]; Benjamin's Sale of Goods, 4th Edn; Colinvauz's Law of Insurance, 6th Edn. by Robert Merkin; State of Maharashtra v. Embee Corporation, Bombay [(1997) 107 STC 196 (SC)]). Insurance can be taken by a third person on behalf of another. A seller, in possession of the goods when the property and risks have passed, may insure his buyer's interest. A bailee, apart from its interest, may also insure the interest of the owner of the property. (Escorts JCB Ltd. [Supra]; Chitty on Contracts, 28th Edn., Vol. 2, Special Contracts, p. 978, Chapter 41, Note 007; Prudential Staff Union v. Hall [1947 KB 685]; Hepburn v. A. Tomlinson (Hauliers) Ltd. [(1966) AC 451]).
In Larsen and Toubro Ltd v. State of A.P [(2006) 148 STC 616) (AP HC) (DB)] and State of Tamil Nadu v. Mahindra and Mahindra Ltd [(2013) 58 VST 483 (Madras) (DB)], it was held that the fact that the insurance coverage was borne by the assessee/supplier, per se, would not stand in the way of its being an inter -State sale. As ownership of the goods is not determined on the basis of who insured the goods, it matters little that, in some of the contracts, the goods were insured, for its inter-state movement, by the owner.
(vi) LIQUIDATED DAMAGES CLAUSES:
It is contended, on behalf of the petitioners, that the clauses relating to liquidated damages envisage only recovery of damages from the contractor by the owner; the supply contract only mandates payment of liquidated damages in case of delay in the supply of goods; the clauses relating to minimum performance guarantee and liquidated damages would only reinforce the fact that the title to the goods has allegedly passed to the owner; the owner can only insist on re-performance and, in case of failure, to recover damages; there is no obligation on the contractor-supplier to take back the goods if they are of defective quality; the supply contract enables the employer to claim liquidated damages for supply of defective goods; a reading of Sections 4(3) and 4(4) of the 1930 Act would show that (a) it is not as if every condition would convert a sale into an agreement to sell; Sections 4(3) and 4(4) of the 1930 Act make it clear that any encumbrance or condition, deferring passage of title, would make the sale conditional, and transfer would take place only upon fulfilment of the conditions; Section 4(4) amplifies and introduces the nexus test; it is not all or any conditions, but only such conditions, which need to be fulfilled, subject to which the property in the goods would be transferred; the condition, if any, should be such that it encumbers or limits the transfer of title to the goods; none of the clauses, relied upon by the revenue, encumber transfer of title; the contracts provide separate parameters for damages to be claimed on the supply of goods and service; compensation is fixed for delay in delivery of goods as per the schedule dates for individual goods, and is not dependant on service and vice versa; and, in the case of erection and commissioning, the contract provides for completion of the work in a defined manner which is on integration of individual goods.
It is contended, on behalf of the revenue, that the liquidated damages clauses in the supply contracts are not relevant for the purposes of ascertaining whether title has passed during movement; if the contract has an inspection or a certification clause, or stipulates a conditional payment, the title does not pass till the said inspection or certification is given; in all these cases the satisfaction of these conditions only happens after movement, and not during movement; the 1930 Act makes a clear distinction between conditions and warranties; breach of warranty only gives a right to a damages claim but, if there is a breach of a condition, the contract itself can be repudiated in addition to damages; there is an implied condition that the goods shall be reasonably fit for the purpose for which the goods are required (Chitty on Contracts Vol. II at page 1471); the purpose for which the owner is procuring the goods has been expressly made known to the petitioner at the bidding stage itself; and, consequently, if the goods are not fit for the purpose, the entire contract can be repudiated.
Article 8.1.2 of the LandT - Konaseema contract stipulates that, in the event of the guaranteed delivery dates not being adhered to, due to reasons attributable to the Supplier (LandT), the Supplier shall pay to the Owner (Konaseema), subject to the Owner incurring a commercial loss due to the delay attributable to the Supplier, liquidated damages. Clause 10 of the Seimens “ Power Grid Agreement provides for liquidated damages for delay in completion and, thereunder, if Seimens Ltd fails to complete the successful commissioning of the sub-stations covered under the contract, within the period stipulated, they shall pay POWERGRID liquidated damages for the delay. Article -11 of the Seimens “ RINL agreement provides that liquidated damages shall be applicable only for late delivery and delay in erection for reasons solely attributable to the contractor; if the Contractor fails in the due performance of the contract to deliver any part of the equipment, within the time fixed by the contract, the Contractor shall be liable to pay liquidated damages; if the contractor fails to complete the work within the time of completion ?, the contractor shall be liable to pay liquidated damages; and, in case of non-achievement of performance guarantee parameters, imposition of liquidated damages, if any, shall not exceed 7.5% of the total contract value.
Section 12 of the 1930 Act relates to conditions and warranties. Under sub-section (1) thereof, a stipulation in a contract of sale, with reference to goods which are the subject thereof, may be a condition or a warranty. Section 12(2) states that a condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. Section 12(3) states that a warranty is a stipulation collateral to the main purpose of a contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. Section 12(4) stipulates that whether a stipulation in a contract of sale is a condition or a warranty depends, in each case, on the construction of the contract; and a stipulation may be a condition, though called a warranty in the contract. Section 16 of the 1930 Act relates to implied conditions as to quality or fitness and, under sub-section (1) thereof, where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller's skill or judgment, and the goods are of a description which it is in the course of the seller's business to supply (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be reasonably fit for such purpose.
The subject contracts, for the supply of goods and erection and installation, have been entrusted to the petitioners for their acknowledged expertise in executing turnkey projects. The goods purchased by the petitioners-contractors, for execution of the turnkey projects, is for its usage as components or parts of the plant, and for its erection and installation. The owner relies on the skill/judgment of the petitioner-contractor in the procurement of such goods. The subject contracts expressly stipulate the purpose for which the goods are required by the owner ie for its use in connection with the erection and installation of the plant. Even if it is called a warranty (liquidated damages clause) in the contract, it would nonetheless, in view of Section 12(4) of the 1930 Act, be a condition ?. Consequently supply of defective goods would confer a right on the owner to reject the goods, and to treat the contract as repudiated, and not merely to claim damages.
Reliance placed by the petitioners, on Sections 4(3) and 4(4) of the 1930 Act, is of no avail. Section 4 of the 1930 Act explains the distinction between a sale and an agreement to sell ?. Under sub-section (1) thereof, a contract for the sale of goods is a contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a price. Sub-section (2) states that a contract of sale may be absolute or conditional. Under sub-section (3) where, under a contract of sale, the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of property in the goods is to take place at a future time, or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. Section 4(4) stipulates that an agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.
Section 2(6) of the 1930 Act defines future goods to mean goods to be manufactured or produced or acquired by the seller after making the contract of sale. An agreement to sell future goods is, in view of Section 4(3) of the 1930 Act, an agreement to sell and not a contract of sale. In case the contract is conditional, Section 4(4) stipulates that an agreement of sale becomes a sale when the conditions, subject to which the property in the goods is to be transferred, is fulfilled. As the quality and fitness of the goods is, in terms of Section 16(1) of the 1930 Act, an implied condition, failure to fulfil the condition would not result in an agreement to sell becoming a sale, and the property in the goods would not pass from the petitioner-contractor to the owner. Transfer of title to the goods, as shall be elaborated hereinafter, passes only after post-delivery inspection of the goods, on completion of its erection and installation in the turn-key project, and on a take over certificate being issued by the owner to the petitioner-contractor thereafter. As compliance with these conditions, by the petitioners-contractors, take place only after completion of movement of the goods, the liquidation damages clause in the subject contracts would not bring the sale within the ambit of Section 6(2) of the CST Act. The finding recorded by the revenue in this regard, in the impugned orders, cannot be said to be perverse necessitating interference under Article 226 of the Constitution of India.
(vii) BAILMENT/FREE ISSUES CLAUSES:
It is contended, on behalf of the petitioners, that the petitioners effect inter-state sale and transit sale of goods to the owners in Telangana and Andhra Pradesh; in terms of the contract, these goods are handed over as free issue materials to the petitioners for installation and erection; the petitioner takes care and custody of these free issue material, acts as an agent or as a bailee of the goods; the goods are handed back to the owner after installation and commissioning; the concept of free issues is well recognized in the field of execution of projects or works; tax laws envisage a non-inclusion or exclusion of the value of such free issue material on the basis that free issues do not involve sale of goods, and cannot form part of the intrinsic value or the sale price; bailment does not mean that the goods, originally entrusted, should alone be returned; it is always subject to the understanding between the parties; in the present case, the expression bailmenthas not been expressly used in all the contracts; some of the contracts contemplate issue of the material, received by the owner in the course of inter-State trade, to the petitioner for execution under the service contract; in order to determine whether a sale is taxable or not, a minor difference between the statutory definition of bailmentand the transactions are immaterial; in almost all the contracts, delivery of the goods were taken by the respective contractees, and accounted as their excisable stock to avail cenvat credit; subsequently, they were issued to the petitioner through issue slips as provided under the Excise Rules; the petitioner, after effecting the sale, can also be treated as an agent of the contractee for erection and commissioning; the respondent erred in not considering the clauses in the agreement on the control that the contracting parties had over the goods, and which required the goods to be issued to the petitioner only as a bailee for the execution of the project; the bailment/material issue certificate, which are understood as free issues, do not stipulate restoration of the goods in the very same condition; and unless the goods are sold to the owner, and title to the goods passes to the owner, the owner cannot issue equipment or material as free issues.
It is submitted, on behalf of the revenue, that there cannot be a pre-existing bailment agreement as such an agreement can be entered with the bailor (owner) only when the bailor is in possession of the goods; the essence of a bailment is a transfer of possession, and not ownership; and the contract of bailment would require the goods to be returned in the very same condition, and not in a completely different form; while the owner is said to have entrusted different goods to the petitioners-contractors, what was returned to them was a completed turn-key project.
Article 2.1.1 (B) of the LandT “ Konaseema Erection Contract stipulates that the scope of the contract shall include, in relation to erection, commissioning and testing of equipment free-issues to the contractor by the owner; to receive such equipment, from the owners contractor for transportation on behalf of the owner, at the facility site; and to store at the facility site as designated by the owner under the terms and conditions of bailment. In terms of the Alstom “ GVK contract, a material received/issued certificate is prepared under which the material is handed over for storage, erection and commissioning. Clause 2.3 (iii) of the Seimens “ Power Grid agreement stipulates that, for the equipment and materials to be provided by Seimens under the First Contract', it would be the responsibility of Siemens to take delivery, unload and store the same at the site and execute an Indemnity Bond in favour of POWER GRID against loss, damage and any risks involved for the full value of the equipment/materials; and the indemnity bond shall be valid till the commissioning and handing over of the sub-station(s) to POWERGRID. Clause 9.3.3 of the Seimens - RINL agreement stipulates that, on receipt of delivery advise/lorry receipt/railway receipt, the Engineer or his authorised representative shall endorse the same to the Contractor for taking delivery of the goods on submission of bailment agreement by the Contractor as per Appendix 10, to store them in his site store and to take custody of them until they are erected and handed over to the Employer (owner).
Section 148 of the Indian Contract Act stipulates that a bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the bailor. The person to whom they are delivered is called the bailee. Section 160 relates to the return of goods bailed on expiration of time or accomplishment of purpose and, thereunder, it is the duty of the bailee to return or deliver, according to the bailor's directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished.
If the intention and result of the contract is to transfer for a price property in which the transferee had no previous property then the contract is a contract of sale. Where, however, the passing of property is merely ancillary to the contract for the performance of work such a contract does not thereby become a contract of sale. (Benjamin's Treatise on the Law of Sale of Personal Property, Eighth Edition (1950). Bailment is a delivery of goods in trust upon a contract, expressed or implied, that the trust shall be faithfully executed on the part of the bailee. Wherever there is a delivery of property on a contract for an equivalent in money or some other valuable commodity, and not for the return of the subject matter in its original or an altered form, it is a transfer of property for value “ it is a sale and not a bailment. (The South Australian Insurance Company v. William Beavis Randell and Samuel Randell [(1869) Law Reports (III) Appeal Cases 101]). The test is whether the identical subject matter was to be restored either as it stood or in an altered form; or whether a different thing was to be given for it as an equivalent for, in the latter case, it is a sale and not a bailment. (William Beavis Randell and Samuel Randell [Supra]; Indian Metal and Metallurgical Corporation v. State of Madras [(1963) 14 STC 788) (Madras HC) (DB)]; M.M. Traders v. State of M.P. [2010 (4) M.P.L.J. 515 = (2010) 36 VST 356) (MP HC). “ (DB)]).
When the petitioner and the owner entered into the subject agreement, neither the petitioner nor the owner were in possession of the goods, as the goods had to be acquired thereafter from the supplier. It is difficult, therefore, to hold that it is a bailment agreement. As is evident from Section 148 read with Section 160 of the Indian Contract Act, a bailment contract entails the return of goods in an identical form. After entrustment of the goods, and after the purpose of entrustment is accomplished, the goods must either be returned or otherwise disposed of according to the directions of the bailor. While some alteration of the goods is permitted, the identity of the original goods cannot be destroyed or substituted by the bailee. In the present case the goods, allegedly given under bailment by the owner to the petitioner-contractor, were in the raw form, and in return the owner received a finished product in the form of an erected power plant. In an alteration, the identity of the original goods is not destroyed. For instance when a car is sent for repair, the contractual relationship is one of bailment. If, for instance, the clutch plates of the car are replaced, the identity of the car is not lost, though the repair has resulted in an alteration. It is evident that, in the subject contracts, the identity of the original goods was lost in the process, the goods originally entrusted were not returned in the same or altered form, and notwithstanding the form in which the clause is couched there is, in substance, no bailment.
The concept of free issues is based on the premise that the owner has entrusted the goods to the contractor for being used or utilized in the works executed by the contractor for the benefit of the owner ?. It is true that, in computation of sales tax, the net sale price, excluding the cost of free issue material, alone should be taken into consideration. Ordinarily the price paid, to the dealer selling the goods, would not include the value of the free issue material. (V.S. Engineering (P) Ltd. v. State of A.P. [(2014) 68 VST 87)(APHC) (DB)]). As shall be detailed hereinafter, the intention of the parties, as is evident from the certification and other clauses of the contract, is to effect transfer of title to the goods from the supplier-contractor to the owner only after inspection and issuance of the taking over certificate ie after completion of erection of the plant. Reliance placed on behalf of the petitioners on the bailment clauses/free issue certificates is, therefore, of no avail.
(viii) TITLE CLAUSES IN THE SUPPLY CONTRACTS:
It is contended, on behalf of the petitioners, that Article 5.3.2 of the LandT “ Konaseema supply contract would govern, as the other clauses in the agreement can be read harmoniously therewith; the odd reference, of full payment for transfer of title, under Article 17 of the contract, has to be subsumed only as an irrelevance, and an out of context reference, as this condition does not gel with any other clause in both the agreements. It is contended, on behalf of the revenue, that the question of passing of title should be ascertained by construing the contract as a whole and the surrounding circumstances, and not merely the title clause; even otherwise, the title clause in the LandT - Konaseema Supply contract shows that title passes at the time of incorporation and not during movement; the title passes, under the LandT Vemagiri, Alstom Supply Contracts and Siemens title clauses, only when the seller dispatches the goods i.e., prior to movement.
Clause 17 of the L and T “ Konaseema supply contract stipulates that the legal title to the property in the equipment shall be deemed to have been transferred from the supplier to the owner when the equipment has been delivered to the owner's contractor for transportation (carrier), subject to transfer by the contractor to the owner of the carrier's receipt or any other document of title to the goods endorsed by the Supplier in favour of the owner, and full payment thereof by the owner. The supply contract provides for full payment only after a site test certification is issued by the owner after inspection and successful erection. Clause 17 thus makes it clear that title to the goods does not pass during movement. Under clause 11.1 of the L and T “ Vemagiri agreement, title to all indigenous equipment shall pass to the owner upon the earlier of (a) payment of a part or whole of the indigenous equipment or (b) when delivered to the transportation contractor or (c) the time that title to the indigenous equipment passes from the onshore supply sub-contractors to the onshore supplier. The payment schedule is prescribed in Appendix-H of the agreement and, thereunder, 10% of the onshore supply contract price is to be paid as advance payment. The words part “ payment in Appendix H would bring within its ambit advance payment also. Title to the goods, thus, passes even before commencement of movement.
Clause 22.1.3 of the Alstom “ GVK and Alstom “ Goutami Supply Contract stipulates that the title to supplies (ex-works) shall pass to the owner upon the earlier of payment in full therefor, or when delivered to the carrier ex-works Indian Factory; and 5% of the supply contract price shall be due at the occurrence of the provisional acceptance of the facility in accordance with Clause 4.2.2 of the agreement. It is evident that, under the title clause, title passes either upon full payment (which is after the successful erection i.e., after completion of movement), or delivery to the carrier ex-works (i.e., prior to commencement of movement). Title does not pass under the aforesaid agreement during movement from one State to another. Clause 2.3 (iii) of the Siemens “ Power Grid contract stipulates that the title, of the equipment and materials to be supplied by Siemens to Power Grid, shall pass on to Power Grid on ex-works despatch and with negotiation of despatch documents. The said clause also stipulates that transfer of title shall not relieve Siemens from the responsibility for all risks of loss or damage to the equipment and materials till its taking over by Power Grid, as specified in the bidding document. That the supplier is held responsible for risk, loss and damage of goods till they are taken over by the owner shows that the parties intended, in terms of Section 26 of the 1930 Act, that title would pass to the owner only after completion of movement. If parties really intended otherwise, the supplier would then have been absolved of all responsibility after despatch of goods ex-works.
Under the L and T “ Konaseema supply contract, full payment is made only after a site test certificate is issued by the owner after inspection and successful erection. Likewise, under Alstom supply contracts, title to the goods passes either upon payment for supply in full (which is only after completion of erection) or when the goods were delivered to the carrier ex-works Indian factory ie prior to commencement of movement. Under the Seimens “ Power Grid supply contract the responsibility for all risk, damages and losses relating to the goods continue with the supplier till the goods are taken over by Power Grid (after erection) despite title allegedly passing on ex-works despatch with negotiation of despatch documents. A transit sale, to be exempt under Section 6(2) of the CST Act, is a sale whereby transfer of title to the goods takes place when they are in movement from one State to another. The aforesaid title clauses show that the parties intended to transfer title to the goods either before commencement of its movement in the State where they were purchased by the petitioner-contractor, or after its delivery in the State where the works were being executed by the contractor for the Owner. In either event, transfer of title to the goods does not take place when the goods are in movement from one State to another.
(ix) INSPECTION AND CERTIFICATION CLAUSES:
It is contended, on behalf of the petitioners, that the site performance test and the performance guarantee test, envisaged in both the agreements, only mandate a re-performance by the contractor so as to ensure no defects or liabilities, and to achieve minimum performance guarantee; in case of failure, it entitles the owner to reject and recover cost; even in a normal sale of goods, an inspection clause would be found, but that does not postpone the sale; the mere fact that there is an inspection prior and post-dispatch would not destroy the inter-State character of the sale; inspection at the seller's premises, and also at the premises of the buyer, is a common commercial feature; reliance placed by the revenue on Usha Beltron Ltd. v. State of Punjab [(2005) 7 SCC 58], is misplaced, as it is not under the CST Act; the nexus test i.e, the conditions, if any, should encumber or postpone the transfer of title under Section 4(4), and the fact that passage of title and risk need not be concurrent and is left to the contracting parties, as envisaged in Section 26 of the 1930 Act, were neither brought to the notice of the Court nor argued; the final performance test would not delay transfer of title to the goods; inspection is pre-delivery and prior to sale; if the goods are rejected, no sale takes place; if goods are approved, the same are sold inter-state; and the only requirement is to verify the actual receipt of stock, post the sale.
It is contended, on behalf of the revenue, that the inspection and certification clauses show that title has not passed during movement; most of the subject supply contracts stipulate not only a pre-despatch inspection, but also a post despatch inspection; in all these contracts the supplier becomes entitled to a portion of the payment only if the inspection is successful; the certification clauses in the LandT Konaseema Supply Contract, LandT Vemagiri Onshore Supply Contract, and Siemens Power Grid Contract, show that, in addition to post-despatch inspection, the supply contracts (as opposed to the erection contracts) also contemplate a certification after erection; by virtue of the said clause, the owner certifies as to the successful operation of the facility; the said certification is given after the owner inspects the facility, and finds that all the units and components, which have been supplied, are working; the scope of certification extends not only to the civil work, but also to the goods supplied under the supply contract; in all the contracts, the supplier becomes entitled to full payment only upon receipt of such certification; the payment is linked to successful inspection and certification; if the contract has an inspection or a certification clause, title does not pass till the inspection and certification are successful, and the buyer / owner has indicated his approval; the Supreme Court, in Usha Belltron158, held that title passes only upon certification; and the petitioners contention that the taking over certificate was merely for ensuring proper quality of goods supplied, and does not relate to passing of property in the goods, is not tenable.
Clause 7.2.1 of the LandT “ Konaseema supply contract records the agreement of the supplier for the goods to be tested, and to be approved to perform the site test on the materials. The site test procedures, prescribed in Appendix-I of the said contract, includes the reliability test to demonstrate that the materials can continuously operate safely, and without failure, at design conditions and requires it to work on continuous operation for seven days at various loads and modes of operation. Clause 2.10.5 of the L and T “ Vemagiri onshore supply contract stipulates that, if as a result of inspection, examination, testing or re-testing, it is found that the onshore supply is defective, or otherwise not in accordance with the agreement, the owner may reject such onshore supply. The clause requires the onshore supplier, following any such rejection, to replace or otherwise repair such goods. Clause 6.13.1 of the L and T “ Vemagiri supply contract provides for final acceptance and, thereunder, final acceptance of the plant is achieved after provisional acceptance of the plant has been achieved; and, in case the civil contractor has adopted the corrective action plan, after provisional acceptance and any corrective and remedial action has been taken in respect of the plant. Clause 2.2.28 of the Seimens “ RINL agreement requires the Contractor to carry out the relevant performance tests; and on satisfactory completion of the performance tests, the employer (owner) is required to issue to the Contractor a provisional acceptance certificate as per the provision of the General Conditions of the Contract.
In Usha Beltron Ltd. [Supra], the petitioner contended that the property in the goods had passed to the Government of India before it entered the Municipal limits; this was a contract for sale of specific goods in a deliverable state; the property in the goods passed to the buyer when the contract was made; and it was immaterial as to what was the time of delivery of the goods. Clause 5.5, of the bid document therein, provided for the issue a taking over certificate when the performance tests had been successfully carried out; and, while issuance of such a certificate would certify receipt of goods in a safe and sound condition, it would not discharge the supplier of their warranty obligations. Clause 6.1 of the bid document stipulated that delivery of the goods shall be made by the supplier in accordance with the terms of the contract; and the goods were to remain at the risk of the supplier until delivery was completed. The Supreme Court held that clause 5.5 and 6.1 of the bid document clearly indicated that the property in the goods remained at the risk of the appellant till delivery was completed; it showed that delivery would be completed only after the take-over certificate was issued; as per Section 19 of the Sale of Goods Act, the property in the goods passes when the parties intended it to pass; in this case the contract provided that property in the goods does not pass till after delivery, and after successful testing and issuance of the take-over certificate; and the High Court was right in concluding that the property in the goods had not passed at the time the goods entered the municipal limits.
In Chem-Dyes Corporation [Supra]the assessee purchased goods from Bombay, despatched them to Rajkot, and handed over the railway receipts to the purchasers of the goods at Rajkot. These purchasers, after taking delivery of the goods from the railways, carried out inspection and then made payment for the goods. The Tribunal held that, as per the relevant terms of agreement, all supplies of goods were subject to checking and approval by the purchasers; the purchasers had the right to reject the goods, at the cost of the assessee, even after taking delivery; there was no sale till the purchasers took delivery of the goods, inspected and ultimately approved them; at the time of endorsement of the railway receipts, in favour of the purchasers, the purchasers were neither required to pay nor had they paid any part of the purchase price of the goods to the assessee; the purchasers had paid the price of the goods to the assessee only after they had checked the goods, and found that they were in order; when the railway receipts were endorsed in favour of the intending purchaser by the assessee, the sale did not take place; the sale took place only after the goods reached the destination, and were inspected and approved by the purchasers; and the provisions of Section 3(b) of the CST Act were not attracted. The Division bench of the Gujarat High Court held that there was nothing to indicate that the intending purchasers had entered into an agreement to sell in which there was a stipulation regarding transfer of the property in the goods; and the property in the goods had passed only after the goods had reached the destination at Rajkot, after the intending purchaser took delivery and, thereafter, inspected and approved the same.
Section 23 of the 1930 Act stipulates that title, in a sale of future goods, passes only when the goods are in a deliverable state, they are unconditionally appropriated to the contract, and there is assent of the buyer. If the contract has a post-delivery inspection or a certification clause, the unconditional appropriation, ordinarily, takes place, and the assent of the buyer is also given, only upon inspection and certification. Under Section 24 of the 1930 Act title passes upon approval which, in the subject contracts, is only after inspection. The post-delivery inspection clauses in the subject contracts would fall within the ambit of the phrase on approval in Section 24 as delivery of the goods is taken only after inspection. The taking over certificate also shows that the buyer indicates his approval only after certification. The inspection and certification clauses in the contract would fall within the ambit of the phrase other similar terms in Section 24. The presence of an inspection and certification clause in the supply contract defers passing of title till the owner has expressed its assent. Such assent is given only after inspection and certification.
The law declared by the Supreme Court, in Usha Beltron Ltd [Supra], is binding on this Court. It is not for the High Court to distinguish a binding precedent on the specious plea that certain aspects were not noticed by the Supreme Court. Even otherwise, reliance placed on behalf of the petitioners, on Section 26 of the 1930 Act, is misplaced. Clause 2.3 (iii) of the Seimens “ Power Grid contract makes it clear that, notwithstanding that title would pass to Power Grid ex-works despatch and with negotiation of despatch documents, the responsibility for all risk of loss and damage to the goods continued with the Seimens Ltd till its taking over by Power Grid on completion of erection of the plant. Section 26 stipulates that risk, prima-facie, passes with the property and, thereunder, unless otherwise agreed, the goods remain at the sellers risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyer's risk whether delivery has been made or not. Section 26 is not attracted where the contract provides otherwise. While the question, as to when title to the goods is transferred from the seller to the buyer, must be determined from the conditions stipulated in the subject contracts, if the parties have agreed that the responsibility for risk of loss and damage to the goods would be that of the supplier till erection of the plant is completed, it is evident that transfer of title to the goods was intended to pass only on erection, and not prior thereto.
Section 41(2) of the 1930 Act stipulates that, unless otherwise agreed, when the seller tenders delivery of the goods to the buyer he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. Section 42 relates to acceptance and, thereunder, the buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller. The post-delivery inspection clauses, in the supply contracts, are in conformity with Section 41(2), and the certification clauses therein accord with the requirement of Section 42 of the 1930 Act.
The aforementioned clauses of the L and T, Siemens and Alstom supply agreements provide for performance of a site test of materials, inspection and testing, for rejection of the goods by the employer if the goods are found defective on inspection and testing, for a part of the price of the supplies to be made after testing and issuance of a taking over certificate, and for payment under the supply contract being conditional on performance acceptance under the service contract. The unconditional appropriation of the goods to the contract by the buyer, with the assent of the seller, under the subject contracts takes place only after the goods are tested after delivery at the site, and on performance acceptance and issuance of a taking over certificate. As acceptance of the goods by the buyer takes place only post-delivery within the State, the transfer of title does not take place during movement of the goods from one State to another, notwithstanding the transit sale clause in some of the subject contracts. As transfer of title to the goods does not pass to the employer, during movement of the goods from one State to another, the sale of goods, under the subject contracts, is not a transit sale and rejection of the petitioners claim for exemption, under Section 6(2) of the CST Act, by the respondents-authorities cannot be faulted.
(x) PAYMENT ON MILESTONE BASIS:
It is contended, on behalf of the petitioners, that Section 2(g) of the CST Act recognises that a sale is also occasioned by deferred payment of the amount due; the terms of payment as agreed upon, and the passing of title, are independent of each other; transfer of title is not kept in abeyance merely because payment is deferred; the contention, that a sale is not complete till final payment is made, if accepted, would defeat the very foundation of sales tax law that transfer is complete - whether the seller receives consideration or not; whatever restrictions apply to a normal sale, would equally apply to a deemed sale; the payment terms are not milestones; percentage-wise payment terms have been provided for supply of goods; as the balance payment is to be paid on completion of commissioning, it implies that the goods have to perform on commissioning; there is a major difference in Private and Govt Contracts; Government Contracts link the balance 5% or 10% payment, through a cross fall breach clause, for performance of the goods supplied; in private contracts the same would be decided through mutual discussion or arbitration, and on determination of the parties responsible for the default; payment or non-payment does not defer passage of title; failure to perform the service obligations may require a repeat of the performance to the satisfaction of the employer or, at best, result in withholding of payment; and this does not defer transfer of title which takes place, without any limitation, during transit.
It is contended, on behalf of the revenue, that the conditional payment clauses show that title does not pass during movement; price is the essential characteristic of a sale; Price is the lynchpin of the definition of sale under Section 4(1) read with Section 2(10) of the 1930 Act; one of the essential characteristics of a sale is that the seller is entitled to payment only upon passing of title; if the Seller does not receive payment even after title in the goods has passed, the seller is entitled to maintain a suit for price under Section 55 of the 1930 Act; in the present case, the petitioners contend that title has passed during movement; consequently the petitioners should be entitled to complete payment after passing of title; but, under the Supply Contract, payment is made only upon successful erection; the petitioner-seller cannot maintain the suit for price, even after all the goods are supplied in a fit condition; if the erection is not successful, the seller is not entitled to payment at all; title passes only when the petitioner becomes entitled to payment after successful erection; title passes only after erection and not during movement; conditional payment is not deferred payment; an instalment payment can be characterised as a deferred payment because there is certainty of payment; and, unlike an instalment payment, the factum of payment in these contracts is subject to the satisfaction of a condition, and is uncertain.
As noted hereinabove it is the petitioners case that the subject contract is merely an agreement to sell for, if it is treated as a contract of sale, the contract, not having come into existence during the movement of goods from one State to another, would not fall within the ambit of Section 6(2) of the CST Act. A contract of sale of goods may be defined as a mutual agreement between the owner of the goods and another that the property in the goods shall, for some price or consideration, be transferred to the other, at such a time and in such a manner, as is then agreed. (Indian Metal and Metallurgical Corporation [Supra]). In order to constitute a sale, it is necessary that there should be an agreement between the parties for the purpose of transferring title to the goods, it must be supported by money consideration and, as a result of the transaction, the property must actually pass in the goods. Unless all these elements are present, there would be no sale. (Gannon Dunkerley and Co. (I) [Supra]; Hindustan Aeronautics Ltd. [Supra];and Member Board of Revenue v. Swaika Oil Mills [(1977) 4 SCC 286]).
Section 4(1) of the 1930 Act stipulates that a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a price. Section 2(10) of the said Act defines price to mean the money consideration for a sale of goods. Under Section 4(3) thereof, where the transfer of property in the goods is subject to some conditions thereafter to be fulfilled, the contract is called an agreement to sell which, under Section 4(4), becomes a sale when the conditions, subject to which the property in the goods is to be transferred, are fulfilled.
Clause 6.1(iii) of the Siemens “ Power Grid supply contract stipulates that the balance 80%, of the ex-works price component of the equipment and materials, shall be paid progressively on certification of the engineer. From out of this 80%, 10% of the ex-works price component is to be paid only on successful completion of erection, testing and commissioning of the sub-station and issuance of the taking over certificate. Clause 4.2.2 of the Alstom “ GVK and Alstom “ Goutami supply contract provides that upon provisional performance acceptance of the facility, as set forth in the Services Contract, the remaining portion of the Contract Price shall be paid to the supplier. Payment under the supply contract is conditional on performance acceptance under the services contract. Similar clauses are to be found in the other supply contracts as well, and the aforesaid clauses have been referred to as illustrative of similar clauses in all the supply contracts. The aforesaid clauses show that a part of the price, to be paid for supply of the goods, is conditional on successful completion of erection, testing and commissioning of the plant, and issuance of a taking over certificate. In other words, if the condition is not fulfilled, ie the plant is not successfully erected, the owner is not contractually obligated to pay that part of the price which is conditional on successful erection of the plant.
Under Section 55(1) of the 1930 Act where, under a contract of sale, the property in the goods has passed to the buyer, and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may sue him for the price of goods. On the property in the goods passing to the buyer (owner), the seller (petitioner-contractor) can sue the buyer for the price if the buyer wrongfully neglects or refuses to pay the price. The right to sue the owner for the price accrues to the contractor only after the property in the goods passes to the owner which, in terms of the clauses aforementioned, is only after successful completion of erection, and not prior thereto. This clause also makes it clear that the parties to the contract did not intend that the property in the goods would pass from the petitioners-contractors to the owners when the goods were in movement from one State to another.
Price is as an essential element of a contract of sale of goods. It is only a transfer of property in goods for cash or deferred payment or any other valuable consideration which constitutes a sale under Section 2(g) of the CST Act. Blacks Law Dictionary defines deferred payment as a principal and interest payment which is a postponed and instalment payment. The essential characteristics of a deferred payment is that, while there is certainty of payment, the payment is postponed. While the buyer is bound to make payment, a contract may provide for deferred payment ?, enabling payment to be postponed to a date even after title to the goods have passed. The essential distinction between a deferred payment and fulfilment of conditions after which payment is to be made must be borne in mind. While there is certainty of payment, and the date of payment is alone postponed, in the former, the payment is uncertain in the latter for, failure to fulfil the conditions, would mean that there is no sale of goods, and the owner is under no obligation to make payment. The contractor can only take back the goods, and cannot sue for price ?. It is only a sale of goods which can be subjected to tax under the CST Act, and not an agreement to sell which does not eventually result in a sale of goods.
(xi) WHEN DOES TITLE TO THE GOODS PASS FROM THE CONTRACTOR TO THE OWNER?
It is contended, on behalf of the petitioners, that, if the goods are said not to have been sold and the title to the goods as not to have passed to the owner till accretion or incorporation, none of the clauses ie transit-insurance, free issues and liquidated damages clauses would have existed the way it had been contracted for; if the title has to pass on accretion or incorporation, as contended by the revenue, then the cost of insurance should have been borne by the contractor; equipment and material would not have been received on a free issue basis; and, if title has not passed, there would be no clause on liquidated damages as the contractor would be free to take back the goods; the title to the goods passes in transit, and during movement by way of an endorsement;for non-payment, the petitioner cannot take back the equipment already supplied; and, in the present case, the parties have clearly understood that the title passes upon delivery of the goods, or payment of price in full, whichever is earlier.
It is contended, on behalf of the revenue, that the timing of passing of title has to be ascertained by construing the subject contracts; merely because the parties say that title passes at a particular time does not, by itself, mean that title has passed at the said time; the description given by the parties is relevant, but is not decisive; the passing of title has to be ascertained by holistically examining the contract and its various clauses; and, as held in Hindustan Shipyard Ltd. [Supra], the Court should not only look into the form, but also at the circumstances of the transaction, the custom of the trade, and the substance of the contract document.
As the scope of Sections 4(3) and (4), 16 and 24 of the 1930 Act have already been dealt with in the earlier paragraphs, it would suffice to observe that reliance placed by the petitioners thereupon is misplaced. Section 19(1) of the 1930 Act stipulates that, where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Section 19(2) stipulates that, for the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. Section 19(1) relates to specific or ascertained goods, whereas the goods in the present case are future goods as the petitioner-contractor was not in the possession of the goods when the supply contract was executed. Section 19(2) indicates that the time of passing of title has to be ascertained by looking at the terms of the contract, conduct of the parties, and the circumstances of the case. The Court is required, by Section 19(2), to go beyond the terms of the contract to ascertain the intention of the parties. In the present case, the terms of the contract itself show that title has not passed during movement. Section 19(3) of the 1930 Act stipulates that, unless a different intention appears, the rules contained in Sections 20 to 24 are the rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. As no different intention appears, from a reading of the contract as a whole, application of the rules contained in Sections 23 and 24 of the 1930 Act shows that the intention of the parties (the contractor-supplier and the owner-buyer), regarding the time at which the property in the goods is to pass to the buyer, is only upon completion of erection of the plant and the issue of a takeover certificate thereafter by the owner, and not when the goods are in movement from one State to another.
In Husenali Adamji and Co. [Supra]it was contended that the property in the goods passed from the respondent to WIMCO (consignee) at the railway stations within the Central Provinces as soon as the logs were loaded on the wagons and the railway receipts were taken out in the name of WIMCO. The Supreme Court held that Clause 4 of the contract required that the logs should be despatched by rail from certain stations within the Central Provinces; the contention that this clause had the effect of passing the property therein to WIMCO, at the railway stations in the Central Provinces, was, prima facie, sound unless there be some other provisions in the contract to negative this conclusion, ie that the logs must be carried to Ambernath and delivered there; the cumulative effect of the provisions of clause 2 that the property in the rejected logs would pass to WIMCO upon the failure of the respondent to remove the same after rejection, of clause 3 that the goods shall be delivered at Ambernath in the presence of WIMCO's Factory Manager, and of clause 6 that the prices will be F.O.R. Ambernath" militated against the theory of passing of property immediately on the goods being loaded into the wagons; Explanation II to Section 2(g) of the Sales Tax Act would apply only if the goods " in respect of " which the contract of sale was entered into were, at the date of such contract, actually in the Central Provinces; the goods, in respect of which the contract of sale was made, must, at the date of the contract, be in existence in the Central Provinces ie the goods must, at the date of the contract, be there in the form in which they are agreed to be sold; and there was not an iota of evidence on that point.
The law declared by Supreme Court, in Husenali Adamji and Co [Supra], is that (i) in a contract for sale of goods, the time of passing of title has to be ascertained on a reading of the contract as a whole; (ii) if the contract contemplates inspection after delivery, the title passes only upon delivery, notwithstanding the fact that the contract also contemplates pre-delivery inspection; (iii) in a contract, for the sale of future goods, title passes only when there has been a unconditional appropriation of the goods to the contract; consequently, if the contract contemplates post-delivery inspection, appropriation of the goods to the contract only happens after inspection; and a mere endorsement on the railway receipts does not transfer title.
The rule of construction, applicable to all written instruments, is that the instrument must be construed as a whole in order to ascertain the true meaning of its several clauses. Just as a document cannot be interpreted by picking out only a few clauses ignoring the other relevant ones, in the same way the nature and meaning of a document cannot be determined by its end-result or one of the results or the consequences which flow from it. The nomenclature and description given to a contract is not determinative of the real nature of the document or of the transactions thereunder. It must be determined from all the terms and clauses of the document and all the rights and results flowing therefrom, and not by picking and choosing certain clauses and the ultimate effect or result. (Titaghur Paper Mills Co. Ltd.5; Halsbury's Laws of England, Fourth Edition, Volume 12, paragraph 1469 at page 602). The contract must be read as a whole, and a single clause, or a few clauses, in the contract should not be read out of context to determine the intention of the parties.
A conjoint reading of the various clauses referred to herein above (such as the title clause, the post-delivery inspection clause, the taking over certificate clause etc.) make it clear that, notwithstanding the bailment/free issues, and liquidated damages clauses, the parties to the contract intended that the title to the goods would be transferred from the contractor to the owner only after erection and commissioning of the plant, and not prior thereto. It is evident, therefore, that the title to the goods was not transferred during its movement from one State to another, but only after the goods were incorporated in the works in the State of Andhra Pradesh (now the States of Telangana and Andhra Pradesh). Consequently the revenue was justified in rejecting the petitionersclaim of the sale of goods, under the subject contracts, being subsequent sales exempt from tax under Section 6(2) of the CST Act.
(xii) CAN THERE BE AN INTER-STATE SALE IN AN INDIVISIBLE WORKS CONTRACT?
It is contended, on behalf of the revenue, that the facts of the present cases demonstrate that (a) there was no sale in the course of inter-state movement, as title did not pass during movement; (b) on a proper construction, the supply and erection contracts demonstrate an indivisible single composite works contract where title passes during incorporation; there cannot be a transit sale in an indivisible works contract, since the essential ingredient of a transit sale is that title passes during movement; and the petitioners have not been able to show a single precedent of a transit sale in an indivisible works contract.
While the submission, urged on behalf of the revenue, that there cannot be a transit sale (a subsequent sale exempt under Section 6(2) of the CST Act) in an indivisible works contract has considerable force, it is wholly unnecessary for us to examine this aspect in adjudicating the issues which arise for consideration in this batch of writ petitions. Suffice it to hold that, in the indivisible works contracts, which are the subject matter of these Writ Petitions, the various clauses of the contracts show that, notwithstanding the transit-sale clause, the parties intended to sell the goods (ie for the title in the goods to pass) only after completion of erection of the plant, and on issuance by the owner of a certificate as proof of having taken over the turnkey project.
(xiii) CAN ONE TRANSACTION OF SALE FALL BOTH UNDER SECTION 3(a) AND SECTION 6(2) OF THE CST ACT?
It is contended, on behalf of the revenue, that a single transaction of sale would not fall both under Section 3(a) and 6(2) of the CST Act; and, as the petitioners contention that the sale of goods in the subject contracts fall within the ambit of Section 6(2) of the CST Act necessitates rejection, their contention that the transaction would also fall under Section 3(a) must be negatived.
Can the very same contract of sale which occasions movement of goods from one State to another, also result in the sale of the very same goods during its movement from one state to another? Can the sale of goods to the eventual purchaser, for whose benefit and at whose instance the goods commence movement from one State to another, fall within the ambit of Section 6(2) of the CST Act? As noted hereinabove, a Section 3(b) sale can arise only during movement of goods from one State to another for, otherwise, the inter-state sale would a Sale under Section 3(a) of the CST Act.
Mere movement of goods from one state to another would not suffice. The movement must involve a sale. For instance, if dealer A purchases goods in State Xand transports it to his godown in State Y', the goods purchased by him in State Xis an intra-state sale within State X ?, and the movement of goods from State Xto State Yis otherwise than by way of a sale as dealer A ?, who is transporting the goods purchased by him in State X to his own godown in State Y', cannot be said to have sold the goods to himself. Such movement of goods is not liable to tax as it is not a sale. If, during such movement of goods from State Xto State Y', dealer A sells the same goods to dealer B ?, by transfer of documents of title, then such a sale is an inter-state sale in terms of Section 3(b) of the CST Act. If the very same goods, during its movement from State X to State Y ?, are again sold by dealer B (who purchased the goods from dealer A ?) to dealer C ?, again by transfer of documents of title to the goods, the sale by dealer B to dealer C is a subsequent sale exempt from tax under Section 6(2) of the CST Act.
Likewise if the movement of goods from State X to State Y is occasioned by the sale of goods by dealer A to dealer B it is a Section 3(a) sale. If, during the movement of the very same goods from State X to State Y ?, dealer B sells them to dealer C ?, such a sale by dealer B (who purchased the goods from dealer A ?) to dealer C is a subsequent sale exempt from tax under Section 6(2) of the CST Act. If, after delivery of goods in State Y ?, the very same goods are again sold, and such a sale also occasions movement of goods from one state to another, then the second sale is also a Section 3(a) sale, and is not exempt from tax under Section 6(2) of the CST Act. In the illustration given hereinabove if, after the goods are delivered in State Y ?, dealer C enters into a contract, for the sale of the very same goods, with dealer D in State Z ?, the movement of goods from State Y to State Z is occasioned by the contract of sale between dealer C and dealer D ?, and is a second Section 3(a) sale liable to tax under the CST Act.
The test to determine whether a sale of goods takes place in the course of inter-State trade and commerce is stipulated only by Section 3 of the CST Act. Section 6(2) merely exempts from tax the subsequent sale which takes place in the course of inter-state trade and commerce. The nature of the subject contracts, in the present batch of writ petitions, can be better explained by way of illustrations. Dealer A enters into a contract with dealer C in State Y that dealer A would purchase the goods, which dealer C requries, from dealer B in State X ?; transport the said goods from State X to State Y ?; during the course of movement of the goods from State X to State Y ?, dealer A would sell the goods to dealer C by transfer of document of title; and, thereby, claim that the sale of goods by dealer A to dealer C is exempt from tax under Section 6(2) of the CST Act. If, pursuant to the contract of sale entered into between dealer A with dealer C in State Y ?, dealer A purchases goods in State X from dealer B and, as a result, the goods move from State X to State Y ?, the movement of the goods is occasioned by the contract of sale between dealer A and dealer C and is a Section 3(a) sale. If, during such movement, the goods are sold by dealer A to dealer C by transfer of documents of title, such a sale would not fall within the ambit of Section 6(2) of the CST Act as the same contract of sale cannot be both a Section 3(a) sale and a subsequent sale exempt from tax under Section 6(2) of the CST Act. As the movement of goods from State X is only because they were intended to be sold by dealer A to dealer C in State Y ?, such a sale is the first inter-state sale liable to tax under Section 3(a) of the CST Act. The person, whose contract of sale with another has occasioned movement of goods from one State to another in terms of Section 3(a), cannot sell the very same goods to the very same person again. It is only where the purchaser of goods, under a Section 3(a) or a 3(b) sale, sells the goods to a third party, would such a sale be a subsequent sale falling within the ambit of Section 6(2) of the CST Act.
A transaction of sale is a single transaction whereby the property in the goods passes through the seller to the buyer, and there can never be two transactions of sale in one sale. (Kalpana Glass Fibre Pvt. Ltd. [Supra]; Edel Cast India v. Sales Tax Officer [(1988) 71 STC 253 (Orissa HC) (DB)]). There can never be two sales between the same parties under the same contract - one under Section 3(a) and the second under Section 6(2), as a Section 3(a) sale is the first sale, and the sale exempt under Section 6(2) is the second sale which takes place when the goods are in continuous movement pursuant to the first sale. As the first sale cannot, simultaneously, be a second sale also, a Section 3(a) or a 3(b) sale cannot, at the same time, be a subsequent sale exempt from tax under Section 6(2) of the CST Act.
The intention of the legislature, in a taxation statute, is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. (Mathuram Agrawal v. State of M.P. [(1999) 8 SCC 667]; Azadi Bachao Andolan [Supra]; Bank of Chettinad Ltd. v. CIT Madras [(1940) 8 ITR 522 (PC)]; Motors and General Stores (P) Ltd [Supra]). There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. (Mahim Patram Private Ltd. v. Union of India [(2007) 6 VST 248 (SC)]; State of West Bengal v. Kesoram Industries Ltd. [(2004) 10 SCC 201]). It is no doubt true that, in case of doubt or ambiguity in the statute, the construction, in favour of the taxpayer and against the Revenue, should be accepted. (Mahim Patram Private Ltd. [Supra]; Sneh Enterprises v. Commissioner of Customs, New Delhi [(2006) 7 SCC 714]; M/s Ispat Industries Ltd. v. Commissioner of Customs, Mumbai [(2006) 12 SCC 583 = 2006 (9) SCALE 652]). If the statutory provision does not suffer from any ambiguity, grant of a relief, in the teeth of the express provisions of the statute to the contrary, is not permissible. On equitable considerations, the Court cannot ignore or overlook the provisions of the statute. Equity must yield to the law. (Shamsu Suhara Beevi v. G. Alex [(2004) 8 SCC 569]).
On a literal construction, it is evident that a subsequent sale under Section 6(2) is akin to a Section 3(b) sale except that, while a Section 3(b) sale is the first sale in the course of inter-state trade or commerce, the sale, exempt under Section 6(2), is a second sale. This construction would also prevent leakage of revenue. The contracts, in the present batch of Writ Petitions, show that the contractors, with a view to fulfil their obligations under the contract with the owner, have purchased goods from the supplier at a lower price and, during movement of the goods intended only to reach the owner, have sold the goods to the owner at a higher price. While tax, under the CST Act, is paid by the contractor on the purchase of goods from the supplier, no tax is paid by them on the sale of goods to the owner. As the value of the goods purchased by the contractor from the supplier is far less than the value of the goods sold by the contractor to the owner, the tax paid under the CST Act is far lower than what should have been paid if the value of the goods, sold by the contractor to the owner, is taken as the measure of tax. While a subsequent sale of goods, independent of the first sale, may also have a similar effect, such a consequence was in the contemplation of Parliament, and revenue generation was consciously foregone in such cases, to ensure free and unrestricted movement of goods from one State to another.
As held in the preceding paragraphs, for a sale to be exempt under Section 6(2), the contract of sale should have come into existence, and the title to the goods should have been transferred, during movement alone. Any sale of goods prior to commencement of its movement from one State to another, or after its completion, would not be exempt under Section 6(2) of the CST Act. It is only for this limited purpose have we examining the elaborate submissions urged by learned counsel on either side. We may not be understood to have held that the sale of goods, from the petitioner-contractor to the owner in terms of the subject contracts, is not an intra-state sale for, even if the sale does not come within the purview of Section 6(2) or Section 3(b) of the CST Act, it could still fall within the ambit of Section 3(a) of the CST Act.
IV. SECTION 3(a) OF THE CST ACT:
(i) ARE THE PETITIONERS DISABLED FROM CONTENDING THAT THE SALE OF GOODS UNDER THE SUBJECT CONTRACTS FALL WITHIN THE AMBIT OF SECTION 3(a) OF THE CST ACT, MERELY BECAUSE THEIR CONTENTION, THAT THE SUBJECT SALES, FALL UNDER SECTION 6(2) OF THE CST ACT, WAS REJECTED?
While the submission urged on behalf of the petitioners, that the sale of goods by the petitioners-contractors to the owner falls within the ambit of Section 6(2) of the CST Act, does not merit acceptance, are the petitioners thereby barred from contending that, alternatively, these transactions are sales falling within the ambit of Section 3(a) of the CST Act? Sri K. Vivek Reddy, Learned Counsel for the respondent, would submit that, since the petitioners have invoked Section 3(a) (without any foundation in the pleadings), and as an alternative argument, the respondents are making their submissions on the same; the petitioner's plea that the second sale may also be treated as a Section 3(a) sale is destructive of their claim that it is a transit sale under Section 6(2); the moment the petitioners assert that the second sale is a Section 3(a) sale, it automatically ceases to be a Section 3(b) sale and a Section 6(2) sale; the petitioners can only assert that the sale is either a Section 3(a) or a Section 3(b) sale; if the petitioners assert both, it would be a case of mutually destructive pleading; and, in the face of such destructive pleadings, the petitionersclaim that the second sale is an inter-state sale is not tenable. Reliance is placed by the Learned Counsel on Steel Authority of India [Supra]and Vimal Chand Ghevarchand Jain [Supra]in this regard.
It is contended, on behalf of the petitioners, that reliance placed on Section 3(a) is in the alternative, and is to the effect that the contract with the owner had occasioned inter-State movement of goods from the other State from known vendors; these are not mutually destructive arguments; reliance placed on Steel Authority of India [Supra]is misplaced; and, in taxing statutes, alternate arguments can be raised without prejudice to each other.
The contention, urged on behalf of the respondent, that the petitioner's plea that the subject transactions are exempt from tax under Section 6(2) is mutually destructive of their plea that it is a Section 3(a) sale, is only to be noted to be rejected. It is no doubt true that pleadings of the parties are required to be read as a whole; although alternative and inconsistent pleas can be raised, pleas which are mutually destructive of each other cannot be permitted, (Vimal Chand Ghevarchand Jain [Supra]; Ranganayakammav. K.S. Prakash (dead) [(2008) 15 SCC 673]), when a definite stand is taken, it would not lie in the mouth of the petitioner to take a contradictory and inconsistent plea, and to raise a mutually destructive plea is impermissible in law. (Steel Authority of India [Supra]).
It cannot, however, be lost sight of thatacquiescence or consent would not confer jurisdiction on the assessing/revisional authorities to levy tax, under the AP VAT Act, on inter-state sales. In view of Article 265 of the Constitution, no tax can be recovered which is not permitted by law. The executive can neither levy tax, (National Mineral Development Corpn. Ltd. v. State of M.P., [(2004) 6 SCC 281]), nor can it take recourse to the process of interpretation of a statute, (Indian BanksAssociation v. Devkala Consultancy Service [(2004) 11 SCC 1]), to levy tax contrary to law. The consent of parties does not, by itself, confer jurisdiction upon a statutory authority. It is not open to the parties to confer, by their agreement, jurisdiction on a Court/Tribunal which it does not possess. The distinction lies in the jurisdiction to decide matters, and the ambit of the matters to be heard by a Tribunal having jurisdiction to deal therewith. While, in the latter, the question of acquiescence or irregularity may be considered and overlooked, in cases where the question is of the jurisdiction of the Court/Tribunal to make the order, no question of acquiescence or consent can affect the decision. (U.C. Bank v. Their Workmen [AIR 1951 SC 230]; and Hakam Singh v. Gammon (India) Ltd [AIR 1971 SC 740]; Estate Officer and Manager (Recoveries), APIIC Ltd. v. Recovery Officer, Debts Recovery Tribunal [2003 (5) ALT 216 (DB)]).
Be it a Section 3(a) or a 3(b) or a 5(2) sale or a sale exempt under Section 6(2) of the CST Act, the respondents lack jurisdiction to subject such sales to tax under the A.P. VAT Act treating them as intra-state sales. Even if the petitioners had not contended, alternatively, that it is a Section 3(a) sale, their acquiescence or consent would not confer jurisdiction on the respondents to subject these transactions to tax under the AP VAT Act. If, from the material on record, it can be established that the sale is a Section 3(a) sale, then the jurisdiction of the respondent authorities to levy tax on such sales, under the AP VAT Act, is ousted. While an inter-state sale cannot fall within the ambit of both Sections 3(a) and 6(2) of the CST Act at the same time, our conclusion, that the subject sales are not exempt under Section 6(2) of the CST Act, would not bar the petitioners from contending that the transaction falls within the ambit of Section 3(a) of the CST Act.
(ii) SECTION 3(a) SALE: ITS SCOPE:
It is contended, on behalf of the petitioners, that the assessing authority did not dispute the fact that the goods were manufactured to the design and the specifications of the contracting parties; the transaction would, therefore, qualify as an inter-state sale by reason of the inter-state movement of goods pursuant to the contract between the parties which contemplated such movement from outside the State; after inspection by the contracting parties alone, did the goods start moving; appropriation to the contract took place outside the State itself, and movement of goods was from outside the State; the respondent has not denied the fact that the goods were manufactured and moved as per the terms of the contract; the goods, involved in the execution of these works contracts, are specific goods tailor made for the particular project, and are required to be procured only from approved vendors from outside the State; the petitioner placed orders on the concerned vendors for manufacture and supply of equipment; after manufacture, inspection and pre-despatch tests were carried out in the presence of the owner; after satisfactory inspection, and approval of the test report by the customer, the goods were cleared for despatch; the vendors handed the goods over to the carrier; there is no diversion of the specified goods to others; the petitioner could not have offered these goods to others without committing breach of the supply agreement; and the inextricable link between the inter-state movement of the goods and the works contract is evident from the fact that there is a pre-despatch inspection by the contractee/owner or through his agent.
Sri K. Vivek Reddy, Learned Special Counsel, would submit that the alleged sales, under the supply agreements, do not satisfy the requirement of a Section 3(a) sale for the following reasons: (a) movement of goods was pursuant only to an agreement of sale, and not of sale; (b) even if there was a sale, the sale agreement did not occasion the inter-state movement; the inter-state movement of goods was pursuant to the contract between the supplier and the petitioner-contractor, and not between the petitioner-contractor and the owner; the deeming fiction in Section 3(a) lays down the following ingredients: (a) there must be a sale or purchase; and (b) the sale or purchase must occasion the inter-state movement; a sale occasioning inter-state movement (Section 3(a)), export (Section 5(1)) or import (Section 5(2)), would arise only if there is privity between the seller and the foreign buyer; if there is any intermediary to effect the sale, it is not exempt from tax; to overcome the ruling in Mohd. Serajuddinv. State of Orissa [(1975) 2 SCC 47], the Parliament introduced Section 5(3) in the CST Act which is confined only to exports; the law declared by the Constitution Benches of the Supreme Court, in Ben Gorm [Supra]; Coffee Board v. Jt. CTO [AIR 1971 SC 870 = (1969) 3 SCC 349]; Binani Bros v. Union of India [(1974) 1 SCC 459] and Serajuddin [Supra], continue to hold the field in respect of a Section 3(a) or a 5(2) sale; if Parliament intended to dispense with the rule of privity, and thereby include even two sales, it would have extended the scope of the amendment even to imports and inter-state sales; the interpretation of sale occasioning movement under Section 3(a) may be summarized as follows: (a) the sale must be the immediate and direct cause of the inter-state movement of goods; if the movement was under any other contract, it is not a Section 3(a) sale; (b) there must be an inextricable link between the contract and the inter-state movement of goods; (c) there must be privity between the seller and the final purchaser, pursuant to which there must be inter-state movement of goods; the judgments cited by the petitioners, in K.G. Khosla and Co. (P) Ltd. v. Deputy Commissioner of Commercial Taxes, Madras Division, Madras [AIR 1966 SC 1216 = (1966) 17 STC 473] and English Electric Company India v. DCT [AIR 1977 SC 1977], are distinguishable; the judgment in Indure [Supra], was rendered on the peculiar facts and circumstances of the case, the Supreme Court did not dispense with the requirement of privity or inextricable relationship as held in the Constitution Bench judgments in Binani Bros [Supra], Coffee Board_(I) [Supra]and Serajuddin [Supra], the Court did not even consider the ruling of the Constitution Bench in National Thermal Power Corporation [Supra]), and it did not differ with the ruling in K. Gopinanthan Nair v. State of Kerala [(1997) 10 SCC 1]; the sale, between the petitioner-contractor and the owner, did not occasion the inter-state movement under Section 3(a) for the following reasons: (i) the inter-state movement was under the penultimate contract i.e., under the contract between the supplier and the petitioner-contractor; (ii) the sale contract with the owner did not immediately cause the inter-state movement; (iii) there was no privity between the supplier, who was effecting the movement, and the owner who was the end consumer; and (iv) the supplier-contractor supply contract, and the contractor-owner contract, are separate and independent contracts.
Let us refer, albeit briefly, to the judgments relied upon by the petitioners. In The State of Bihar v. Tata Engineering and Locomotive Co. Ltd. [(1970) 3 SCC 697], the Supreme Court held that the dealers of the respondent-company were required, under the contract, to remove the trucks, purchased by them, from the State of Bihar to places outside Bihar; they would have committed breach of their contracts, and incurred the penalty prescribed in their dealership agreements, if they had failed to abide by the terms requiring them to move the goods outside the State of Bihar; where, under the terms of a contract of sale, the buyer is required to remove the goods from the State in which he purchased those goods to another State, and when the goods are so moved, the sale in question must be considered as a sale in the course of inter-State trade or commerce; and the ratio of the decision in Coffee Board (I)175, did not bear on the facts wherein, under the terms of the contract of sale, the purchasers were required to remove the goods from one State to another State.
In Union of India v. K.G. Khosla and Co. Ltd. [(1979) 2 SCC 242], the Supreme 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 the contract. A similar view was expressed in Sahney Steel and Press Works Ltd. v. CTO [(1985) 4 SCC 173]; and National Thermal Power Corpn. Ltd., [Supra].
In DCM Ltd. v. CST [(2009) 4 SCC 231], the Supreme Court held that taking delivery of the goods in Delhi by the purchasing dealers, for their assigned territories outside Delhi, would not take away the transactions from the category of inter-State sales; the determinative test to be applied was whether the purchasing dealers were obliged contractually to remove the goods from Delhi, (in which they were bought), to the assigned territories; and whether, in fact, the goods stood actually removed.
In Asea Brown Boveri Ltd. v. State of Karnataka [(2014) 70 VST 84 (Karnataka HC) (DB)], it was contended, on behalf of the revenue, that movement of the goods from outside the State was neither as a result of the contract nor was it incidental to the contract; the General Conditions of Contract did not mention about inter -State vendors; and, therefore, it could not be stated that the goods were moved in pursuance of the contract. The Karnataka High Court Division bench held that, in the present case, the movement of goods from one State to another may or may not be as a result of a covenant, but it was definitely an incident of the contract.
A sale, in the course of inter-State trade, has three essential ingredients: (i) there must be a contract of sale, incorporating a stipulation, (express or implied), regarding inter-State movement of goods; (ii) the goods must actually move from one State to another, pursuant to such contract of sale, the sale being the proximate cause of movement; and (iii) such movement of goods must be from one State to another State where the sale concludes. (National Thermal Power Corpn. Ltd., [Supra]; Manganese Ore (I) Ltd. v. Regional Asst. Commissioner [(1976) 4 SCC 124= (1976) 37 STC 489 (SC)]; Balabhagas Hulaschand [Supra]). The State Legislature cannot, by law, treat Section 3(a) sales as sales within the State as it is within the exclusive domain of the appropriate legislature i.e. Parliament to fix the location of the sale by way of a legal fiction or otherwise. The State, where the goods are delivered in the transaction of an inter-State sale, cannot levy a tax on the basis that one of the events in the chain has taken place within the State. (National Thermal Power Corpn. Ltd., [Supra]; 20th Century Finance Corpn. [Supra];Builders Association of India v. Union of India [(1989) 2 SCC 645 : AIR 1989 SC 1371 =(1989) 73 STC 370 (SC)]). Whenever a question arises whether a sale is an inter-State sale or not, it has to be answered with reference to Section 3 alone. (Zunaid Enterprises [Supra]; S.R. Sarkar [Supra]).
A sale being, by definition, a transfer of property becomes taxable under Section 3(a) if the movement of goods from one State to another is under a covenant or incident of the contract of sale, and the property in the goods passes to the purchaser otherwise than by transfer of documents of title when the goods are in movement from one State to another. It does not matter in which State the property passes. (S.R. Sarkar [Supra]). The sale must be shown to have occasioned the movement of the goods from one State to another. The movement must be the result of a covenant or incident of the contract of sale (State of Bihar v. TELCO [Supr