ORDER
V.K. Singhal, J.
1. In this revision, the order of the Karnataka Appellate Tribunal dated July 31, 1996, in respect of the assessment year 1990-91 is in dispute.
2. The assessee undertook a contract for retreading of tyres from Andhra Pradesh State Road Transport Corporation. The assessing authority granted exemption for the turnover of Rs. 6.30.094.30 considering it to be inter-State transaction. The Joint Commissioner of Commercial Taxes, exercised the revisional powers under Section 21(2) ex parte. The Tribunal was of the view that retreading of tyres amounts to deemed sale within the State under Section 5B of the Karnataka Sales Tax Act, 1957 read with entry 24 of the Sixth Schedule to the Act.
3. The controversy that has arisen is because of explanation 3(c) to the definition of 'sale', which is to the following effect :
'Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to have taken place in the State, if the goods are within the State at the time of such transfer, irrespective of the place where the agreement for works contract is made, whether the assent of the other party is prior or subsequent to such transfer :'
4. The validity of this provision was challenged before the apex Court in Builders' Association of India v. State of Karnataka [1993] 88 STC 248. It was observed that :
'A perusal of clause (t) shows that in the main part the expression 'sale' has been defined and in the inclusive part of the said definition, sub-clauses (i) to (iv) reproduce sub-clauses (a) to (d) of clause (29-A) of Article 466. Explanation (3) contains three clauses, whereby the situs of the sale is fixed. Clause (a) of explanation (3) contains the words 'other than the sale in the course of inter-State trade or commerce or in the course of import or export' which means that a sale or purchase of goods in the course of inter-State trade or commerce or in the course of import or export is excluded. Moreover clause (a) of explanation (3) merely reproduces the provisions contained in the main part of Sub-section (2) of Section 4 of the Central Sales Tax Act. Clause (b) of explanation (3) contains the explanation in Sub-section (2) of Section 4 of the Central Sales Tax Act. Clause (c) of explanation (3) relates to works contracts and fixes the situs of the deemed sales resulting from transfer of property in goods involved in execution of a works contract. It starts with a non obstante clause which refers to the Sale of Goods Act, 1930. This means that clause (c) has to be read with other provisions of the Act, including clauses (a) and (b) of explanation (3), which expressly exclude a sale in the course of inter-State trade or commerce and a sale in the course of import or export. Construing clause (c) in the light of clauses (a) and (b) of explanation (3) we are unable to hold that in fixing the situs in respect of deemed sales resulting from transfer of property in goods involved in execution of a works contract the Legislature has included a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import or export.'
The Full Bench of the Punjab and Haryana High Court in Thomson Press (India) Ltd. v. State of Haryana [1996] 100 STC 417 it was observed that :
'Wherever the sale or purchase of goods occasions the movement of goods from one State to another, it is deemed to have taken place in the course of inter-State trade or commerce. In the cases covered by sections 3, 4 and 5 of the Central Act, the State Legislature has no competence to provide for the levy of sales tax. This principle shall apply even in the case of works contract. The position cannot be different in a case where an indivisible contract is made divisible by the legal fiction introduced by a State legislation in pursuance to the 46th Amendment. Once the contract occasions the movement of the end-product from one State to another, the inputs or the goods involved in the execution of the works contract shall also be deemed to have moved and the levy of sales tax in such a case would be outside the field of legislative competence of the State Legislature. By introducing a fiction, the State Legislature cannot convert a sale in the course of inter-State trade and commerce into a local sale. In fact, this is the view expressed by the Full Bench in conclusions 3 and 4 in the East India Cotton Manufacturing Company's case [1993] 90 STC 221 (P&H;) [FB]. This is also the position that emerges from the decision of the Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204.'
This Court in India Equipment Leasing Ltd. v. Deputy Commissioner of Commercial Taxes, Assessments VIII, Gandhinagar, Bangalore [1998] 111 STC 403 has considered the effect of explanation 3(d) in the context of Section 5(c) and came to the conclusion that the inter-State transaction would not be subjected to tax under the Karnataka Sales Tax Act.
5. The main stress of the learned Government Advocate is that the property itself has been transferred in the State of Karnataka. The word 'sale' which has included the works contract in its ambit refers to supply of goods for money consideration under a contract and delivery in pursuance thereon. If the contract itself contemplate movement from one State to another, passing of the property in either State is immaterial as held in Oil India Ltd. v. Superintendent of Taxes : [1975]3SCR797 :
'No matter in which State the property in the goods passes, a sale which occasions 'movement of goods from one State to another is a sale in the course of inter-State trade'. The inter-State movement must be the result of a covenant, express or implied, in the contract of sale or an incident of the contract. It is not necessary that the sale must precede the inter-State movement in order that the sale may be deemed to have occasioned such movement. It is also not necessary for a sale to be deemed to have taken place in the course of inter-State trade or commerce, that the covenant regarding inter-State movement must be specified in the contract itself. It would be enough if the movement was in pursuance of and incidental to the contract of sale.'
In the present case, it is also not established that the property was transferred in the State of Karnataka. The retreading was done on the tyres of Andhra Pradesh State Road Transport Corporation in Karnataka, but that fact would not be sufficient to come to the conclusion that the property is transferred to Andhra Pradesh State Road Transport Corporation in Karnataka.
6. The controversy is settled by series of other decisions of the apex Court. The contract which has been entered into was for retreading the tyres and sending them to Andhra Pradesh State Road Transport Corporation, Andhra Pradesh from Karnataka after retreading. The movement of goods is so linked that it cannot be disassociated except at the violation of the contract. There may be other stipulations in the contract like inspection of the goods, etc., but they cannot convert an inter-State sale into a local sale. The main point to be seen is the movement of goods in pursuance of the contract of sale from one State to another. The movement must be the incident of the contract.
7. In the present matter, though rubber was added on the tyres of Andhra Pradesh State Road Transport Corporation in Karnataka but that is only part of agreement. The other part of agreement contemplated movement of goods, i.e., rubber from Karnataka to Andhra Pradesh.
8. Clause 3 of agreement dated December 26, 1991 is as under :
'The company shall collect the tyres to be retreaded at its own cost and shall deliver back the same fully retreaded at the company's own cost subject to condition (2)(a) pertaining to freight clause. The tyres as per list prepared at the time of collection of tyres shown the sizes and quantities shall be removed from the premises of the Corporation by the company within 10 (ten) days after the intimation in that behalf from the Deputy Manager (Materials), D & T, Cuddapah region or their representatives and returned duly retreaded within 20 (twenty) working days from the date of removal of the tyres to the Deputy Manager (Materials), D & T, Cuddapah. If the tyres are not removed by the company within 10 (ten) days of receipt of the intimation, the Corporation shall have the right to impose the penalty of Rs. 5 (five rupees only) per tyre per day after expiry of 15 (fifteen) days period till the date company remove the tyres from the premises of the Corporation. If the company fails to deliver the retreaded tyres within the period stipulated, viz., 20 (twenty) working days from the date of lifting the tyres, the Corporation shall have the right to impose a penalty of Rs. 5 (rupees five only) per tyre per day after the expiry of 20 (twenty) working days till the date the company delivers the retreaded tyres.'
9. Before the assessing authority it was submitted that :
(a) That the execution of works contract to Andhra Pradesh State Road Transport Corporation, Hyderabad was in the course of inter-State trade and commerce and that it was in pursuance of an existing contract entered into with Andhra Pradesh State Road Transport Corporation.
(b) That the turnover did not fall under entry 24 of the Sixth Schedule read with Section 5-B and that the observation made by me that the situs of sale was in Karnataka State and the property in goods was transferred to the customers (APSRTC) in Karnataka was also not correct.
(c) That the transactions from the point of bringing worn out tyres belonging to APSRTC from Andhra Pradesh, and its return after retreading in the company's P.R.Ds. in Karnataka was in compliance to an existing contract under Section 3 of the Central Sales Tax Act, 1956 and hence was outside the purview of the Karnataka Sales Tax Act, 1957.
(d) That the 46th Amendment to the Constitution of India did not deem an outside State sale to be an inside State sale and it did not confer on the States the power to tax, sales outside the State and then it did not deem an inter-State sales to be an 'intra-State sales'.'
10. The assessing authority observed that :
'With regard to dealer's contentions relating to tax proposed on works contract receipts from Andhra Pradesh State Road Transport Corporation the reply is examined with reference to the decision cited by the company in support of its contention and the agreement copy filed with the objection. The contents of the agreement clearly reveal that the transaction is in the nature of in the course of inter-State trade and commerce. The transaction carried out by the company for Andhra Pradesh State Road Transport Corporation is in compliance to a prior existing contract based on written agreement and hence it falls within Section 3 of the Central Sales Tax Act, 1956. Throughout, it retains the character of an inter-State transaction. The decision cited aptly fits into the transaction of the assessee-company. The decision relates to 'grey cloth sent by contractors from outside the State of Haryana and was processed in the State of Haryana into finished cloth by being subjected to processes such as bleaching, dyeing, sizing and printing and thereafter sent back to the contractors outside the State'. The honourable High Court of Punjab and Haryana has held it to be an inter-State sale within the meaning of Section 3 of the Central Sales Tax Act, 1956 (East India Cotton Manufacturing Company Limited v. State of Haryana [1993] 90 STC 221).'
11. According to the revising authority the assessee has undertaken works contracts of retreading of tyres belonging to Andhra Pradesh State Road Transport Corporation. From this it is clear that the assessee has taken delivery of tyres to be retreaded and after completion of the work, deliver the same. Thus property in goods always remains with the employer and value of goods involved in execution of works contract passed immediately after the work. Therefore, it is a local works contract and not inter-State works contract as contemplated by the assessing authority. Hence, it is taxable at 8 per cent. In Builders' Association of India v. State of Karnataka [1993] 88 STC 248 (SC) the following principles were laid down:
'(1) In exercise of its legislative power to impose tax on sale or purchase of goods under entry 54 of the State List read with Article 466{29-A)(b), the State Legislature, while imposing a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract is not competent to impose a tax on such a transfer (deemed sale) which constitutes a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import or export.
(2) The provisions of sections 3, 4, 5 and sections 14 and 15 of the Central Sales Tax Act, 1956, are applicable to a transfer of property in goods involved in the execution of a works contract covered by Article 466(29-A)(b).
(3) While defining the expression 'sale' in the sales tax legislation it is open to the State Legislature to fix the situs of a deemed sale resulting from a transfer falling within the ambit of Article 466(29-A)(b) but it is not permissible for the State Legislature to define the expression 'sale' in a way as to bring within the ambit of the taxing power a sale in the course of inter-State trade or commerce, or a sale outside the State or a sale in the course of import and export.'
12. From agreement dated December 26, 1991 it is clear that the retreaded tyres are sent to Andhra Pradesh State Road Transport Corporation in Andhra Pradesh. This clause is part of the agreement and the petitioner have no option but to move the goods in the course of inter-State. Clause (a) of explanation 3 to the definition of 'sale' has excluded the sales which are in the course of inter-State trade or commerce or in the course of import or export. Clause (c) of explanation 3 which relates to works contract has to be read with clause (a) and therefore an inter-State sale in works contract has to be excluded. The situs so fixed by clause (c) of explanation 3 would apply to such works contract where the contract does not contemplate movement of goods from one State to another.
13. Fixing of rubber over the tyres of Andhra Pradesh State Road Transport Corporation though passes the property in goods on the theory of accretion to the movable property is only one part of the contract on the basis of which it has to be considered as works contract. But the other part of the contract stipulates movement of goods from one State to another and hence both being integral part of contract it has to be considered an inter-State sale of works contract which is not liable to tax under the Central Sales Tax Act and on which the provision of the Karnataka Sales Tax Act cannot be applied.
14. We are therefore of the opinion that the Tribunal was not right in law in coming to the conclusion that it was a works contract within the State of Karnataka liable to tax under entry 24 of the Sixth Schedule to the Karnataka Sales Tax Act, 1957 read with Section 5B thereof, since the contract itself contemplated movement of such deemed sale from the State of Karnataka to Andhra Pradesh.
15. The revision is accordingly allowed and the order of the Tribunal is quashed.