as far as the present case is concerned, merely because the component parts were brought from different places outside Orissa and assembled in Orissa, it cannot be said that it was an intra-State sale and that a colourable device was deployed to avoid paying sales tax under the OST Act. This is contrary to the facts. The documents placed on record clearly show that components either manufactured in the Petitioner’s own facilities outside Orissa or brought from outside Orissa were transported to Orissa for erection, testing and commissioning of the 100 TPD Rotary Kiln.
There was no occasion for the Tribunal to have gone into a lengthy discussion whether it amounted to a works contract when the focus ought to have been on whether it was an intra-State sale as contended by the State. The goods were indeed supplied in course of inter-State rate, and received by TRL in Orissa. The movement of the goods originated from outside the State. This was not an intra-Sate sale by any stretch of imagination.
Consequently, the Court is unable to agree with the conclusion reached by the authorities at all levels, i.e., STO, ACST and the Tribunal and accordingly all their orders in this regard are hereby set aside. Question No.1 is answered in the negative by holding that the Full Bench of the Tribunal erred in treating the transactions as intra-State sales despite those transactions having been exigible under Section 6(2) of the CST Act.
FULL TEXT OF THE JUDGMENT/ORDER OF ORISSA HIGH COURT
1. The present revision petition arises from an order dated 23rd April, 2008 passed by the Sales Tax Tribunal, Cuttack by which S.A. No.3009 of 1995-96 filed by the present Petitioner was partly allowed. By the said impugned order, the Full Bench of the Tribunal upheld the decision dated 27th November, 1995 of the Assistant Commissioner of Sales Tax (ACST), Sambalpur Range, Sambalpur in Sales Tax Appeal No. AA 76 (SA III) of 94-95. It was held that the three separate contracts for supply, design and erection of 100 TPD Rotary Kiln by the Petitioner to M/s.Tata Refractories Ltd. (TRL) amounts to works contract and an intra-State sale exigible to sales tax at 4% notwithstanding that the Petitioner had paid Central Sales Tax (CST) on the same transaction.
2. While admitting the petition on 29th July, 2009, the following substantial questions of law were framed by this Court:
“1. Whether in the particular facts and circumstances of the case the Full Bench, Orissa Sales Tax Tribunal has acted in accordance with the statutory provision and the settled position of law while disallowing the claim of sales u/S.6(2) of the CST Act and treat it as intra state sale when the selfsame turn over has been assessed under the CST Act for the selfsame year by the STO, Rourkela II Circle?
2. The Full Bench, Orissa Sales Tax Tribunal having been satisfied with the fact that conditions do not exist for imposition of penalty u/S. 12(5) of the Orissa Sales Tax Act, 1947, whether the Tribunal is legally justified in not deleting the penalty imposed entirely?”
3. The background facts are that the Petitioner and TRL entered into three separate contracts on 25th August, 1992. One was for supply of indigenous equipment including all accessories for the 100 TPD Rotary Kiln. The second was for erection, testing and commissioning of the Rotary Kiln. The third was for the system engineering and design of the 100 TPD Rotary Kiln including all auxiliary equipment. The Rotary Kiln was to be set up in Belpahar in Orissa and the equipment was to be supplied from outside the State of Orissa. Some of the equipments were to be manufactured by the Petitioner at its factory in Maharashtra and some of them were brought from other manufacturers located outside Orissa and despatched to TRL by way of transfer of documents with the title to the goods passing when the goods were in transit.
4. The trigger point for the dispute was an order dated 28th October, 1994 passed by the Sales Tax Officer (STO), Rourkela for the assessment year ending 1993-94. The STO held that the Petitioner had failed to get itself registered under the Orissa Sales Tax Act (OST Act) leading to a notice under Section 12 (5) of the OST Act being issued to it. Before the STO, it was contended by the Petitioner that out of the three contracts, the one for system engineering and design was purely a service contract and did not attract the provisions of either the OST Act or the Central Sales Tax Act (CST Act). The supply of indigenous equipment was in the course of inter-State trade for which the Petitioner was separately registered. The jurisdiction for levying CST on such transaction was, under Section 6(2) of the CST Act, with the STO, Rourkela-II Circle, Rourkela. The agreement for erection and commission was purely a labour and service agreement.
5. It was contended by the Petitioner before the STO that in the year 1992-93, no work was executed and therefore proceedings under Section 12(5) of the OST Act were unwarranted. The Petitioner produced before the STO invoices, which showed that 4% CST had been collected.
6. The STO rejected the above contentions and came to the conclusion that when the component materials and equipments were despatched from outside the State, the property in the complete equipment had not passed yet to the buyer. It was held that the transaction fell “squarely outside the Section 3(a) of the C.S.T. Act”. It was further held that the property in the Rotray Kiln passed only after successful its commissioning. It was then concluded as under:
“The complete 100 TPD Rotary Kiln which is nothing but is an end product, is the subject of contract and is separate from the component materials imported from other States. The movement of the above component materials from different states was with object of making the 100 TPD Rotary Kiln which alone was the subject of the contract. Here the 100 TPD Rotary Kiln took stupe only when all the component and materials of the equipment are brought to the site in Orissa and assembled. It was made over thereafter to the purchaser by appropriation to the contract.”
7. On this basis notwithstanding that the Petitioner had paid CST on the above transaction, the STO by the impugned assessment order determined the tax payable under the OST Act at 4% amounting to Rs.51,25,273.56. Further, surcharge and penalty were also levied.
8. The Petitioner’s appeal against the above order was dismissed by the ACST by the order dated 27th November, 1995. The conclusions reached by the ACST were as under:
“(i) The contract for supply and commissioning is a composite one held out to the appellant through two instruments. One is inextricably linked with the other in as much as by supply alone the contractee’s entrustment would not be fulfilled. Nor is erection and commissioning possible without supply. After all the contractee was not interested in mere supply of goods but wanted 100 TPD Rotary Kiln installed in their physical and functional entirety.
(ii) The goods envisaged in the contract were not the same goods which made their way from Maharashtra to Orissa in course of inter-state trade. The items received from Maharashtra were reshaped in Orissa and appropriated to the contract.
(iii) The inter-state journey of the goods was breached when the appellant himself took delivery of the same in order to fabricate the items necessary to be appropriated for compliance of contract.
(iv) The goods were not sold qua-goods but were pleased on to the contractee on the theory of accretion.”
9. The Petitioner then went before the Full Bench of the Tribunal which initially by an order dated 7th October, 2002 dismissed the appeal, rejecting the contention of the counsel for the Petitioner that the contractee, i.e., TRL had received the materials brought from Maharashtra to the State of Orissa and stored in its own godown and therefore, it was an inter-State sale and not an intra-State sale. The Tribunal observed that it could not “find out any documentary evidence to show that as goods were received by the contractee.”
10. Aggrieved by the above orders, the Petitioner filed ST Revision No. 23/2003 in this Court. By order dated 12th March, 2008, this Court remanded the matter to the Tribunal for rehearing after examining the documents produced by the Petitioner before it. It was directed that the Tribunal should hear the appeal afresh, consider the documents before coming to a finding.
11. Consequent upon the remand, the Tribunal after hearing the appeal and considered the documents passed the impugned order dated 23rd April, 2008 holding inter alia as under:
“It is clear from the three numbers of Letter of Indent mentioned earlier that what was intended by the parties to the contract was not sale or supply of goods simpliciter but drawing design supply, installation, erection, testing commissioning & demonstration of 100 TDP Rotary Kiln. It is not supply of chattel qua chattel but a works contract involving the aforesaid processes. It is an indivisible works contract which has been made divisible by legal fiction by the constitution (46th) amendment Act. It is not a contract for deemed sale of goods and labour involved in works contract. In the instant case, a colorable device adopted by the parties to make indivisible works contract divisible in order to evade payment of tax under the OST Act. In order that there should be a sale of goods qua goods which is liable to sales tax as a part of the contract for work there must be a contract in which there is not merely transfer of title of goods as an incident of the contract, but there must be a contract, express of implied for sale of very goods. Prior to the constitution (46th) Amendment Act and in view of the decision of the Hon’ble Supreme Court of India in case of State of Madras Vs. Gannon Dunkerley & Co (1958) 9 STC 353 (SC) the real question that was to be decided was whether the contract was primarily a contract for supply of materials at the price agreed to between the parties for the materials so supplied and the works and service rendered was incidental to the execution of the contract. If it was so the contract was for sale of materials. If on the other hand the contract was primarily a contract for work and labour and supply of material was incidental to the execution of such contract it could not be said there was a contract for sale of materials. It would be a works contract. But after 46th Amendment of the constitution the position has been altogether different.
In a works contract however small is involvement of the material that is to be exigible to Sales Tax as deemed sale of goods in course of execution of such contract. From the facts of the present case it would be seen that the setting up the 100 TDP Rotary Kilns is a highly sophisticated activity which requires very high degree of skill. Drawing, design, supply, erection testing commissioning is one single indivisible process and the kiln comes into existence when the erection is complete. Erection, installation or commissioning is thus a fundamental and integral part of the contract. It is, therefore, not a sale of equipments simpliciter but works contract involving deemed sale of the equipments and supply of labour and services in course of execution of the work. Moreover the contract entered into by the parties is a contract for design, supply, erection, etc of unascertained/future goods. At the time of execution of contract the goods are not in existence. In case of unascertained or future goods at the time of their appropriations to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation. In case of the present contract the appropriation to the contract has been made after installation/erection of 100 TDP rotary kiln and demonstration. Therefore, the present contract is a works contract involving deemed sale of goods after accretion/erection/ commission and demonstration of the working of the kiln.”
12. The further finding of the learned Tribunal was under:
“Here the instant case when the contract is for supply, erection etc of 100 TDP Rotary Kiln bringing of the component parts and equipments and assembly of the same at the work site amounts to manufacture and erection of the same and both these manufacture and erection amount to works contract.”
xxx xxx xxx
“But in the instant case when the sole purpose is the drawing, design, supply erection etc of 100 TDP Rotary Kiln and assembly of the equipments and component tantamount to manufacture and erection the components can’t be sold inter-State by the contractor to the contractee inter-State and if it is so then the contractor’s assembly and erection of the same can’t amount to works contract but sales of component parts inter-State and the contract is not sale of component parts inter-State but the deemed sale of the Rotary Kiln. Further, most of the goods have been claimed to have been sold inter-State by way be subsequent inter-State sales and exemption of such sales from levy of CST as per the provisions of Sec.6(2) of the CST Act.”
13. The Tribunal then proceeded to discuss Section 6(2) of the CST Act and its applicability. Ultimately, the Tribunal concluded as under:
“In the absence of documentary evidence, it is established that M/s.L&T has taken delivery of goods from the common career in Orissa in course of 1st inter-State movement of goods, thereby bringing such movement to an end and thereafter delivered the goods to M/s.TRL who in his turn delivered the goods to M/s.L&T to assemble and erect the 100 Rotary Kiln and such assembly, erection etc of the equipments in a phased manner amounts to works contract and is exigible to sales tax at the rate of 4% the rate of tax applicable for goods deemed to have been sold in course of execution of works contract.”
15. This Court heard the submissions of Mr.Sidhartha Ray, learned counsel appearing for the Petitioner and Mr.Sunil Mishra, learned A.S.C. for the Department.
15. The first issue be considered is whether the Tribunal erred in treating the above transactions as an intra-State sale despite the Petitioner having paid CST on the same transaction.
16. The question appears to be no longer res integra. In Bharat Heavy Electrical Limited v. Union of India AIR 1996 SC 1854, the Supreme Court was considering a similar question which arose in the background of Bharat Heavy Electrical Limited (BHEL) being awarded a Letter of Intent (LOI) by the National Aluminium Company Limited (NALCO), Bhubaneswar for setting up of five captive power plants (120 MW each) at its Aluminium smelter complex at Angul, Orissa. Pursuant to the LOI, BHEL instructed its several units in Haridwar, Jhansi, Bhopal, Bangalore, Ramachandrapuram (Andhra Pradesh- near Hyderabad), Ranipet and Tiruchi (Tamil Nadu) and so on to manufacture the requisite machinery and equipment. There was a separate supply and service contract executed between the parties. The execution of the work order involved manufacturing of some of the components and parts in places outside Orissa and then bringing them to the work site at Angul, Orissa to be incorporated into the captive power plant being erected in Orissa. BHEL paid Central Sales Tax on the value of entire boiler systems manufactured by Tiruchi unit in Tamil Nadu which ultimately became part of the captive power plant. When the sales tax authorities in Orissa sought to levy OST BHEL protested stating that simultaneous taxation in different States for the same transactions was causing it an unbearable burden. The Supreme Court examined the question whether the above sales were intra-State sales? It observed as under:
“22. Whether a particular sale is an inter-State sale or an intra-state sale is essentially a question of fact.
Perhaps, it may be more appropriate to say that it is a mixed question of fact and law. Whenever BHEL enters into a supply contract with a party, it designates one of its units as the executing unit. That is treated as the main unit executing the work. (Sometimes, this is not done and each unit is entrusted a particular job). But it may happen that the executing unit does not manufacture all the parts and components which are required for completing the job entrusted to it. It, therefore, requests other units of BHEL to manufacture the parts and components required by it and to despatch the same. Some of the parts and components so manufactured by other units are sent directly to the executing unit for being incorporated into the main machinery/system while some parts and components are despatched directly to the work-site. Tiruchi unit was supposed to be the executing unit. But some parts and components required for the boiler system and other equipment (which was the responsibility of the Tiruchi unit to manufacture) were being manufactured at the Hyderabad unit. At the request of the Tiruchi unit-or on the instructions of the Head office, as the case may be – the Hyderabad unit manufactured those parts and components and dispatched some of them to Tiruchi and some of them directly to Angul in Orissa (work-site). The consideration stipulated in the supply contract was payable in the manner provided therein.”
17. The Supreme Court disagreed with the view of the Tribunal that the transaction was not an inter-State sale since the goods sent (by rail or road) did not answer the description of the goods mentioned in the annexure to the LOI/supply contract. The Supreme Court observed as under:
“Obviously, the annexure mentions only the major items of machinery and equipment. These major items cannot be transported as such; transport has to be effected in sections and parts and assembled at the spot. For that reason, it cannot be said that the goods transported are not the goods agreed to be supplied. It is nobody’s case that BHEL supplied some other goods than the goods agreed upon. Having thus erroneously excluded Section 3 of the Central Sales Tax Act, the Tribunal went to Section 4 and held that in the circumstances, the sales must be held to have taken place inside the State of Orissa. The discussion about endorsement of goods by NALCO to BHEL in Orissa and so on is rather ambiguous.”
18. On the same basis, as far as the present case is concerned, merely because the component parts were brought from different places outside Orissa and assembled in Orissa, it cannot be said that it was an intra-State sale and that a colourable device was deployed to avoid paying sales tax under the OST Act. This is contrary to the facts. The documents placed on record clearly show that components either manufactured in the Petitioner’s own facilities outside Orissa or brought from outside Orissa were transported to Orissa for erection, testing and commissioning of the 100 TPD Rotary Kiln.
19. There was no occasion for the Tribunal to have gone into a lengthy discussion whether it amounted to a works contract when the focus ought to have been on whether it was an intra-State sale as contended by the State. The goods were indeed supplied in course of inter-State rate, and received by TRL in Orissa. The movement of the goods originated from outside the State. This was not an intra-Sate sale by any stretch of imagination.
20. Consequently, the Court is unable to agree with the conclusion reached by the authorities at all levels, i.e., STO, ACST and the Tribunal and accordingly all their orders in this regard are hereby set aside. Question No.1 is answered in the negative by holding that the Full Bench of the Tribunal erred in treating the transactions as intra-State sales despite those transactions having been exigible under Section 6(2) of the CST Act. Question No.1 is accordingly answered in favour of the Petitioner-assessee and against the Department.
21. Consequently, Question No.2 is answered in the negative by holding that the Tribunal was not justified in declining to delete the penalty imposed in its entirety.
22. The STREV is accordingly disposed of.
23. An urgent certified copy of this order be issued as per rules.