1995 (3) TMI 459 - HC - VAT and Sales Tax

Issues Involved:
1. Whether the supply of cement, iron, and steel by the company to the contractors for construction purposes amounts to a sale under the U.P. Sales Tax Act, 1948.
2. Whether the company is liable to pay sales tax on the value of these goods supplied to the contractors.

Issue-wise Detailed Analysis:

1. Whether the supply of cement, iron, and steel by the company to the contractors for construction purposes amounts to a sale under the U.P. Sales Tax Act, 1948:

The revisionist company, a Government of India undertaking, supplied cement, iron, and steel to contractors for constructing factory buildings under specific agreements. The assessing authority considered these supplies as sales and levied sales tax. The company contended that these supplies did not amount to sales and thus should not attract tax liability. The learned counsel for the revisionist argued that the supply of materials for specific purposes under the terms of the contract does not constitute a sale. He cited various decisions supporting this view, including Oil and Natural Gas Commission v. Commissioner of Sales Tax 1992 UPTC 170 and Modi Xerox v. Commissioner of Sales Tax 1992 UPTC 717.

The standing counsel for the opposite party argued that the supply of materials amounted to a sale under section 2(h) of the Act, citing the Supreme Court's decision in N.M. Goel & Co. v. Sales Tax Officer [1989] 72 STC 368 and a decision of the Allahabad High Court in Executive Engineer, Electricity Civil Construction Division, UPSEB, Meerut v. Commissioner of Sales Tax 1994 UPTC 438.

Upon examining the terms and conditions of the contract, it was found that the materials were issued solely for incorporation in the works, and the contractors were responsible for their proper storage and return of unused materials. The company retained ownership of the materials, and the contractors acted as trustees. The definition of "sale" under section 2(h) of the Act requires a transfer of property in goods, which did not occur in this case. The materials supplied were not transferred as owners to the contractors, thus not constituting a sale.

2. Whether the company is liable to pay sales tax on the value of these goods supplied to the contractors:

The Tribunal's observation that the supply of materials amounted to a sale due to the maintenance of debit and credit accounts and the option for contractors to retain unused materials on payment was found to be incorrect. The nature and purpose of the accounts and the entire agreement's provisions must be considered. The company's registration was for manufacturing and selling fertilizers, not for dealing in cement, iron, and steel. The materials were procured under a license for constructing the factory, not for resale. The contractors were bailees under section 148 of the Contract Act, accountable for the materials' proper use and return.

The Tribunal's reliance on the Supreme Court's decision in N.M. Goel & Co. was misplaced as the clauses in the present agreement differed significantly. The supply of materials was not by way of sale but as trusteeship, with the company retaining ownership. The Tribunal's conclusion based on isolated clauses was unjustified. The company's noble cause of setting up a fertilizer manufacturing plant should not be hindered by an erroneous tax liability.

Conclusion:

The High Court concluded that the supply of cement, iron, and steel by the company to the contractors for construction purposes did not amount to a sale under section 2(h) of the Act. Consequently, no tax liability was attracted under the Act. The Tribunal's judgment was set aside, and the petitions were allowed. The Tribunal was directed to pass further consequential orders accordingly.

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