1996 (3) TMI 517 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Determination of whether the transactions between the respondent and M/s. IBDL constitute second sales under the Karnataka Sales Tax Act, 1957.
2. Examination of the nature of the agreement between the respondent and M/s. IBDL, specifically whether it is a works contract or a sale.
3. Analysis of the Tribunal's interpretation of the agreement and its conclusion regarding the nature of the transactions.

Issue-wise Detailed Analysis:

1. Determination of whether the transactions constitute second sales:

The revision petitions challenge the Karnataka Appellate Tribunal's decision that certain sales by the respondents are second sales and thus not taxable under the Karnataka Sales Tax Act, 1957. The respondent, a dealer registered under the Karnataka Sales Tax and Central Sales Tax Acts, disclosed a turnover of Rs. 20,45,44,295.41 and a taxable turnover of Rs. 2,23,82,933.09 under the KST Act in their revised annual return filed on May 2, 1984. The Assistant Commissioner of Commercial Taxes assessed the total turnover at Rs. 20,45,71,897.93 and taxable turnover at Rs. 3,85,82,493.85 under the KST Act. Following an inspection and document processing, the Commercial Tax Officer reopened the proceedings under section 12A of the KST Act, revising the total turnover to Rs. 26,50,28,634.69 and levying a penalty of Rs. 40,00,000 under the CST Act. The Tribunal's decision that the sales were second sales was contested by the State, leading to the present petitions.

2. Examination of the nature of the agreement between the respondent and M/s. IBDL:

The State argued that the Tribunal failed to properly appreciate the true nature of the transaction between M/s. India Breweries and Distilleries Ltd. (IBDL) and the respondent. The State contended that the agreement was a works contract, not a sale, as IBDL manufactured Indian Made Foreign Liquor (IMFL) for and on behalf of the respondent. The respondent countered that the agreement indicated a sale of liquor by IBDL to the respondent, justifying the Tribunal's conclusion. The agreement, entered into in October 1983, detailed the activities of both parties, including the manufacture of spirit by IBDL, blending by the respondent's technical representative, and the supply of IMFL products to the respondent.

3. Analysis of the Tribunal's interpretation of the agreement:

The Tribunal's interpretation was based on the agreement's clauses, which described the manufacture and blending processes. Clause (4) allowed the respondent to post a technical representative at IBDL's distillery to supervise the manufacture and blending of spirit. Clause (6) held IBDL responsible for the quality of spirit supplied. Clause (8) stated that the essence/blends required for IMFL production would be provided by the respondent and blended by their representative. Clause (10) indicated that IBDL would manufacture IMFL products for and on behalf of the respondent. The Tribunal concluded that the transactions were not works contracts but sales, as the respondent's involvement in the blending process was to maintain trade secrets and ensure quality, not to manufacture IMFL.

The High Court, however, found that the agreement's terms indicated that IBDL manufactured IMFL for and on behalf of the respondent. The spirit, once blended, was held for the respondent's benefit, and IBDL had no control over the blended spirit. The court noted that the blending process was crucial and done by the respondent's representative, making it an essential part of manufacturing IMFL. The court rejected the Tribunal's reliance on the Supreme Court's decision in Cibatul's case, as the facts differed significantly. The court also dismissed the relevance of the Central India Machinery Manufacturing Co. Ltd. case, as the blending process in IMFL manufacturing was more critical than the materials used in wagon manufacturing.

Conclusion:

The High Court allowed the revision petitions, setting aside the Tribunal's order and restoring the first appellate authority's order. The court concluded that the transactions were not second sales and that the agreement constituted a works contract, with IBDL manufacturing IMFL for and on behalf of the respondent. The court emphasized that the blending process, controlled by the respondent, was an integral part of manufacturing IMFL, making the transactions taxable under the Karnataka Sales Tax Act, 1957.