2000 (1) TMI 943 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the retreading of tyres for Andhra Pradesh State Road Transport Corporation constitutes an inter-State transaction or a local works contract.
2. The applicability of the Karnataka Sales Tax Act, 1957 to the transaction in question.
3. The interpretation of Explanation 3(c) to the definition of "sale" under the Karnataka Sales Tax Act in light of inter-State trade principles.

Issue-wise Detailed Analysis:

1. Whether the retreading of tyres for Andhra Pradesh State Road Transport Corporation constitutes an inter-State transaction or a local works contract:

The assessee undertook a contract for retreading of tyres from Andhra Pradesh State Road Transport Corporation. The assessing authority initially granted exemption considering it an inter-State transaction. However, the Joint Commissioner of Commercial Taxes, exercising revisional powers, viewed it as a deemed sale within Karnataka under section 5B of the Karnataka Sales Tax Act, 1957.

The controversy arises from Explanation 3(c) to the definition of "sale" which states: "the transfer of property in goods 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."

The Tribunal's stance was that retreading of tyres amounts to a deemed sale within Karnataka. However, the contract stipulated that the retreaded tyres would be sent back to Andhra Pradesh, indicating an inter-State movement of goods.

2. The applicability of the Karnataka Sales Tax Act, 1957 to the transaction in question:

The validity of the provision was challenged in Builders' Association of India v. State of Karnataka [1993] 88 STC 248, where it was observed that the situs of sale fixed by Explanation 3(c) should be read with other provisions, excluding inter-State sales.

The Full Bench of the Punjab and Haryana High Court in Thomson Press (India) Ltd. v. State of Haryana [1996] 100 STC 417 stated that the movement of goods from one State to another in execution of a works contract falls under inter-State trade, and the State Legislature cannot levy sales tax on such transactions.

In India Equipment Leasing Ltd. v. Deputy Commissioner of Commercial Taxes, this Court held that inter-State transactions are not subject to tax under the Karnataka Sales Tax Act.

3. The interpretation of Explanation 3(c) to the definition of "sale" under the Karnataka Sales Tax Act in light of inter-State trade principles:

The learned Government Advocate argued that the property was transferred within Karnataka. However, the Supreme Court in Oil India Ltd. v. Superintendent of Taxes held that a sale occasioning the movement of goods from one State to another is an inter-State sale, irrespective of where the property passes.

The contract in question involved retreading tyres in Karnataka and sending them to Andhra Pradesh, indicating an inter-State movement. The agreement dated December 26, 1991, specified that the company would collect and return the retreaded tyres to Andhra Pradesh State Road Transport Corporation, further supporting the inter-State nature of the transaction.

The assessing authority initially recognized the transaction as inter-State, but the revising authority considered it a local works contract. However, the Supreme Court's principles in Builders' Association of India v. State of Karnataka [1993] 88 STC 248 clarified that States cannot tax inter-State sales under the guise of local works contracts.

Conclusion:

The High Court concluded that the Tribunal erred in deeming the transaction a local works contract liable to tax under the Karnataka Sales Tax Act. The contract inherently involved the movement of goods from Karnataka to Andhra Pradesh, making it an inter-State sale not subject to Karnataka Sales Tax. The revision was allowed, and the Tribunal's order was quashed.

Petition allowed.