2006 (7) TMI 615 - HC - VAT and Sales Tax

Issues Involved:
1. Whether the material issued to the contractor, i.e., cement and steel, constitutes a sale.
2. Whether the recovery of royalty from the contractor for the use of river bed material is liable to sales tax.

Issue-wise Detailed Analysis:

Issue 1: Material Issued to Contractor Constitutes a Sale

The primary question was whether the issuance of cement and steel to contractors by the corporation for construction purposes constituted a "sale" under section 2(h) of the U.P. Trade Tax Act, 1948. The assessing authority held that such issuance was indeed a sale and assessed sales tax accordingly. The revisionist contended that the materials supplied remained the property of the corporation and were merely issued to the contractor for use, with any unused materials to be returned. The revisionist argued that this transaction should be considered a "works contract" rather than a sale, as there was no transfer of title or consideration passed for the supply of goods.

The court examined the relevant clauses of the contract and concluded that the transaction did constitute a sale. The contract stipulated that the materials were supplied at an agreed cost, which was deducted from the contractor's running bills, indicating a transfer of property and consideration. The court referenced several precedents, including Government of Andhra Pradesh v. Guntur Tobaccos Ltd. and Hindustan Steel Ltd. v. State of Orissa, where similar transactions were held to be sales. The court emphasized that the substance and not the form of the contract is material in determining the nature of the transaction. The predominant object of the contract and the circumstances indicated a sale, as the materials were supplied for a price and consumed in the execution of the work.

The court also referred to N.M. Goel & Co. v. Sales Tax Officer, where the Supreme Court held that the supply of materials by the PWD to a contractor for a consideration amounted to a sale. Similarly, in Rashtriya Ispat Nigam Ltd. v. State of Andhra Pradesh, the Supreme Court held that the supply of materials for construction, with their value deducted from the contractor's bills, constituted a sale. The court found that the facts of the present case were analogous to these precedents and concluded that the transactions between the revisionist and the contractor fell within the definition of "sale" under section 2(h) of the Sales Tax Act.

Issue 2: Recovery of Royalty Liable to Sales Tax

The second issue was whether the recovery of royalty from the contractor for the use of river bed material was liable to sales tax. The revisionist argued that royalty payments could not be subjected to sales tax. However, the Assistant Commissioner found that the assessee had been charging the value of the royalty and the tax thereupon, leading to the inference that the authorities had rightly assessed the tax on the assessee. The court upheld this finding, noting that the royalty charges were part of the taxable transaction.

The revisionist also pointed to a departmental circular interpreting the judgment in N.M. Goel & Co. v. Sales Tax Officer, arguing that it should be binding on the authorities. The court clarified that while such circulars might be binding on the Commissioner, they were not binding on the courts. The interpretation of a judgment and its applicability to the facts of a case is within the court's purview, and the court found no reason to deviate from the established legal principles regarding the taxation of royalty payments.

Conclusion:

In conclusion, the court dismissed Revisions Nos. 58 of 2006, 59 of 2006, 60 of 2006, 61 of 2006, 62 of 2006, and 63 of 2006, holding that the transactions between the revisionist and the contractor constituted sales under section 2(h) of the Act and were liable to sales tax. However, Sales Tax Revision No. 85 of 2001 was allowed, and the impugned order dated February 6, 1992, was set aside. All pending applications were disposed of in terms of the judgment.

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