2015 (12) TMI 470 - HC - VAT and Sales Tax

Exemption from tax under Section 6(2) of the CST Act - Import sales under Section 5(2) of the CST Act - Lack of jurisdiction - Does existence of a statutory remedy of appeal under the A.P. Vat act require this court to refrain from exercising jurisdiction under Article 226 of the Constitution of India - Held that - The orders, under challenge in these Writ Petitions, are either assessment or revisional orders passed by the concerned authorities exercising jurisdiction under the AP VAT Act. This Court has been called upon, by Learned Counsel on either side, to mainly examine whether the impugned orders are without jurisdiction. The enquiry, in these Writ Petitions, is confined to an examination of the material placed before the assessing and the revisional authorities on the parameters applicable to certiorari proceedings. This Court is conscious, and need not be reminded, that the statutory system of appeals is more effective and more convenient than an application for certiorari as an appeal can be disposed of where the issue is a matter of law or fact, whereas an application for certiorari is limited to cases where the issue is a matter of law appearing on the face of the order ie where the decision is liable to be upset as it is made without jurisdiction or in consequence of an error of law. If the tribunal has erroneously refused to admit admissible and material evidence, or has erroneously admitted inadmissible evidence, or if a finding of fact is based on no evidence, it would be an error of law which can be corrected by a writ of certiorari. Where the conclusion of law by the tribunal is based on an obvious mis-interpretation of the relevant statutory provisions, or in ignorance of it or even in disregard of it or is expressly founded on reasons which are wrong in law, the said conclusion can be corrected by a writ of certiorari. Whether or not an error is an error of law, and an error of law which is apparent on the face of the record, must always depend upon the facts and circumstances of each case, and upon the nature and scope of the legal provisions which is alleged to have been misconstrued or contravened. - As larger issues regarding the scope of certain provisions of the CST Act arise for consideration, we have examined all the issues raised both on behalf of the petitioners and the respondents, even though they may not have been dealt with in the impugned orders, as a quietus must be given to the oft recurring questions regarding the jurisdiction of the authorities to subject similar transactions to tax under the AP VAT Act. While doing so, we have been careful to limit our scrutiny within the parameters applicable to certiorari proceedings. We see no reason, therefore, to now relegate the petitioners to the statutory remedy of appeals under the provisions of the AP VAT Act. Are the subject contracts divisible or indivisible contracts - Held that - For convenience sake the petitioners shall, hereinafter, be referred to as the contractor; the person, from whom the contractor purchased the goods, as the supplier; and the person, for whom the goods were purchased and incorporated in the works, as the owner. The submission, made on behalf of the petitioners, is that the subject contracts are two independent contracts - one for supply and the other for erection, and the bailment / free issues clauses in the contracts show that, after the goods are sold by the petitioner - contractor to the owner, the owner then issues the very same material as free issues to the petitioner-contractor for being used in the erection and installation of the plant. The contention of the respondents, however, is that the contract is, in effect, an indivisible contract and, while they are styled as two contracts i.e., supply and erection contracts, they are, in fact, one composite indivisible contract. Existence of a cross-fall breach clause, or a clause which enables the owner to terminate the supply contract for breach of the erection contract and vice-versa, would mean that, while the contracts are ostensibly two separate contracts - one for supply of material and the other for rendering works and services, they are, in fact, one single indivisible contract. The goods supplied to the owner, under the supply contracts, are tailor made goods, and cannot be bought off the shelf. Such goods cannot, ordinarily, be sold to another except for its use in turnkey projects of a similar nature. The petitioners have been entrusted with the work mainly for their expertise in erection and installation of plants in the execution of turn-key projects. As they were entrusted with the work of erection and installation, the petitioners contractors have also been entrusted with the task of procuring material therefor. The functions relating to the supply of material, and rendering services of erection and installation, are integrally connected and are interdependent. A consolidated price is stipulated as the total contract price combining the contract prices of the individual agreements. It is evident that, while the form of the contracts indicate that they are two separate contracts, in substance they are one single indivisible works contract for supply of material and for erection and installation of equipment. Existence of a bailment clause or a free issues clause does not alter the situation. - L and T has admitted in its Writ Petition that the contract between the petitioner and owner is an indivisible works contract; the averments in the Writ Affidavit cannot be treated as an inadvertent or a typographical error; the statement made by the petitioner is an admission; and admission in pleadings stand on a higher pedestal than evidentiary admissions. As we have held that the subject contracts are indivisible contracts, it is unnecessary for us to examine the effect of the admission, by L and T in their pleadings, that the contract is an indivisible contract. Does the sale of goods by the petitioner-contractors to the owners fall within the ambit of section 6(2) of the CST Act - Held that - Section 6(1) envisages payment of tax on all sales effected in the course of inter-state trade or commerce and, in effect, provides for a multipoint or multi-stage taxation regime for the inter-state sale of goods. Section 6(1) is subject to the other provisions of the CST Act. Section 6(2), which contains a non-obstante clause, has been introduced to avoid the cascading effect of multiple taxation. (Aand G Projects and Technologies Ltd.107). In view of the non-obstante clause, the provisions of Section 6(2) prevail over Section 6(1) of the CST Act and all subsequent sale of goods (i.e., the second sale onwards), during their movement from one state to another, are exempt from tax. It is only with a view to ensure free and unhindered movement of goods from one state to another that the first inter-state sale, be it under Section 3(a) or under Section 3(b), is alone subject to tax and all subsequent sales, effected during the movement of such goods from one State to another, are exempt from tax under Section 6(2) of the CST Act. Should the subsequent sale, to be exempt under section 6(2), have the characteristics of an inter-state sale under section 3(b) of the CST Act - Held that - The conditions discernible from Section 6(2) are that, while the first sale can be either a Section 3(a) or a Section 3(b) sale, the second or subsequent sale has to be a Section 3(b) sale i.e. it must necessarily have all the other characteristics of a Section 3(b) sale. Like a Section 3(b) sale, a sale under Section 6(2) also takes place during the movement of goods from one State to another. Again like a Section 3(b) sale the subsequent sale, which is exempt under Section 6(2), is also effected by transfer of document of title during the movement of goods from one State to another. While the situs of a Section 3(a) sale can either be in the State from where the goods move or in the State where the goods are delivered, both a Section 3(b) and a subsequent sale exempt under Section 6(2) can only take place when the goods are in movement from one State to another. A contract of sale entered into either before commencement of movement in the first State, or after completion of movement of the goods in the second State, can neither be a Section 3(b) sale nor a subsequent sale exempt under Section 6(2) of the CST Act. Sale of unascertained goods can also take place after its delivery in the other State when the contract requires the buyer to ascertain and, thereafter, to buy the goods. When the movement of the goods starts, pursuant to a sale, they shed the character of either unascertained goods or future goods. Sale of goods, by transfer of documents of title during its movement from one State to another, can only be the sale of specific or ascertained goods (Balabhagas Hulaschand v. State of Orissa (1975 (12) TMI 136 - SUPREME COURT OF INDIA). It is only a contract of sale of specific goods which can be effected by transfer of documents of title during its movement, and not a sale of future goods. - As the subject contracts provide for sale of future goods, they could not have been, and were not, entered into when the goods were in movement from one State to another. A contract for the sale of future goods can neither be a Section 3(b) sale nor a subsequent sale exempt from tax under Section 6(2) of the CST Act. As the subject contracts provide for the sale of future goods, the said contracts cannot be said to have arisen after commencement of movement of the goods i.e., during the movement of the goods from one State to another. It cannot, therefore, be a subsequent sale exempt from tax under Section 6(2) of the CST Act. Notwithstanding the bailment/free issues, and liquidated damages clauses, the parties to the contract intended that the title to the goods would be transferred from the contractor to the owner only after erection and commissioning of the plant, and not prior thereto. It is evident, therefore, that the title to the goods was not transferred during its movement from one State to another, but only after the goods were incorporated in the works in the State of Andhra Pradesh (now the States of Telangana and Andhra Pradesh). Consequently the revenue was justified in rejecting the petitioners claim of the sale of goods, under the subject contracts, being subsequent sales exempt from tax under Section 6(2) of the CST Act. Subsequent sale under Section 6(2) is akin to a Section 3(b) sale except that, while a Section 3(b) sale is the first sale in the course of inter-state trade or commerce, the sale, exempt under Section 6(2), is a second sale. This construction would also prevent leakage of revenue. The contracts, in the present batch of Writ Petitions, show that the contractors, with a view to fulfil their obligations under the contract with the owner, have purchased goods from the supplier at a lower price and, during movement of the goods intended only to reach the owner, have sold the goods to the owner at a higher price. While tax, under the CST Act, is paid by the contractor on the purchase of goods from the supplier, no tax is paid by them on the sale of goods to the owner. As the value of the goods purchased by the contractor from the supplier is far less than the value of the goods sold by the contractor to the owner, the tax paid under the CST Act is far lower than what should have been paid if the value of the goods, sold by the contractor to the owner, is taken as the measure of tax. While a subsequent sale of goods, independent of the first sale, may also have a similar effect, such a consequence was in the contemplation of Parliament, and revenue generation was consciously foregone in such cases, to ensure free and unrestricted movement of goods from one State to another. It is not for the revenue to suggest how the parties should frame the terms of their contract. All that the assessing and revisional authorities are required to examine is whether the subject transactions, on a reading of the contract as a whole, fall within the ambit of either Section 3(a) or Section 3(b) of the CST Act. It is not open to them to consider whether, instead of an inter-state sale, the goods could have been transferred by the petitioner contractor to themselves within the state, and then sold the goods to the owner only to enable the revenue to levy tax on such sales as intra-state sales. Likewise there is no obligation cast on the supplier, either under the CST Act or under the contract, to make a branch transfer, and then sell the goods to the contractor. Questions, as to how a contract should be structured, and whether the goods should be sold in the course of inter-state trade or commerce or brought within the state as branch transfers, are commercial decisions, for the contracting parties to take, and not for the assessing/revisional authorities to impose. There is no provision either under the A.P. VAT Act or under the Writ Proceedings Rules which enable the petitioners to simultaneously invoke the jurisdiction of the High Court and the statutory appellate authorities against the very same assessment/revisional orders, albeiton different grounds. That would, however, not justify this Court taking upon itself the task of examining all the issues, which arise for consideration from the impugned orders, merely because the Writ Petitions were entertained on the plea that a part of the assessment/revisional orders suffered from a jurisdictional error. - ends of justice would require the exercise of our extraordinary jurisdiction under Article 226 of the Constitution of India, (which, in L. Chandra Kumar v. Union of India 1997 (3) TMI 90 - SUPREME Court , has been held to be a part of the basic structure of the Constitution of India), to directthe appellate authorities/STAT, in case appeals are filed by the petitioners herein within four weeks from today, to entertain them despite expiry of the period of limitation for filing appeals under the Act. - Petition disposed of.

Summary

Issues Involved:
1. Jurisdiction of the High Court under Article 226 despite the existence of an appellate remedy under the AP VAT Act.
2. Nature of the subject contracts: divisible or indivisible.
3. Applicability of Section 6(2) of the CST Act to the subject sales.
4. Applicability of Section 3(a) of the CST Act to the subject sales.
5. Applicability of Section 5(2) of the CST Act to the subject sales.
6. Validity of the assessment/revisional orders under the AP VAT Act.

Issue-Wise Detailed Analysis:

I. Jurisdiction of the High Court under Article 226 despite the existence of an appellate remedy under the AP VAT Act:

The revenue contended that the A.P. VAT Act prescribes an appellate mechanism to challenge the revisional and assessment orders, and hence, the High Court should refrain from exercising jurisdiction under Article 226 of the Constitution of India. However, the Court held that the existence of an alternative remedy does not impinge upon the jurisdiction of the High Court to deal with the matter itself if it is in a position to do so on the basis of the affidavits filed. The Court emphasized that the rule of exclusion of writ jurisdiction, in view of the existence of an alternative remedy, is not a rule of compulsion. Exceptions to this rule include cases where the statutory authority has not acted in accordance with the provisions of the enactment or in defiance of fundamental principles of judicial procedure.

II. Nature of the subject contracts: divisible or indivisible:

The petitioners argued that the subject contracts are divisible into supply and erection contracts. The revenue contended that the contracts are, in reality, one composite indivisible contract. The Court held that the subject contracts are indivisible works contracts. The Court noted that the contracts involved both supply of material and rendering services in connection with the work of erection and installation of the plant. The presence of a cross-fall breach clause, or a clause which enables the owner to terminate the supply contract for breach of the erection contract and vice-versa, indicated that the contracts are, in fact, one single indivisible contract.

III. Applicability of Section 6(2) of the CST Act to the subject sales:

The petitioners claimed that the goods supplied by them were subsequent sales exempt from tax under Section 6(2) of the CST Act. The Court held that for a sale to fall under Section 6(2), it must be a subsequent inter-State sale effected by transfer of documents of title to such goods during their movement from one State to another. The Court found that the subject contracts did not meet these criteria as the transfer of title to the goods did not take place during movement but only after the goods were incorporated into the works. Therefore, the sales did not qualify for exemption under Section 6(2).

IV. Applicability of Section 3(a) of the CST Act to the subject sales:

The petitioners alternatively contended that the sales fall within the ambit of Section 3(a) of the CST Act. The Court held that the subject contracts occasioned the movement of goods from one State to another, and therefore, the sales fall within the ambit of Section 3(a) of the CST Act. The Court noted that the goods moved from one State to another in satisfaction of the contractual obligations of the petitioners-contractors under the supply contracts, and there was an inextricable link between the movement of goods and the contract.

V. Applicability of Section 5(2) of the CST Act to the subject sales:

The petitioners claimed that some of the sales were import sales under Section 5(2) of the CST Act. The Court held that the sale of imported goods by the petitioners-contractors to the owner would fall within the ambit of the first limb of Section 5(2) of the CST Act, as the sale was the direct and proximate cause of the import. The Court found that there was an inextricable link between the import of the goods and the sale of the imported goods to the owner, and therefore, the respondents lacked jurisdiction to subject such import sales to tax under the A.P. VAT Act.

VI. Validity of the assessment/revisional orders under the AP VAT Act:

The Court set aside the assessment/revisional orders to the limited extent the turnover, relating to inter-state sales and import sales under Sections 3 and 5 of the CST Act, had been subjected to tax under the AP VAT Act. The Court directed the assessing/revisional authorities to pass orders afresh, in accordance with the law, after affording the petitioners an opportunity of a personal hearing. The Court also permitted the petitioners to contest all other issues by way of statutory appeals under the AP VAT Act within four weeks from the date of the judgment.