9911796707
TMI Blog1998 (9) TMI 641X X X X Extracts X X X X X X X X Extracts X X X X ..... RN-39 of 1998 and RN-40 of 1998 respectively). 2.. The case of the applicant is that it is registered under the Companies Act, 1956, in Bombay and is engaged in the business of execution of works contract. A turnkey contract for design, manufacture, supply and delivery at site of plant and equipment, steel structures including civil work, erection, commissioning, performance guarantee tests and handing over the plant of rolling mill for merchant mill for Durgapur Steel Plant modernization, was made on October 31, 1989 between the Durgapur Steel Plant of the Steel Authority of India Limited (in short, "the DSP") of the one part and Hoestemberghe Klutsch, GMBH [in short, "the H K (Germany)"] and the petitioners as members of Consortium of the other part. In terms of article 3 of the agreement with DSP the applicant entrusted its entire scope of work of the modernization project to three sub-contractors for work and labour, one sub-contractor for labour job and five sub-vendors in other States under separate back-to-back agreements executed between the applicant and each of those sub-contractors and sub-vendors for different types of work entrusted to them. The appointment of each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the Commercial Tax Officer did not discuss anything about the inter-State purchase made by the dealer which were subsequently used in the execution of the works contract. The Assistant Commissioner observed that the State Government is empowered to collect tax on the transfer of property in goods used in the execution of works contract. This observation, it is submitted, is due to insufficient appreciation of the judicial pronouncements on restriction on the power of State Government although they were brought to his notice. It is further submitted by the applicant that the Assistant Commissioner did not apply his mind to the copies of the ten contracts which were given to the Commercial Tax Officer at the time of assessment. 5.. Being aggrieved by the order dated April 20, 1995 of the Assistant Commissioner, the applicant filed a petition for revision before the West Bengal Commercial Taxes Appellate and Revisional Board challenging the observations of the Assistant Commissioner. By an order dated June 17, 1997 the Board dismissed the petition for revision without applying its mind to the contracts and records placed before it. On going through the order, the applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchased in course of inter-State trade or commerce was ever transferred before, and independent of the execution of the works contract in West Bengal to their contractee. Movement of goods in course of inter-State trade or commerce from one State to another terminates the moment such goods are taken delivery of from the common carrier. The applicant has its site office at Durgapur; they took delivery of the goods purchased by them in course of inter-State trade or commerce. No inter-State purchase can be said to have been taxed under section 6D of the 1941 Act as what is taxed under section 6D is the contractual transfer price, i.e., deemed sale only after transfer of the property in goods involved in the execution of the works contract. The applicant s claim for deduction of contractual transfer price of goods used in execution of works contract by their sub-contractors is not tenable in the eye of law as the sub-contractors have no privity of contract with the applicant s contractee. There were two parties in the contract as it appeared from the agreement dated October 31, 1989; the DSP of the one part and Hoestemberghe and Klutsch, GMBH (in short, "the H K Germany") and the appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive and not in accordance with contract specification and the achievement is not up to the mark of guaranteed performance, the applicant as a contractor was entirely responsible to replace and make good such defective supply and services at no extra cost to the purchaser. Clause 3.2 categorically mentions that the applicant, who is the contractor, shall be solely responsible for the completion of work as per specification and within the time schedule agreed upon in the contract. Supply of goods, if any, made by any sub-contractor for use in execution of works contract by the applicant is the transfer of goods by the applicant itself in execution of works contract to DSP. In execution of works contract between the applicant and DSP whatever goods were used, the ownership of such goods were transferred by the applicant to DSP and, as such, the applicant was liable to pay tax on the contractual transfer price of the goods so used in the execution of works contract in West Bengal. It is denied that while levying tax under section 6D of the 1941 Act, the State has imposed any tax on any sale in the course of inter-State trade or commerce or a sale outside the State or on a sale in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by sub-contractors is not included in sub-clauses (a) to (e) of sub-section (2) of section 6D of the 1941 Act. The entire scheme of taxation under section 6D relates to only intra-State sales and not to any sale which is covered by section 3 of the Central Sales Tax Act, 1956 which relates to sale or purchase of goods which takes place in the course of inter-State trade or commerce. He also submitted that after the 46th Amendment of the Constitution, and section 6D of the Act, fixing of liability to pay tax on transfer of property in goods in execution of works contract is within the legislative competence of the State Legislature. In the instant case, Mr. Saha submitted, the authorities have correctly held that in execution of the works contract by the applicant deemed sale by the applicant has taken place at Durgapur and they have correctly decided to levy tax on such deemed sale. Mr. Saha referred in this connection to the case of Builders Association of India v. Union of India [1989] 73 STC 370 (SC) in support of his arguments. 10.. The applicants have referred in their applications to the order of the Assistant Commissioner of Commercial Taxes who had observed that "Ma Ka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant, viz., H K, India does not properly fulfil any of its obligations, H K, Germany should submit alternative remedial steps and actions to be taken for the consideration of the purchaser. Whenever H K, Germany notified to the purchaser that H K, India has failed in regard to the scope of supplies, etc., and the purchaser accepts the recommendation of H K, Germany as a leader to the remedial steps, the balance (part or whole) of the scope of supplies and services of the said defaulting member of the consortium shall be got done at the risk and cost of the said defaulting member. For this purpose, the purchaser shall be free to encash the bank guarantees of H K, Germany and also to proceed against the said defaulting member for recovering the balance of the amount necessitated. Again in article 1.8 of the contract between the applicant and DSP it was stipulated that in case any of the supplies under the contract proved to be defective and not in accordance with the contract specification, workmanship or did not achieve the guaranteed performance, the contractor would have to replace/make good such defective supplies and services at no extra cost to DSP. It would be cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Site, Durgapur Steel Plant before June 30, 1991". At condition No. 5 of the General Conditions of the order, it is mentioned "prices given in annexure IV will be on the basis of ex-H K site at Durgapur Steel Plant, Durgapur." 13.. It would be clear from the contracts entered into between the subvendors on whom the applicant-company placed their orders for the different types of mechanical equipments, spares, etc., that these were contracts in which contracting parties were the applicant-company on the one hand and the sub-vendors on the other. The sub-vendors were required to send the items, orders for purchase of which had been issued on them to despatch the material to the H K, India site at Durgapur Steel Plant. 14.. The contract between the applicant and Mechem Industries has been referred to by the applicant as an exclusively labour contract. The applicant has stated that their sub-contractors manufactured the equipments according to DSP specification and despatched the same to DSP site after inspection and approval of MECON and DSP. These are unloaded by Mechem Industries and taken to site for erection by Mechem Industries. The contract between Mechem Industries a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acceptance of the ventilation system was to have been after successful commissioning at DSP site, Durgapur. DSP/MECON inspection, acceptance certificate for satisfactory performance at DSP site, Durgapur, would construe final acceptance. This contract also is clearly a contract between the applicant on the one hand and Duvent Fans Pvt. Ltd., on the other hand and there is no scope of holding that there was any contractual relationship, either express or implied, between Duvent Fans Pvt. Ltd. and the DSP. It is true that Duvent Fans Pvt. Ltd., were required to erect, test and commission the ventilation system at DSP site and it is also correct that the inspection, acceptance certificate for satisfactory performance at DSP site by DSP/MECON would construe final acceptance but in case there was any deficiency noticed in the course of such final acceptance that would result in the contract between the applicant-company and Duvent Fans Pvt. Ltd. not being finally completed. As has been mentioned earlier in the contract between the applicant-company and DSP it is clearly mentioned that the contractor (i.e., the applicant) shall be solely responsible for the completion of the work as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant reached the DSP site of the applicant, the inter-State movement was complete. The transfer of property in these goods to DSP took place when the works contract was executed by the applicant in terms of its contract with the Steel Authority of India Ltd. (DSP), and not earlier than that. 17.. Mr. Mookerji has cited several judgments of the Supreme Court in support of his argument that the deemed sale of the goods involved in the works contract in the instant case related to sales which took place in the course of inter-State trade or commerce and hence were not exigible to tax under the State Taxation Laws. However, in all such cases cited by him it is found that the facts were completely different and therefore the ratio decidendi in those cases have no application to the facts of the instant case. (a) Thus in the case of the State of Bihar v. Tata Engineering and Locomotive and Co. Ltd. [1971] 27 STC 127 (SC), the company had its head office in Bombay and its factory in Jamshedpur. It had appointed several dealers all over India. Under the agreements between the company and the dealers, each dealer was assigned a territory in which alone he could sell the truc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was an order placed to the company and for the purpose of fulfilling that order the manufactured goods commenced their journey from the registered office in the State of Andhra Pradesh to the branch outside the State for delivery of the goods to the customer. Both the registered office and the branch office were offices of the same company; they did not possess separate juridical personalities. The movement of the goods was occasioned by the order placed by the customer and it was an incident of the contract and all along it was an inter-State movement. This case also is completely distinguishable from the present case. (c) In the case of Balabhagas Hulaschand v. State of Orissa [1976] 37 STC 207 (SC), referred to by Mr. Mookerji, the appellant was a firm dealing in buying and selling jute and has its head office in Calcutta. The appellant entered into a contract of sale with certain Calcutta firms by which the appellant agreed to sell raw jute of certain specifications of weight and quality to the buyers. After the goods were ready the appellant booked the goods in bags in the names of the buyers from certain railways stations in Orissa to the railways sidings of the buyer at Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a conduit pipe throught which different sub-contractors supplied their equipments to the buyers DSP. But while the goods moved from the other States to West Bengal in pursuance of a contract, that contract was between the applicant and the sub-vendors and it had nothing to do with the DSP. The property in the goods passed to DSP only when the applicant-company completed their contractual obligation in completing its turnkey contract. The company cannot now take the plea that the real participants in its contract with DSP were the sub-vendors outside the State and that its own rule was that of a conduit pipe only. As has been made eminently clear in the contract between the applicant and the DSP. it was the applicant who was responsible for the performance of the contract and although approval of the DSP was required before appointing any subcontractor, the sub-contractors had no privity of contract with the DSP. The approval of DSP was required in order to ensure that incompetent subcontractors were not appointed by the applicant. (e) Mr. Mookerji has also referred to the case of Gannon Dunkerley Co. v. State of Rajasthan {1993} 88 STC 204 (SC), where it has been held by the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover; (a) labour charges for execution of the works; (b) amount paid to a sub-contractor for labour and services; (c) charges for planning, designing and architect's fees; (d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract; (e) cost of consumables such as water, electricity, fuel, etc., used in the execution of the works contract, the property in which is not transferred in the course of execution of a works contract; (f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services; (g) other similar expenses relatable to supply of labour and services; (h) profit earned by the contractor to the extent it is relatable to supply of labour and services. The amounts deductible under these heads will have to be determined in the light of the facts of a particular case. If the principles laid down above for determination of value of the goods involved in the execution of works contract are examined, it will be seen that the cost of the plant and equipments, etc., pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not inter-State sale. The submission of the Government Advocate, in other words, is that article 286 of the Constitution and the provisions of the Central Act are not applicable to deemed sales and purchases under clause (29A) of article 366 of the Constitution, namely, transfer of property in execution of works contract". This is the issue on which the High Court gave its verdict. In this connection, the court referred to the decision of the Supreme Court in Builders Association of India v. Union of India [1989] 73 STC 370, wherein repelling similar contention, it was declared that sales tax laws passed by the Legislatures of State levying taxes on the transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract were subject to the restrictions and conditions mentioned in each clause of sub-clause of article 286 of the Constitution. The court also mentioned that it had been held by the Supreme Court that if the movement of goods from one State to another is the result of a covenant or an incident of contract of sale then the sale is an inter-State sale. If the movement of goods is a result of contract and is an incident of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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