Duggirala Ramakotaiah vs State of Andhra Pradesh

M.S. Ramachandra Rao, J.—The petitioner in all these cases is M/s. Duggirala Ramakotaiah, a firm which is engaged in civil contract works. It is registered as a dealer on the rolls of the Commercial Tax Officer, Seetharamapuram Circle, Vijayawada (for short, "the CTO"). The petitioner commenced business with effect from June 1, 1998. It entered into an agreement with M/s. A. P. State Police Housing Corporation Limited (a State Government Undertaking) on January 16, 1998 for construction of part of external compound wall, administrative building, court buildings, Special Cells, Watch towers, etc., for a rehabilitation centre for social offenders at Moula-Ali, in Ranga Reddy District. For execution of this contract, the Department of Jails under the control of the Home Department of the State Government allegedly supplied gravel free of cost to the petitioner. The petitioner transported the gravel from the place where it was found to the place where it was required in the execution of the aforesaid works.

For the assessment year 1998-99, the petitioner filed monthly returns (APGST) before the CTO/assessing officer. In the said returns, it included a sum of Rs. 40,30,754 under the category "earth filling charges" and claimed it as an exemption. It contended that this portion of the turnover represents the charges for lifting and transporting of gravel to the worksite and that this amount is exempted from levy of sales tax u/s 5F of the Andhra Pradesh General Sales Tax Act, 1957 (for short, "the Act") read with rule 6(2) of the Rules framed under the Act.

The assessing officer/CTO, by proceedings dated May 5, 2000 completed final assessment and held that u/s 5F of the Act, the Government levies tax on transfer of property in the goods involved in the execution of works contract, that the goods enumerated in the Schedules to the Act are subject to tax, that under rule 6(2) of the Rules framed under the Act, certain deductions are permissible in determining the taxable turnover of the contractor, that the petitioner''s claim for exemption of Rs. 40,30,754 representing the value of gravel used in the above works contract from levy of sales tax is valid as per G.O. Ms. No. 1091 Revenue, dated June 10, 1957 (wherein "earth work and gravel quarrying contracts" are exempted from levy of sales tax vide item No. 11 of the said G.O.) and therefore the petitioner is entitled to deduct the said amount from his taxable turnover. He therefore excluded the said amount from the taxable turnover of the petitioner, arrived at the net turnover and calculated tax at the rate of six per cent thereon.

Similarly, for the assessment year 2000-01, the petitioner filed return claiming an exemption of Rs. 9,49,220 contending that this portion of the turnover represents the charges for lifting and transporting of gravel to the worksite and that this amount is exempted from levy of sales tax u/s 5F of the Act read with rule 6(2) of the Rules framed under the Act.

By order dated September 17, 2001, the assessing officer/CTO held that the gravel is allotted by the Department of Jails to the petitioner and is exempted from levy of sales tax as it represents expenses incurred purely towards lifting and transport of gravel by the dealer and such transport charges are liable to be deducted under rule 6(2) of the Rules framed under the Act.

The Deputy Commissioner (CT), No. II Division, Vijayawada in exercise of his powers u/s 20(2) of the Act, issued show-cause notices dated October 20, 2001 and February 18, 2003, proposing to revise the said assessment orders as he felt that the assessment orders dated May 5, 2000 and September 17, 2001 for the assessment years 1998-99 and 2000-01 passed by the CTO were prejudicial to the interests of Revenue. In the said show cause notices he prima facie opined that the intention of G.O. Ms. No. 1091 Revenue dated June 10, 1957 exempting earth work and gravel quarrying contracts from sales tax levy is only to exempt dealers exclusively doing earth work and gravel quarrying contracts and not persons such as the petitioner who are dealing in civil contract works, that the said G. O is inapplicable to the petitioner and therefore the value of the gravel supplied includes the transportation charges and is not exempted u/s 5F of the Act or rule 6(2) of the Rules. He proposed to withdraw the exemption granted by the assessing officer on the said portion of the turnover for the assessment years 1998-99 and 2000-01 and subject the said turnover to levy of tax at six per cent under the Act.

The petitioner filed objections to the above show-cause notices on December 20, 2001 and May 17, 2003. In the said objections, the petitioner contended that the portion of turnover of Rs. 40,30,750 for the assessment year 1998-99 and Rs. 9,49,220 for the assessment year 2000-01 do not represent the value of the gravel but only expenditure incurred under the head "earth filling charges"/transportation charges, that it represents the labour charges paid to the labourers for loading the gravel at the quarry allotted by the A. P. State Police Housing Corporation Limited, Hyderabad and unloading the same at the work spot for levelling purpose and also transport charges incurred for transport of the gravel from the quarry to the work spot. It contended that as per the above G.O. 1091 Revenue dated June 10, 1957 all earth works and gravel quarrying contracts are eligible for exemption. Copies of the agreement with the A. P. State Police Housing Corporation Limited, Hyderabad, were filed before the revisional authority.

The revisional authority by order dated January 30, 2002 and September 21, 2004 held that for the assessment years 1998-99 and 2000-01, the petitioner is not entitled to seek deduction of the above amounts from his turnover, and the said amounts are liable for levy of sales tax u/s 5F of the Act. He held that clause 4.18 of the agreement between the petitioner and the said Corporation provided that the petitioner shall make his own arrangements for supply of all materials including cement and steel unless otherwise specified, that the petitioner shall be responsible for all transportation and storage of materials at the site and shall bear all related costs; that as per clause 4.4.1 of the said agreement, every tenderer was expected before quoting his rates to inspect the site of the proposed work, that he should also inspect the quarries and satisfy himself about the quality and availability of materials; that the petitioner collected amounts from the contractee for supply of gravel and for using it in the works; that he cannot claim exemption on the ground that he incurred expenditure on transport, etc.; that the contract is for construction of civil works specified therein and earth filling is only a part of it and as labour charges are already deducted from the total amount received, no further deduction/exemption is permissible on the value of the gravel supplied during the execution of the works contract. He also held that the audited trading account filed by the dealer for the assessment year 2000-01 at the time of final assessment indicated the amount of Rs. 9,49,220 under the caption "gravel supply charges", that it represents the value of gravel used by the contractor in the works and that even if the said amount includes the value of transportation, it adds up to the ultimate value for which the property in gravel is transferred to the contractee. He therefore rejected the objections of the petitioner and confirmed the levy of sales tax on the above turnovers.

Aggrieved thereby, the petitioner filed before the Sales Tax Appellate Tribunal, Visakhapatnam, TA No. 979 of 2002 in respect of the order of the revisional authority dated January 30, 2002 for the assessment year 1998-99 and TA No. 939 of 2005 in respect of the order of the revisional authority dated September 21, 2004 for the assessment year 2000-01.

The said appeals were rejected by the Tribunal by separate orders dated October 19, 2011 in TA No. 979 of 2002 and TA No. 939 of 2005. The Tribunal was of the view that though the gravel is supplied free of cost, the transportation charges for transporting gravel from the quarry to the work spot added to the value of the gravel, that the gravel is incorporated while executing the works contract, the incorporation value of the gravel is the value which has to be taken into consideration while computing the turnover u/s 5F of the Act in view of the decision of the Supreme Court in Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, nd therefore the value of the gravel would be Rs. 40,30,754 for the assessment year 1998-99 and Rs. 9,24,220 for the assessment year 2000-01.

Challenging the same, TREVC No. 112 of 2012 is filed against the order in TA No. 979 of 2002 for the assessment year 1998-99 and TREVC No. 101 of 2012 is filed against the order in TA No. 939 of 2005 for the assessment year 2000-01.

The petitioner also filed WP No. 23984 of 2012 and W.P. No. 24015 of 2012 to direct the Revenue not to take any coercive steps for recovery of the sales tax for the assessment years 1998-99 and 2000-2001 pursuant to the orders of the Sales Tax Appellate Tribunal, Visakhapatnam in TA No. 979 of 2002 and TA No. 939 of 2005, each dated October 19, 2011.

Heard Sri Suri Babu, learned counsel for the petitioner and Sri P. Balaji Varma, learned Special Standing Counsel for Commercial Taxes.

Sri Suri Babu, counsel for the petitioner contended that:

(a) The petitioner is not the owner of the gravel and there cannot be a transfer of property in such gravel in favour of the contractee;

(b) The measure for the levy of taxes u/s 5F of the Act is value of the goods involved in the execution of the works contract as the taxable event is the transfer of the property in such goods involved in execution of the works contract;

(c) The gravel belongs to the Department of Jails and all that the petitioner did was to bring the said material to the work spot by employing a fleet of lorries belonging to various transporters and made payments to them, and such transport charges cannot be considered as increasing the value of the material at the time of incorporation;

(d) As per G.O. Ms. No. 1091 Revenue, dated June 10, 1957 "earth work and gravel quarrying contracts" are exempted from levy of sales tax vide the item No. 11 of the said G.O. and transportation charges/earth supplying charges come within this G.O. and hence are exempted from levy of tax;

(e) Even otherwise, clause (g) of rule 6(2) of the Rules provides for a deduction of "other similar expenses relatable to supply of labour and services" from the total turnover of a dealer executing a works contract that the transportation charges/gravel supply charges would fall within this clause and therefore they cannot be subjected to levy of sales tax.

The Special Government Pleader for Commercial Taxes on the other hand submits that:--

(a) the petitioner is not doing earth work which is exempted under G.O. Ms. No. 1091 Revenue dated June 10, 1957 but is doing civil contract works of which only a small portion is earth filling work.

(b) the gravel is admittedly supplied by the Department of Jails, Home Department, Government of Andhra Pradesh but the said Department is not a party to the contract between the petitioner and the A. P. State Police Housing Corporation Limited, that the latter is the contractee and therefore it has to be treated that the petitioner acquired the gravel at "zero" cost to which the transportation charges should also be added to arrive at the value of the gravel at the time of incorporation into the works.

(c) In The State of Andhra Pradesh and Others Vs. M/s. Seven Hills Constructions, Penumantro, W.G. District and Others a Full Bench of this court had held that the value of goods under rule 6(3)(i) would not only include the costs of acquisition of goods by the contractor-dealer but also the transportation charges incurred by him to deliver the goods to the sites of the works wherein they are incorporated. Therefore, the transportation charges of gravel are liable to be included in the taxable turnover and subjected to levy of tax.

We have noted the respective contentions of the parties.

In the present case, the petitioner had entered into an agreement dated January 16, 1998 with the A. P. State Police Housing Corporation Limited (a State Government Undertaking) for construction of part of external compound wall, administrative building, court buildings, special cells, watch towers, etc., for rehabilitation centre for social offenders at Moula-Ali, Ranga Reddy District. It is contended that the Department of Jails, Home Department, supplies gravel free of cost to the petitioner and the petitioner transports the gravel from the place where it is found to the place where it is required in the execution of the above works. The petitioner filed a certificate dated April 17, 2000 issued by the Deputy Executive Engineer, A. P. State Police Housing Corporation, certifying that earth utilized for filling the foundations and basement for the work of construction of rehabilitation centre under package II carted was from the available earth within the Jail compound, Moula-Ali, Hyderabad. In our view, there is no mention of the cost of supply of gravel in the said letter as it does not say that the gravel is being supplied free of cost to the petitioner. No other material is produced before us by the petitioner to prove that the gravel is supplied to it free of cost. Therefore, it is not possible to accept the contention of the petitioner that the gravel was supplied to it free of cost.

Be that as it may, in Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, the Supreme Court held that the measure for the levy of tax contemplated by article 366(29A)(b) is the value of the goods involved in the execution of a works contract, that the value of such goods for levying tax cannot only be assessed on the basis of the costs of acquisition of the goods by the contractor, but also the value of goods at the time of incorporation of the goods in the works; and that the costs of incorporation of the goods in the works such as labour charges cannot be made a part of the measure for levy of tax contemplated by the said article. In The State of Andhra Pradesh and Others Vs. M/s. Seven Hills Constructions, Penumantro, W.G. District and Others a Full Bench of this court held that the deductions under clauses (a) to (1) of rule 6(2) of the Rules framed under the Act are similar to the deductions referred to in Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, ; that rule 6(3)(i) of the Rules is applicable where execution of a works contract extends beyond a period of one year and creates a legal fiction whereby the total turnover of the dealer is deemed to be the value of the goods purchased and supplied or used in the execution of such contracts in that year; that it provides another method for arriving at the turnover of the dealer and the value of the goods under rule 6(3)(i) would not only include:--

--the costs of acquisition of goods by the contractor dealer

--the transportation charges incurred by him to deliver the goods to the situs of the works wherein they are incorporated

--costs of establishment relatable to supply of material involved in the execution of the works contract

--other charges borne by the contractor dealer in relation to these goods till its incorporation in the works and

--also the profits relatable to the value of such goods.

Assuming that gravel is obtained free of cost by the petitioner from the Department of Jails, it is to be taken that the petitioner acquired the gravel at "zero" cost but the said gravel has to be transported to the place of execution of the contract from the quarry from which it is taken out. In doing so, the petitioner incurred transportation charges as he had to transport the gravel by hiring lorries. These amounts were also collected by the petitioner from the contractee, i.e., the A. P. State Police Housing Corporation. This element of transportation charges becomes part of the value of gravel when it is incorporated in the works as held in The State of Andhra Pradesh and Others Vs. M/s. Seven Hills Constructions, Penumantro, W.G. District and Others . As rightly held by the Tribunal, any expense incurred for bringing the material to work spot would go in accretion to the material value and the value of the material at the time of incorporation which is the basis for computing the taxable turnover u/s 5F of the Act.

G.O. Ms. No. 1091 Revenue dated June 10, 1957 no doubt exempted "earth work and gravel quarrying contracts" from levy of sales tax. But in the present case, the petitioner is not executing contracts of the said nature but is executing civil contracts works wherein earth filling may be only a part. Therefore, this G.O. cannot be relied upon by the petitioner.

The contention of the petitioner that the transportation expenses for transport of gravel come in the category of "other similar expenses relatable to supply of labour and services" in clause (g) of rule 6(2) of the Rules framed under the Act is also not valid because gravel supply charges or transportation charges are not similar to supply of "labour" or "services", although they may be similar to supply of "goods". Transportation charges are not deductible as they are not specifically mentioned in rule 6(2) of the Rules. In this view of the matter, we find no error in the orders of the Tribunal in passing the impugned orders. Hence the appeals and writ petitions are without any merit and they are dismissed. No costs.