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Judgment
Assessment for the year 1990-91 was framed on 24-2-1993 in which the value deducted in running account bills against supply of iron and steel and explosives were subjected to tax, following the judgment in the case of Hindustan Steel Limited v State of Orissa, AIR 1970 SC 253. Thereafter order of rectification under Section 25-A was passed by which the rate of tax in respect of declared commodities was reduced. The grievance of the petitioner is with regard to the supply of material to its contractor. Clauses 11 and 11-A of the Contract provided as under:
"Clause 11. Stores supplied by the Corporation:
If the specification or estimate of the work provides for the use of any special description of materials to be supplied from the store of the Corporation or if it is required that the contractor shall use certain stores to be provided by the Divisional Engineer or other competent authority (such materials and stores and the prices to be charged therefore as hereinafter mentioned being so far as practicable for the convenience of the contractor but not so as in any way to control the meaning or effect of this contract specified in the schedule or memorandum hereto annexed) the contractor shall be supplied with such materials and stores as may be required from time to time to be used by him for the purpose of the contract only and the value of the full quantity of the materials and non-Schedule-A materials and stores so supplied shall be set off or deducted from any sums than due or thereafter become due to the contractor under the contract, or otherwise, or from the security deposit, or the proceeds of sale thereof; if the security deposit is held in Government securities the same or sufficient portion thereof shall in that case be sold for the purpose. All materials supplied to the contractor shall remain the absolute property of the Corporation and shall on no account be removed from the site of work and shall at all times be open to inspection by the Divisional Engineer or other competent authority".
"Clause 11-A.-(i) The contractor shall see that only the required quantities of materials are indented. Any such materials remaining unused and in perfectly good condition at the time of completion or termination of the contract shall be returned to the Corporation Stores if the competent authority so requires by a notice in writing given under his hand. The unused store materials supplied to contractors should be returned to the stores after allowing for due wastages.
Credit for such materials returned to the stores will be given at the issue rate actually charged for these materials. The contractor shall not be entitled to cartage and incidental charges for returning the surplus materials to the stores wherefrom they were issued. If the store issues are not accounted for properly the wastages are more than the allowable, the unaccounted materials will be charged at a penal rate to be decided by the competent authority and recovered from any sum due to the contractor.
(ii) On completion of the work, the theoretical quantity of cement to be used on the works shall be calculated on the basis of approved design mix or the standard formula approved by the Chief Engineer (Civil-Kali). Over this theoretical quantity of cement, a maximum variation of 1% (one per cent) shall be allowed. The difference in quantity of cement actually issued to the contractor and the computed utilisation on the contractor and the computed utilisation on the works including the permitted variation, if not returned by the contractor, shall be recovered at twice the issue rate indicated in Schedule A. In the event of it being discovered that the quantity of cement used is less than the quantity ascertained as hereinbefore provided (allowing variations on minus side as stipulated above) the cost of quantity of cement not so used shall gain be recovered from the contractor at the issue rate without prejudice to the provision of the relevant conditions regarding the value of materials governing the contract.
(iii) The provisions of the foregoing sub-clause shall apply in the case of steel reinforcement and structural sections, except that the theoretical quantity of steel shall be taken as the quantity required as per design or as authorised by the Engineer-in-charge, including authorised lappages and as check measured in the measurement took. Over this theoretical quantity a variation of two and a half per cent shall be allowed.
(iv) Provisions regarding recovery indicated above for nonreturn of surplus materials issued or short utilisation is without prejudice to the right of the Corporation to take any other action against the contractor".
It is stated that the property in iron and steel/cement always remained with the petitioner and the material was to be utilised only at petitioner''s project work. It is stated that the judgment given in the case of Hindustan Steel Limited''s case, supra and M/s. N.M. Goel and Company v Sales Tax Officer, Rajnandgaon and Another, AIR 1989 SC 285, are not applicable. This Court in the case of the petitioner in STRP Nos. 33 to 39 of 1994 decided on 5-2-1996 in the case of M/s. Karnataka Power Corporation Limited Bangalore v A.C.C.T. (Assessments-V), Bangalore, W.A. Nos. 221 and 222 of 1992, DD: 5-2-1996, in respect of the assessment years 1978-79 to 1984-85 have allowed the petitions and set aside the order passed by the Tribunal where such supply were held liable to tax. The decision given in the case of Bangalore Water Supply and Sewerage Board v State of Karnataka, 1999(46) Kar. L.J. 1, was followed. In the case of BWSSB, supra, the decision given in the case of M/s. N.M. Goel and Company'', supra, was considered and it was observed that in the context of Entry Tax Act, certain items of building material supplied by the PWD enabling it to deduct the full value of the items supplied from the amount due to the contractor did not constitute sale since the materials could not be used in any other work, much less goods could be taken out of the site and sold to other parties and the left over items were to be returned by the contractor. It was observed that since the goods did not pass to the contractor and having been utilised for the benefit of the Board and never ceased to be goods of the Board mere utilisation of such material in the course of work done by the contractor cannot be considered as having lost control or possession or ownership of the goods or became the property of the contractor.
Condition No. 10 of the Contract in Hindustan Steel Limited''s case, supra, was as under: (page 257)
"If the specification or estimates of the work provides for the use of any special description of materials to be supplied from the Engineer-in-Charge''s store, or if it is required that the contractor shall use certain stores to be provided by the Engineer-in-Charge (such materials or stores, and the prices to be charged therefor as hereinafter mentioned being so far as practicable for the convenience of the contractor, but not so as in any way to control the meaning or effect of this contract specified in the schedule or memorandum hereto annexed), the contractor shall be supplied with such materials and stores as required from time to time to be used by him for the purpose of the contract only, and the value of the full quantity of materials and stores so supplied at the rates specified in the said schedule or memorandum may be set off or deducted from any sums then due, or thereafter to become due to the contractor under the contract, or otherwise or against or from the security deposit. All materials supplied to the contractor shall remain the absolute property of the Company, and shall not on any account be removed from the site of the work, and shall at all times be open to inspection by the Engineer-in-Charge. Any such materials unused and in perfectly good condition at the time of the completion or determination of the contract shall be returned to the Engineer-in-Charge''s store, if by a notice in writing under his hand he shall so require".
In para 6 it was observed by Apex Court that no serious argument was advanced before us that the supply of building material belonging to the company for an agreed price did not constitute a sale. It was found that the company expressly agreed that 31/2% over the agreed price of goods was chargeable as storage charges. Fixed price was charged which was the cost paid by the company while purchasing the goods. In respect of 31/2% amount charged which was expressly called storage charges, it was observed that it may be reasonably inferred that the company did not carry on business and supplied the material as part of business activity with a view to make profit. Since the statement was not sufficient to answer that question supplementary statement was directed to be submitted within three months.
The decision in the case of M/s. N.M. Goel and Company, supra, is in respect of provisions of the Entry Tax Act. There also Clause 10 of the Contract was as under: (page 376)
"Clause 10.-If the specification or Schedule of terms provides for the use of any special description of materials to be supplied from Engineer-in-Charge''s stores, or if it is required that the contractor shall use certain stores to be provided by the Engineer-in-Charge as shown in the Schedule of materials hereto annexed, the contractor shall be bound to procure and shall be supplied such material and stores as are from time to time required to be used by him for the purposes of the contract only, and the value of the full quantity of materials and stores to supply at the rates specified in the Schedule of materials may be set off or deducted from any sums then due or thereafter to become due to the contractor under the contract or otherwise, or against or from the security deposit, or the proceeds or sale thereof if the same is held in Government securities, the same or a sufficient portion thereof being in this case sold for the purpose. All materials so supplied to the contractor shall remain the absolute property of Government and shall not be removed on any account from the site of the work, and shall be at all times open to inspection by the Engineer-in-Charge. Any such materials remaining unused and in perfectly good condition at the time of the completion or determination of the contract shall be returned to the Engineer-in-Charge at a place directed by him, if by a notice in writing under his hand he shall so require; but the contractor shall not be entitled to return any such materials unless with such consent and shall have no claim for compensation on account of any such materials so supplied to him as aforesaid not being used by him or for any wastage in or damage to any such materials. Provided that the contractor shall in no case be entitled to any compensation or damages on account of any delay in supply or non-supply thereof all or any such materials and stores. Provided further that the contractor shall be bound to execute the entire work if the materials are supplied by the Government within the scheduled time for completion of the work plus 50 per cent thereof (scheduled time plus 6 months if the time of completion of the work exceeds 12 months) but if a part only of the materials has been supplied within the aforesaid period, then the contractor shall be bound to do so much of the work as may be possible with the materials and stores supplied in the aforesaid period. For the completion of the rest of the work, the contractor shall be entitled to such extension of time as may be determined by the Engineer-in-Charge whose decision in this regard shall be final".
It was observed that "in order to be sale taxable to duty, not only the property in the goods should pass from the contractor to the Government, or the appellant in this case but there should be an independent contract-separate and distinct-apart from mere passing of the property where a party purchases or procures goods from the Government. Merely passing of property from the contractor to the Government would not suffice. There must be sale of goods. It was found that the contractor was bound to procure material and in order to ensure that quality material is procured the PWD undertook to supply such materials and stores as from time to time required by the contractor to be used for the purpose of performing the contract only. The value of such quantity of materials and stores so supplied was specified at a rate and got set off or deducted from any sum due or to become due thereafter to the contractor. The sale was considered in terms of the language of clause (1) of the Contract. The decision of Kerala High Court in the case of Construction Company, Changanacherry and Another v State of Kerala, (1975)36 STC 320 (Ker.), was also considered wherein on consideration of the contract the Kerala High Court came to the conclusion that the consideration stipulated to be paid to the petitioner was for the work which the petitioner has undertaken to perform and not by way of sale price of the poles to be produced and delivered by the petitioner. It was held not liable to tax. In another judgment referred, the Calcutta High Court in the case of Cementation Patel (Durgapur) v Commissioner of Commercial Taxes, West Bengal, Calcutta, (1981)47 STC 385 (Cal.), came to the conclusion that the property in the materials all along remained with the Government of India and whatever was the nature of the transaction involved between the assessee on the one hand and the other members of the consortium or the sub-contractors on the other, the same did not and could not amount to sale as the assessee could not in the facts of the case transfer the property therein.
In the case of Rashtriya Ispat Nigam Limited v State of Andhra Pradesh, (1998) 109 STC 425, the decision in M/s. N.M. Goel and Company, supra, was considered and it was observed that a contention was raised that the contractor had the liberty to retain the goods that were supplied to him by the employer, the deduction of the value thereof was on supply not on use; there was no penal provision which would operate for non-return of such goods; the contract used the word "sale" and there was no restriction on the use of the goods. It was observed that there was no material difference between the contracts that we are to construe here.
The basic elements of sale as has been interpreted by the Apex Court in State of Madras v Gannon Dunkerley and Company (Madras) Limited, 5 SCST 5423, after referring to the Entry and Sale of Goods Act, 1930, it was found that in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transfer of title to goods which presupposes capacity to contract, that it must be supported by money consideration and that as a result of the transaction property must actually pass in the goods.
In Arun Electrics, Bombay v Commissioner of Sales Tax, Maharashtra State, 5 SCST 4778, it has been held by the Apex Court that Bill is not decisive with regard to sale and in the light of the law laid down by the Apex Court it has to be established that all the four elements of sale existed to constitute it as a sale. Even if one element is absent the sale would not be considered to be completed. In Chandra Bhan Gosain v State of Orissa and Others, 5 SCST 4738, though the contract did not use the word sale, it was considered that there was transfer of property for consideration liable to tax.
Rajasthan High Court in Commercial Tax Officer, Circle B, Udaipur v Executive Engineer, Irrigation, Kankroli, District Udaipur, (1986)62 STC 176 (Raj.), following the decision in Hindustan Steel Limited, referred to above held that the supply of cement bags to the contractor for being utilised in the execution of the contract constitute sale. Allahabad High Court in Uttar Pradesh Avas Evam Vikas Parishad Karyalaya v Commissioner of Sales Tax, Uttar Pradesh, Lucknow, (1990)78 STC 417 (All.), on the basis of the supplies with the contractor being kept under lock and key of the Corporation and open to inspection on demand by the Engineer-in-Charge and liable to pay penal charges at double the stock issue rate for damages, misuse, etc., it was held that it did not constitute sale. In Arun Electrics case, supra, it was observed that the question whether in respect of transaction, sales tax in exigible may be determined only on the terms of the contract and not from the invoice issued by the person entitled to receive money under the contract.
8-A. From the judgments of the Apex Court referred to above, it is clear that it is only the terms of the contract on the basis of which it could be determined as to whether any sale is effected. The burden to prove sale is on the department and it has to be established that there was a transfer of property in goods. In the assessment orders the terms and conditions of contract or any other material were not referred or relied upon. At this stage, I would not examine this matter because the original contract has also not been supplied along with the petition and only two clauses have been reproduced. It is stated that the entire contract was produced before the Assessing Authority. The Assessing Authority should have taken into consideration the contract produced by the petitioner and thereafter a finding could have been recorded that the supply of the materials to the contractor amounts to sale or not. It may also be observed that against the Division Bench decision, S.L.P. was filed in the Supreme Court and it is stated that the same has been dismissed. Copy of the judgment given by the Apex Court also is not before me.
In the context of Income-tax liability a question was examined in Brij Bhushan Lal Parduman Kumar v Commissioner of Income-tax, Haryana, Himachal Pradesh and New Delhi-III, (1978)115 ITR 524 (SC), whether the materials supplied by the Government at fixed rate and remaining the property of the Government and surplus to be returned to the Government for which credit was to be given at fixed rate at which they were supplied, it was held that the cost of materials supplied by the Government could not be added to the figure of cash payment received by the appellants as no profit could have arisen therefrom and the real total value of the entire contract was considered to be the total minus cost of the material so supplied. Though it was given in the context of income to be computed on the amount received under the contract, it was observed that since the materials were supplied at fixed price for rate purpose such amount cannot be taken into consideration.
For the purpose of considering a sale in respect of materials supplied by the awarder to the contractor for use and construction of building or other works contract it is relevant to consider the following principles as laid down by the Apex Court:
(1) The burden to prove the sale is on the department and the department can require the assessee to produce such documents which are with the assessee including the contract and the correspondence.
(2) The contract may stipulate that the contract amount shall stand reduced with the price charged for the material supplied by the awarder.
(3) In order to examine the supply of material by the awarder whether it constitute a sale or not, the contract itself could be examined under which the work of construction is undertaken. It is also possible that there may be a separate contract for supply of material by the awarder to the contractor.
(4) If the material is supplied by the awarder under the contract for being utilised in the contract work without transferring a property in such material, then in spite of the fact that for accounting purpose debit note in respect of material supplied is issued would not be determinative factor to come to the conclusion of any sale.
(5) Supply of material and transfer of property in the material stands on different footing. For the purpose of examining as to whether there is any transfer of property, it has to be seen that the control, possession and ownership remains with the awarder. He may during the period of construction also exercise right of inspection. If there is no transfer of property, then no sale can be inferred.
(6) The fact that the unutilised material supplied by the awarder to the contractor is to be returned has also to be examined whether it is provided in the contract itself or contractor has option to retain such material.
(7) Damages for non-use of the material supplied by the awarder may be because it is the property of the awarder or may be because the materials have been supplied at lower price. Facts in this regard have to be ascertained.
In the case of Hindustan Steel Limited, supra, the question of sale was not seriously disputed and there was a stipulation of 31/2% to be charged over the agreed price of goods as storage charges. Storage charges could be realised in respect of goods of other persons.
In M/s. N.M. Goel and Company''s case, supra, it was observed that mere passing of property from the contractor to Government is not sufficient. In order to come to the conclusion that there is a sale, various clauses of the contract have to be taken into consideration.
Since the assessment order was passed without taking into consideration the contract, the copy of which was provided to the Assessing Authority, and there is no discussion of various clauses of the contract, I consider it is proper that the entire matter be examined by the Assessing Authority afresh and a fresh assessment order be framed after considering the submissions of the petitioner and the material which is already on record.
Writ petition stands disposed of with the above observation.