Rashtreeya Ispat Nigam Ltd. vs State of Andhra Pradesh

Syed Shah Mohammed Quadri, J.—This batch of Tax revision cases, filed u/s 22(1) of the Andhra Pradesh General Sales Tax Act, 1957 (for short "the Act"), arises under similar circumstances and raises the same question of law, therefore all the revisions are heard together and are being disposed of by a common order.

To appreciate the question of law arising in this batch of cases, we would refer to the facts in T.R.C. No. 256 of 1990.

The petitioner-company is the assessee and it is a Government of India undertaking engaged in manufacture of steel. The work relating to the construction of the administrative buildings and erection of plant in the petitioner-company was entrusted to the contractors. One of the conditions of the contract was that the assessee-company would supply cement, steel and A.C. Sheets from its stores basis. The turnover relating to the supply of the material, viz., steel, cement and A.C. sheets for the assessment year 1981-82 was not subjected to sales tax by the assessing authority on the ground that the material was supplied for construction of its own buildings by the assessee-company. But the Deputy Commissioner (C.T.) revised the order of assessment in exercise of the power vested in him u/s 20 of the Act and brought to tax on amount of Rs. 2,38,26,240 being the value of the said goods, viz., steel, cement and A.C. sheets. The assessee-company unsuccessfully pursued the matter before the the Sales Tax Appellate Tribunal by filing the appeal which was dismissed on March 28, 1990. It is the correctness of that order of the Tribunal that is assailed in this T.R.C. (viz., T.R.C. No. 256 of 1990) and the correctness of similar orders are assailed in the other T.R.Cs. No. of this batch.

Sri P. Sreenivasa Reddy, the learned counsel appearing for the petitioners in the first fourteen cases, and Sri S. Krishna Murthy, the learned counsel appearing for the petitioners in the last mentioned four cases, contend that the Tribunal dismissed the appeals of the assessees purporting to follow the judgment of the Supreme Court in M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, without taking note of the fact that there are material differences the terms and conditions of the contract in the M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, , and in the present batch of cases.

Sri M. Ramayya, the learned Government Pleader, on the other hand, contends that the ratio laid down in M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, squarely applies to the facts of the present batch of cases as well and therefore these T.R.Cs. are liable to be dismissed.

The question that arises for consideration in these T.R.Cs. is :

Whether, on the facts and in the circumstances of the case, would the supply of material by the assessee-company to the contractor constitute "sale" so as to attract the provisions of the Act for exigibility of the sales tax ?

The assessments in these, relate to the assessment years 1980-81 to 1989-90. The expression "sale" us defined in section 2(n) of the Act. The said definition, in so far as it is relevant for our purpose, reads as follows :

"''Sale'' with all its grammatical variations and cognate expressions means every transfer of the property in goods (whether as such goods or in any other form in pursuance of a contract or otherwise) by one person to another in the course of trade or business, for cash, or for deferred payment, or for any other valuable consideration or in the supply or distribution of goods by a society (including a co-operative society), club, firm or association to its members, but does not include a mortgage, hypothecation or pledge of or a charge on goods.

(Explanations I to VIII :..............)"

From a perusal of the above definition, it is clear that every transfer of the property in goods by one person to another in the course of trade or business, whether for cash or for deferred payment, or for any other valuable consideration would be within the meaning of "sale"; the transactions of mortgage, hypothecation or pledge of or a charge on goods are specifically excluded from the said definition.

It would be useful here to refer to the judgment of the Supreme Court in M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, because if the transactions in the present batch of cases fall within the ratio of the said judgment, the irresistible conclusion would be that there is sale of goods supplied by the assessee-company to the contractor. In that case the Supreme Court was considering whether supply of iron, steel and cement by the Public Works Department to the contractor against the deduction of prices of the material supplied from the final bill payable to the contractor, would constitute "sale" within the meaning of section 2(n) of the Madhya Pradesh General Sales Tax Act, 1958. There clause (10) of the contract was relied upon to show that the supply did not constitute "sale". We shall advert to clause (10) presently. Here we would note the ratio laid down by the Supreme Court in that case. It was laid down that clause (10) of the contract indicated that a sale inhered from the transaction and that by the use or consumption of materials in the work of construction, there was passing of the property in the goods to the appellant from the Public Works Department and by appropriation and by the agreement, there was a sale from the Public Works Department to the appellant as envisaged thereunder. It will be apt to read clause (10) to the contract in that case, which is as follows :

"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 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 materials and stores as are from 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 said 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 of 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 month 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."

Referring to the judgment of a Bench of three Judges of the Supreme Court in Government of Andhra Pradesh Vs. Guntur Tobaccos Ltd., the Supreme Court pointed out, in the case of M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, , that a contract for work, in the execution of which goods were used, might take one of the three forms, viz., (i) the contract might be for the work to be done for remuneration and for supply of materials used in the execution of the work for a price; (ii) the contract might be for work in which the use of the material was accessory or incidental to the execution of the work; and (iii) the contract might be for work and use or supply of materials, though not accessory to the execution of the contract, was voluntary or gratuitous. The first category of contract is a composite contract for work and sale of goods and the contract of the second category is for execution of work not involving sale of goods. Whether a contract falls in the first category or in the second category depends upon the circumstances of each case; but in so far as the third category of contract is concerned, there is no sale because through the property passes, it does not pass for a price. For purposes of sales tax it is not sufficient to examine whether there is transfer of title to goods as an incident of the contract but it is also necessary to determine whether there is a contract, whether express or implied, for the sale of the very goods which are used in the execution of the work for a money consideration. In other words, there must be in the contract for work and independent term or stipulation for the sale goods by one party (employer) to the other (contractor) for a money consideration and again this has to be determined on true interpretation of the contract and the attendant circumstances of the case and the bargain must be judged in its entirety. That the contract in a given case involves sale of goods, which is taxable, has to be established by the authority intending to tax the transaction and that burden will not be discharged by merely showing that the property in the goods belonged to the party entrusting the contracted work stood transferred to the other party (contractor). On the facts of that case the contractor was bound to procure materials and in order to ensure that quality materials are procured, the Public Works Department 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 and that 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. It was emphasized that through in a transaction of that type there was not inherent sale, yet a sale inhered from the transaction and that clause (10) read in the proper light indicated that position. It may be noted that the contract in the above case was a composite contract, that is, labour and material; there were no two agreements - one for supply of material and the other for labour separately.

Turning to the facts of the case on hand, it would be enough to point out that the Tribunal having extracted various clauses of the agreement, both general conditions of the contract as special conditions of the contract, with regard to the supply of steel and cement ass well as relating to return of surplus material by the contractor, recorded file finding that the terms of the contract indicated that the goods continued to vest in the assessee-company till they were utilised in the contracted work and that surplus materials after completion of work had to be returned and that only to the extent of the goods consumed, the amount wa charged and recovered and not in regard to the entire supply.

However, Sri P. Sreenivasa Reddy, the learned counsel for the petitioners in the first cases, has pointed out that there are six features which distinguish this case from M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, . We may note those features here viz., -

(i) the assessee-company is not bound to supply the materials;

(ii) the contractors are bound to return the unused material;

(iii) fixed recovery rates are mentioned irrespective of market price to be based on actual consumptions;

(iv) consumption, reported in excess of the prescribed norms, attracts penal recovery at 150 per cent of market value;

(v) the VSP may reserve right to inter-transfer of raw steel issued from one contractor to another; and

(vi) the contractor was bound to execute an indemnity bond.

Before we embark upon consideration of these features, it would be necessary to read here the clauses which are upon by Sri P. Srinivasa Reddy to urge that they would prevent the transaction from becoming "sale".

"General conditions of Contract :

Clause No. 6.23 : Except where otherwise specified, the contractor shall at his own expense supply and provide all the constructional plant, materials both for temporary and for permanent and for permanent works, labour (including the supervision thereof) transport to or from site and in and about the works and other things of every kind required for the construction, completion and maintenance of the works.

6.26 : Notwithstanding anything contained to the contrary anywhere in this contract wherever any materials for the execution of the contract are procured with the assistance of the employer either by issue from employer''s stock or purchase made under orders or permits or licences issued by the employer, the contractor shall use the said materials economically and solely for the purpose of the contract and not dispose them of without the permission of the employer and if required by the engineer shall return to the employer all surplus or unserviceable material that may be left with the contractor after the completion of the contract or at its termination for any reason whatsoever on being paid or credited such price as the engineer shall determine, having due regard to the initial cost and the present condition of the materials at the time of such return thereof. The credit to be allowed to the contractor shall not exceed the amount charged to him excluding the departmental and storage charges, etc., if any. In the event of breach of the aforesaid condition shall (in addition to making himself liable for action for contravention of the terms of the licence or permit and/or for criminal breach of trust) be liable to the employer for all moneys, advantages or profits accrued or which in the usual course, would have accrued to the contractor by reason of such breach.

37.2 : The contractor shall keep proper account of the materials supplied to him by the employer and shall submit monthly statements to the engineer showing the materials received and consumed and the balance in hand.

37.4 : Where the contracts is terminated due to any default on the part of the fabricator/contractor the fabricator/contractor shall arrange to return all materials issued to him by the employer to him by the employer to the place/places specified by the employer, at his own cost.

41.0 : Accounting of steel :

41.1 : Steel shall be supplied to the fabricator/contractor in sizes available on cost recovery basis. The fabricator/contractor will have to make the best use of the sections supplied, most economically to avoid unnecessary wastage. The contractor shall maintain a cutting list and the same shall be open to the engineer for verification from time to time.

41.3 : The total quantity of fabricated steel structures based on the approved DODLS plus 5 per cent (five per cent) of this fabricated quantity of steel structures (towards non-recoverable wastage, cut pieces, etc.) plus returned/accounted surplus steel in full sizes must be equal to the total quantity of raw steel issued by the employer, after due adjustment of the steel directly purchased and used in the works by the fabricator/contractor, if any. Any shortage of steel after accounting as above shall be treated as unaccounted steel.

The cost recovery for the total raw steel issued by the employer to the fabricator/contractor shall be made as follows :

(a) For the total tonnage of the fabricated steel structures based on approved DODLS plus 5 per cent (five per cent) for this fabricated quantity of steel structures (towards non-recoverable wastage, cut pieces, etc.) the recovery shall be made based on the issue rates stipulated in Schedule A of special conditions of contract.

(b) For the unaccounted raw steel the fabricator/contractor shall be charged at the rate of 150 per cent (one hundred and fifty per cent) of the current stock yard price rates prevailing at the time of material accounting in case of indigenous steel and at 150 per cent (one hundred and fifty per cent) of the average landed cost in case of imported steel.

42.0 : The employer/engineer reserves the right for inter-transfer of raw steel issued by the employer from one contractor to the other if it so becomes necessary during the course of execution of work and the contractor shall not normally object to this."

He contends that the general conditions of the contract contained in various sub-clauses are subjected to the special conditions contained in various clauses in annexure 1-E. We find no difficulty in accepting the submission of the learned counsel, in regard to interpretation of general clauses and special clauses in the contract. But, even so, on a proper reading of the various clauses, in our view, the supply of material by the petitioner-company to the various contractors on condition of price of the material to be deducted or adjusted from the bills payable to the contractors for the work done, would constitute sale of the goods supplied to the contractor. Here it will be appropriate to note that cement and steel were supplied to the contractor to ensure quality of the materials which would go into the construction work entrusted to the contractor. The Tribunal pointed out that various clauses in the agreement were evidently introduced only with a view to see that there was no pilferage or misuse of the material so supplied at the control price as the market price was higher and held that such condition in the agreement could not be interpreted to say that the appellant himself remained the power of the goods even after their supply and consumption as such there was no transfer of ownership and consequently there was no sale. This conclusion of the Tribunal, in our view, is justified having regard to the general conditions in clause 6.26, extracted above, which says that wherever any materials for the executions of the contract are procured with the assistance of the employer (assessee-company) either by issue from employer''s stock or purchase made under orders or permits or licences issued by the employer, the contractor shall use the said materials economically and solely for the purpose of the contract and not dispose them of without the permission of the employer and if required by the engineer shall return to the employer all surplus or unserviceable material that may be left with the contractor after the completion of the contract or at its termination for any reason whatsoever on being paid or credited such prices as the engineer shall determine, having due regard to the initial cost and the present condition of the materials at the time of such return thereof and that the credit to be allowed to the contractor shall not exceed the amount charged to him excluding the departmental and storage charges, etc., if any. These reasons would be a complete answer to the aforementioned distinguishing features Nos. (i), (ii), (iii), (iv) and (vi) pointed out by the learned counsel. The only distinguishing feature which (vi) pointed out by the learned counsel. The only distinguishing feature which remains to be considered is No. (v), the right to make inter-unit transfer of the goods as mentioned in clause 42, extracted above. A plain reading of the above clause makes it abundantly clear that this provision was made to ensure the smooth execution of the work and the phrase "...the contractor shall not normally object to this" presupposes that sale was complete and the contractor had a right to object and it was that right of the contractor that was sought to be curtailed by the said clause. It would be appropriate to read clause 37 of the agreement also here, which runs as follows :

"All the materials supplied by the employer shall remain the absolute property of the employer and at all times shall be open for inspection by the employer/engineer. The contractor shall be solely responsible for watching and guarding of the stores. The employer''s authorised representative shall be free to make any surprise check of the contractor''s stores to verify the stock of employer''s materials. The responsibility for any loss, damage or theft to these materials after they have been issued to the contractor shall rest entirely with the fabricator/contractor. These materials shall not be removed from the site/shop by the contractor due to any reason whatsoever without the written permission of the employer.

The contractor shall not divert or convert any such materials for their own use or for any other use unconnected with the works entrusted."

In our view, the substance of this clause (10) of the agreement which was subject-matter of interpretation by the Supreme Court in M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, is the same. Therefore, notwithstanding the so-called distinctions pointed out by the learned counsel, in our view, the material aspects which constitute or inhere contract, pointed out by their Lordships of the Supreme Court in M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, , are present in these cases.

Sri P. Srinivasa Reddy relied upon a judgment of the Allahabad High Court in Oil & Natural Gas Commission v. Commissioner of Sales Tax STI 1991 All. 121; (printed at page 466 infra) and laid emphasis on the point that in that case a learned single Judge distinguished M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, , on two aspects and these two aspects are present in these cases. The learned Judge pointed out that in the case before him the contractor was duty-bound to return the unused material i.e., cement, iron and steel on completion of the contract finally or otherwise he was liable for criminal breach of trust and penalty to the extent of twice the amount in terms of clause 33 of the contract. The relevant clause which fell for consideration of the learned Judge is not quoted in the judgment, so we cannot express any opinion on the interpretation of that clause. However, we could like to point out that if on true interpretation of the relevant clauses in the agreement it is found that supply of the goods to the contractor constitutes sale, the mere fact that he was bound to return the goods after completion of the construction work, on pain on payment of penalty or prosecution, will not alter the nature of the earlier sale transaction. It may be recalled that in M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, it was laid down that till the time of appropriation of the goods, they were the properties of the company (employer) and if they remain unused the company-employer was entitled to get back the same from the contractor. With respect to the learned Judge, we are unable to agree with the reasoning in that case and in our view that case is of no assistance to the petitioners in these cases.

Another judgment relied upon by Sri Reddy is a Division Bench judgment of the Karnataka High Court in S.T.R.P. Nos. 61 to 67 of 1993 (Bangalore Water Supply and Sewerage Board v. State of Karnataka), dated August 28, 1995. There also the M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, was pressed into service in support of the contention that the supply of the material by the Board to the contractor amounted to sale of the material but the Bench distinguished the case observing thus :

"........Therefore, the principles stated in M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, case cannot be made applicable to the facts of the present case, because in that case the terms if contract were entirely different from the terms of contract in the present case. At any rate, it is clear that the goods did not pass to the contractors at all. When the goods did not pass to the contractors, the same having been utilised by the contractors for the benefit of the Board and never ceased to be the goods of the Board, merely by utilisation of such materials in the course of the work done by the contractors, it cannot be said that the Board lost control or possession of ownership of the goods nor on completion of the work the goods do not become the property of the Board once again......." (Emphasis [Here italicised.] supplied)

As can be seen from the above observation of the Division Bench, there was not passing of the goods from the Board to the contractor but that is not the position in our case. Therefore, that case also is of no assistance to the petitioners.

Sri S. Krishna Murthy, the learned counsel for the petitioners, in the last mentioned four T.R.Cs. invited our attention to the general conditions in clauses 5.1 and 5.2 of the agreement to support the contention that supply of goods to the contractor did not constitute sale. The relevant clauses on which reliance is placed by the learned counsel read as follows :

"Clause 5.1 : Materials to be supplied by owner at issue rates :

Owner will issue as per terms and conditions set fourth in clauses 5.2 and 5.3 general conditions of contract, cement for all items of work involving cement and steel for items where it has been specified that steel will be made available at issue rates by owner at the following rate ex-owner''s storage points. Necessary indents will have to be raised by the contractor as per procedure laid down by engineer-in-charge from time to time.

.............

Further such shall be subjected to the following conditions :

(i) Cost of all materials issued by owner shall be recovered in full from the contractor''s dues under this contract.

(ii) Materials will be issued only for permanent works and not for making templates, other temporary works, etc.

.............

All the cement/steel shall be strictly accounted for by the contractor. In case of cement the permissible wastage shall be 3 per cent and in the case of reinforcements allowable wastages/scrap generated shall be 3 per cent (i.e., 1/2 per cent unaccountable and 2 1/2 per cent accountable).

.............

Any unused quantity of cement and steel not returned and wastage/consumption beyond specified/agreed limits shall be charged at penal rate of 200 per cent (two hundred per cent) of issue rates in accordance with the provisions of general conditions of contract. The theoretical consumption of steel and cement required for the work will calculated on the basis of approved drawings/joint measurements. In the case of cement the theoretical rates of consumption shall be decided by the engineer-in-charge in accordance with standard engineering practices and his decision in this regard shall be final and binding.

Clause 5.2 : Conditions for issue of materials :

(vii) It shall be the responsibility of the contractor to arrange in line all materials required for the works other than those to be supplied by the owner. If, however, in the opinion of the engineer, the execution of the work is likely to be delayed due to contractor''s liability to make arrangements for supply of materials which normally he has to arrange for, the engineer shall have the right at his own discretion to issue such materials if available with the owner or procure the materials from the market or elsewhere and the contractor will be found to take such materials at the rates decided by the engineer-in-charge. This, however, does not in any way absolve the contractor from responsibility of making arrangements for the supply of such materials in part or in full, should such a situation occur nor shall this constitute a reason for the delay in the execution of the work.

(viii) None of the materials supplied to the contractor will be utilised by the contractor for manufacturing item which can be obtained as supplied from standard manufacturer in finished form.

(xiii) Materials/equipment supplied by owner shall not be utilised for any other purpose(s) than issued for.

Clause 5.3 : Return of surplus :

Notwithstanding anything to the contrary in any or all the clauses of this contract are procured with the assistance of the owner with or by issue from owner''s stock or purchases made under, or permits or licences issued by Government the contractor shall hold the said materials as trustee for the owner and use such materials economically and solely for the purpose of the contract and not dispose them of without the permission of the owner and return, if required by the engineer-in-charge, all surplus or unserviceable materials that may be left with him after the completion of the contract or at its termination for any reason whatsoever on his being paid or credited such price as the engineer-in-charge shall determine having due regard to the contractor, however, shall not exceed the amount charged to him excluding the storage charges, if any. The decision of the engineer-in-charge shall be final conclusion in such matters. In the event of breach of the aforesaid licences, or permits and/or for criminal breach of trust........"

We have gone through these clauses carefully. They are not materially different from relevant clauses in other T.R.Cs. extracted above. In our view these clauses would not militate against the conclusion that the contract of sale of the goods supplied by the company inheres in terms of the various clauses of the or the conditions general and special of the agreement. In our view these clauses reinforce the above conclusion rather that detract from reaching that conclusion.

For the aforesaid reasons, we see no merit in the T.R.Cs. They are accordingly dismissed but, in the circumstances of the cases, without costs.

Petitions dismissed.