Tanakpur Jal Vidyut Pariyojna vs Commissioner, Trade Tax

J.C.S. Rawat, J.—Since there is a common question of law involved in all the revisions, therefore, all the aforesaid cases have been heard together and are being disposed of by this single judgment and order.

All these revisions except Sales Tax Revision No. 85 of 2001, preferred u/s 11(1) of the U. P. Trade Tax Act, 1948, are directed against the judgment and order dated March 7, 2006, passed by the Sales Tax Tribunal, Haldwani in Second Appeal Nos. 19 of 1994, 20 of 1994, and 39 of 1994, 36 of 1998, 37 of 1998 and 38 of 1998.

Sales Tax Revision No. 85 of 2001 has been preferred by the department before me against the judgment and order dated February 6, 1992 passed by the Sales Tax Tribunal, Bareilly.

The Sales Tax Tribunal, Haldwani in Second Appeal No. 19 of 1994 passed an order assessing the sales tax of Rs. 33,09,703 for assessment year 1987-88, in 20 of 1994 of Rs. 59,05,513 assessment year 1988-89, in 39 of 1994 of Rs. 76,02,43.54, assessment year 1989-90, in 36 of 1998 of Rs. 67,41,777.66 in assessment year 1990-91, in 37 of 1998 of Rs. 5,15,550.38 1991-92, in 38 of 1998 of Rs. 90,299.15 in assessment year 1992-93 and in 290 of 1990 of Rs. 76,208 for the assessment years 1985-86.

The facts for the disposal of all the revisions are the similar. The revisionist had a registered office at Faridabad, Haryana and the revisionist started construction of Tanakpur Hydro Electric Project at river Sharda for hydro electric generation which included construction of barrage, power house, power channel, tail race channel, etc. The project was completed by different contractors and the revisionist during the course of execution of work issued cement and steel to complete the work to their contractors with a strict stipulation that the same shall all along remain with the corporation and after the completion of the work the contractor would return all unused materials. It was further made clear in the agreement in-between the contractor and the corporation that the material would be supplied at the agreed cost and the said cost of the consumed articles would be deducted or adjusted in the running bills of the contractor. The assessing authority held that the issuance of cement and steel was a "sale" within Section 2(h) of the Sales Tax Act and assessed the sales tax upon that sale. Feeling aggrieved by the said order of the assessing authority the revisionist preferred the first appeal before the Deputy Commissioner (Appeal) and the same was dismissed. Feeling aggrieved by the said appellate order the revisionist preferred the second appeal before the Trade Tax Tribunal, Haldwani, in which the revisionist assailed the findings of both the authorities and also agitated that the material issued by the department does not come under the purview of the definition of "sale" provided u/s 2(h) of the Sales Tax Act. After hearing the appeal the learned Tribunal also dismissed the appeal stating therein that the material issued by the dealer to the contractor comes within the purview of "sale" and, as such, the revisionist was liable to pay tax as has been directed by the assessing authority. Feeling aggrieved by the said order the present revisions have been preferred before this court.

The learned Counsel for the revisionist contended that on the facts of the case in hand, there is no transaction of sale involved. According to the learned Counsel for the revisionist, as per the terms of the clause of the agreement the materials supplied to the contractor remained to be the absolute property of the corporation and the same could not be removed on any account from the site of the work and at all times it was open to inspection by the concerned authorities. It was also pointed out that any materials supplied remaining unused in the works contract, were to be returned to the authority concerned and the contractor, at all given points of time was only a custodian or a trustee. It was further contended that the title in the property supplied to the contractor never got transferred nor any consideration has been passed for the supply of the goods. It was further contended that the said contract comes under the definition of "works contract". It was further contended that the department has claimed the tax on the royalty paid to the forest department. The learned Counsel pointed out that this royalty cannot be a subject-matter of sales tax by the department. The learned Additional Advocate-General Sri Maulekhi appearing for the State asserted that the supply of the cement, iron, etc., by the corporation to the contractor for being used for construction of corporation building and other projects amounted to a transaction of sale within the meaning of Section 2(h) of the Act. He further contended that the sales tax was liable to be paid and the assessing authorities had rightly assessed the revisionist and he also contended that the lower appellate courts were perfectly justified in confirming the order of the assessing authority.

In these revisions there are two substantial questions involved, namely, (i) whether, in the facts and circumstances of the case the learned Tribunal is legally justified in holding that the material issued to the contractor, i.e., cement and steel, is a sale ? and (ii) whether on the facts and circumstances of the case the learned Tribunal is justified in holding that the recovery of the royalty from the contractor for the use of river bed material by contractor for applicant''s work is liable to sales tax.

Before examining the respective contentions of the parties, I would like to mention the relevant clause of the contract which is reproduced as under:

Cement.-(a) Cement will be supplied to the contractor in bags as received from the suppliers or by weight at the rates specified in Schedule ''B'' and will be consumed in work as per mix design approved by the Engineer-in-charge.

(b) ...

(c) The allowance as mentioned in (b) above shall be considered as inclusive of all wastage on account of handling, re-handling, transportation, storage or any other account whatsoever as may be involved at any stage and such allowance shall be to the contractor''s account. The recovery in this regard shall be effected by the Engineer-in-charge from the monthly running bills at the rate as specified in Schedule ''B''. However, if the limit of allowance in cement exceeds the aforesaid permissible limits the recovery shall be effected for such excess quantity at double the rate indicated in Schedule ''B'' by the Engineer-in-charge.

Steel.-(a) Reinforcement steel and structural steel will be supplied to the contractor on sectional weight basis (based on liner measurements multiplied by corresponding unit weights) at the rates specified in Schedule ''B''. The same shall be accounted for on sectional weight basis while working out consumption.

(b) ...

(c) ...

(vii) Such material shall be supplied for the purposes of the contract only and the value of materials so supplied at the rates specified in the aforesaid schedule shall be set-off or deducted, as and when materials are consumed in items of work for which payment is being made to the contractor, from any sums then due or which may thereafter become due to the contractor under the contract. At the time of submission of bills, the contractor shall properly account for the materials issued to him to the satisfaction of the Engineer-in-charge and certify that balance of materials supplied is available at site.

(x) On completion of works/foreclosure/cancellation, the contractor shall return forthwith all the materials issued to him by the corporation lying in his possession or custody, failing which the Engineer-in-charge shall be at liberty to effect recovery at double the rates specified in Schedule ''B'' for the aforesaid materials.

It is not disputed that universal concept of sale may be defined an agreement to transfer title supported by consideration and an actual transfer of title in goods. In the absence of any one of these elements it would be held that there was no sale. It is pertinent to mention here that the learned Counsel for the assessee tried to point out that the transaction which has taken place in-between the parties should be treated as a works contract. A contract for work in 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 the remuneration and for supply of materials used in the execution of the works for a price, (ii) the contract might be a contract for work in which the use of the materials was accessor, or incidental to the execution of the work, (iii) the third type of contract might be contract for work and use or supply of materials though not accessory to the execution of the contract, is voluntary or gratuitous. In the third contract there was no sale because though the property passed, it did not pass for a price. The question is largely one of fact depending upon the terms of the contract including the nature of the obligation to be discharged thereunder and the surrounding circumstances. The true effect of assertion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a contract of sale the main object is the transfer of property and delivery of possession of the property. Whereas the main object of contract for work is not the transfer of the property but is one for the work and the labour. Another test may be applied as to when and how the property of the contract in such a transaction passes to the contractor. If it is by transfer at the time of delivery of the articles, it is a sale. The essence of the contract or the reality of the transaction, as a whole, is to be taken into consideration. The predominant object of the contract and the circumstances of the cases would be a guiding factor to decide the transaction of a sale or contract. It is a subject of interpretation of a contract. It is also well-settled law that the substance and not the form of the contract is material in determining the nature of the transaction. Therefore, this question has to be ascertained on the facts of the present case on the basis of the proper construction on terms and conditions of the contract between the parties. The matter came up before the honourable apex court in Government of Andhra Pradesh v. Guntur Tobaccos Ltd. 1965 16 SCT 240. In that case the assessee-company was a dealer carrying on the business of re-drying in its factory raw tobacco entrusted to it by its customers. The assessee re-dried the tobacco, packed it in packing materials purchased from the market and delivered it to the customers. For re-drying each container of tobacco the assessee charged the customers a certain sum but there was no separate charge for the value of the packing materials used. The assessee was assessed to sales tax on the value of the packing materials on the ground that there was a sale of the packing materials. The honourable apex court held that the ingredients of the charging section read with the definition of "sale" were satisfied. The honourable court observed that unless it could be said that the material used for packing was transformed into some other commodity not covered by the definition of "goods", it could not be held that there was no sale of the material. The packing material remained distinct from the dried tobacco. Property in it passed to the customer, who had paid for it. On the basis of the practice obtaining in the factory of the assessee, contracts of sale arose easily by implication and, therefore, the sales tax authorities had rightly assessed the assessee. The same controversy came before the honourable apex court in Hindustan Steel Ltd. Vs. State of Orissa, , in which it was clearly held by the apex court that when a company supplies to the contractors for use in construction coal, steel, cement, etc., for a consideration it amounts to a sale and the company becomes a dealer for that purpose. The sales tax was rightly assessed from the assessee.

The Uttar Pradesh Sales Tax Act, 1948 defines the "sale" u/s 2(h) which reads as under:

(h) ''sale'' with its grammatical variations and cognate expressions, means any transfer of property in goods (otherwise than by way of a mortgage, hypothecation, charge or pledge) for cash or deferred payment or other valuable consideration, and includes-

(i) a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration ;

(ii) a transfer of property in goods (whether as goods or in some other forms) involved in the execution of a works contract ;

(iii) the delivery of goods on hire purchase or any system of payment by instalments ;

(iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration ;

(v) the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; and

(vi) the supply, by way of or as part of any service or in any other, manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service is for cash, deferred payment or other valuable consideration.

The honourable apex court had an occasion to deal with a similar clause where Union of India entered into an agreement for construction of certain works therein. In M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, , in which N. M. Goel Company was a building contractor in Madhya Pradesh and is registered as a dealer under the M. P. General Sales Tax Act. The company''s tender for construction of foodgrains godown and ancillary buildings was accepted by the Central Public Works Department (CPWD). It was an item of rate tender. In the tender, the prices of the materials to be used for the construction including the cost of iron, steel and cement were included. The CPWD had agreed to supply from its stores the said iron, steel and cement for the construction work and to deduct the prices of materials so supplied and consumed in the construction from the final bill of the company and if any materials supplied by the PWD remained unused in its works contract they were to be returned to the PWD. In pursuance of the contract, the company was assessed by the department for the tax for the relevant periods, including penalty. The company filed revisions before the Deputy Commissioner of Sales Tax who affirmed the assessment orders. When the matter came up before the High Court, there was a question whether there was a sale and whether the property in the goods in question passed to the company or continued to remain with the PWD although the PWD had in the final bill debited the prices of the goods so supplied to the company under Clause 10 of the contract. The High Court found that there was sale and as a result of that the duty was leviable. When the matter came up before the honourable Supreme Court, it was held that in order to be sale taxable to duty, not only the property in the goods should pass from the PWD to the appellant 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. Mere passing of property from the PWD to the appellant would not suffice. There must be sale of goods. The primary object of the bargain judged in its entirety must be viewed. It was further held that for purpose of performance, the contractor was bound to procure materials. But in order to ensure that quality materials are 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 the rate and got set-off or deducted from any sum due or to become due thereafter to the contractor. It was further held by the honourable Supreme Court that the said transaction of providing cement by the PWD to the company was a sale.

The similar controversy came again for consideration before the apex court in Rashtriya Ispat Nigam Ltd. Vs. State of A.P., in which the honourable apex Court held that for the purpose of performance, the contractor was bound to procure materials. But in order to ensure that quality materials are 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 attempt of the assessee to distinguish this case with the case of the Goel''s M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, on facts, came to be rejected by the apex court. In that case also the apex court held that by use or consumption of the materials in the work of construction, there was passing of property and by virtue of receipt of value of such transferred property by way of adjustment in bills, the consideration has also passed over and in the opinion of the apex court, there was a sale which was liable to tax under the Sales Tax Act.

A similar question was again considered by the apex court in Karya Palak Engineer, CPWD, Bikaner v. Rajasthan Taxation Board, Ajmer reported in 2004 136 STC 641 : 2005 37 STJ 1. In the said case, the CPWD undertook the work of erection of barbed wire fencing along Indo-Pak border. In order to get the construction work, the appellant awarded contracts to various contractors and under the terms of the contract it had been agreed to supply the contractors materials such as cement, barbed wire, etc. The appellant purchased the material and supplied to the contractors and the value of the goods were adjusted in the final bills of the contractors. The honourable Supreme Court has held that by the use or consumption of materials supplied in the work of construction there was passing of property and by virtue of receipt of value of such transferred property by way of adjustment in bills the consideration has also passed which satisfies the definition of "sale" in the local Sales Tax Act.

The learned Counsel for the revisionists contended that the honourable apex court had held in Sunrise Associates v. Government of NCT of Delhi 2006 145 SCT 576 : 2006 30 NTN 61 that the sale of the lottery tickets was not considered as sale and was not held to be liable to levy of tax under the provisions of the Sales Tax Act. The honourable apex court held that a lottery having been held to be in essence a chance for a prize, the sale of a lottery ticket can only be a sale of that chance. There is no other element. Every right can be sub-divided into lesser rights. When these lesser rights culminate in a legally recognisable right, it is the latter which defines the right. The right to participate in the draw is a part of the composite right of the chance to win and it does not feature separately in the definition of the word "lottery". It is an implicit part of the right to win. It is not a different right. The separation is specious since neither of the rights can stand without the other. A draw without a chance to win is meaningless and one cannot claim a prize without participating in the draw. In fact, the transfer of the chance to win assumes participation in the draw. There is no value in the mere right to participate in the draw and the purchaser does not pay for the right to participate. The consideration is paid for the chance to win. There is therefore no distinction between the two rights. The right to participate being an inseparable part of the chance to win is therefore part of an actionable claim. The claim has been defined under the Transfer of Property Act and the court held that it does not come within the purview of the goods under the selling of lottery tickets, as such, it was held that the view taken earlier was not correct. The facts of this case are not applicable in the present case. However, the learned Counsel relied on this judgment which has been emphasised in paragraph 5 of the said judgment and there must be a transfer of property from one hand to another, as I have already discussed this aspect in my preceding paragraphs.

Learned Counsel pointed out that the said agreement mentions that the unused materials would be returned to the assessee. The conditions mentioned in the agreement of M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, are as under:

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 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 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 of 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.

The conditions resemble in both the cases. For the purpose of performance, the contractor was bound to procure materials. But in order to ensure that quality materials are procured, the assessee undertook to supply such materials and stores as pointed out in the agreement 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 recovery in this regard have to be effected by the engineer from the monthly running bills at the rate specified in Schedule "B". It also reveals that there was a contract about the rates of the materials and stores and that rate, the said quality was to be supplied. Thus, on the perusal of the entire agreement as well as the circumstances and the terms and conditions in letter and spirit, it is a sale as provided u/s 2(h) of the Sales Tax Act.

It was contended on behalf of the learned Counsel for the revisionists that the royalty cannot be taxed for the purposes of sales tax. The fact finding court, i.e., Sri R. N. Pande, Assistant Commissioner has held as under:

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It is revealed that the assessee had been charging the value of the royalty and the tax thereupon. This fact leads me to take an inference that the authorities had rightly assessed the tax on the assessee. The learned Counsel for the revisionist further pointed out that the department had issued a circular dated October 4, 1991 by which the judgment of the apex court rendered in M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, , has been interpreted. The learned Counsel for the revisionist pointed out that the Tribunals have not considered the said circular while giving the judgment. He further pointed out that the honourable apex court has held that the circular made are binding on the authorities. The said circular was also cited before me. The circular which interprets a judgment cannot be the basis of the finding recorded by this court. However, it may be binding on the Commissioner. The interpretation of a judgment and its applicability on the facts and circumstances has to be given by the court itself. It is not binding on the assessee and a circular made by the Commissioner is not binding on the courts. However, it may be binding upon the authorities. See Commissioner of Sales Tax v. Indra Industries 2001 122 SCT 100 (SC) : 2000 UPTC 472 (SC) . I have already discussed in the preceding paragraphs about the applicability of the judgment recorded in M/s. N.M. Goel and Co. Vs. Sales Tax Officer, Rajnandgaon and another, .

So far as Sales Tax Appeal No. 85 of 2001 is concerned, the assessment in this case was made on the basis of the aforementioned agreement and the judgment of the assessing authority was rescinded, by the learned Tribunal. I have already discussed in detail with regard to the applicability of the provisions of the Sales Tax Act with regard to this agreement. As such, in view of the above discussion I am of the view that the present appeal is liable to be allowed.

In view of the foregoing discussion, the Revisions Nos. 58 of 2006, 59 of 2006, 60 of 2006, 61 of 2006, 62 of 2006 and 63 of 2006 are squarely covered by the aforesaid judgments of the honourable apex court. Therefore, the transactions between the revisionist and the contractor come within the meaning of the word "sale" under the provisions of Section 2(h) of the Act. I do not find any ground for interference in these matters. The revisions are devoid of merit and, therefore, the revisions are dismissed in limine accordingly.

Sales Tax Revision No. 85 of 2001 is allowed and the impugned order dated February 6, 1992 is hereby set aside.

All applications pending in this case stand disposed of in terms of the judgment.