1. We had carried out works in the State of Andhra Pradesh for our client. The nature of work was to set up the project on turnkey basis. The contract was a lump sum contract but the values of the individual equipments have been specified.
The contract indicates that the prices are inclusive of customs duty (including countervailing duty, special duty, if any), procurement and other charges, excise duty, sales tax, vat, entry tax etc.,
Following clause appears in the contract:
“Owner will issue C forms to contractor, on all inter-State sales in India of materials for permanent incorporation in the works by the contractor to the owner to enable the contractor to avail concessional rate of sales tax.
2. The Company had furnished returns in the State of Andhra Pradesh since the work of supply and erection was executed for client. In the returns, the Company claimed non-liability under Section 6(2) of the Central Sales Tax Act, 1956 (hereinafter referred to as “the CST Act”) in respect of various equipments procured from vendors outside the State for fulfilment of the contract. To perform the contract, vendors were identified outside AP. The said vendors after manufacturing the different equipment against the orders placed by the Company dispatched the goods direct to the site. The consignment so moved from out of the State was accompanied by the vendor’s Commercial-cum-Excise Invoice and Packing slip-cum-Delivery Challan.
3. The Company staked its claim for exemption under Section 6(2) of the CST Act and the issue is now being adjudicated by the tax authorities in the State of Andhra Pradesh. The VAT authorities have issued show-cause notices for different periods and have indicated the sales u/s. 6(2) would be disallowed in view of the judgment of the A. P. High Court in the case of M.s/ Larsen & Toubro Ltd., in W.P. No. 22960 of 2007 dated 14-9-2013. In this background, the following questions are posed:
(a) Can the transaction in question take place under Section 6(2) of the Central Sales Tax Act in the execution of a works contract for any client?
(b) If the answer to question (a) is in the negative, whether the State of Andhra Pradesh can impose tax under the VAT Act/CST Act in respect of the goods sold to that client?
4. At the outset kindly see the observations of the Andhra Pradesh High Court in the case of L & T reported in 132 STC 418.
“Held allowing the appeals, (i) that the entire project work had to be completed by the appellant which included installation of machinery and supervision up to certain point of time, that is to say, the contract was composite in nature. By merely supplying material to the contractee, the responsibility arising out of the agreement did not cease, the appellant had to install the machinery and watch the performance for a period of 15 months. Certain goods were manufactured by the appellant on the specification of the contractee at the factory near Bombay and the representative of the contractee inspected the goods and after being satisfied with the quality of goods clearance was given. 90 per cent of the value of goods was already received by the appellant from the contractee. The movement of goods was occasioned pursuant to the contract. The documents on record would go to show that these goods had reached the destination as per the terms of the contract. Central sales tax was paid to the State of Maharashtra under the scheme of the Act. Having regard to the fact that there were two facets of the contract, supply of goods and installation of machinery with the labour of the appellant, the contract was a divisible contract. The transaction was an inter-State transaction and not an intra-State transaction and the turnover arising on this transaction could not be brought under the net of the Andhra Pradesh Act.”
5. The legal position vis-à-vis, the taxing power to impose tax under the General Sales Tax law in legislation under Serial No. 54 of the State List has been declared by the Hon’ble Supreme Court. It is needless to quote extensively from 88 STC 204 (SC)(Gannon Dunkerley & Co., v. State of Rajasthan). The Constitution Bench held that, even a composite works contract involving deemed sale of goods in the State where the work is performed will be subject to the Constitutional bar and disabled from imposing sales tax on deemed sales taking place in the course of inter-State trade and commerce or in the course of import. The argument of the States that in a works contract, there can never be any sale in the course of inter-State trade or commerce or an outside sale was dealt and negatived vide Pages 222 to 225 of the report.
Thus, it is clear that before taxing any transaction of sale, whether involved in works contract or otherwise, the State has to avoid taxing a transaction taking place in the course of inter-State trade and commerce as well as a sale taking place outside the State. Gannon Drunkenly itself, vide Page 229, held that “ legislative power of the State to impose tax on such transfers under Entry 54 of the State List will have to be exercised, keeping in view the provisions contained in Sections 3,4 and 5 of the Central Sales Tax Act “.
6. Since one of the issues raised for the opinion is the permissibility of a sale and purchase of the goods independent of the incorporation of the goods in the works (e.g. sale under Section 6(2) of the CST Act), the same is discussed here. Sale is a consensual transaction. In a sale, property passes when intended to pass. There can be little doubt that in a sale effected in the legal sense, the property could pass when intended to pass, i.e. at the time and place of choice of the parties. See Section 19 of the Sale of Goods Act, 1930. It will be a misconception to believe that in a works contract, property should only pass by accretion and only when the materials are incorporated in the works and never earlier. This aspect has been dealt by the Constitution Bench in 73 STC 370 (Builders Association of India v. Union of India). Vide Pages 400-401, the Hon’ble Supreme Court observed, “ordinarily, unless there is a contract to the contrary in the case of a works contract, property in the goods used in the construction of a building, passes to the owner of the land on which the building is constructed, when the goods or materials used are incorporated in the building.” See the following observations of the Apex Court in the case of Larsen & Toubro Ltd., v. State of Karnataka, 65 VST 1 (On page 42) “Ordinarily, in the case of works contract the property in the goods used in the construction of the building passes to the owner of the land on which the building is constructed when the goods and materials used are incorporated in the building. But there may be contract to the contrary or a statute may provide otherwise. Therefore, it cannot be said to be an absolute proposition in law that the ownership of the goods must pass by way of accretion or exertion to the owner of the immovable property to which they are affixed or upon which the building is built”. Thus, as between a contractor and an employer, there can be a stipulation to pass title or risk even prior to the incorporation in the work.
In view of the above, it may not be improper to accept a portion or arrangement by which parties agree for sale of the goods against delivery of goods at site, or against documents at the time of delivery to the common carrier for transportation to the site. Therefore, even in a composite contract, a special clause or term may provide for property passing before incorporation in the work.
7. I find that as and when the materials are dispatched by the vendors, the goods being accompanied by document of title in favour of the customer and invoice-cum-delivery challan, the carriers are authorised to effect delivery of the documents themselves with goods taken into their account by appropriate entry in their inward register. Customer does not wait for completion of the work by the querist for either taking the goods into their records or for taking the benefit or credit of the duty paid on the goods received at site for availment of CENVAT credit. It is already seen that the goods are dispatched for direct transmission to site and the documents accompany the goods. The sequence of events considered that customer/employer have consented to issue “C” Forms, because of the inter-State movement of materials, though subsequently employed in the contract. As already seen, “sale” is a consensual transaction and as defined under Section 2(g) of the CST Act, sale involves transfer of property for money consideration.
8. Having regard to the authority of the Supreme Court, it is difficult to assert that there can never be a sale of the goods prior to incorporation in the work. A sale can take place, if agreed to between the parties even prior to incorporation. In the case on hand, goods have been required to be consigned favouring employer as consignee, the consignment note is handed over to the carrier for transmission and presentation to the employer who, receives the consignment and takes them into their books. These facts point out that the goods having been bought and sold (transferring property) during transit of the goods. The goods have been dispatched as directed by employer under Clauses of Special Conditions of Contract. The position is made clear in 84 STC 317 (Guj.) (State of Gujarat v. Haridas Mulji Thakker), later followed and applied by the Division Bench of the Madras High Court in 2010(35) VST 262 (State of Tamil Nadu v. Hydels Engineers (P) Limited)… Haridas Mulji (84 STC 317 (Guj.) observed as under vide Page 322:
“When the Transport receipt /railway receipts were taken out by the supplier at Bombay in the name of the purchaser, the property in goods stood transferred in favour of the purchaser. This second sale took place during the movement of the goods from one State to another. Therefore, as far as second sale is concerned, provisions of Section 3(b) of the Central Sales Tax Act, 1956 are attracted.”
9. The Andhra Pradesh Value Added Tax Act, 2005, by Section 5, excludes sale or purchase taking place in the course of inter-State trade or commerce or outside the State requiring application of the principles in Section 3 and 4 of the CST Act. In the case on hand, there has been movement of the goods from one State to the other. The goods have been sold and dispatched by vendors outside the State complying with the instructions issued by customer with regards to the making out of the documents including consignment note. Orders have been placed by the Company on out-of-the State vendors to execute the contract of customer in AP. Accordingly, goods were moved from one State to the other solely for the purpose of delivery to customer/employer and for employment in the contract. The sale and the movement from State to State are integral. This is a case of cause and effect. It is already seen that the transmission of the goods from one State to other and the sale during the movement of goods (prior to the termination) has been accompanied by the presentation of the consignment note bringing the transaction within Section 6(2) of the CST Act. It is also seen that even if the goods were meant to be employed in the execution of contract, there is no antithesis if parties provide for passing of property in the goods prior to incorporation of the goods in the work. Parties can agree for such a position. Therefore, it may be incorrect to assert that there can never be a sale under Section 6(2) of the CST Act of the goods involved in the execution of a work contract.
10. Assuming that in the case on hand, there was no sale falling under Section 6(2) of the CST Act, the further question is whether the sale is taxable in the State of Andhra Pradesh. Answer is provided by Section 5 of the AP Value Added Tax Act, which expressly excludes sales outside the State, applying Section 4 of the CST Act. Section 4 reads as under:
“4. When is a sale or purchase of goods said to take place outside a State –
(1) Subject to the provisions contained in Section 3, when a sale or purchase of goods is determined in accordance with sub-Section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States.
(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State –
(a) In the case of specific or ascertained goods, at the time the contract of sale is made; and
(b) In the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation”
In the case on hand, the goods were neither specific nor ascertained at the time of the contract between employer and the querist. They were future goods to be later found and dispatched. But at the time when the goods were later appropriated by the vendors as per the contract with the querist, the goods were outside the State. The matter calls for application of Section 4(2)(b) of the CST Act. “Appropriation” is the act of setting apart of the goods, as the goods to which the contract of sale attaches. Thus, when the vendors were required to take out the lorry receipt indicating employer as “Consignee” and simultaneously prepared delivery challans-cum-packing slip, the goods were set apart for customer. The goods were at that point of time outside the State of AP. There was further delivery of the goods to the common carrier who by reason of the consignee being CUSTOMER/CONTRACTEE, transported the goods as agent of CUSTOMER/EMPLOYER. This aspect is stressed in the judgment in Haridas Mulji Thakkar, which vide page 321, referred Supreme Court judgment in Bayyana Bhimayya & Sukhdevi Rathi v. Government of A.P. 12 STC 147, to state:
“When the Bombay supplier transported the goods to Surat and Ahmedabad and took out receipts in the name of the purchaser/purchasers at Surat and Ahmadabad, there was constructive delivery in favour of the opponent-assessees. At the same time, there was constructive delivery of the same goods in favour of the purchasers. However, the second delivery by the Bombay supplier could not be as principal to principal. While effecting second delivery, it has to be inferred in the facts of the case that the Bombay supplier acted as agent of opponent-assessee. Such inference has been drawn by the Tribunal and in our opinion rightly. The moment the goods are transported and the transport receipt or the railway receipts are taken in the name of the purchasers at Ahmedabad and Surat, the property in the goods stood transferred in favour of the purchasers”.
11. There was an unconditional appropriation of the goods in favour of EMPLOYER/CONTRACTEE when consignment notes were taken under the instructions of the querist in favour of CONTRACTEE. There was direct transmission to the consignee. This brings in the principle set out in Section 23 of the Sales of Goods Act, 1930. The cumulative circumstances indicate that the first appropriation of goods in favour of CONTRACTEE was outside the State and not in the State of AP. It should be kept in mind that Section 4 of the CST Act does not require an appropriation, which is accompanied by transfer of property. Section 4 sets out the principle as to the situs irrespective of the time and place of passing of property. Section 4 looks to the place of the first appropriation. In this, view, it appears that in such a situation, it may be inappropriate to invoke the provisions of the AP VALUE ADDED TAX ACT, 2005.
12. Equally, the State of AP may be incompetent to invoke the provisions of CST Act to impose any tax. The answer is provided by Section 9 of the CST Act. A sale occasioning the movement is taxable in the movement State. Sale during the movement of the goods alone are entrusted for levy and collection to the State of delivery. i.e. by the proviso to Section 9(1), which is the State from which the registered dealer obtained or as the case may be, could have obtained the form prescribed for the purpose of sub-section (iv) of Section 8 in connection with the purchase of such goods. In the case on hand, the State of Andhra Pradesh can impose central sales tax only if that State concedes to the position that the sale in question was during the movement of the goods and only if the Company had not complied with Section 6(2) of the CST Act. In other words, the State of Andhra Pradesh comes into picture only if the sale of the Company is during the movement of the goods effected by transfer of document and only if the conditions of Section 6(2) are not complied. In the case on hand, the conditions of Section 6(2) were complied by the production of the certificate in Form – E1 and the declaration in Form “C”. If the certificates and Forms had not been produced, then the State of AP can rely upon the proviso to Section 9(1) and impose central sales tax, provided the sale is during the movement of goods. If the State takes the position that the sale itself does not fall under Section 6(2) of the CST Act, nevertheless the State may be non-jurisdictional State either to impose Central Sales tax or AP VAT.
It may be noted that in 2009 (19) VST 239 (A & G Projects and Technologies Ltd., vs. State of Karnataka), the claim of the assessee in the State of Karnataka, though negatived under Section 6(2) of the CST Act, was nevertheless held not attracted tax in the State of Karnataka at all.
However, there is another approach to the sales u/s. 6 (2) qua inter-State works contract. The Parliament always intended to encourage inter-State sale and therefore exempted the second sale in the course of such trade. See the Objects and Reasons appended to the Act No. 31 of 1958 which introduced sub-section (2) in Section 6 of the CST Act, 1956. The definition of sale u/s. 2(g) was amended on 11.05.2002 by Finance Act No. 20 of 2002 so as to include therein the then non sale transactions like works contract. Section 6(2) contemplates the sale by Transfer of Documents of Title to the goods. If the word “sale” used in Section 6(2) is read in the defined way then the second sale under that section is impossible (as has been held in the L&T judgment by A.P. High Court vide their judgment dated 14-9-2015) since under the works contract transfer of property is always on incorporation. However, considering the legislative intention, the term sale used in that sub-section need not be interpreted in a defined manner but should be understood with reference to context. Section 2 of the CST Act, 1956 which is the definition section commences with the words, ‘Unless the context requires-‘ indicating that the words defined thereunder should be read in the defined manner only if the context permits. I am therefore of the considered view that in impugned case the sale u/s. 6(2) should be allowed. Kindly see the following judgments:
M/s. Vanguard Fire and General Insurance Co. Ltd., Madras v. M/s. Fraser and Ross, (AIR 1960 SC 971).
“ ………….. The main basis of this contention is the definition of the word “insurer” in S.2(9) of the Act. It is pointed out that definition begins with the words “insurer means” and is therefore exhaustive. It may be accepted that generally the word “Insurer” has been defined for the purposes of the Act to mean a person or body corporate etc., which is actually carrying on the business of insurance, i.e., the business of effecting contracts of insurance of whatever kind they might be. But S.2 begins with the words “In this Act, unless there is anything repugnant in the subject or context” and then come the various definition clauses of which (9) is one. It is well-settled that all statutory definitions or abbreviations must be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive in as much as the word defined is said to mean a certain thing, it is possible for the word to leave a somewhat different meaning in different sections of the Act depending upon the subject or the context. That is why all definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context. Therefore in finding out the meaning of the word “Insurer” in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context to which the word has been used and that will be giving effect to the opening sentence in the definition section namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances. Therefore, though ordinarily the word “Insurer” as used in the Act would mean a person or body corporate actually carrying on the business of insurance, it may be that in certain sections the word may have carrying on the business of insurance, it may be that in certain sections the word may have a somewhat different meaning”.
The principle emerging from the aforestated observations of the Supreme Court has subsequently been followed by the Gujarat High Court in the case of M/s. Union Medical Agency v. The State of Gujarat (31 STC 396) in which the term ‘Registered Dealer’ in the context of a dealer registered under the Central Act and liable to pay tax under Section 4 of the Bombay Act, (as was then applicable to Gujarat State) had fallen for interpretation. Under Section 8(ii) of the Bombay Act, a deduction from the taxable turnover was admissible in respect of ‘the resale of goods purchased by the assessee on or after the appointed day from a Registered Dealer’. In other words, the resales were allowable only if the corresponding purchases were effected from a Registered Dealer.
The term ‘Registered Dealer’ was defined in Section 2(25) of the Bombay Act as to mean ‘a dealer registered under Section 22 of the Bombay Act’. The question posed before the Gujarat High Court in a reference under Section 61 of the Bombay Act was as regards whether a dealer liable to pay tax under Section 4 of the Bombay Act but not registered under Section 22 of the Bombay Act could be considered as a ‘Registered Dealer’ and whether the sales of goods purchased from such a dealer would qualify for the deduction of ‘Resale’ under Section 8(ii) of the Bombay Act, even though such a dealer is not a ‘Registered Dealer’ strictly as per the defined meaning of that term in Section 2(25) of the Bombay Act. Having regard to the context, collocation and the object of the expression ‘Registered Dealer’ in Section 8(ii) and having regard to the policy of the Bombay Act, the High Court held that the said expression would also include a dealer who is not registered under Section 22 of the Bombay Act but who is registered under the Central Act and on whom special liability to pay tax has been imposed under Section 4 of the Bombay Act. In view thereof, the sales of goods purchased from such a dealer would qualify for the deduction as a ‘Resale’ under Section 8(ii). While holding this view, the High Court drew support from the above-mentioned Supreme Court judgment and observed that –
“It is thus clear that though ordinarily the meaning to be given to an expression found in a provision of a statute is one that is given in the definition clause, there may be cases in which that meaning may have to be departed from having regard to the context, collocation and the object of the statute and it may become necessary to interpret the word differently so as to give effect to the enacting provisions of the Act”.
Same principle has been followed in another judgment of the Gujarat High Court in the case of the State of Gujarat v. Wood Polymer Ltd. (50 STC 229). As in the present case, in that case also, the term ‘sale’ under the Bombay Act and that too in the context of set-off provision fell for interpretation and the question there was as regards whether that expression should be given a meaning wider than the defined meaning, having regard to the context, collocation and the object of the set-off rule. From that point of view, the said case is more or less a direct Authority on the issue presently disputed. In that case, the assessee was a certified manufacturer who had established a new industry and therefore he was entitled to set-off of the tax paid by him on his purchases of raw materials, processing materials, machinery etc., provided they were used in manufacture of goods for sale. Thus a ‘sale’ of the manufactured goods was a condition for admissibility of the set-off of the tax paid on the purchases of inputs. The term ‘Sale’ was defined in Section 2(28) to mean a sale of goods made within the State for cash or deferred payment or other valuable consideration’ (Emphasis*supplied). In the said Section 2(28), the term ‘sale’ within the State’ was explained to include a sale determined to be inside the State in accordance with the principles formulated in Section 4(2) of the Central Act. Obviously, an inter-State stock-transfer of manufactured goods is not a sale as per the aforesaid defined meaning of the term ‘sale’. The assessee M/s. Wood Polymer Ltd. had sales-depots in various other States, where he transferred his manufactured goods and sold them in those respective States. Holding that the assessee had not ‘sold’ the manufactured goods to the extent of the inter-State stock-transfers, the Departmental Authorities disallowed the set-off proportionately. This disallowance having been confirmed in the First Appeal was further contested before the Tribunal. It was argued before the Tribunal that having regard to the object of the set-off scheme and the legislative intent of granting concessional incentives to the new industries, the term ‘sale’ in the set-off rule should not have been construed as per the defined meaning, but it should be interpreted to mean as ‘sale’ in its generic sense. The Tribunal traced the legislative history of the set-off scheme, considered the entire context of the Scheme and accepted the assessee’s contention that the term ‘sale’ in the set-off rule should not be restricted only to ‘a sale within the State.’ The Tribunal thus gave a wider meaning to the term ‘sale’ in the set-off rule and thus held the assessee as entitled to the set-off even in the context of the inter-State stock transfer of the manufactured goods. At the instance of the department, the matter was referred to the High Court for its decision under Section 61. Before the High Court, it was inter alia argued on behalf of the Revenue that the term ‘sale’ in the set-off rule cannot be construed de hors its legislative dictionary which defines it to mean ‘a sale of goods made within the State’ and that the Tribunal committed a substantial error of law in upholding the Assessee’s set-off claim in disregard to the said dictionary meaning by trying to spell out the repugnancy by travelling outside the particular set-off provision. The High Court however rejected this argument by drawing support from the aforesaid Supreme Court judgment in the case of M/s. Vanguard Fire and General Insurance Co. Ltd (supra), as also another Apex Court Judgment in the case of M/s. Dhandhania Kedia and Co. v. Commissioner of Income Tax, (1959) 35 ITR 400: AIR 1959 SC 219. The High Court observed that the Court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances. So observing, the High Court went through in depth the entire taxation Scheme embodied in the Bombay Act as also the basic object of the set-off provision, and held the assessee as legally entitled to set-off in the context of inter-State stock-transfers of his manufactured goods, by making the following observations –
“We are therefore of the opinion that there is sufficient justification and warrant for departing from the dictionary meaning of the term ‘sale’ and that having regard to the object, purpose, structure and tenor of the rule, it is not necessary that in order to earn set-off, the sale of the manufactured goods by a certified manufacturer should be within the State only. The Tribunal was therefore justified in reaching the conclusion that the assessee was entitled to set-off the whole amount of tax paid on the purchases of raw materials.”
(Emphasis * supplied)
In support of the proposition that the definition in a section of a statute should not be always subject to a wooden interpretation, but sometimes it ought to be liberally understood in accordance with the context in which the defined word appears, you may kindly see few other judicial pronouncements. In the Madras High Court case of M/s. Indian Express (Madurai) Ltd. (29STC 88) and in the Supreme Court case of M/s. Printers (Mysore) Ltd (1994) 93 STC 95, newspapers were held to be ‘Goods” for the purposes of Sections 7 and 8 of the Central Act, even though Newspapers have been specifically excluded from the definition of ‘Goods’ in Section 2(d) of the Central Act. It was held that the exclusion of ‘Newspapers’ from the scope of the expression ‘Goods’ in the definition clause was actuated by the object of exempting the sale of newspapers from the levy of Central Sales Tax. That would however not mean that the newspapers have ceased to be ‘Goods’ for the purposes of Sections 7 and 8 of the Central Act and therefore a purchase of newsprint for the purpose of use in the manufacture of newspapers would be permissible to be made at a concessional tax-rate against a declaration in Form C. Thus considering the object of the amendment whereby newspapers were excluded from ‘Goods’, the expression was given a wider meaning and was not confined to the defined meaning. While doing so, the Madras High Court observed that –
“No doubt, it is fundamental that the definition clause in a statute is by itself a small dictionary of its own in which it endeavours to define certain words and terms, sometimes arbitrarily. But, invariably it takes the precaution of using a non obstante clause such as unless there is anything repugnant in the subject or context” in the beginning of the section. Thus, if in the course of the statute some words are used in different parts thereof, then it would not be improper to interpret those words differently if the context so requires.”
13. I submit my answers to the questions raised as under :
(i) I do not subscribed to the views expressed by the A.P. High Court in the case of L&T vide their lordships judgment dated 14-9-2015.
(ii) There can be a sale and purchase during the movement of the goods even in the execution of a works contract if parties to the contract so provide or agree.
(iii) The querist is found to have effected transfer of property even prior to incorporation of the goods in the contract when instructions were issued to the vendors to take out goods consignment note favouring contractee as consignee, and when the goods were so consigned and document handed over to contractee to be received and goods accounted by contractee in their books and when contractee availed CENVAT credit.
(iv) Situs of the sale, in any view, is outside the State of AP, since the goods were appropriated to the contract outside the State in terms of Section 4(2)(b) of the CST Act.