Karnataka High Court
Steel Authority Of India Ltd. vs Assistant Commissioner Of Commercial ... on 16 February, 1996
Equivalent citations: ILR1996KAR1136
ORDER
Bharuka. J.
1. The sole Question in these Writ Petitions is as to whether the contract entered into by the petitioner with various Re-rolling Mills for conversion of M.S. Semis like blooms and billets, etc. into torsteel to the extent it was allowed to be appropriated by the latter against conversion charges, amounts to a contract of sale of goods making in Constitutionally permissible on the part of the State Legislature, and, consequentially, the functionaries under the Karnataka Sales Tax Act, 1957 (for short "the act") to levy tax under the provisions of the Act on the said transactions.
2. These Writ Petitions which pertain to the assessment years 1985-86 to 1991-92 had originally been filed against the show cause notices issued under Section 12A of the Act whereby the respondent Assessing Authority had initiated re-assessment proceedings under Section 12A of the Act in order to bring the transactions in question to levy of tax under the Act since according to him there was escapement to that extent in the original assessment.
3. During the notice stage in Writ Petition No. 31914 of 1994 pertaining to assessment year 1985-86, the assessing authority has completed the assessment on the ground that it was getting time barred, and, accordingly, on obtaining permission of this Court the said Writ Petition has been amended impugning the order of re-assessment and consequent penalty dated 19-2-1994 (Annexure-E) as well.
4. Parties are not at dispute on material facts which may hereinafter be narrated in brief. Petitioner is a Government Company within the meaning of Section 617 of the Companies Act, 1956. It is engaged in the manufacture and sale of iron and steel products, such as plates, structurals, torsteels rods, semis, etc. It is having one of its branch offices at Bangalore. It brings semis from outside the State on Stock Transfer basis. It gets these semis converted into tor-steel through various re-rolling mills on the terms and conditions mutually agreed. As per these terms and conditions, re-rollers instead of being paid the conversion charges in terms of money are being allowed to retain a part of the materials as per the exchange ratio fixed by the petitioner. Materials so allowed to be retained by the re-rollers is to cover the conversion cost, bundling and transportation charges, as also the burning losses. The exchange ratio is fixed considering the market rate of the raw materials, namely blooms, billets, etc. as also keeping in view the overall expenses, electric charges, etc. It also depends upon the quality and size of the materials that are supplied for the purpose of conversion.
5. Some of the important clauses of one of such Agreements which is in the form of a communication from the petitioner to the re-rollers, as referred to in the statement of objections filed by the respondents, are to the following effect:
"(i) For every tonne of tor steel delivered by you in the above manner, we would supply to you equivalent quantity of lS:2030/2831/75/OG quality billets/blooms/slabs in the sizes as per the ratio indicated in the enclosure sent along with earlier letter in respect of each size/group of billets/blooms/stabs.
(ii) The billets/blooms/slabs given in exchange for tor steel would be lifted by you from our nearest stockyard at your expenses. However, loading into your transport will be done by us free of cost ex-stockyard.
(iii) The above exchange ratios includes transportation of billets/blooms/slabs from SAIL stockyard to your premises, cutting of billets into required size/length, conversion cost, metal loss, your profit margin, size and other extras, twisting charges, bending, bundling, metal tagging, testing, inspection, loading into our allottees' transport in your premises and any other services to be rendered to us as well as to our allottees. In other words, no other extra payment would be made either in terms of money or materials either by us or by our allottees over and above the above exchange ratios."
6. According to the respondents, the excess material which is allowed to be retained and appropriated by the re-rollers amounts to sale since it involves transfer of property in goods against the cost of labour payable to the re-rollers, and its value is assessable in terms of money.
7. In the said background, the first question to be determined is as to whether the nature of contract involved herein tantamounts to a sale in the legal sense.
8. Mr. P.K. Sinha, appearing for the petitioner, has very ably tried to bring home his point to impress that so long the genuineness of the transaction is not in dispute, it can by no amount of permissible stretching be construed as a contract of sale authorising the levy of sales tax. On the other hand, Mr. D'Sa, learned Government Advocate, has tried to persuade by submitting that the contract in question even if it is bona fide entered into, in effect it amounts to sale, because admittedly there is a transfer of property in goods, namely, the excess material and it is for price i.e. value of conversion charges which is assessable in terms of money. The submissions advanced at the Bar are purely in the realm of law.
9. Section 4 of the Sale of Goods Act, 1930 defines "Contract of sale of goods" to mean a contract whereby a seller transfers or agrees to transfer the property in goods to the buyer for a price. "Price" has been defined under Section 2(10) of this Act to mean money consideration for a sale of goods. Therefore, a contract relating to goods can be said to be a contract of sale only if the consideration for transfer of property in goods in favour of the transferee is money. If the goods are agreed to be transferred for any other consideration like their exchange by any other goods or for services rendered, in law, such a contract cannot be said to a contract of sale of goods.
10. The said question is no more res Integra since, in my opinion, it has been well settled by the Supreme Court in the case of CIT vs. MOTORS & GENERAL STORES (P.) LTD., AIR 1968 SC 200. In this case the said question had fallen for consideration before the Court keeping in view the use of word "sold" under Section 10(2)(vii) of the Income Tax Act, 1922. In this case, the assessee Company had .transferred its immoveable and moveable assets valued at Rs. 1,20,000/- for a consideration of certain preference shares having the face value of Rs. 1,20,000/-. This transfer was effected under a document described as "Exchange Deed". The Supreme Court by taking into account the definition of 'sale' under the Sale of Goods Act held that the presence of money consideration is an essential element in a transaction of sale. It was further held that: "Section 2(10) of the Sale of Goods defines price as meaning money consideration for sale of goods, and it is therefore an essential element of transaction of sale. If the consideration is not the money but some other valuable consideration, it may be an exchange or barter, but not sale."
Following this Judgment, the Supreme Court again in the case of CIT vs. BOMBAY BURMA TRADING COMPANY CORPORATION, has. reiterated the same view. But, nonetheless Mr. D'Sa by relying on three Decisions of the Madras High Court has tried to substantiate the point of view of the Department. The said Decisions referred to by him are : (i) V.P.VADIVEL ACHARI vs. MADRAS SALES TAX APPELLATE TRIBUNAL, (1969) 23 STC 273 (ii) PREMIER ELECTRO MECHANICAL FABRICATORS vs. THE STATE OF TAMlLNADU, (1984) 55 STC 371 and STATE OF TAMILNADU vs. T.M.T, DRILL (P) LTD., (1991) 82 STC 59
11. In the case of V.P. Vadivel Achari (supra), the assessee had received gold with which he made jewels and supplied the same to the customers after collecting the labour charges for making. The High Court held the transaction to be that of sale of goods. It was held that the money is not necessarily to be confined to coins or currency notes. According to the learned Judges, it has a wider connotation and sense and will take in its sweep the gold or/and silver as well. But this is not the situation appearing in the present case. Services rendered by the re-rollers cannot by any stretch of imagination be held to be money either in legal sense or even in common parlance.
12. Apart from above at this stage, I would like to notice a Bench Decision of the Allahabad High Court in the case of SALES TAX COMMISSIONER vs. RAMKUMAR AGARWAL, (1967) 19 STC 400. In this case, the, assessee was a dealer in bullion and ornaments. He used to obtain new ornaments by giving in exchange bullion from his own stock plus making charges to the goldsmiths. The Department's contention was that the transaction amounted to sale of bullion. But it was repelled by the High Court by holding that the transaction was one of exchange or barter and not of sale. Similar view has been taken by a Bench Decision of the Madhya Pradesh High Court in the case of COMMISSIONER, SALES TAX, M.P. INDORE vs. KANSARI UDYOG SAHAKARI SAMITI, (1979) 43 STC 177. In this case, the assessee was a utensil dealer who in exchange of old bronze utensils used to give new utensils of the same weight by separately collecting making charges.
13. The case of Premier Electro Mechanical Fabricators (supra), is the second Case cited by Mr.D'sa. In this case, the assessee had sold the machinery to a limited Company against its fully paid up shares. The Court held it to be a transaction of sale. It was further held that the idea of exchange or barter would emerge where the owner of the property transfers it to another in consideration of that other person parting with his property in favour of the former. It has also held that the allotment of fully paid up shares to a person by a Company does not amount to transfer of Company's property or asset, because equity shares or any other kind of shares in a Company are really part of the share capital of the Company. In this view of the matter, the Court concluded by saying that the contract before them really involved two transactions, namely (i) sale of machinery at a stated price and (ii) discharge of the obligation for payment of the price by the Company by the medium of allotment of its own shares. For holding so, reliance was placed on a Judgment of the Supreme Court in the case of the COMMISSIONER OF INCOME TAX vs. B.M. KARWAR, (1969) 72 ITR 603, wherein it has been held that:
"A person carrying on business may agree with a company that the assets belonging to him shall be transferred, to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to him. In that case there are in truth two transactions - one a transaction of sale and the other a contract under which the shares are allotted in satisfaction of the liability to pay the price."
It is equally well settled that the shares in the hands of a member of the Company are the property; and if it is given in exchange for acquiring the other property, theory of two transactions cannot be inducted therein to give it a colour of sale, as held by the Supreme Court in the. case of CIT v. Motors and General Stores (supra) unless it is held that that transaction was merely a make-believe in nature to conceal the real intention of the parties. Therefore, this Judgment is also not of much consequence for the Department.
14. The third Judgment of the Madras High Court cited by Mr.D'Sa is State of Tamil Nadu v. T.M.T.Drill (P) Ltd (supra). The facts being somewhat identical to those in Premier Electro Mechanical Fabricators' case (supra), the Court merely followed the dictum of the said Case without any further elaboration. Therefore,it does not require any detailed consideration. This Case also therefore is not of much avail to the respondents on the facts of the present Case.
15. On the contrary, another Bench Decision of the Madras High Court in the case of M.A.M.V. RAMASAMI NADAR & SONS vs. STATE OF TAMIL NADU, (1975) 36 STC 373, is more apt to the facts of the present cast, wherein it was found that the assessee was a dealer in ground-nuts who used to send the same for decortication to the millers, and as a part of bargain the millers were allowed to deliver only the kernel and retain the husk in lieu of decorticating charges. The Court on. these facts held that there was no sale of husk since it was given only in lieu of charges for decortication.
16. In the case of STATE OF ANDHRA PRADESH vs. HOTEL SRI LAXMI BHAWAN, (1974) 33 STR 444 (DB) the assessee, an hotelier, use to supply food to its employees as a part of their wages. The Sales Tax authorities took the stand that these supplies of food amounted to sale and was therefore liable to levy of tax under the provisions of Andhra Pradesh Sates Tax Act, 1957. The High Court repelled the said contention by holding that the contract between the parties was that of service and not of sale.
17. In the case of DEVI DASS GOPAL KRISHNAN vs. STATE OF PUNJAB, , Supreme Court by referring to its earlier Pronouncements has observed that the State Legislature, by enlarging the definition of 'Sale' could not include transactions which are not sales according to well established concepts of Sale under the Law of Contracts or Sale of Goods Act. Keeping in view the said Constitutional limitations, it has further been held that the expression "valuable consideration" as used in the definition of 'Sale' in various State Sales Tax Legislations, [like in Section 2(t) of the present Act] can only mean some monetary payment in the nature of cash or deferred payment
18. It is well settled that: "In the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document the liability to tax depends upon the meaning the content of the language used in accordance with the ordinary Rules of Construction. The doctrine that in revenue cases the 'substance of the matter' may be regarded as distinguished from the strict legal position, is erroneous. If a person sought to be taxed comes within the letter of the law he must be taxed, however, great the hardship may appear to the Judicial mind to be. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might other appear to be." [See:(1) Commissioner of Income Tax, AP v. Motors and General Stores (P) Ltd.; AIR 1968 SC 200 (Para-6); COMMISSIONER OF INCOME-TAX, GUJARAT vs. B.M. KHARWAR, AIR 1968 SC 200 - Para 6; BANK OF CHETTINAD LTD. vs. COMMISSIONER OF INCOME TAX, MADRAS, AIR 1940 PC 183, AIR 1940 PC 183; DUKE OF WESTMINISTER v. COMMISSIONERS OF INLAND REVENUE, (1935) 19 TC 490, (1935) 19 TAX CASES 490; COMMISSIONER OF INLAND REVENUE vs. WESLEYAN AND GENERAL ASSURANCE SOCIETY, (1948) 30 Tax Cases 11, (1948) 30 Tax Cases 11.
17. In the case of JOINT COMMERCIAL TAX OFFICER, HARBOUR DIVISION II, MADRAS vs. YOUNG MEN'S INDIAN ASSOCIATION, , it has been held that-
"In a criminal trial or quasi criminal proceeding the Court is entitled to consider the substance of the transaction and determine the law of the offender. But in a taxing statute, the strict legal position as disclosed by the form and not the substance of the transaction is determinative of its taxability."
18. In the present case, as noticed above, Mr. D'Sa, learned Government Advocate, fairly concedes that the Department has no material to allege that the contract in question in the form it has come on record was adopted as a cloak to conceal a different transaction. There is no suggestion of any mala fide or bad faith or fraud against the petitioner. In that view of the matter, keeping in view the aforesaid discussions, it has to be held that the contract in question is not a contract of sale.
19. Keeping in view the Judgment of the Supreme Court in the case of THE STATE OF MADRAS vs. GANNON DUNKERLEY & CO., , it is well settled that the expression 'sale or purchase of goods' in Entry 54 of List II of VII Schedule to the Constitution of India is a nomen juris, its essentials ingredients being an agreement to sell moveables for a price and property passing therein pursuant to that agreement. Therefore unless a contract is shown to be a contract of sale as understood in the legal sence under the Sale of Goods Act, it is legislatively incompetent on the part of the State Legislature to bring to tax the transactions covered thereunder muchless it is so for the functionaries acting under such legislation. No doubt, the Parliament by 46th Constitutional amendment has extended the meaning of the expression "tax on the sale or purchase of goods" by introducing Clause (29A) in Article 366 of the Constitution, but, even this extended definition does not embress within its fold a contract of the nature involved here in this case.
20. Accordingly, it is held that the transactions covered by the contracts involved herein are not accessible to tax under the provisions of the Act. Consequently, the impugned reassessment orders for the assessment year 1985-86 and the re-assessment notices in the remaining years referred to above are quashed with a consolidated cost assessed at Rs. 10,000/-