Allahabad High Court
M/S Comfort Systems vs Commissioner Commercial Tax, U.P on 1 February, 2019
Author: Saumitra Dayal Singh
Bench: Saumitra Dayal Singh
HIGH COURT OF JUDICATURE AT ALLAHABAD Court No. - 7 A.F.R. Case :- SALES/TRADE TAX REVISION No. - 346 of 2018 Applicant :- M/S Comfort Systems Opposite Party :- Commissioner Commercial Tax, U.P Counsel for Applicant :- Rahul Agarwal Counsel for Opposite Party :- C.S.C. with Case :- SALES/TRADE TAX REVISION No. - 344 of 2018 Applicant :- M/S Comfort Systems Opposite Party :- Commissioner Commercial Tax, U.P Counsel for Applicant :- Rahul Agarwal Counsel for Opposite Party :- C.S.C. with Case :- SALES/TRADE TAX REVISION No. - 345 of 2018 Applicant :- M/S Comfort Systems Opposite Party :- Commissioner Commercial Tax, U.P Counsel for Applicant :- Rahul Agarwal Counsel for Opposite Party :- C.S.C. with Case :- SALES/TRADE TAX REVISION No. - 349 of 2018 Applicant :- M/S Comfort System Opposite Party :- Commissioner Commercial Tax U.P Counsel for Applicant :- Rahul Agarwal Counsel for Opposite Party :- C.S.C. Hon'ble Saumitra Dayal Singh,J.
1. The present set of revisions have been filed by the assessee against the common order dated 12.9.2018 passed by the Commercial Tax Tribunal, Noida Bench in two sets of cross-appeals filed before the Tribunal. Details of the same are as below:
Sales / Trade Tax Revision No. Appeal No. Assessment Year 346 of 2018 452 of 2016 2011-12 (U.P.) 345 of 2018 453 of 2016 2012-13 (U.P.) 349 of 2018 488 of 2016 2011-12 (U.P.) 344 of 2018 489 of 2016 2012-13 (U.P.)
2. Since the facts and circumstances in the above noted revisions are similar and/or inter-connected, they were heard together and are being decided by a common order. The present revisions were entertained on the following question of law:
"Whether in the facts and circumstances of the case, the order of the Tribunal dis-entitling the revisionist to the benefit of Rule 9(1)(e) of the U.P.V.A.T. Rules is legally sustainable on the reasoning that the goods in question were not specified in the original works contract, though according to the Tribunal, the goods were brought inside the State of U.P. by way of inter-state purchase for execution of the works contract by the assessee?"
3. Heard Sri Rahul Agarwal, learned counsel for the applicant-assessee and Sri B.K. Pandey, learned Standing Counsel for the revenue.
4. Briefly, the applicant-assessee is a works contractor who had been awarded different works contracts during the assessment year in question. Also, undisputedly, for execution of these contracts, the assessee imported certain goods. Basically, the works contract were for installation and commissioning of Air Conditioner/Chiller Plant. The assessing officer did not grant any benefit with respect to value of goods imported by the assessee for execution of the aforesaid works contract and treated those purchases to be independent of the works contract awarded to the assessee. The first appeal authority granted part relief to the assessee. In that regard, the first appellate authority granted the benefit of deduction of the value of goods involved in the execution of the works contract, to the extent such goods had been dispatched with the endorsement on the goods receipt/'biltee', for delivery at site i.e. the place of execution of the works contract. Against the remaining goods that were imported into the state of U.P. and applied in execution of the works contracts without that endorsement, the claim of deduction made by the assessee was disallowed.
5. The said finding recorded by the first appellate authority gave rise to cross-appeals before the Tribunal. The Tribunal has decided these appeals by it's common order which is impugned in the present revisions. According to the Tribunal, no doubt the assessee was awarded and had executed the works contract for installation and commissioning of Air Conditioner/Chiller Plants. Also, according to the Tribunal, the description and make of the goods to be imported by the assessee for execution of such works contract, was specified in the contract document executed between the assessee and the contractee. Further, it had been found by the Tribunal there was no dispute such goods had in fact been applied to the works contract awarded to the assessee. However, the Tribunal reasoned, the contract for import of such goods was independent of the works contract awarded to the assessee. According to the Tribunal, there was absence of an 'inextricable link' between the works contract awarded to the assessee, by the contractee parties and the subsequent contracts entered into by the assessee with the suppliers/manufacturers etc., which occasioned the movement of goods from outside to inside the State of U.P. On such finding and reasoning, the Tribunal allowed the appeal filed by the revenue and dismissed the appeal filed by the assessee. Thereby, the entire value of goods imported by the assessee as were applied to the works contract executed by it has been subjected to tax under the Uttar Pradesh Value Added Tax Act, 2008 (hereinafter referred to as 'the Act')
6. Learned counsel for the assessee submits that for the purpose of examining the eligibility of the deduction claimed by the assessee, the governing rule is contained in Rule 9(1)(e) of the Uttar Pradesh Value Added Tax Rules, 2008 (hereinafter referred to as 'the Rules'). For ready reference, Rule 9(1)(e) of the Rules is quoted as below:
"Rule 9. Determination of turnover of sale of goods involved in the execution of a works contract-
(1) Subject to other provisions of this Rule, the tax on turnover of sale of goods where such sale is affected by way of transfer of property in goods (whether as goods or in some other form) involved in the execution of a work contract shall be computed on the taxable turnover of sale of taxable goods. For the purpose of determining the taxable turnover of sale of such goods, the amounts specified below shall be deducted if they are included in the gross amount received or receivable in respect of the works contract:-
(a) .......
.......
.......
(e) all amounts representing the value of goods in which property, has been transferred in the execution of the works contract as a result of sale in the course of inter-state trade or commerce."
7. It is thus submitted, for the purpose of grant of that deduction the assessee had only to establish, the sale made in the inter-state trade or commerce had resulted in the transfer of the property in the goods. Once such fact was established, the value of such goods would be eligible for a deduction equal to that value. Insofar as it remained undisputed and it had been specifically found by the Tribunal that the movement of the goods had been caused solely for and, those goods had been applied only to, the works contract executed by the applicants, there could not arise any further test to be satisfied by the assessee.
8. As to the test of inextricable link referred to by the Tribunal, it has been submitted, in the first place, such a test was not required to be applied and in any case, that test stood satisfied on the finding of the Tribunal that the assessee had to import the goods only to execute the works contract. It being undisputed that the entire goods had imported and had been utilised solely for execution works contract, the principle of inextricable link stood satisfied.
9. Learned Standing Counsel, on the other hand submits, since the source of the goods to be imported had not been specified in the works contract and the assessee had imported the goods as per it's own choice and, thereafter, applied the same to the works of contract executed by it, the test of Rule 9(1)(e) of the Rules was not satisfied. Referring to the language of Section 9(1)(e) of the Act, it has been submitted, only transactions of inter-state sale of goods may result in deduction under Rule 9(1)(e) of the Rules and the assessee having made inter-state purchase of the goods, it cannot be allowed to claim the exemption. Therefore, the order of the Tribunal was justified.
10. Having heard learned counsel for the parties and having gone through the record, in the first place, there is no dispute as to the fact that the assessee had been awarded and it had executed indivisible works contract. Also, the Tribunal recorded a specific finding that the assessee had made import of the goods only for the purpose of execution of and applied the goods to the works contract, in paragraph nos. 9 and 10 of the impugned order. In face of such finding it had to be accepted, the assessee had imported the goods only for the purpose of execution of the works contract and not for the purpose of any other business, trading or other contract.
11. Looking at the language of Rule 9(1)(e) of the Rules, the inter-state sale of the goods (giving rise to the claim of exemption) must precede their transfer under the works contract. Second, transfer of the property in those goods must result or spring from the transaction of inter-state sale of those goods. The findings recorded by the Tribunal are to the effect, first a works contract was executed. Thereafter, the assessee caused the movement of goods from outside the state of U.P. for purpose of execution of the works contract. Third, as a fact, the assessee applied those goods to the works contract executed by it. Consequently, it has to be inferred that the property in those goods stood transferred to the contractee parties.
12. Merely because the works contract itself did not specify the place source or the exact specification of the goods imported would not be relevant, inasmuch as according to the Tribunal, the make of the goods, numbers and other specifications had been specified. Whether in the case of intra-state or inter-state sale of goods, it is for the contracting parties to conduct their affairs in the manner best suited to the circumstances that may exist, as per their mutual agreement.
13. Once the Tribunal had found that the movement of goods from outside the state had been caused by the pre-existing works contract and that the goods thus imported had been applied solely for execution of those works contracts and there was no allegation or finding that such goods had been imported by the assessee independent of the works contract, the enquiry necessary to decide the dispute should end there. According to the facts found by the Tribunal, the deemed sale was one performed in the course of inter-state sale as the movement of the goods had been occasioned from outside the state, only for the purpose of execution of the works contracts, by the assessee.
14. It would have been a completely different case if the assessee had been found to hold in stock any goods that may have been imported from before and may have been applied to the works contract subsequently. However, neither there is any room for presumption nor such speculation is permissible in the clear facts of the present case.
15. Insofar as the principle to be applied in such matters, it would be worthwhile to take note of the ratio laid down by the Supreme Court in the case of Gannon Dunkerley & Co. and others Versus State of Rajasthan and others, (1993) 1 SCC 364 (hereinafter referred to as 'Gannon Dunkerley-II). First, the Supreme Court specified the restrictions on the competence of the State Legislatures to make law under Entry 54, List II. Para 31 of the report reads:
"31..............................................In view of the aforesaid limitations imposed by the Constitution on the legislative power of the States under Entry 54 of the State List, it is beyond the competence of the State Legislature to make a law imposing or authorising the imposition of a tax on transfer of property in goods involved in the execution of a works contract, with the aid of sub-clause (b) of clause (29-A) of Article 366, in respect of transactions which take place in the course of inter-State trade or commerce or transactions which constitute sales outside the State or sales in the course of import or export. Consequently, it is not permissible for a State to frame the legislative enactment in exercise of the legislative power conferred by Entry 54 in State List in a manner as to assume the power to impose tax on such transactions and thereby transgress these constitutional limitations. Apart from the limitations referred to above which curtail the ambit of the legislative competence of the State Legislatures, there is clause (3) of Article 286 which enables Parliament to make a law placing restrictions and conditions on the exercise of the legislative power of the State under Entry 54 in State List in regard to the system of levy, rates and other incidents of tax. Such a law may be in relation to (a) goods declared by Parliament by law to be of special importance in inter-State trade or commerce, or (b) to taxes of the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366. When such a law is enacted by Parliament the legislative power of the States under Entry 54 in State List has to be exercised subject to the restrictions and conditions specified in that law. In exercise of the power conferred by Article 286(3)(a) Parliament has enacted Sections 14 and 15 of the Central Sales Tax Act, 1956. No law has, however, been made by Parliament in exercise of its power under Article 286(3)(b)".
(emphasis supplied)
16. Then, in absence of any amendment to the Central Sales Tax Act, 1956, the Supreme Court framed a question noted in para 34 and answered in para 35 and 37 of the report, thus:
"34. The question is whether in the absence of an amendment in the Central Sales Tax Act specifically applying its provisions to a transfer of property in goods involved in the execution of a works contract, the provisions of Sections 3, 4 and 5 contained in Chapter II can be held applicable to such a transfer............................................
35...........................................Since the provisions of Sections 3, 4 and 5 were applicable to such contracts containing two separate agreements, there is no reason why the said provisions should not apply to a contract which, though single and indivisible, by legal fiction introduced by the Forty-sixth Amendment, has been altered into a contract which is divisible into one for sale of goods and other for labour and services..........
.............
37. For the reasons aforesaid, we are of the view that even in the absence of any amendment having been made in the Central Sales Tax Act (after the Forty-sixth Amendment) expressly including transfers of property in goods involved in execution of a works contract, the provisions contained in Sections 3, 4 and 5 would be applicable to such transfers and the 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. For the same reasons Sections 14 and 15 of the Central Sales Tax Act would also be applicable to the deemed sales resulting from transfer of property in goods involved in the execution of a works contract and the legislative power under Entry 54 in State List will have to be exercised subject to the restrictions and conditions prescribed in the said provisions in respect of goods that have been declared to be of special importance in inter-State trade or commerce".
17. As to the submission being advanced by the revenue in the present case, a generic submission had been advanced on behalf of the States before the Supreme Court. It was noted and answered thus:
"40. On behalf of the States it has been seriously contended that a deemed sale resulting from transfer of property in goods involved in the execution of a works contract can never be a sale in the course of inter-State trade or commerce and it cannot be an outside sale or a sale in the course of import since the transfer of property in the goods takes place only at the stage when the goods are incorporated into the works and that can take place only in the State where the works is required to be executed. On behalf of the contractors, on the other hand, it has been urged that a works contract can involve transactions constituting a sale in the course of inter-State trade and commerce as well as an outside sale or a sale in the course of import and that is a matter which will have to be considered in accordance with the principles contained in Sections 3, 4 and 5 of the Central Sales Tax Act keeping in view the terms and conditions of the particular contract. In this regard, the learned counsel have placed reliance on a number of decisions of this Court wherein the provisions of Sections 3 and 4 of the Central Sales Tax Act, 1956 have been considered. We do not propose to go into this controversy because the question whether a deemed sale resulting from transfer of property in goods involved in the execution of a particular works contract amounts to a sale in the course of inter-State trade or commerce under Section 3 of the Central Sales Tax Act or an outside sale under Section 4 of the Central Sales Tax Act or a sale in the course of import under Section 5 of the Central Sales Tax Act has to be decided in the light of the particular terms of the works contract and it cannot be decided in the abstract. As at present advised, we are not in a position to say that in no case, can there be a sale in the course of inter-State trade or commerce or an outside sale or a sale in the course of import in respect of a deemed sale resulting from transfer of property in goods involved in the execution of a works contract falling within the ambit of sub-clause (b) of clause (29-A) of Article 366 of the Constitution."
(emphasis supplied)
18. Having thus dealt with the objection raised on behalf of the State Governments, the Supreme Court then concluded:
"41. It must, therefore, be held that while enacting a law imposition a tax on sale or purchase of goods under Entry 54 of the State List read with sub-clause (b) of Clause (29-A) of Article 366 of the Constitution it is not permissible for the State Legislature to make a law imposing tax on such a deemed sale which constitutes a sale in the course of inter-State trade or commerce under Section 3 of the Central Sales Tax Act or an outside sale under Section 4 of the Central Sales Tax Act or sale in the course of import or export under Section 5 of the Central Sales Tax Act. So also it is not permissible for the State Legislature to impose a tax on goods declared to be of special importance in inter-State trade or commerce under Section 14 of the Central Sales Tax Act except in accordance with the restrictions and conditions contained in Section 15 of the Central Sales Tax Act." (emphasis supplied)
19. That being the governing principle, the language of Rule 9(1)(e) of the Rules relied upon by the learned Standing Counsel has to be examined in that light. In absence of any legislative competence on part of the State legislature to impose tax on deemed sale in the course of inter-state trade, the phrase "as a result of sale in the course of inter-state trade or commerce" appearing in Rule 9(1)(e) of the Rules cannot be restricted or confined to inter-state sale but as referring to transaction of "a sale or purchase of goods" falling under section 3 of the Central Sales Tax Act, 1956.
20. If that Rule were to be read to allow for deductions on deemed inter-state sales alone, it may render the Rule largely redundant, inasmuch as a transaction of inter-state sale made inside the state of U.P. would never be referable to any works contract being executed inside the state of U.P. A works contract being executed outside the state of U.P. may never qualify for assessment inside the state of U.P. in the context of Rule 9(1)(e) of the Rules. The only other situation where the Rule may remain functional may be of sale in transit in pursuance of a works contract being executed inside the State of U.P. However, there does not appear any reason or circumstance to limit the applicability of the Rule to that species of inter-state sale transactions alone.
21. Therefore, merely because there was no privity of contract between the contractee and the actual seller of the goods (from whom the assessee made the purchases), and though such seller was not known/specified at the time of the execution of the works contract document, it would make no difference to the eligibilty to deduction claimed by the assessee under Rule 9(1)(e) of the Rules, on deemed inter-state sale arising upon transfer of property in goods involved in the execution of the works contract. On the findings recorded by the Tribunal, the goods in question had been moved from outside the State solely by reason of the pre-existing works contract and those goods had been applied only solely the execution of that works contract. Therefore, the deemed sale of goods arose, only by way of inter-state sale as the movement of goods was occasioned by the prior contract of sale, namely the works contract.
22. Rule 9(1)(e), though worded differently from section 3-F(2)(i) of U.P.Trade Tax Act, 1948, it does not and it cannot be permitted to convey a different meaning, in view of the binding principle laid down by the Supreme Court in the case of Gannon Dunkerley-II. Also, in absence of legislative intent to exclude the applicability of that Rule to some cases of inter-state sale (such as the present case), would be to allow such interpretation of the law to arise in conflict with the law laid down in Gannon Dunkerley-II. Therefore, the phrase - "as a result of sale in the course of inter-state trade or commerce" appearing in Rule 9(1)(e) of the Rules has to be read to include in its cover all transactions covered under section 3 of the Central Sales Tax Act, 1956.
23. The question of law framed above is answered thus:
Since in the present case, the Tribunal recorded a specific finding that there pre-existed works contracts between the assessee and the contractees and further the assessee had purchased the goods from outside the State of U.P., only to execute those pre-existing works contracts, in absence of any further finding that such goods had been sourced from before or that they were not applied to the works contract or that there arose two sales, the assessee was clearly entitled to the benefit of deduction contemplated under Rule 9(1)(e) of the Rules.
24. Accordingly, the question of law framed in the present revisions is answered in the negative i.e. in favour of the assessee and against the revenue.
25. Revisions stand allowed. No order as to costs.
Order Date :- 1.2.2019 Prakhar