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DIGEST OF IMPORTANT DECISIONS

THE CENTRAL SALES TAX ACT, 1956

BASIS PRINCIPLES

Reasons to be recorded

[1] WHILE DECIDING CASES OR APPLICATIONS AFFECTING RIGHTSOF PARTIES REASONS MUST BE RECORDED

The Hon’ble Supreme Court, in its judgment in the case of M/s Vasudeo

Vishwanath saraf vs. New Education Institute and Others 1986 STC 361

(SC), has held that recording of reasons in deciding cases or applications

affecting rights of parties is a mandatory requirement to be fulfilled in

consonance with principles of natural justice. Following observations of

the Court are noteworthy:

“It is cardinal principle of rule of law which governs our policy that, the

court including Writ Court is required to record reasons while disposing

of writ petition in order to enable the litigants, more particularly the

aggrieved party, to know the reasons which weighed with the mind of the

Court in determining the question of facts and law raised in the writ petition

or in the actions brought. This is imperative for the fair and equitable

administration of justice. More so when there is a statutory provision for

appeal to the higher court in the hierarchy of courts in order to enable the

superior court or the appellate court to know or to be apprised of the

reasons which impelled the court to pass the order in question. This

recording of reasons in deciding cases or applications affecting rights of

parties is also a mandatory requirement to be fulfilled in consonance with

principles of natural justice. It is no answer at all to the legal position that

for the purpose of expeditious disposal of cases laconic order like

“dismissed” or “rejected” will be made without passing a reasoned order

as a speaking order. It is not, however, necessary that the order disposing

of a writ petition or of a cause must be a lengthy one recording in detail

all the reasons that played in the mind of the court in coming to the

decision. What imperative is that the order must in a nutshell record the

relevant reasons which were taken into consideration by the court in coming

to its final conclusion and in disposing of the petition or the cause by

making ,the order, thereby enabling both the parties seeking justice as

well as the superior court, where an appeal lies, to know the mind of the

court as well as reasons for its findings on questions of law and facts in

deciding the said petition or cause, In other words, fair play and justice

demand that justice must not only be done but must seem to have been

done.”

M/s Vasudeo Vishwanath Saraf vs. New Education Institute and Others

2007 NTN DIGEST OF IMPORTANT DECISIONS 1

1986 STC 361 (SC)

[2] CLASSIFICATION OF A COMMODITY FALLING UNDER TWONOTIFICATIONS

For the purpose of levy of tax, classification of a commodityfalling under two notifications

The Hon’ble Allahabad High Court in its judgment in the case M/s

Deys Medical Stores Limited vs. Commissioner Trade Tax, U. P., reported in

2004 NTN (Vol. 24) - 222, has expressed its views as under:

“In the case of Shakti Lace Factory vs. Commissioner of Sales Tax,

U.P. reported in [1984] 57 STC 261 (All), it has been observed by this

Court that if a commodity falls under two notifications, then the notification

which is beneficial to the assessee should be applied.”

M/s Deys Medical Stores Limited vs. Commissioner Trade Tax, U. P.,2004 NTN (Vol. 24) - 222 [Allahabad High Court]

[3] BINDING NATURE OF JUDGMENTS

The Hon’ble Allahabad High Court in its judgment in the case M/s

Deys Medical Stores Limited vs. Commissioner Trade Tax, U. P., reported in

2004 NTN (Vol. 24) - 222, has expressed its views as under:

‘It may be added here that the law laid down by the apex Court is the

law of the land and is binding on all the authorities, whether judicial or

executive, all over India . It has been held by the Honourable Supreme

Court in the case of Union of India vs. Kamlakshi Finance Corporation

Ltd. reported in 1992) Supp 1 SCC 648 that:

“The order of the Appellate Collector is binding on the Assistant

Collectors working within his jurisdiction and the order of the Tribunal is

binding upon the Assistant Collectors and the Appellate Collectors who

function under the jurisdiction of the Tribunal. The principles of judicial

discipline require that the orders of the higher Appellate Authorities should

be followed unreservedly by the subordinate authorities. The mere fact

that the order of the Appellate Authority is not ‘acceptable’ to the

department - in itself an objectionable phrase- and is the subject-matter

of an appeal can furnish no ground for not following it unless its operation

has been suspended by a competent court. If this healthy rule is not

followed, the result will only be undue harassment to assessees and

chaos in administration of tax laws.”’

M/s Deys Medical Stores Limited vs. Commissioner Trade Tax, U. P.,2004 NTN (Vol. 24) - 222 (Allahabad High Court)

[4] RIGHT OF PERSON TO BE EFFECTED

Person, against whom action is proposed, has a right to know aboutthe material which is being used against him

Where action is proposed to be taken on the basis of information that

Transit Pass obtained under Section 28-B, of the Uttar Pradesh Trade

Tax Act, 1948, had not been surrendered at the exit check-post, it was

right of the person to know about the material which was being used

2 DIGEST OF IMPORTANT DECISIONS 2007 NTN

against him. This view has been expressed by the Hon’ble Allahabad

High Court in the case of M/s Escorts Limited Faridabad vs. Commissioner

of Sales Tax , reported in 2004 NTN (Vol. 24)-558. Paragraph 7 of the

judgment runs as under:

“7. In case, if the Assessing Authority receives information that Form

34 (transit pass) has not been surrendered at the exit check post, by the

person, to whom such transit pass was issued, and intending to draw

inference on the basis of said Form, it is obligatory on the part of such

authority to confront such Form 34 to the person concerned. Only on

confrontation of such Form-34 (transit pass) person concerned may be

able to know the contents of Form and able to adduce the evidences to

rebut the presumption as contemplated under Section 28-B of the Act.

Every person has a right to know about the material, which are being

used against it. Therefore, in case, if in the course of proceeding if the

person disputes having obtained such transit pass and about the contents

of the information or even otherwise demands for the confrontation of such

Form 34, it is incumbent upon the authorities to confront such Form 34

on the basis of which proceeding has been initiated against the person

concerned. In case if the authority concerned fails to confront Form 34,

the presumption would be that revenue failed to prove its case and no

adverse inference would be drawn against such person on the basis of

mere information regarding alleged Form-34 and information may be treated

without any material.”

M/s Escorts Limited Faridabad vs. Commissioner of Sales Tax,U.P., 2004 NTN (Vol. 24)-558 (Allahabad High Court)

[5] Technical mistake in application

Whether a technical mistake in any application warrants itsrejection?

Following the decision of the Hon’ble Supreme Court in the case reported

in AIR 1955 SC 125, AIR 1983 SC 355, the Allahabad High Court has

held that procedure is designed to facilitate justice. Rejection of application

on technical ground will not serve the interest of justice.

M/s Ansari Bricks Field Vs. The Commissioner Sales Tax, U.P.,2004 NTN. (Vol-24)-527 (Allahabad High Court)\

[6] Circular issued by Commissioner Whether Circular of Commissioner is binding upon theDepartment despite contrary view has been expressed by the court?

Held-Yes -Regardless of interpretation put by court on a particular provision

of law, if a circular issued by Commissioner places a different interpretation,

the interpretation put by the circular shall be binding upon the revenue.

M/s International Office Machines Vs. Commissioner of Trade Tax,U. P., 2004 NTN (Vol-25)-810 (Allahabad High Court)

[7] Affidavit


There is a presumption about correctness of uncontrovertedaffidavit filed by a party.

M/s Juggilal Kamlapathi vs. Ram Janki Gupta, AIR, 1962 (AllahabadHigh Court)

Affidavit

Non consideration of an uncontroverted affidavit itself vitiates the findings.

M/s Balaji Asbestos Traders vs. The Commissioner Trade Tax, U. P.,2004 NTN (Vol-24) 576, (Allahabad High Court)

[8] Validity of circulars issued by the Commissioner

In Commissioner of Sales Tax A. P. vs. M/s Indira Industries (2000)

UPTC- 472 (SC), the Honorable Supreme Court has held that the Circular

issued by the Commissioner of Sales Tax even if erroneous is binding on

the Sales Tax Authorities and not on dealers. The sales tax Authorities

cannot contend that Circular is contrary to law.

The same view has been expressed by the honorable High CourtAllahabad in M/s Raghunathya Laxminarain Spices Pvt. Ltd. Vs State ofU. P. 2000 NTN (vol. 17) 493. A. P. vs. M/s Indira Industries (2000) UPTC-472 (Supreme Court)

[9] Taxing Statutes - Applicability of principle of res judicataWhether principle of res judicata applies in matters pertaining to taxfor different assessment years where the cause of action for eachassessment year is different?

Held-No, that res judicata does not apply in matters pertaining to tax for

different assessment years because res judicata applies to debar Courts

from entertaining issues on the same cause of action whereas the cause

of action for each assessment year is distinct. The Courts would generally

adopt an earlier pronouncement of the law or a conclusion of a fact unless

there is a good ground urged for or a material change in the factual position.

The reason why the Courts have held parties to the opinion expressed in

a decision in one assessment year to the same opinion in a subsequent

year is not because of any principle of res judicata but because of theory

of precedent or the precedential value of the earlier pronouncement. Where

facts and law in a subsequent year are the same, no authority whether

quasi judicial or judicial can generally be permitted to take a different

view. This mandate is subject only to the usual gateways of distinguishing

the earlier decision or where the earlier decision is per incuriam. However,

these are fetters only on a coordinate bench which, failing the possibility

of availing of either of those gateways, may yet differ with the view

expressed and refer the matter to a bench of superior strength or in some

cases to a bench of superior jurisdiction.

Bharat Sanchar Nigam Ltd. & Anr. Versus Union of India & Ors.2006, NTN (Vol-30) (Supreme Court)

DEFINATIONS –INTERPRETATIONS

[10] Valuable consideration


Expression “valuable consideration” used in definition sale under the Punjab

General Sales Tax Act, can only mean some other monetary payment in

the nature of cash or deferred payment.

M/s Devidas Gopal Krishna vs. State of Punjab AIR 1967, SupremeCourt 995

[11] Other Valuable Consideration

The words “ other valuable consideration” which find place under section

2(h) of the Act do not find place in the definition of ‘sale’ in the Sale of

Goods Act. Interpreting the words “other valuable consideration” this court

in 1967 (19) STC 400, Sales Tax Commissioner vs. Ram Kumar Agrawal,

has held that other valuable consideration mean payment i. e. by cheque,

bills of exchange or any such other negotiable instrument.

M/s Durga Metal works vs. The Commissioner Sales Tax 2004 NTN(Vol-24) 578 (Allahabad High Court)

[12] Import Licences called Rep licences or exim scrips- are “Goods”

Goods- Definition-Import Licences called Rep licences or exim scrips-

are “Goods”- Are not actionable claims -Are not securities- Sales of rep

licences or exim scrips are liable to sales tax-Constitution of India- Article

366 (12), (29-A); Sch Vll, List I entries 41,92-A; List ll, entry 54-Sale of

goods Act (3 of 1930), Sec. 2(7), (H)-General Clauses Act, 1987-Central

Sales Tax Act (74 of 1956), Sec. 2(d)-Tamil Nadu General Sales Tax Act

(1 of 1959), Sec 2(j)-Karnataka Sales Tax Act (25 of 1957) -Kerala General

Sales Tax Act, (15 of 1963)-Securities contract (Regulation) Act, (42 of

1956) Sec 2(h).

M/s Vikas Sales Corporation Vs. Commissioner of Commeercial Taxes1996 NTN (Vol. 9) 20(SC); 102 STC -106 (Supreme Court)

[13] Technical advice or technology is intangible asset but themoment the information or advice is put on media, whether paper ordiskette then what is supplied becomes chattel

Goods - Drawings and Designing - Customs Act, 1962 Section 2(22),Section 12, Section 28 - In these petitions the petitioners have challenged

the imposition of Custom Duty and penalty upon the drawings, designing

etc. related to machinery or industrial technology. The drawing, designs

etc. were received from abroad through courier or as personal luggage

and nominal value of one dollar was declared - It was contended by the

Petitioners that technical drawings and designs etc. are not goods as

they are intangible. It was also contended that even if drawings and designs

were to be treated as goods only the nominal value declared will be liable

for tax - The petitioners also contended that since there was not willful

misrepresentation or concealment the extended period of five years is

not available to the department for initiation of proceedings - Whetherdrawings and designs received from outside India are goods? Held- Yes - The appellant had wanted technical advice or technology which is

intangible asset but the moment the information or advice is put on media,

whether paper or diskette then what is supplied becomes chattel- the


drawings, designs and mannuals etc. so received are goods on which

custom duty could be levied.

M/s Associated Cement Companies Ltd. Vs. Commissioner ofCustoms 2002 NTN (VOL.20)-73 (Supreme Court)

[14] Works Contract or Sale

The primary difference between a contract for work or service and a contract

for sale of goods is that in the former there is in the person performing the

work or rendering the service no property in the thing produced as a whole.

In the case of a contract for sale, the thing produced as a whole has

individual existence as the sole property of the party who produced it,

before delivery thereof, and the property therein passes only under the

contract relating thereto to the other party for a price.

Commissioner of Sales Tax, M.P. vs. Purshottam Premji -26 STC 38(Supreme Court)

[15] Works Contract and Service Contract

The contract, whose dominant object is not the transfer of property in

goods but whose dominant object is to provide service and where the

transfer of the property is only incidental to the rendering of the services,

then the contract is a service contract and not the works contract.

The division of indivisible works contract under the supply of material

and the supply of labour and services, by legal fiction, created by

amendment of Article 366 by the 46th Amendment of the Constitution

can be made only if the contract involved a dominant object to transfer

the property in goods and not in the contract where the transfer of property

takes place only as an incident of service. State is not empowered by the

amended law to tax the materials used in the execution of such contracts.

Rainbow Colour lab and another vs. State of Madhya Pradeshand Others - 2000 NTN (Vol.16) -210 (Supreme Court)

[16] Resale by him - meaning of

Second proviso to Section 5(2)(a)(ii) of the Bengal Finance (Sales Tax)

Act, 1941, (as applied to Delhi) speaks of “resale” only and not to “resale

within the State”. Therefore, any subsequent sale whether within Delhi or

outside Delhi is covered in resale. The word “resale by him” cannot be

interpreted as resale by the dealer registered within the territory of Delhi.

Since the words in Section 5(2)(a)(ii), second proviso are “resale” simplicitor

without any geographical limitation and according to its plain and natural

meaning it would mean resale anywhere and not necessarily inside Delhi.

“Resale” is a “subsequent sale”, after the “first sale”, and must therefore

have the same meaning as the word ‘sale’ has, as defined in section 2(g).

When the resale is made by the branches of the assessee outside Delhi,

it is resale by the assessee because the branches are not independent

and distinct from the assessee and they are merely the establishments

of the assessee.

Polstar Electronics Private Limited vs. Additional Commissioner


of Sales Tax and another - 1979 UPTC - 129 (Supreme Court)

[17] Works Contract

In Associated Cement Company case (supra) the supreme Court observed

in paragraph 26 that even if the dominant intention of the contract is the

rendering of a service, which will amount to a works contract, after the

Forty-sixth Amendment the State would now be empowered to levy sales

tax on the material used in such contract.

When a photograph, whether positive or the negative print, is given to the

customer certainly some material property is transferred to the customer,

and it cannot be said that only service is rendered to the customer. It

often happens that a customer goes to a photographer’s shop, the

photographer takes him in to the studio and takes his photographs. To

this extent service is rendered. Thereafter when the photograph is handed

over to the customer there is transfer of goods, when the photograph is

sold to the customer there is a transfer of the property in goods and it is

not merely rendering of service as is the case in a barber’s shop.

M/s Vaaho Photo International, Kanpur and another vs. State ofU.P. and another 2003 NTN (Vol. 22)-246 (Allahabad High Court)

[18] Valuable consideration

In the definition of word sale, the words “other valuable consideration”

mean payment i.e. by cheque, bills of exchange or any such other negotiable

instruments.

Commissioner of Sales Tax vs. Ram Kumar Agrawal (1967) 19 STC400 (Allahabad High Court)

INTER-STATE SALE OR PURCHASE

[19] In case the Branch office, situated outside the State, receivesorders from the customers for supply of goods conforming to differentspecifications and drawings and in pursuance of those orders goodsare supplied by the Head-office either directly to the customers orthrough branch office, such transactions constitute inter-state sales.

The assessee company, Sahney Steel and Press Works Ltd. had its

registered office and its factory in Hyderabad. Its branches at Bombay,

Calcutta and Coimbatore were mainly engaged in collecting orders from

customers for supply of goods conforming to different specifications and

drawings and sending advice to the registered office at Hyderabad. The

company manufactures: (a) standard goods according to the company’s

own business and specifications; and (b) non-standard goods according

to the designs and specifications supplied by customers. The dispute

was with regard to the non-standard goods which the company

manufactured according to specifications and drawings supplied by

customers at its factory at Hydrabad and despatched them to the

respective branches by way of stock transfer. The goods were booked to

self and sent by lorries. The branches entered them in stock registers

and kept in stock for ultimate delivery to the customers. On the goods


reaching the branches the customers inspected them and accepted them.

Where the customers were outside the State the branch despatched the

goods to them. Where the customers were local parties the goods were

delivered to them. The branches raised the bills and received the sale

price. The company was assessed to State sales tax in Maharashtra,

West Bengal and Tamilnadu. In respect of those goods it claimed that

there was only transfer of stock from Hyderabad to the branches outside

the State of A . P. and that the sales effected to the customers by the

branches were local sales in the respective States. The Commercial Tax

Officer held the sales to be sales in the course of inter-State trade and

made an assessment.

Before the Supreme Court the petitioner-company contended that when

the registered office of the company at Hyderabad despatched the goods

to its branch offices it was only transfer of stock to the branch offices and

thereafter the movement of goods started from the branch office to the

buyer. It was urged that the registered office and the branch offices were

separately registered as dealers in the Sales Tax Law and transactions

effected by the branch office could not be identified with transactions

effected by the registered office. The movement of goods from Hyderabad

to the branch office was only for the purpose of enabling the sale by the

branch office and was not in the course of fulfillment of the contract of

sale. The Supreme Court negatived the contention and held:

“Even if, as in the present case, the buyer places an order with the branch

office and the branch office communicates the terms and specifications

of the orders to the registered office and the branch office itself is concerned

with the sales despatching, billing and receiving of the sale price, the

conclusion must be that the order placed by the buyer is an order placed

with the company, and for the purpose of fulfilling that order the

manufactured goods commence their journey from the registered office

within the State of Andhra Pradesh to the branch office outside the State

for delivery of the goods to the buyer. We must not forget that both the

registered office and the branch office are offices of the same company,

and what in effect does take place is that the company from its registered

office in Hyderabad takes the goods to its branch office outside the State

and arranges to deliver them to the buyer. The registered office and the

branch office do not possess separate judicial personalities. The question

really is whether the movement of the goods from the registered office at

Hyderabad is occasioned by the order placed by the buyer or is an incident

of the contract. If it is so, as it appears no doubt to us, its movement from

the very beginning from Hyderabad all the way until delivery is received

by the buyer is an Inter-state movement.”

Sahney Steel and Press Works Ltd. Vs. Commercial Tax Officer(1985) 60 STC 301(Supreme Court)

[20] Where inter-state movement is as a result of a covenant in thecontract of sale, the sale falls under the category of inter-state sales.

In the case Commissioner of Sales Tax, M.P. Vs. Allwyn Cooper (1970)


25 STC 26(SC), out of the four contracts in two contracts there was a

clause to the effect that the price was FOR loading Railway station and

that the first weighment on the Gondia weigh-bridge should be the basis

for final accounts. In the other two contracts there was a specific clause

that the price would include railway freight from the loading railway station

in Madhya Pradesh to the port of Visakhapatnam in the State of Andhra

Pradesh. In the other cases the price was payable after the acceptance

of the goods in the plots of the buyers of the port. It was held by the

Supreme Court that the movement of manganese ore from the State of

Madhya Pradesh to the States of Andhra Pradesh and Maharashtra was

consequent upon the contract and the transactions constituted inter-State

sales under section 3(a). It was held that Even if, the inter-State movement

is the result of a covenant in the contract of sale, the transaction should

be considered as inter-State sale under section 3(a) of the C.S.T.Act.

Commissioner of Sales Tax, M.P. Vs. Allwyn Cooper (1970) 25STC 26(Supreme Court)

[21] Where inter-state movement is as a result of necessaryconsequence of the contract, the sale falls under the category of inter-state sales

In the case of Hanuman Mining Corporation Ltd. Vs. Commissioner of

Sales Tax, (1970) 25 STC 6O (SC), the appellants loaded manganese

ore in the wagons indented by the buyer, the buyer figured as consignor

and the consignee and according to the stipulation in the contract the

goods were to be weighed at Gondia weigh bridge outside the State and

the weight so ascertained was determinative of the price. The Hon’ble

Supreme Court has held that the movement of the goods across the frontier

was a direct and necessary consequence of the contract and therefore,

the sales were inter-State sales falling under Section 3 (a) and were not

internal sales.

Hanuman Mining Corporation Ltd. Vs. Commissioner of Sales Tax,(1970) 25 STC 6O (Supreme Court)

[22] Movement of goods from the place of production to the place ofdistribution not related to the requirement of any particular customercannot be considered as a movement pursuant to a contract of sale.

The appellant, Tata Engineering & Locomotive Co. at Jamshedpur in Bihar

maintained stock-yards in different States operated by the appellant’s

own personnel and the sales of vehicles to dealers and other users were

effected from the stock-yards. As and when sales are made from the

stock-yard, the sales tax was duly paid according to the respective State

tax laws on the sales effected. The Head-office of the assessee in Bombay

issued stock transfer authorisation letters to the factory at Jamshedpur

to transfer stocks of vehicles to the stock-yards in various States. Pursuant

to the said instructions the factory prepared a stock transfer memo and

sent the same to the concerned stock-yards. Subsequently, the stocks

were distributed to the dealers by the sales office of the assessee. The

sales office issued allocation letter to the concerned dealers. There was


no nexus between the stock transfer authorisation and the allocation letter.

It was open to assessee to re-allot the vehicle from one stock-yard to

another stock-yard. The Sales Tax authorities of Bihar considering the

movement of vehicles from the factory to the stock-yards as incidental to

the allocation letters, held the transactions as inter-state sales.

The sales office of the appellant in Bombay issued stock transfer

authorisation to different stock-yards and pursuant to that, the factory

prepared the stock transfer memos and transferred the required number

of the vehicles to the stock-yards. The Supreme Court held that this did

not give rise to a transaction of ‘sale’ within the meaning of Section 2 (g)

of the Act. The Supreme Court further held that the movement of the

vehicles from the factory to the stock-yards was not occasioned by any

covenant or incident of the contract of sale. It was observed:

“It would appear from the materials placed before us that generally the

completion of the sales to the dealers did not take place at Jamshedpur

and the final steps in the matter of such completion were taken at the

stock-yards. Even if the appellant took into account the requirements of

the dealers which it naturally was expected to do when the vehicles were

moved from the works to the stock-yards it was not necessary that the

number of vehicles allocated to the dealers should necessarily be delivered

to him. The appropriation of the vehicles was done at the stock-yards

through specification of the chassis number and it was open to the

appellant till then to allot any vehicle to any purchaser and to transfer the

vehicles from one stock-yard to another. Even the Asst. Commisioner

found that on some occasion vehicles had been moved from a stock-yard

in one State to a stock yard in another State. It is not possible to

comprehend how in the above situation it could be held that the movement

of the vehicles from the works to the stock-yards was occasioned by any

covenant or incident of the contract of sale.”

Tata Engineering & Locomotive Co. Vs. Asst. Commissioner (C.T.)(1970) 26 STC 354 (Supreme Court)

[23] Where the sales effected by the registered office or branch ordepot are in the routine course of its business, without earmarkingthe goods to any particular customer, the movement of goods fromthe factory to the registered office cannot be regarded as an incidentof contract of sale.

The assessee, M/s. Kelvinator of India Ltd., is having its factory at

Faridabad in Haryana and sales office, registered office and godown at

Delhi. It entered into three distribution agreements with M/s Spencer &

Co., in respect of Kelvinator refrigerators, M/s Blue Star Enginering Co.,

in respect of Leonard refrigerators, M/s General Equipment Merchants in

respect of Gem refrigerators. Purchase orders were placed by the

distributors after the goods reached the Head-office in Delhi and the

property in the goods passed at Delhi on delivery. The Sales Tax authorities

of Haryana held that the movement of refrigerators from Faridabad to Delhi

was in pursuance of agreements of sale which had been termed as


distribution agreements and assessed them under the C.S.T. Act, which

was upheld even by the High Court of Haryana when referred to it by the

Tribunal. The Supreme Court held that the three agreements between the

assessee and the distributors were merely agreements for thedistribution of refrigerators and were not agreements of sale. The

distribution agreements provide only a broad framework within which the

agreements could be reached. The actual purchase orders placed by the

distributors on the Delhi office could only be considered as contract of

sale. It cannot therefore be said that there was any movement of

refrigerators from Faridabad to Delhi under a contract of sale. Therefore,

there was no liability to pay tax under the CST Act in the State of Haryana.

Kelvinator of India Ltd. Vs. State of Haryana (1973) 32 STC 629(Supreme Court)

[24] Where, after making appropriation of goods at the factory orhead office, goods are sent to depot, branch or agent in another Statefor delivery to the buyer in such State, the sale occasions the movementof goods from one State to another.

The assessee M/s Khosla & Co. having its factory at Faridabad in the

State of Haryana and its Head-office in Delhi. The Head- office in Delhi

entered contacts of sale with dealers of Delhi. Thereafter, the factory at

Faridabad in Haryana manufactured the goods and despatched the goods

to depot at Delhi. The Head Office has been paying tax on the sale of

goods in Delhi. The Sales Tax authorities in Faridabad also assessed the

identical sales under the C.S.T Act. The question that arose for

consideration was whether the transactions should be assessed to tax

by the State of Haryana or the Union territory of Delhi. The assessee flied

a writ petition in the High Court of Delhi.

The Delhi High Court held that the sales were effected by the assessee

under a pre-existing contract of sale which fell under section 3 (a) and

were liable to be assessed by the authorities at Faridabad since those

sales caused the movement of goods from Faridabad to Delhi. The other

local sales effected by the Head-office could however be assessed by the

Sales Tax authorities of Delhi.

The Supreme Court, on appeal, expressed the view that the movement of

goods from Faridabad to Delhi was as a result of incident of the contracts

of sale made in Delhi. The Factory produced the goods only after the

contracts were concluded in Delhi. The contracts of sale did not envisage

that goods should be moved from Faridabad. Their Lordships observed as

under:

“The view of the majority was approved by this Court in Cement Marketing

Co. of India Vs. State of Mysore; State Trading Corporation of India Vs.

State of Mysore and Singareni Colleries Co. Ltd., Vs. Commissioner of

Commercial fuels, Hyderabad. In K.G. Khosla & Co. Vs. Deputy

Commissioner of Commercial fuels. Counsel for the Revenue invited the

Court to reconsider the question, but the Court declined to do so. In a

recent decision of this Court in Coal India Ltd. Vs. Superintendent of


fuels it was observed by Mathew J., who spoke for the Court, that: (i) a

sale which occasions movement of goods from one State to another is a

sale in the course of inter-State trade, no matter in which State the property

in the goods passes; (ii) it is not necessary that the sale must precede

the inter-State movement in order that the sale may be deemed to have

occasioned such movement; and (iii) it is also not necessary for a sale to

be deemed to have taken place in the course of inter-State trad or

commerce, that the covenant regarding inter-State movement must be

specified in the contract itself. It would be enough if the movement was in

pursuance of and incidental to the contract of sale (page 801) (page 449

of 35 STC). The learned Judge added that it was held in a number of

cases by the Supreme Court that if the movement of goods from one

State to another is the result of a covenant or an incident of the contract

of sale, then the sale is an inter-State sale.”

Union of India vs. K. G. Khosla & Co. Ltd. (1979) 43 STC 457(Supreme Court)

[25] Where, after making appropriation of goods at the factory orhead office, goods are sent to depot, branch or agent in another Statefor delivery to the buyer in such State, the sale occasions the movementof goods from one State to another.

The assessee manufactured goods in its factory at Bahadurgarah in

Haryana in accordance with the order with reference to the specific number

and quality of spring leaves and sent to its Head-office at Delhi. The

manufactured goods were covered by the chalans issued from the factory

and the same goods were rebooked from Delhi border. At Delhi border,

chalans were replaced by invoices. The transactions were held as inter-

State sales taxable by the sales tax authorities of Haryana only. The

authorities in Delhi had no such power to tax. The High Court followed the

decision of the Supreme Court in Union of India Vs. K.G.Khosla &

Co.Ltd.(1979) 43 STC 457 (SC).

Pandit Brothers Vs. Union of India, Delhi (1982) 50 STC 67 (DelhiHigh Court)

[26] Where some of the parts of machinery, to be supplied under thecontract of sale are manufactured outside the State of sale andmachinery, after completing its manufacture in the State of sale, issupplied in the within the State, sale of parts does not constitute aninter- state sale.

The assessee, Flowmore Private limited, was a Private Limited Company.

It had a factory at Ghaziabad in U.P. and its head office at Delhi. The

head office entered into a contract of sale for supply of pumpsets complete

with motors etc., to T.H.C. The contract was entered into in Delhi. Pumps

were manufactured at the factory at Ghaziabad and were moved to Delhi

to become part of the machinery supplied by the head office to T.H.C. On

the question whether central sales tax could be levied on pumpsets and

spare parts, the High Court of Allahabad held that-

once it was found that the pumping sets were part of the machinery


to be supplied under the contract of sale, there could be no question of

treating the movement of pumping sets from Ghaziabad to the head office

of the assessee as sale transaction subject to central sales tax. There

was no sale of the goods by the assessee to the head office. . Further,

there was no contract of sale for pumpsets and the pumpsets were part

of the goods sold. There was a further finding that the goods were

assembled in Delhi and the title passed to the buyer in Delhi. Therefore

the assessee was not liable to pay central sales tax on the pumpsets.

Flowmore Private limited Vs. Commissioner of Sales Tax 53 STC88 (Allahabad High Court)

[27] The movement of goods envisaged in Section 3(a) Of the Actneed not necessarily be either by rail or otherwise

The assessee, Pandiya Vishwanath & Sons entered into an agreement

with the Secretary to the President of India to sell gold laces, gold braids

and gold jhallars at specified rates and personally carried it to the

Rashtrapathi Bhavan, New Delhi and delivered them. The Sales Tax

authonties subjected the transactions to tax under the C.S.T. Act 1956.

It was contended on behalf of the assessee that the movement of goods

was not the result of covenant or incident of the contract of sale and as

the goods were carried personally to Delhi and had the liberty to divert

the goods to anyone else in Delhi, the sale cannot be considered as an

inter-State sale. Reliance was placed on the decision of the Supreme

Court in Balabhagas Hulaschand case 37 STC W7 (SC) particularly on

case No.II detailed therein.Their Lordships of the Allahabad High Court

relied on the decision of the Supreme Court in K.G.Khosla & Co. (P) Ltd.

Vs. Deputy Commissioner of Commercial Taxes (1966) 17 STC 473 and

held that it is not necessary that the sale must precede the inter- state

movement, but what was necessary is whether the movement of the goods

was considered a covenant or was incident of contract of sale. It was

further held that the testing point is not the one whether the goods were

despatched from one State to another in the name of the buyer, but what

is decisive is whether the goods were manufactured or caused to be

manufactured as per terms of the contract and whether the delivery of

them was intended to be made to the buyer. When the goods are got

prepared accordingly to specification and taken to be delivered in the

State where the buyer resides, then reasonable inference that can be

drawn is that the movement of the goods was the result of a covenant or

incident of contract of sale.

Pandiya Vishwanath & Sons Vs. Commissioner of Sales Tax (1989)72 STC 224 (Allahabad High Court)

[28] Where the contract provides for inspection or earmarking at thefactory and due intimation before despatch to the purchaser thetransactions constitute inrer-Stare sales and not branch transfers.

The assessee, a manufacturer of electrical equipment had its factory

at Sonepat in the State of Haryana, Head office at Delhi and branch at

Rajpura in Punjab. It entered into a contract with the Punjab State


Electricity Board for supply of transformers. After manufacture at Sonepat,

the transformers were despatched to Rajpura for delivery to the Board

after fixing certain equipment there. The dealer claimed exemption towards

branch transfers. The Revenue considered them as inter-State sales and

subjected to tax. The Punjab and Haryana High Court held, that clause

(b) of para 22 of the order provided for inspection by the purchaser at the

factory and intimation to the purchaser before despatch for arranging

payment. The assessee despatched the same number of transformers to

its branch as were required to be delivered to the Board. These facts

clearly showed that the goods were appropriated to the Board at Sonepat

before their despatch and that the movement of these goods took place

in pursuance of the contract sale as envisaged under section 3 (a) of the

CST Act.

Their Lordships relied on the decision in Union of India Vs. K.G.Khosla &

Co. Ltd., (1979) 43 STC 457 (SC) and applied the principles in English

Electric Co. of India Vs. Deputy Commercial Tax Officer 1976 38 STC

475 (SC)

Electric Construction & Equipment Co. Ltd. Vs. State of Haryana(1990) 77 STC 424 (Punjab & Haryana High Court)

[29] Where goods to be supplid under the contract, are manufacturedaccording to specifications of the buyer bearing marking of the buyer,sale occasions the movement of goods.

The respondent, Lakbamshi Ladha & Co., a manufacturer of water-proof

tarpaulins with its place of manufacture at Bombay entered into a contract

with the Gujarat State Road Thansport Corporation for supply of water-

proof tarpaulins. The goods were to be ready for inspection at Bombay

and should also bear the markings of the purchaser. The goods were to

be despatched to their various divisions in Gujarat as per the despatch

instructions. The respondent accordingly sent the goods to its agent at

Surat for supply to the different units. The transactions were claimed as

local sales in Gujarat. But the Revenue considered them as inter-State

sales and assessed to tax. Held, that the contract was entered into

directly with the buyers in Gujarat by the respondent at Bombay and

although the goods were sent to the agent at Surat the said agent acted

merely as a conduit pipe for the purpose of supply. The goods were also

marked with the stamp of the purchaser which signified their appropriation

to the purchaser at the factory. In the circumstanses, the transactions

were held as inter-State sales. Their Lordships relied on the decisions of

the Supreme Court in English Electric Co. of India Ltd. Vs. Deputy

Commercial Tax Officer (1976) 38 STC 475 (SC).

Commissioner of Sales Tax Vs. Lakbamshi Ladha & Co. (1990) 77STC 366 (Bombay High Court)

[30] Where a branch of a company forwards a buyer’s order to theprincipal factory of the company and instructs them to despatch goodsdirect to the buyer the sale will be an inter-state sale.

The assessee M/s English Electric Co., is having its registered office in


Calcutta with branches at Bombay, Delhi, Madras. The Bombay branch

after, ascertaining certain specifications from the Madras branch as per

the requirements of a buyer in Bombay placed an indent order with the

Madras branch giving particulars, of the Bombay buyer, order and date

and instructed the Madras office to despatch the goods by train to the

buyer and the R. R. and other documents to be sent to them for disposal.

The Madras office despatched the goods by goods train “freight to pay” to

the buyer in Bombay under intimation to the Bombay branch. The goods

were delivered to the Bombay buyer through clearing agents. The assessee

contended that it was an internal sale in Bombay and not an inter-state

sale. The Sales Tax authorities in Tamil Nadu held them as inter-State

sales. Their Lordships of the Supreme Court held that branches are not

independent and separate entities. Where a branch of a company forwards

a buyer’s order to the principal factory of the company and instructs them

to despatch the goods direct to the buyer, the sale will be an inter-state

sale and the goods are sent to the buyer. The inter-state movement of the

goods from Madras to Bombay was the result of the contract of sale and

the fact that the contract emanated from correspondence which passed

between the Bombay branch and the company could not make any

difference. The sale was liable to be taxed under Section 3(a) of the C.S.T.

Act.

Contract of sale need not necessarily be between the seller and the buyer

direct. When the branch office of a company forwards a buyer’s order to

the principal factory of the Company and instructs the latter to despatch

the goods direct to the buyer and the goods are sent to the buyer under

those instructions, it would be an inter-State sale by the principal company

in favour of the out of State buyers. The presence of an intermediary such

as seller’s own representative or branch office who initiated the contract

or who hands over the documents of title does not make the matter

different. The transaction would still be an inter-State sale liable to tax

under Section 3(a) of the CST Act.

English Electric Co. of India Vs. Dy. Commercial Tax Officer (1976)38 STC 475 (Supreme Court)

[31] Where parts of machinery are transported to the State ofpurchaser for assembling the machinery under the contract andcontract provides for payment of freight to the seller, sale of machineryfalls under the category of inter-state sales.

Where under a contract the assessee was required to sell and supply

dredgers in Kashmir and for the execution of the contract the component

parts of the dredgers were required to be taken to Kashmir from West

Bengal, assembled there and thereafter delivery of the dredgers had to be

given afloat in Kashmir, and the clause for payment envisaged payment

of all freight and insurance charges including those relating to machinery

and other items supplied from the plant of the assessee at Howrah to the

site in Kashmir:

Held, (i) that on a true and proper construction of the relevant terms of


the contract and in the facts and circumstances of the case there was

inter-State movement as a result of or in the execution of the contract of

sale;

(ii) that the inter-State movement of components was a part of the sale

contract; and

(iii) that there is no conflict between sections 3 and 4 of the C.S.T. Act.

Hooghly Docking & Engineering Co. Ltd. Vs. Commissioner,Commercial Taxes S3 STC 198 (Calcutta High Court)

SALE OR PURCHASE IN THE COURSE OF IMPORT ANDEXPORT

[32] SALE IN THE COURSE OF EXPORT THROUGH INTERMEDIARY

In Mohd. Serajuddin Vs. State of Orissa, reported in (1975) 36 STC 136,

the Apex Court held that in absence of privity of contract between the

selling dealer and the foreign buyer, sales could not be said to be in the

course of export of the goods. In this case the assessee had sold goods

to State Trading Corporation and the State Trading Corporation had sold

goods to foreign buyer. There was no privity of contract between the

assessee and the foreign buyer. The Apex Court observed that immediate

cause of export of goods was the contract between the State Trading

Corporation and the foreign buyer. Therefore, sale by State Trading

Corporation was in the couse of export and sale by the petitioner to State

Trading Corporation was not in the course of export.

Mohd. Serajuddin Vs. State of Orissa, (1975) 36 STC 136 (Supreme Court)

Note: After pronouncement of the aforesaid judgment, a new sub-section

(3) in section 5 has been added. Therefore the aforesaid judgment is not

relevant for cases which are covered by section 5(3) of the Central Sales

Tax Act, 1956.

[33] SALE IN THE COURSE OF IMPORT

In K. G. Khosla & Co. (P) Ltd. Vs. Deputy Commissioner of Commercial

Taxes, the assessee entered into a contract with the Director General of

Supplies and Disposals, New Delhi for the supply of axle-box bodies. The

goods were to be manufactured in Belgium according to specifications

and the D.G.I.S.D. London or his representative had to inspect the goods

at the works of the manufacturer and issue an inspection certificate.

Another inspection was provided for at Madras. The assessee was entitled

for payment of 90% of the price after inspection and delivery of the stores

to the consignee and balance of 10% was payable after final acceptance

by the consignee. The assessee was entirely responsible for the safe

arrival of the goods at the destination. The contract provided that

notwithstanding any approval or acceptance given by the inspector, the

consignee was entitled to reject the goods, if it was found that the goods

were not in conformity with the terms and conditions of the contract in all

respects. The manufacturer consigned the goods to the assessee by

ships under bill of lading and the goods were cleared by the assessee at


the Madras Harbour by the assessee’s clearing agents and dispatched

for delivery to Southern Railway in Madras and Mysore. In the case, the

question involved was whether the sales by the assessee to Government

Departments were in the course of import and exempt from tax under

section 5(2) of the Central Sales Tax Act, 1956.

In this Case, the Apex Court held, the movement of goods from Belgium

into India was incidental to the contract that they would be manufactured

in Belgium, inspected there, and imported into India for the consignee,

and was in pursuance of the conditions of the contract between the

assessee and the Director General of Supplies and Disposals. There was

no possibility of goods being diverted by the assessee for any other

purpose, and therefore, the sales took place in the course of import of

goods within section 5(2) of the Central Sales Tax Act, 1956, and were

exempt from tax.

Under the provisions, in K.G.Khosla’s Case, the Supreme Court has

held that before a sale could be said to have occasioned the import, the

movement of the goods must have been incidental to the contract or in

pursuance of the conditions of the contract and there should be no

possibility of the goods being diverted by the assessee for any other

purpose, meaning thereby that there should be no possibility of diversion

according to law or contract and not in breach of them.

K. G. Khosla & Co. (P) Ltd. Vs. Deputy Commissioner ofCommercial Taxes (1966) 17 S.T.C. –473 (Supreme Court)

[34] SALE IN THE COURSE OF IMPORT

In Binai Bros. (P) Ltd. Vs Union of India, the petitioner used to procure

non-ferrous metals from various countries and also from within the country

for fulfilling contracts with the Government of India through the D.G.S.&

D. Assessee was paying tax on sales to D.G.S.& D. either under the

CST Act or under the State Act. After the pronouncement of the Supreme

Court in K.G. Khosla & Co. Vs. Deputy Commissioner Commercial Taxes,

quoted above, the D.G.S.& D., on the assumption that in view of the

judgment in the aforesaid case, purchases by D.G.S.& D. were purchases

in the course of import, the D.G.S.& D. withheld the amount of tax charged

in the bill by the assessee and asked for refund of amount paid on its

earlier purchases. The Best Bengal Sales Tax Authorities dealing with

petitioner’s assessment cases took the view that there being two sales,

one by the petitioner to D.G.S.& D. and other between the petitioner and

the foreign supplier, the petitioner’s sales to D.G.S.& D. were taxable.

The petitioner filed petition under article 132 of the Constitution to the

Supreme Court.

The Apex Court held that in the Khosla’s case there was no possibility of

the goods being diverted by the assessee for any other purpose other

than being supplied to D.G.S.& D. as per contract between them.

Consequently it was held that the sales took place in the course of import

of goods within section 5(2) of the Central Sales Tax Act, and were,

therefore, exempt from tax. In present Case, the petitioner had to purchase


goods from foreign sellers and it was these purchases from the foreign

sellers which occasioned the movement of goods in the course of import.

The purchases of goods and import of the goods in pursuance of the

contracts of purchases were, no doubt, for sale to the D.G.S.&D. But it

would not follow that sales or contracts of sales to D.G.S.&D. occasioned

the movement of goods into this country. There was no privity of contract

between D.G.S.&D. and foreign sellers. There was no obligation under

the contracts on the part of the D.G.S.&D. to procure import license.

Therefore, even if the contracts envisaged import of the goods and their

supply to D.G.S.&D. from out of the goods imported, it did not follow that

the movement of the goods in the course of import was occasioned by

the contract of sale by the petitioner with D.G.S.&D.

Binai Bros. (P) Ltd. Vs. Union of India (1974) 33 S.T.C. -254(Supreme Court)

CONSIGNMENT AND STOCK TRANSFER OF GOODS

[35] CONSIGNMENT OF GOODS IN INTER-STATE TRADE ORCOMMERCE

Where in respect of any goods, the assessing authority of transferor-

dealer of goods, has, in exercise of its powers under section 6-A of the

Central Sales Tax Act, 1956, determined that the goods have moved to

other State otherwise than by reason of a sale, the order of an authority

under Section 6-A is conclusive for all practical purposes. An order passed

by the statutory authority who has jurisdiction therefore, the same would

amount to a part of substantive and not procedural law. In addition to this

there is no provision for appeal. Thus, it is only in limited cases of fraud,

misrepresentation etc. that the reassessment can be directed and not if

there had been a mere error of judgment.

Expressing views as aforesaid, the Hon’ble Supreme Court in M/s Ashoka

Leyland Ltd. Vs. State of Tamil Nadu & Anr. 2004 NTN (Vol.24) 165 has

held as under:

On an analysis of provisions, the following propositions of law emerge:

1. The initial burden of proof is on the dealer to show that the movement

has occasioned by reason of transfer of such goods which is otherwise

than by reason of sale. The assessee may file a declaration. On a

declaration so filed an enquiry is to be made by the assessing authority

for the purpose of passing an order on arriving at a satisfaction that

movement of goods has occasioned otherwise than as a result of a

sale.

2. Wherever such an order is passed, a legal fiction is created. Legal

fiction, as is well known, must be given its full effect.

Stock transfer accepted after examination of evidence and declaration in

Form F under Section 6-A of the Central Sales Tax Act, 1956 is not

subject to Section 9 (2) of the Act and cannot be reopened due to change

of opinion. Determination and acceptance of stock transfer under Section

6-A is conclusive presumption which cannot be altered.


M/s Ashoka Leyland Ltd. Vs. State of Tamil Nadu & Anr. 2004 NTN (Vol.24)165 (Supreme Court)

[36] Discharge of burden of proof

Stock transfer - Consignment sale -Central Sales Tax Act, 1956Section 6-A, Central Sales Tax (U. P.) Rules, Rule 4(4) - The petitionercompany effected consignment transfer to various agents duringAssessment year 1994-95, 1995-96 and 1996-97 - The petitionerpresented declaration in Form F in respect of part of turnover andalso presented proof of despatch of goods through GRs and despatchregisters - The Assessing Authority rejected the consignment transferand Form F on the ground that sales invoice, sale patti ( salestatement) and assessment orders of such consignee agents werenot prroduced and in few cases Form F, which were furnished,were either reported to be stolen or were reported not to havebeen issued to concerned agents by the Sales Tax Department - Itwas also found that in few cases agent did not confirm thetransaction of consignment transfer

Whether submission of Form F and presentation of despatch document

is sufficient for proving consignment of goods even if compliance of Rule

4(4) of the Central Sales Tax (U. P.) Rule has not been made?

With respectful agreement with the decision of the Madras High Court in

the case M/s A. Dhandapani Vs State of Tamil Nadu (1995) 96 STC 98,

the Allahabad High Court has held that the burden cast under Section 6-

A of the Act is discharged by producing evidence of dispatch of the goods

and presentation of declaration in Form F. Rule 4(4) is not mandatory and

is only directory.

Stock transfer - Form F - Central Sales Tax Act, 1956 Section 6-A,the Central Sales Tax(Registration & Turnover) Rules, 1957 Rule12(5)

Whether the petitioner is responsible for subsequent finding thatform F were stolen/not issued to the consignment agent or ifconsignment agent is not tracable or denies the transaction?

Held - No, If the dealer who furnished form F has committed mischief or

has utilized forms which were stoien or issued to some other dealers,

then the deaier who received declaration Form F can not be held

responsible.

M/s Kanha Vanaspati Limited Budaun Vs Commissioner Trade Tax, U.P.,2002 NTN (Vol-20)-35 (Allahabad High Court)

[37] Stock Transfer -Burden of proof

Stock Transfer -(Burden of proof etc., in case of transfer of goodsclaimed otherwise than by way of sale)-Central Sales Tax Act 1956,Section 6A, 3(a), 9(2)-Tamil Nadu General Sales Tax Act, 1959,Section 16, 32 -Section 6A does not create a conclusive presumptionand that an order accepting Form ‘F’ whether passed during the


assessment or at any point earlier thereto, is ultimately a part andparcel of the order of assessment. Its amenability to power ofreopening and revision depends upon the provisions of theconcerned State sales tax enactment by virtue of section 9 (2) ofthe C.S.T. Act. It is not possible to agree that the word “deemed”in sub-section (2) of section 6 A can be understood as creating aconclusive presumption nor is it possible to agree that the fact“deemed” is final and conclusive. Section 6-A merely states a ruleof evidence. Section 6 A states that the burden to prove atransaction otherwise than by way of sale can be discharged byproducing form ‘F’ and on the particulars stated in the said formbeing found true on being enquired into by the assessing officer.From this it does not follow that once an order is made acceptingForm ‘F’ as true it is not subject to the power of re-opening orrevision contained in Section 16 and 32 of the Tamil Nadu GeneralSales Tax Act read with section 9(2) of the Central Sales Tax Act.

M/s Ashoka Leyland Ltd. Etc. Vs. Union of India & Ors.1997 NTN (Vol-ll)-593 (Supreme Court)

[38] Nature of enquery where Form F submitted

Section 6-A (2), Central Sales Tax Act, 1956-Form prescribed under

Central Sales Tax Act-Once Form ‘F’ is filed-Only enquiry to be made is

that goods transferred to the assessee himself, or to branch or to agent

and not third party -Any other enquiry is beyond the realm of Assessing

Authority. Once Form F accepted and stock transfer treated as stock

transfer -that order attains finality -Cannot be challenged.

M/s Ashok Leyland Ltd. Vs. State of Tamil Nadu 2004 NTN (Vol. 24)165(SC); 2004 UPTC-475 (Supreme Court)

[39] Submission of Form ‘F’-whether mandatory?

Stock Transfer -Central Sales Tax Act, 1956, Section 6-A,Submission of

Form ‘F’ Whether mandatory in respect of claim of stock transfer ? -No-

It is not mandatory to submit ‘F’ form in respect of claim for stock tranfer.

The plea of stock transfer can be substantiated by other evidence also.

The evidence filed by the assessee was found reliable both by the first

appellate authority and the findings of fact recorded by the Sales Tax

Tribunal. The order of the Sales Tax Tribunal does not suffer ffom any

legal or factual infirmity.

M/s Oriental Carbon Ltd. Vs. The Commissioner Sales Tax U. P. 1995NTN. (Vol-7) 535 (Allahabad High Court)

PROSECUTION AND PENALTY

[40] The Central Sales Tax Act, 1956-Section 10A-Penalty proceedingsare quasi judicial in nature- Penalty not to be levied for technicalbreach.

Misuse of Declaration Form-Technical breach -The Central Sales Tax Act,

1956 - Section 10A-Penalty proceedings are quasi judicial in nature, unless


and until it is established that by committing breach some advantage has

been gained, no penalty can be levied.

K.V. Electronics Vs. Commissioner of Trade Tax U.P. 2003 NTN (Vol-23)-693 (Allahabad High Court)

[41] The Central Sales Tax Act, 1956-Section 10A- Penalty can belevied only if the dealer has made a false representation-Differencebetween wrong representation and false representation explained bythe Court.

Held:- Similar penlaty was also levied in respect of previous years, namely,

1981-82 and 1982-83 . The matter traveled to this Court though at the

instance of Commissioner. The said judgment was reported in 1995 UPTC

1137 Commissioner of Sales tax Vs. Kisan Sahkari Chini Mills . In the

previous years, the Tribunal set aside the penalty order on the ground

that dealer was under bonafide belief that the purchases were made in

respect of the goods, which were mentioned in the registration certificate.

This order of the Tribunal was confirmed by this Court with the observation

that the dealer was Government of U. P. Undertaking and was run by the

Government. The department of Sales Tax could have accepted the plea

of the Government Undertaking and the omission on certain goods in the

registration certificate should have been ignored and penalty should not

have been imposed. That apart, for levying penalty under Section 10(b)

the dealer should falsely represent that the goods are covered by the

certificate of registration. The word’ falsely’ implies deliberate act, which

has been done knowingly. The false representation and wrong

representation both stand on different footing. In the present case there

was no finding by the Tribunal that there was any deliberate representation

by the dealer. A line of distinction has to be drawn in between ‘’false

representation” and “wrong representation”. “Wrong representation” may

be on account of some inadvertence or some omission. “False

representation” takes place when a person knowingly makes

representation for certain things when he believes that he is not entitled

to make the said representation. Section 10(b) has to be read with Section

10A. Section 10A provides imposition of penalty in lieu of prosecution.

Section 10 provides penalties and also simple imprisonment, which may

extent to six months or with a fine both. In the present case for most of

the items the applicant was entitled to issue Form ‘C’ under provisional

registration certificate except for Cement. The authorities below had

proceeded on the footing that the applicant has issued Form ‘C’ in respect

of certain items, which were not mentioned in permanent registration

certificate and consequently imposed penalty. There was no finding that

any false representation was made by the applicant. In view of the above

and looking to the facts that for the earlier assessment year on identical

facts penalty order has been set aside, I find that it was a case of bonafide

mistake and the applicant being a Government organization, no penalty

should have been levied. The department had been continuously accepting

Form 4 maintained and filed by the applicant under Central Sales Tax

(U.P.) rules, 1957 . Hence, the levy of penalty was not justified .


M/s Kisan Sahkari Chini Mills Ltd. Vs. The Commissioner of Sales TaxU.P. 2003 NTN (Vol. 23) 834; 2004 STI (Allahabad High Court-368)

[42] The Central Sales Tax Act, 1956-Section 10A- In absecnce of thefinding that there was any deliberate representation by the dealer,penalty cannot be levied.

The Sales Tax Officer is supposed to be expert on the subject. He, from

the assessment year 1977-78 upto 15.10.1985, raised no objection with

regard to the issuance of Form ‘C’ for cotton waste and in view of these

facts one could not say that false representation was made by the applicant.

Further for levying penalty under section 10(b) the dealer should falsely

represent that the goods are covered by the certificate of registration.

The word falsely refers to deliberate act, which has been done knowingly

. The false representation and wrong representation both stand on different

footing. In the present case, there was no finding by the Tribunal that

there was any deliberate representation by the dealer.

M/s Sanjay Fabrics Vs. Commissioner of Sales Tax U.P. 2003 NTN(Vol. 23) 980; 2004 STI (All. H.C.-376) (Allahabad High Court)

[43] The Central Sales Tax Act, 1956-Section 10A-Penalty cannot tobe upheld in absence of finding of malafides recorded by authorities.

Section l0-A, Central Sales Tax Act, 1956-Penalty-False representation-

Dealer, authorised to purchase Steel wire, M.S. Rod, M.S. Steel, Dry

steel sheet, Dry steel rod etc. made purchase of cold roll sheets against

Form ‘C’-Contention of the dealer that he made the purchase under bona

fide belief that it was covered by his registration certificate- No finding of

mala fides recorded by the authorities- Conclusion of Tribunal that cold

roll steel is not the same as mild steel contrary to facts existing on record-

Penalty order set aside.

M/s K.V. Electronics. Naini Vs. Commissioner of Trade Tax 2003 NTN(Vol. 23) 693; 2004 UPTC-62 (Allahabad High Court)

CONDITIONS AND RESTICTIONS ON STATE SALES TAXLAWS

[44] Applicability of Clause (ca) of section 15 of the CST Act

Exporter of rice, making purchase of rice under sub-section (3) of Section

5 of the CST Act, is not entitled to claim exemption from tax on paddy

under clause (ca) of Section 15 and likewise where a Miller makes sale of

rice to an exporter, the Miller is also not entitled to claim exemption

under the said clause.

The clause (ca) of section 15 of the Central Sales Tax Act, 1956 runs as

under:-

“(ca) Where a tax on sale or purchase of paddy referred to in sub-clause

(i) of clause (i) of Section 14 is leviable under the law and the rice procured

out of such paddy is exported out of India, then, for the purposes of sub-

section (3) of Section 5, the paddy and rice shall be treated as a single

commodity;”


While interpreting the aforesaid clause in the Special Leave Petitions, M/

s Monga Rice Mill Etc. vs. State of Haryana and another, the Honourable

Supreme Court has held as under:

“At one stage, it was sought to be contended on behalf of the appellant in

civil appeal Nos. 1117-1121 of 2003 that terms ‘rice’ and ‘paddy’ were

interchangeable under clause (ca) from which it follows that what the

appellant sold to the exporter was paddy and, therefore, the last purchaser

of such paddy was the exporter and not the appellant and consequently

the appellant was not liable for payment of purchase tax. We do not find

merit in this argument. Clause (ca) of Section 15 inter alia states that

where a tax on purchase of paddy is leviable under the State law and the

rice procured out of such paddy is exported, then for the purposes of

Section 5 (3), paddy and rice shall be treated as a single commodity. As

stated above, clause (ca) contains a limited deeming fiction which only

applies to sale of rice by the exporter. This fiction is attached to the

purchased commodity which is paddy from which rice is procured and

not the exported commodity. Clause (ca) equates the two commodities

only in cases where rice procured from paddy is exported and not to any

other case. Accordingly we hold that the purchase of paddy by the

appellants in these cases is not exempt from the levy of a tax. Such

purchases do not fall within Section 5 of 1956 Act. The sale by the exporter

is however, exempt under Section 5 (1) and the purchase of paddy by the

miller-cum-exporter is covered under Section 5 (3) of 1956 Act.”

M/s Monga Rice Mill Etc. vs. State of Haryana and another 2004 NTN(Vol.24)-545 (Supreme Court)

TRANSFER OF RIGHT TO USE

[45] Use of vehicles for transporting goods

Facts: The petitioner transported Indian made foreign liquor produced by

respondent to various Government warehouses and received transportation

charges. Assessing authority initiated assessment proceedings taking the

view that the petitioner transferred the right to use of its vehicles to respondent.

Held, that the right to use can be said to have been transferred when complete

possession of specified vehicles is vested in the respondent. Unless vehicles

are specified and they are put in actual possession of the respondent it can

not be said that right to use those vehicles is transferred by the petitioner to

the respondent.

It is clear that trucks to be used for carrying goods of respondent will

continue to remain in the custody of the drivers employed by the owner

(s) of the trucks. It is manifest that there was no transfer of possession

even of the vehicles which were being used for carrying the goods of the

respondent. On the other hand the extent of the consignment to be loaded

and transportation charges to be paid to the petitioner are well specified.

In absence of the vehicles being specified and in absence of possession

of specified vehicles having been transferred to respondent No.3 by the

petitioner and petitioner being entitled only to transportation charges on


contractual rates. We find force in the contention of the petitioner that

the contract was for rendering service on payment and that there was no

transfer of the right to use of any specified vehicles to respondent No.3.

A mere contract of hiring without more, is a species of the contract of

bailment. Transfer of right implies that full liberty is vested on the transferee

to have the right to use the goods to the exclusion of all other including

the owner of the goods. From the facts of the case at hand it is not at all

established that between the point of loading and unloading of the

consignments of respondent No.3. The vehicles were being used by

respondent No.3 to the exclusion of all others including the owner of the

vehicles. The vehicles were driven by the drivers employed by the owner(s)

of the trucks and there was none for respondent No.3 to exercise control

over the vehicles during the transit. Transit risk also was on petitioner.

Vehicles remained in the custody of the petitioner through drivers, and,

therefore, it can not be said that respondent No.3 was in possession of

them between the point of loading and unloading of its consignments.

We are, therefore, of the view that the contract between petitioner and

respondent No. 3 was only a contract for service and the transportation

charges received by the petitioner from respondent No.3 are not exigible

to tax under section 3-F of the Act as there was no transfer of right to use

of any specified vehicles.

Ahuja Goods Agency and Another v. State of U.P. and Another 1997NTN (Vol. 11) 484; 1997 U.P.T.C. - 629 (Allahabad High Court)

[46] Carriage of passengers on payment of fixed rates from one pointto another

Section 2(h), U.P. Sales Tax Act, 1948- Carrying of passengers onpayment of fixed rates from one point to another - Right to use thevehicle never transferred or leased out to the passengers - Transferof right to use the vehicle not involved.

Pursuant to notices, the petitioners filed explanation, stating that the

petitioners carry passengers from one place to another on specified agreed

amount and right to use of the vehicles belonging to the petitioners was

never transferred. It was stated that the vehicles always remained under

the control of the petitioners and only fixed charges for carrying the

passengers from one point to another were recovered. Considering the

explanation of the petitioners, the assessing authority completed the

assessment holding that there was transfer of right to use of the vehicles

by the petitioners and, therefore, the petitioners were liable to tax. The

assessing authority has not controverted the facts as stated in the

explanation by the petitioners, that they carry the passengers on payment

of fixed rates from one point to another and that they never transferred or

leased out the right to use the vehicle to the passenger. The assessing

authority, however observers that the fact that the petitioners carried

passengers from the place to another on agreed charges made no

difference and that amounted to transfer of right to use the vehicles.

Held, that there is no substance in this reasoning of the assessing authority.


The petitioners will not be assessed for carrying on the activity, namely,

carrying the passengers from one point to other on fixed agreed charges for

short distances and for short directions.

M/s. Touraids (I), Agra and Another v. State of Uttar Pradesh and Another1993 U.P.T.C 828 (Allahabad High Court)

[47] Leasing of equipment-Whether a service contract or a contractof transfer of right to use goods

The language employed in sub-clause (d) of clause (29A) of article 366 of

the Constitution is clear and unambiguous and does not admit of more

than one meaning. In terms of the sub-clause, it includes tax on the

transfer of the right to use any goods for any purpose, whether or not for

a specified period, for cash, deferred payment or any other valuable

consideration. The position is clarified by the use of the words “whether

or not for a specified period”. Therefore, it is totally immaterial whether

the parting with of goods is for a specified period or not in deciding the

question whether the goods fall within sub-clause (d) of clause (29A) of

article 366.

The petitioners were companies engaged in extending finance facilities in

respect of hire purchase and leasing transactions. They purchased

equipment directly from the manufacturers and let it on lease to lessees

who paid fixed monthly rentals and were bound to return the leased

equipment to the petitioners with the lessees. In writ petitions, the

petitioners contended that service contracts could not be equated with

works contracts:

Held, dismissing the petitions, that even assuming the dealers parted with

the goods only for a specified period, that fact itself would not take away the

goods from the purview of sub-clause (d).

DLC Finance Limited and Another v. Union of India And Others(2002) 126 S.T.C. 249 (Andhra Pradesh High Court)

[48] Hiring of Bank Lockers

Pursuant to the amendment of the definition of “tax on the sale or purchase

of goods” in the Constitution of India to include a tax on the “transfer of

the right to use any goods” by insertion of sub-clause (d) in clause (29-A)

of article 366 by the Constitution (Forty-sixth Amendment) Act, 1982,

and corresponding changes made in the Andhra Pradesh General Sales

Tax Act, 1957 in the definitions of “dealer” and “sale” in section 2(e) and

(n) of the Act, and the insertion of section 5-E being the charging section

for levy of tax on amounts realised in respect of the transfer of the right to

use any goods, by Act 18 of 1985 the sales tax authorities raised demands

on various banks in respect of charges collected by them from their

constituents on hire of lockers for the years 1983-84 and 1985-86. The

banks filed writ petition challenging the said levy:

Held,

that the insertion of clause (20-A) in article 366 of the Constitution of

India did not automatically confer power on the State Government to


levy tax on the transfer of the right to use goods. Consequential steps

had to be taken by effecting necessary amendments to the State Sales

Tax Acts. Liability to pay tax under the Andhra Pradesh General Sales

Tax Acts arose only if a person was a dealer and therefore there could

not be levy of such tax until September 9, 1985 when the definition of

dealer was suitably amended. Moreover the charging section, section

5-E, itself came into force on July 1, 1985 and there could thus be no

levy before that date;

that valuables deposited in a bank locker are felt to be safer than at

home because of the high security arrangements at the bank and the

provision of strong rooms. Persons using the lockers pay the hire

charges not only for the right to use the lockers but for a host of other

services associated with the maintenance of lockers by the banks.

The hire charges collected by banks from constituents represent a

consolidated charge levied by the banks for a variety of services and

facilities provided, of which the use of the lockers forms a small part.

Any endeavour to levy tax on the aggregate hire charges levied by

banks would amount to levying tax not only on the right to use the

locker but also on the charges collected by the bank for the provision

of strong rooms, round the clock watch and ward facility and

employment of necessary staff for close supervision in the operation

of strong rooms. Banks, therefore could not be called upon to pay

sales tax on the hire charge received for the use of lockers which

forms a fractional and inseparable part of the composite charge for a

variety of services; that where the lockers were imbedded in the floor

they were not “goods” for the purpose of levy of sales tax;

that clause (29-A) of article 366 of the Constitution and the

consequential amendments in the Andhra Pradesh General Sales Tax

Act refer only to cases where there is a transfer of the right to use

goods delivered to the person concerned. They do not include

transactions which merely license a person to use goods without

securing possession. The conditions of the contract between the banks

and their constituents unmistakably indicate that the exclusive

possession and custody of the lockers were kept with the bank itself

always. The lockers could be operated only during prescribed hours

and only with the help of the master key kept by the bank. There was

neither delivery of the lockers nor did the bank put the lockers in the

possession of the constituent. The constituent was a mere licensee.

The levy was without jurisdiction; and

that, however, even if a contrary view was possible, the banks could

not be called upon to pay the tax in question, for the period prior to

August 19, 1987 on which date G.O. Ms. No. 794 was issued rescinding

the earlier notification G.O. Ms. No. 1091 dated June 10, 1957 which

had exempted all banks from any levy under the Andhra Pradesh

General Sales Tax Act, 1957.

State Bank of India and Others v. State of Andhra Pradesh.1988S.T.C. Vol.70 page 215 (Andhra Pradesh High Court) )


[49] Supply of sophisticated machinery to the contractors for beingused in the execution of the contracted works against receipt ofcharges

The taxable event under section 5-E of the Andhra Pradesh General Sales

Tax Act, 1957, is transfer of the right to use any goods. This means that

unless there is a transfer of the right to use the goods, no occasion for

levying tax arises; providing a facility which involves the use of goods nor

even a right to use the goods is not enough, there must be a transfer of

that right.

A transfer of the right to use the goods necessarily involves delivery of

possession by the transferor to the transferee. Delivery of possession of

a thing must be distinguished from its custody.

Whether there is a transfer of the right to use goods or not is a question

of fact which has to be determined in each case having regard to the

terms of the contract under which there is said to be a transfer of the right

to use goods.

The petitioner, which owned the Visakhapatnam Steel Project, for the

purpose of the steel project, allotted different parts of the project work to

contractors. To facilitate the execution of work by the contractors with

the use of sophisticated machinery, the petitioner had undertaken to supply

the machinery to the contractors for the purpose of being used in the

execution of the contracted works of the petitioner and received charges

for the same. The respondents made a provisional assessment levying

tax on the hire charges under section 5-E of the Andhra Pradesh General

Sales Tax Act. On a writ petition:

Held: that the agreement had to be read as a whole in order to determine the

nature of the transaction. Under the agreement, the effective control of the

machinery, even while the machinery was in the use of the contractor, was

that of the petitioner-company. The contractor was not free to make use of

the same for other works or move it out during the period the machinery was

in his use. The condition that he would be responsible for the custody of the

machinery while the machinery was on the site did not militate against the

petitioner’s possession and control of the machinery. Therefore, the contractor

was entitled to make use of the machinery for purposes of execution of the

works of the petitioner and there was no transfer of the right to use it as

such in favour of the contractor. As the fundamental requirement of section

5-E was absent, the hire charges collected by the petitioner from the

contractors were not exigible to sales tax.

Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, Company Circle,Visakhapatnam, 1990 S.T.C. Vol. 77 page 182 (Andhra Pradesh HighCourt)

[50] Supply of sophisticated machinery to the contractors for beingused in the execution of the contracted works against receipt ofcharges

The respondent, which owned the Visakhapatnam Steel Project, allotted


different works to contractors. It supplied sophisticated machinery to the

contractors for being used in the execution of the contracted works and

received charges for the same. When the sales tax authorities made a

provisional assessment on the respondent of sales tax under section 5-E

of the Andhra Pradesh General Sales Tax Act, 1957, on the hire charges,

the respondent filed a writ petition in the High Court challenging the levy

of sales tax. The High Court, on a consideration of the agreement of the

respondent with the contractors, found that the effective control of the

machinery, even while the machinery was in use, was with the respondent

: the contractors were not free to make use of the machinery for other

works or move the machinery out during the period the machinery was in

use; and held that the transactions between the respondent and the

contractors did not involve the transfer of right to use the machinery in

favour of the contractors and the hire charges could not be brought to tax

under section 5-E. On appeal to the Supreme Court:

Held, affirming the decision of the High Court, that the transaction did not

involve the transfer of the right to use the machinery in favour of the

contractors, and, in the absence of satisfying that essential requirement of

section 5-E, the hire charges collected by the respondent from the

contractors were not exigible to sales tax.

State of Andhra Pradesh and Another v. Rashtriya Ispat Nigam Limited(2002) 126 STC 114 (Supreme Court)

[51] Use of equipment and tools contractor where such equipmentand tools belonged to the contractee

The transfer of property in goods is the prime consideration in deciding

the question whether a particular transaction is sale within the meaning

of section 2(33) of the Assam General Sales Tax Act, 1993. Clauses (ii)

and (iv) of section 2(33) provide that transfer of property in a goods or in

some other form in the execution of works contracts and transfer of the

use of any goods under an operating lease are also regarded as sale for

the purpose of levy of sales tax. The definition of “Lease” in section 2(19)

of the Act speaks of an arrangement whereby the right to use any goods

for any purpose is transferred by one person to another, and it does not

include within its fold the concept of possession. Once it is shown that

the right to use any goods is transferred by one person to another for

exclusive use, it would become a lease within the meaning of section

2(19) of the Act.

Judgments rendered in the context of a special statute with regard to

immovable property cannot be superimposed in a revenue dispute arising

out of the 1993 Act wherein the term lease has been defined in different

language in a different context.

The petitioner-company entered into a contract with oil India Limited for

wire line logging and perforation activities consisting of electronic or

seismic scanning of subterranean strata and rock formation by the use of

equipment and tools belonging to the petitioner. The contract provided

that the equipment and tools to be provided by the contractor with the


exclusive right to use such equipment and tools being with the contractor,

but the contractor was required to provide twenty four hours service as

and when required by the company by mobilising crew and equipment

and the equipment and tools were to be used exclusively for the services

of Oil India Limited. Monthly rental charges on the equipment were payable

by Oil India Limited for the equipment which the petitioner was to include

in its invoices and Oil India Limited was to deduct from its payments to

the petitioner, for payment over to the Government. The question was

whether the transaction was a sale within the meaning of the Assam

General Sales Tax Act, 1993:

Held, that the conditions of the contract clearly indicated that the petitioner

had entered into an agreement / arrangement whereby the right to use all the

equipments for the purpose of oil logging and perforation was transferred to

Oil India on payment of rental charges. The equipments provided by the

petitioner were exclusively meant for use by Oil India on payment of charges.

The petitioner having placed the equipments at the work site was not entitled

to use it for any other purpose or to withdraw it at its volition. The terms and

conditions clearly indicated an element of implied possession over the

equipments by Oil India. The contract was a lease within the meaning of

section 2(19) of the Act and within the fold of the definition of “sale” in

section 2 (33) (iv) of the Act. The clause in the contract requiring Oil India to

deduct sales tax at source from its payments to the petitioner was not contrary

to the provisions of law.

HLS ASIA Ltd. v. State of Assam and Others (2003) 132 S.T.C. 217 (GauhatiHigh Court)

[52] Supply of gas in cylinders-charges for retaining of cylindersbeyond stipulated time

The assessee is a dealer in industrial gases and medical oxygen. It

supplies industrial gases / medical oxygen to its various customers in

cylinders. As per the stipulation in the sale bill, the cylinder has to be

returned to the assessee within ten days of the supply. If for any reason

the cylinder is not returned within the said period, the instruction in the

bill provides for payment of a rent of 75 paise per day for the period after

the expiry of ten days up to a period of 20 days and thereafter at the rate

of Rs. 1/- per day till it is returned to the assessee. In the assessments

for the two years, i.e., 1985-86 and 1986-87, the assessee had received

certain amounts by way of rent for the delayed return of the cylinders.

The assessing authority had included the said amount as turnover liable

to tax under the Act in view of section 5(1) (iii) of the Act. The assessee

fi led appeal against the assessment order before the Deputy

Commissioner (Appeals), A.I.T. and S.T., Ernakulam wherein the

assessee, inter alia, challenged the inclusion of the rent. The first appellate

authority agreed with the assessing authority and rejected the claim.

This was confirmed by the Tribunal in second appeal. In revision:

Held, allowing the revision, that it is only for the detention beyond the

stipulated period a rent is provided and that cannot be treated as turnover


received for transfer of the right to use the cylinders. The rent received for

the delayed return of the cylinder is not liable to be assessed under section

5(1) (iii) of the Act. The orders of the two appellate authorities on this issue

are to be set aside.

West Coast Industrial Gases Ltd. v. State of Kerala 2003 NTN (Vol. 23)564; (2003) 132 S.T.C. 177 (Kerala High Court)

[53] Hiring of Bank Lockers

The extended meaning of “sale” in section 2(g) (ii) of the Bengal Finance

(Sales Tax) Act, 1942, takes in any transfer of the right to use any goods

for any purpose for cash, deferred payment or valuable consideration.

The department issued notices to a number of banks for the purpose of

levying tax on the transfer of the right to use the bank lockers, which

amounted to sale. The banks filed writ petitions challenging the notices,

contending that the facility granted to customers of the bank was not a

sale.

Held, allowing the petitions, that where property was specially equipped

and fitted out for a special purpose and let out, it could not be regarded

as mere parting with possession of the property for the purpose of earning

income. The banks had built a strong room, installed a steel cabinet with

safety lockers with double locking system; access to lockers was

checked and constant guard provided over the property. The locker could

not be opened by a customer unless the bank opened the lock with a

master key. Customers obtained admission to the vaults only when the

bank allowed it. The authority granted to the authorised person had to be

recorded in the books of the bank beforehand. After the death of a

customer only the executor or administrator of the estate of deceased

could operate the locker. The bank had alien on the goods stored in the

locker for the rent payable by the customer.

Therefore, the subject hired out was a complex one, not merely a transfer

of right to use goods, but a rendering of various services along with a

limited right to use the locker. The lease of bank lockers did not come

within the meaning of “sale” as contained in section 2(g) (ii) of the Bengal

Finance (Sales Tax) Act.

Bank of India v. Commercial Tax Officer, Central Section, Calcutta, AndOthers 1987 S.T.C. Vol. 67 page 199 (Calcutta High Court)

[54] Hiring out of buses to transport corporation

The petitioners hired out a bus belonging to them to the Orissa State

Road Transport Corporation, under a contract under which the owner had

to abide by all orders and directions of the General Manager of the

Corporation or any officer authorised by him in this behalf in regard to the

starting station of the journey, operation, haltage, destination, timing and

routes, issued from time to time. The owner could not use the vehicle

covered by the agreement in any route except in accordance with the

orders and directions issued by the Corporation under the agreement.

Though the driver was provided by the owner he was answerable to the


Corporation. The question before the court was whether the agreement

represented a transfer of the right to use goods within the extended

definition of “sale” in section 2(g) of the Orissa Sales Tax Act, 1947:

Held, that for all practical purposes the effective control or general control

of the vehicle under the agreement rested with the Corporation. There was

possession of the bus by the Corporation and loss of possession by the

owner. Consequently there was transfer of the right to use the bus, and it

was a case of sale within the extended meaning of the term in section 2(g) of

the Orissa Sales Tax Act, 1947.

Krushna Chandra Behera and Another v. State of Orissa and Others 1991S.T.C. Vol. 83 325 (Orissa High Court)

[55] Situs of a sale in cases of transfer of right to use goods -Legislative competence of States to levy tax

In this case, the Honorable Supreme Court has observed as under-

1. The States in exercise of power under Entry 54 of List II read

with article 366 (29-A) (d) are not competent to levy sales tax on the

transfer of right to use goods, which is deemed sale, if such sale

takes place outside the State or is a sale in the course of inter-State

trade or commerce or is a sale in the course of import or export.

2. The appropriate Legislature by creating legal fiction can fix situs

of sale, in the absence of any such legal fiction the situs of sale in

case of the transaction of transfer of right to use any goods would be

the place where the property in goods passes, i.e. where the written

agreement transferring the right to use is executed.

3. Where the goods are available for the transfer of right to use the

taxable event on the transfer of right to use any goods is on the transfer

which results in right to use and the situs of sale would be the place

where the contract is executed and not where the goods are located

for use.

4. In cases where goods are not in existence or where there is an

oral or implied transfer of the right to use goods, such transactions

may be effected by the delivery of the goods. In such cases the taxable

event would be on the delivery of goods.

5. The transaction of transfer of right to use goods can not be

termed as a contract of bailment as it is deemed sale within the meaning

of legal fiction engrafted in Clause (29-A)(d) of Article 366 of the

Constitution wherein the location or delivery of goods to put to use is

immaterial.

6. Article 366 (29-A) (d) further shows that levy of tax is not on use

of goods but on the transfer of the right to use goods. The right to use

goods accrues only on account of the transfer of right. In other words,

right to use arises only on the transfer of such a right and unless there

is transfer of right, the right to use does not arise. Therefore, it is the

transfer which is sine qua non for the right to use any goods. If the

goods are available, the transfer of the right to use takes place when


the contract in respect thereof is executed. As soon as the contract

is executed, the right is vested in the lessee. Thus, the situs on taxable

event of such a tax would be the transfer which legally transfers the

right to use goods. In other words, if the goods are available irrespective

of the fact where the goods are located and a written contract is entered

into between the parties, the taxable event on such a deemed sale

would be the execution of the contract for the transfer of right to use

goods. But in case of an oral or implied transfer of the right to use

goods. It may be effected by the delivery of the goods.

7. Therefore, the contention, on behalf of the respondents that there

would be no completed transfer of right to use goods till the goods are

delivered is to prevail, then the respondents are further required to

show that the contract of transfer of right to use goods is also entered

into in the said State in which the goods are located or delivered for

use. The State can not levy a tax on the basis that one of the events

in the chain of events has taken place within the State. The delivery of

the goods may be one of the elements of transfer of right to use, but

the same would not be condition precedent for the contract of transfer

of right to use goods. Where a party has entered into a formal contract

and the goods are available for delivery irrespective of the place where

they are located, the situs of such sale would be where the property in

goods passes, namely, where the contract is entered into.

8. What is required is that the goods should be in existence so

that they may be used. And further contract in respect thereof is also

required to be executed. Given that the locus of the deemed sale is

the place where the right to use the goods is transferred, where the

goods are, when the right to use them is transferred, is of no relevance

to the locus of the deemed sale.

M/s 20th Century Finance Corporation Ltd. and Another v. State ofMaharashtra 2000 NTN (Vol. 16) 425; (2000) 116 S.T.C. 12 (Supreme Court)

[56] Transfer of the right to use a telephone connection and Mobilephones

The case State of Uttar Pradesh and Another v. Union of India and others

(2000) 130 S.T.C. 114 (Supreme Court) relates to transfer of the right to

use a telephone connection. In this case the Hon’ble Supreme Court has

observed as under:

”It needs to be borne in mind that handing over of the possession is not

sine qua non of completing the transfer of the right to use goods. It was

so held by a constitution Bench of this court in 20th Century Finance

Corporation LTD and Another v. State of Maharashtra and Another [(2000)

116 STC 12]. A ‘transfer of the right to use any goods’ will be completed

according to law lay down by the majority in that case on completion of

the contract to transfer of the right to use the goods”.

State of Uttar Pradesh and Another v. Union of India and others (2000)130 S.T.C. 114 (Supreme Court)


Important Note: The Hon’ble Supreme Court, on the Review Petition

presented by Bharat Sanchar Nigam Ltd. & Anr. has reviewed the aforesaid

decision. In view of the judgment given in the review petition, aforesiad view

does not prevail.

[57] Telephone Connection & Mobile phone -Concept of transfer ofright to use goods

In the case of Bharat Sanchar Nigam Limited & Ors Vs. Union of India,

the Hon’ble Supreme Court has given its decision on following important

points:-

(A) Taxing Statutes-Appl icabi l i ty of pr inciple of res judicata

Whether principle of res judicata applies in matters pertaining to tax

for different assessment years where the cause of action for each

assessment year is different?

Held-No, that res judicata does not apply in matters pertaining to tax for

different assessment years because res judicata applies to debar Courts

from entertaining issues on the same cause of action whereas the cause of

action for each assessment year is distinct. The Courts would generally

adopt an earlier pronouncement of the law or a conclusion of a fact unless

there is a good ground urged for or a material change in the factual position.

The reason why the Courts have held parties to the opinion expressed in a

decision in one assessment year to the same opinion in a subsequent year

is not because of any principle of res judicata but because of theory of

precedent or the precedential value of the earlier pronouncement. Where

facts and law in a subsequent year are the same, no authority whether quasi

judicial or judicial can generally be permitted to take a different view. This

mandate is subject only to the usual gateways of distinguishing the earlier

decision or where the earlier decision is per incuriam. However, these are

fetters only on a coordinate bench which, failing the possibility of availing of

either of those gateways, may yet differ with the view expressed and refer

the matter to a bench of superior strength or in some cases to a bench of

superior jurisdiction.

(B) Constitution- 46th Constitutional Amendment- Clause (29A) of Article

366- Gannon Dunkerley’s Case.

Whether law laid down by the Apex Court in Gannon Dunkerley’scase survived the 46th Constitutional Amendment?

HELD- that Gannon Dunkerley survived the 46th Constitutional Amendment

in two respects. First with regard to the definition of ‘sale’ for the purposes of

the Constitution in general and for the purposes of Entry 54 of List II in

particular except to the extent that the clauses in Art.366 (29A) operate. By

introducing separate categories of ‘deemed sales’, the meaning of the word

‘goods’ was not altered. Thus the definitions of the composite elements of a

sale such as intention of parties, goods, delivery etc. would continue to be

defined according to known legal cannotations. This does not mean that the

content of the concepts remain static. Courts must move with the times.

But the 46th Amendment does not give a licence for example to assume

that a transaction is a sale and then to look around for what could be the


goods. The word “goods” has not been altered by the 46th amendment. That

ingredient of a sale continues to have the same definition. The second respect

in which Gannon Dunkerley has survived is with reference to the dominant

nature test to be applied to a composite transaction not covered by Article

366(29A). The transactions which are mutant sales are limited to the clauses

or Article 366(29A). All other transactions would have to qualify as sales

within the meaning of Sales of Goods Act, 1930 for the purpose of levy of

sales tax.

(C) Goods - Electromagnetic waves or radio frequencies -Telephone

communication and other accessories giving access to telephone

exchange with or without instruments.

What are “goods” in telecommunication for the purposes ofArticle 366(29A)(d)?

Goods do not include electromagnetic waves or radio frequencies for the

purpose of Article 366(29A)(d). The goods in telecommunication are limited

to the handsets supplied by the service provider.

(D) Transfer of right to use goods- Telephone communication and other

accessories giving access to telephone exchange with or without

instruments. Is there any transfer of any right to use any goods by

providing access or telephone connection by the telephone service

provider to a subscriber?

THERE MAY BE TRANSFER OF RIGHT TO USE GOODS AS DEFINEDIN ANSWER TO THE PREVIOUS QUESTION BY GIVING A TELEPHONE

CONNECTION.

(E) Nature of transaction - Providing of telephone connection

Is the nature of the transaction involved in providing telephone

connection a composite contract of service and sale? If so, is it

possible for the States to tax the sale element?

THE NATURE OF THE TRANSACTION INVOLVED IN PROVIDING THETELEPHONE CONNECTION MAY BE A COMPOSITE CONTRACT OFSERVICE AND SALE. IT IS POSSIBLE FOR THE STATE TO TAX THESALE ELEMENT PROVIDED THERE IS A DISCERNIBLE SALE ANDONLY TO THE EXTENT RELATABLE TO SUCH SALE.

(F) Applicability of aspect theory- Providing of telephone connection- A

composite contract of sale and service.

Would the “aspect theory” be applicable to the transaction enabling

the States to levy sales tax on the same transaction in respect of

which the Union Government levies service tax?

THE ASPECT THEORY WOULD NOT APPLY TO ENABLE THE VALUEOF THE SERVICES TO BE INCLUDED IN THE SALE OF THE GOODSOR THE PRICE OF GOODS IN THE VALUE OF THE SERVICE.

(G) Goods -SIM Cards- Sale or service

Whether SIM cards are goods for the purpose of levyof sales tax?


WHAT A SIM CARD REPRESENTS IS ULTIMATELY A QUESTION OFFACT AS HAS BEEN CORRECTLY SUBMITTED BY THE STATES. INDETERMINING THE ISSUE, HOWEVER THE ASSESSINGAUTHORITIES WILL KEEP IN MIND THE FOLLOWING PRINCIPLES:IF THE SIM CARD IS NOT SOLD BY THE ASSESSEE TO THESUBSCRIBERS BUT IS MERELY PART OF THE SERVICES RENDEREDBY THE SERVICE PROVIDERS, THEN A SIM CARD CANNOT BECHARGED SEPARATELY TO SALES TAX. IT WOULD DEPENDULTIMATELY UPON THE INTENTION OF THE PARTIES. IF THEPARTIES INTENDED THAT THE SIM CARD WOULD BE A SEPARATEOBJECT OF SALE, IT WOULD BE OPEN TO THE SALES TAXAUTHORITIES TO LEVY SALES TAX THEREON.IF SALE OF A SIM CARD IS MERELY INCIDENTAL TO THE SERVICEBEING PROVIDED AND ONLY FACILITATES THE IDENTIFICATION OFSUBSCRIBERS, THEIR CREDIT AND OTHER DETAILS, IT WOULD NOTBE ASSESSABLE TO SALES TAX.

Bharat Sanchar Nigam Ltd. & Anr. Versus Union of India & Ors. 2006,NTN (Vol-30) (Supreme Court)

[58] Vehicles remained in the control and possession of the ownerof buses - Whether matter involves transfer of the right to use the

buses?

The dealer opposite party had contended that he had not transferred right

to use buses and therefore, transportation charges received were not

turnover of sale. Assessing Authority, after rejecting the plea of the dealer,

assessed the receipts treating it the turnover of sale, effected by transfer

of right to use buses. In appeal before the Tribunal, the Tribunal, after

making following observations, accepted the plea of the dealer:

“It appears that in view of the terms and conditions of the agreement

made from the Indian Oil Corporation, Mathura, the vehicle remained in

the ownership of the appellant after the day word on scheduled routes are

over. The bus owner was also liable for all expenditure in running the bus

and for its upkeep. The driver and all other staff were the employees of

the bus owner. The bus owner was also liable not only for running

expenditure but also for the insurance etc.”

Dismissing the revision filed by the Commissioner, Trade Tax, the Hon’ble

Court held that the case was squarely covered by the judgment in the

case of M/s Ahuja Goods Agency and another Vs. State of U. P. 1997

NTN (Vol. 11) 469; 1997 UPTC 629, delivered by the Division Bench of

that Court. In that case it was found that the custody of the trucks

remained with the owner and only transportation charges for transportation

of goods were paid. There was no transfer of right to use any specified

vehicle. The vehicle remained in the custody of the owner through drivers.

Therefore, it was held that transportation charges were not liable to tax.

The Commissioner, Trade Tax, U.P. Lucknow Vs. Sunil Agrawal2006 NTN (Vol-29) – 98 (Allahabad High Court)


[59] The U. P. Trade Tax Act, 1948 –Section 3-F – Transfer of right touse goods – Contract of transportation of milk from one place to other-Places specified under the contract – Vehicles remaining in the controlof the owner – Salary of employees, diesel expenses, taxes, insurancecharges, maintenance charges borne by the owner of the vehicles –Contract of transportation of milk and not a contract for transfer of theright to use vehicles.

Held – “ Further, a bare perusal of the various terms and conditions of the

aforesaid contract show beyond doubt that it was essentially a contract to

transport the milk from one point to another. It was not a case of transfer of

transport vehicle and its use. The transport vehicle remained under the control

of the dealer the opposite party in as much as it has to employ the driver and

other staff for its running and was made liable to get the vehicle insured and

pay the road tax, goods tax and salary of the driver and cleaners etc. The

Tribunal misconstrued the terms and conditions of the above contract and it

has wrongly reached to the conclusion that there was transfer of right to use

the transport vehicle.”

M/s Jagannath Gautam Vs. Commissioner of Trade Tax, U. P. Lucknow2006 NTN (Vol-29) – 118 (Allahabad High Court)

WORKS CONTRACT

[60] Measure of Tax in a Works Contract

Though the tax is imposed on the transfer of property in goods involved in

the execution of a works contract, the measure for levy of such imposition

is the value of the goods involved in the execution of a works contract.

The Hon’ble Supreme Court has expressed its opinion as under:

“Measure for the levy of the tax contemplated by Article 366 (29-A) (b) is

the value of the goods involved in the execution of works contract. Though

the tax is imposed on the transfer of property in goods involved in the

execution of a works contract, the measure for levy of such imposition is

the value of the goods involved in the execution of a work contract. It

cannot be accepted that the value of such goods for levying the tax can

be assessed only on the basis of the cost of acquisition of the goods by

the contractor. Since the taxable event is the transfer of property in goods

involved in the execution of a works contract and the said transfer of

property in such goods takes place when the goods are incorporated in

the works, the value of the goods which can constitute the measure for

the levy of the tax has to be the value of the goods at the time of

incorporation of the goods in the works and not the cost of acquisition of

the goods by the contractor. It cannot also be accepted that in addition to

the value of the goods Involved in the execution of the works contract the

cost of incorporation of the goods in the works can be included in the

measure for levy of tax. Incorporation of the goods in the works forms part

of the contract relating to work and labour which is distinct from the

contract for transfer of property in goods and, therefore, the cost of

incorporation of the goods in the works cannot be made a part of the

measure for levy of tax contemplated by Article 366 (29-A) (b).”


Gannon Dunkerley & Co. and Another vs. State of Rajasthan and Others(1992 NTN (Vol. 1) 417; 1993 U P T C - 416) (Supreme Court)

[61] Levy of tax by the States in cases of works contracts is subjectto provisions of Entry 92-A of Union List of the Seventh Schedule andArticle 286 of the Constitution

Sections 3, 4, 5, 14 and 15 of the Central Sales Tax Act, 1956 apply to

levy of tax by the States in cases of works contracts. In paragraph 49 of

its judgment in the case of M/s Gannon Dunkerley & Co. and Another vs.

State of Rajasthan and Others (1993 U P T C - 416) SC, the Hon’ble

Supreme Court has held as under:

“We may, however, make it clear that apart from the deductions referred

to above, it will be necessary to exclude from the value of the works

contract the value of the goods which are not taxable in view of Sections

3, 4 and 5 of the Central Sales Tax Act and goods covered by Sections

14 and 15 of the Central Sales Tax Act as well as goods which are exempt

from tax under the sales tax Legislation of the State. The value of goods

involved in the execution of a works contract will be determined after

making these deductions and exclusions from the value of the works

contract.”

M/s Gannon Dunkerley & Co. and Another vs. State of Rajasthan andOthers 1992 NTN (Vol. 1) 417; (1993 U P T C - 416) (Supreme Court)

[62] Computation of value of goods involved in the execution of aworks contract

The Hon’ble Supreme Court has held that in case of a works contract,

value of involved goods can be arrived at by deducting expenses incurred

for providing labour and other services from the value of works contract. In

the judgment in the case M/s Gannon Dunkerley & Co. and Another vs.

State of Rajasthan and Others (1993 U P T C -416) SC, the Hon’ble

Supreme Court has laid following principle:

“The position of a contractor in relation to a transfer of property in goods

in the execution of a works contract is not different from that of a dealer in

goods who is liable to pay sales tax on the sale price charged by him

from the customer for the goods sold. The said price includes the cost of

bringing the goods to the place of sale. Similarly, for the purpose of

ascertaining the value of goods which are involved in the execution of a

works contract for the purpose of imposition of tax, the cost of

transportation of the goods to the place of works has to be taken as part

of the value of the said goods. ————. Ordinarily the cost of

establishment is included is the sale price charged by a dealer from the

customer for the goods sold. Since a composite works contract involves

supply of materials as well as supply of labour and services, the cost of

establishment of the contractor would have to be apportioned between

the pars of the contract involving supply of materials and the part involving

supply of labour and services. The cost of establishment of the contractor

which is relatable to supply of labour and services cannot be included in

the value of the goods involved in the execution of a contract and the cost


of establishment which is relatable to supply of material involved in

execution of the works contract only can be included in the value of the

goods. Similar apportionment will have to be made in respect of item No.

(viii) relating to profits. The profits which are relatable to the supply of

material, can be included it: the value of the goods and the profits which

are relatable to supply of labour and services will have to be excluded,

This means that respect of charges mentioned in items Nos. (vii) and

(viii), the cost of establishment of the contractor as well as the profit

earned by him to the extent the same are relatable to supply of labour

and services will have to be excluded. The amounts so deductible would

have to be determined in the light of the facts of a particular case on the

basis of the material produced by the contractor. The value of the goods

involved in the execution of a works contract will, therefore, have to be

determined by taking into account the value of entire works contract and

deducting therefrom the charges towards labour and services which would

cover:

(a) labour charges for execution of the works;

(b) amount paid to a sub-contractor for labour and services;

(c) charges for planning, designing and architect’s fees;

(d) charges for obtaining on hire or otherwise machinery and tools used

for the execution of the works contract;

(e) cost of consumables such as water, electricity, fuel, etc., used in the

execution of the works contract the property in which is not transferred

in the course of execution of a works contract; and

(f) cost of establishment of the contractor to the extent it is relatable to

supply of labour and services;

(g) other similar expenses relatable to supply of labour and services;

(h) profit earned by the contractor to the extent it is relatable to supply of

labour and services.”

M/s Gannon Dunkerley & Co. and Another vs. State of Rajasthan andOthers 1992 NTN (Vol. 1) 417; (1993 U P T C -416) (Supreme Court)

[63] State Legislature may prescribe formula for deduction of cost oflabour and services where accounts either have not been maintainedor produced by the contractor or if produced, the same have not beenfound worthy of credence by the assessing authority

In paragraph 50 of its judgment in the case of M/s Gannon Dunkerley &

Co. and Another vs. State of Rajasthan and Others (1993 U P T C - 416)

SC, the Hon’ble Supreme Court has observed as under:

“Normally, the contractor will be in a position to furnish the necessary

material to establish the expenses that were incurred under the aforesaid

heads of deduction for labour and services, But there may be cases where

the contractor has not maintained proper accounts or the accounts

maintained by him are not found to be worthy of credence by the assessing

authority. In that event, a question would arise as to how the deduction


towards the aforesaid heads may be made. On behalf of the States, it

has been urged that it would be permissible for the State to prescribe a

formula on the basis of a fixed percentage of the value of the contract as

expenses towards labour and services and the same may be deducted

from the value of the works contract and that the said formula need not be

uniform for all works contracts and may depend on the nature of the works

contract. We find merit in this submission. In cases where the contractor

does not maintain proper accounts or the accounts maintained by him

are not found worthy of credence it would, in our view, be permissible for

the State Legislature to prescribe a formula for determining the charges

for labour and services by fixing a particular percentage of the value of the

works contract and to allow deduction of the amount thus determined

from the value of the works contract for the purpose of determining the

value of the goods involved in the execution of the works contract. It must,

however, be ensured that the amount deductible under the formula that is

prescribed for deduction towards charges for labour and services does

not differ appreciably from the expenses for labour and services that would

be incurred in normal circumstances in respect of that particular type of

works contract. Since the expenses for labour and, services would depend

on the nature of the works contract and would not be the same for all

types of works contracts, it would be permissible, indeed necessary, to

prescribe varying scales for deduction on account of cost of labour and

services for various types of works contracts.”


[64] Validity of fixation of uniform rate of tax for various types ofgoods involved in the execution of a works contract

Uniform rate of tax for various types of goods involved in execution of a

works contract can be fixed, which may be different from rate of tax fixed

in respect of sales or purchases of those goods as a separate article. In

paragraph 51 of its judgment in the case of M/s Gannon Dunkerley & Co.

and Another vs. State of Rajasthan and Others (1992 NTN (Vol. 1) 417;

1993 U P T C - 416) SC, the Hon’ble Supreme Court has observed as

under:

“A question has been raised whether it is permissible for the State

Legislature to levy tax on the sale falling, within. the ambit, of Article 366

(29-A) by prescribing a uniform rate of tax for all goods involved in the

execution of a works contract even though different rates of tax are

prescribed for sale of such goods. The learned counsel for the contractors

has urged that it would not be permissible to impose, two different rates

of tax in respect of sale of the same article, one rate when the article is

sold separately and a different rate when there is deemed sale in

connection with the execution of a works contract. On behalf of the States

it has been submitted that it is permissible for the State to impose a

particular rate of tax on all goods involved in the execution of a works

contract which may be different from the rates of tax applicable to those

goods when sold separately. In the field of taxation the decisions of this


Court have permitted the Legislature to exercise an extremely wide

discretion in classifying items for tax purposes, so long as it refrains

from clear and hostile discrimination against particular persons or classes.

(See: East India Tobacco Company v. State of Andhra Pradesh, (1962)

13 STC 529 (SC) at page 534: (1963) 1 SCR 404 at page 404; P. M,

Ashwathanarayan Shelly v. State of Karnataka, (1988) Supp 3 SCR 155

at page 188 ; Federation of Hotel & Restaurant Association of India v.

Union of India, (1989) 74 STC 102 (SC) at page 126: (1989) 2 SCR 918 at

page 949 and Kerala Hotel & Restaurant Association v. State of Kerala,

1990 UPTC 617 (SC): (1990) 77 STC 253 (SC) at page 264: (1990) 1 SCR

516 at page 530). Imposition of sales tax at different rates depending on

the value of the annual turnover was upheld in Kodar v. State of Kerala,

(1974) 34 STC 73 (SC): (1975) 1 SCR 121. Similarly, imposition of

purchase tax at different rates for sugar mills and khandsari units was

upheld in Ganga Sugar Corporation Ltd. v. Stale of U. P. 1980 UPTC 174

(SC): (1980) 45 STC 36 (SC): (1980) 1 SCR 769. In our opinion, therefore,

it would be permissible for the State Legislature to tax at the goods involved

in the execution of a works contract at a uniform rate which may be

different from the rates applicable to individual goods because the goods

which are involved in the execution of the works contract when incorporated

in the works contract can be classified into a separate category for the

purpose of imposing the tax and a uniform rate may be prescribed for

sale of such goods.”


[65] Cost of establishment of a contractor to be apportioned betweenthe the part of the contract involving supply of materials and the partinvolving supply of labour and services

In its judgment in the case of M/s Gannon Dunkerley & Co. and Another

vs. State of Rajasthan and Others (1992 NTN (Vol. 1) 417; 1993 U P T C

- 416) SC, the Hon’ble Supreme Court has observed as under:

“Ordinarily the cost of establishment is included is the sale price charged

by a dealer from the customer for the goods sold. Since a composite

works contract involves supply of materials as well as supply of labour

and services, the cost of establishment of the contractor would have to

be apportioned between the part of the contract involving supply of

materials and the part involving supply of labour and services. The cost of

establishment of the contractor which is relatable to supply of labour and

services cannot be included in the value of the goods involved in the

execution of a contract and the cost of establishment which is relatable

to supply of material involved in execution of the works contract only can

be included in the value of the goods. Similar apportionment will have to

be made in respect of item No. (viii) relating to profits. The profits which

are relatable to the supply of material, can be included it: the value of the

goods and the profits which are relatable to supply of labour and services

will have to be excluded, This means that respect of charges mentioned

in items Nos. (vii) and (viii), the cost of establishment of the contractor as


well as the profit earned by him to the extent the same are relatable to

supply of labour and services will have to be excluded.”

M/s Gannon Dunkerley & Co. and Another vs. State of Rajasthanand Others 1992 NTN (Vol. 1) 417; (1993 U P T C - 416) (Supreme Court)

[66] In a works contract, value of materials to include cost oftransportation of such materials



SC, the Hon’ble Supreme Court has observed as under:

“The position of a contractor in relation to a transfer of property in goods

in the execution of a works contract is not different from that of a dealer in

goods who is liable to pay sales tax on the sale price charged by him

from the customer for the goods sold. The said price includes the cost of

bringing the goods to the place of sale. Similarly, for the purpose of

ascertaining the value of goods which are involved in the execution of a

works contract for the purpose of imposition of tax, the cost of

transportation of the goods to the place of works has to be taken as part

of the value of the said goods.”

M/s Gannon Dunkerley & Co. and Another vs. State of Rajasthanand Others 1992 NTN (Vol. 1) 417; (1993 U P T C - 416) (Supreme Court)

[67] Whether decision given by the Hon’ble Supreme Court in caseof Rainbow Colour Lab Ltd v. State of Madhya Pradesh and Othershas been overruled

In view of the decision of the Hon’ble Supreme Court in case of of M/s

Associated Cement Companies Ltd. V. Commissioner of Customs 2000

NTN (vol. 20) 73 SC, the Hon’ble Allahabad High Court, in its decision in

Civil Misc. Writ Petition No. 266 0f 2003, M/s Vahoo Photo International

and Another v, State Of Uttar Pradesh and Another 2003 NTN (Vol. 22) -

246, has held that decision of the Supreme Court in case of M/s Rainbow

Colour Lab has been over ruled by the decision of the Supreme Court in

case of M/s Associated Cement Companies Ltd. V. Commissioner ofCustoms 2000 NTN (vol. 20) 73 SC.

In this judgment, validity of circulars dated 4-5-2001 and dated 28-1-2002,

issued by the Commissioner Trade Tax U. P. directing the the subordinate

officer for levying tax on photographers by splitting the value of service

and sale, has been upheld by the Hon’ble High Court.

M/s Vahoo Photo International and Another v, State Of UttarPradesh and Another 2003 NTN (Vol. 22) -246 (Allahabad High Court)

[68] Guidelines for leving tax on sale of goods under a works contract



SC, the Hon’ble Supreme Court, in the matter of levy of tax on sale of

goods in a works contract, has provided following guidelines :- In exercise

of its legislative power to impose tax on sale or purchase of goods under


entry 54 of the State List read with Article 366 (29-A) (b), the State

Legislature, while imposing a tax on the transfer of property in goods

(whether as goods or in some other form) involved in the execution of a

works contract is not competent to impose a tax on such a transfer

(deemed sale) which constitutes a sale in the course of inter-State trade

or commerce or a sale outside the State or a sale in the course of import

or export.

The provisions of Sections 3, 4, 5 and Sections 14 and 15 of the Central

Sales Tax Act, 1956, are applicable to a transfer of property in goods

involved in the execution of a works contract covered by Article 364

(29-A) (b).

While defining the expression “sale” in the sales tax legislation it is

open to the State Legislature to fix the situs of a deemed sale resulting

from transfer falling within the ambit of Article 366 (29-A) (b) but it is

not permissible for the State Legislature to define the expression “sale”

in a way as to bring within the ambit of the taxing power a sale in the

course of inter-state trade or commerce, or a sale outside the State or

a sale in the course of import and export.

The tax on transfer of property, in goods (whether as goods or in some

other form) involved in the execution of a works contract falling, within

the ambit of Article 366 (29-A) (b) is leviable on the goods involved in

the execution of a works contract and the value of the goods which are

involved in the execution of works contract would constitute the,

measure for imposition of the tax.

In order to determine the value of the goods which are involved in the

execution of a works contract for the purpose of levying the tax referred

to in Article 366 (29-A) (b), it is permissible to take the value of the

works contract as the basis and the value of the goods involved in the

execution of the works contract can be arrived at by deducting

expenses incurred by the contractor for providing labour and other

services from the value of the works contract.

The charges for labour and services which are required to be deducted

from the value of the works contract would cover (i) labour charges for

execution of the works, (ii) amount paid to a sub-contractor for labour

and services, (iii) charges or obtaining on hire or otherwise machinery

and tools used for execution of the works contract, (iv) charges for

planning, designing and architect’s fees, and (v) cost of consumables

used in the execution of the works contract, (vi) cost of establishment

of the contractor to the extent it is relatable to supply of labour and

services, (vii) other similar expenses relatable to supply of labour and

services, and (viii) profit earned by the contractor to the extent it is

relatable to supply of labour and services.

To deal with cases where the contractor does not maintain proper

accounts or the account books produced by him are not found worthy

of credence by the assessing authority the Legislature may prescribe

a formula for deduction of cost of labour and services on the basis of a


percentage of the value of the works contract but while doing so it has

to be ensured that the amount deductible under such formula does

not differ appreciably from the expenses for labour and services that

would be incurred in normal circumstances in respect of that particular

type of works contract. It would be permissible for the Legislature to

prescribe varying scales for deduction on account of cost of labour

and services for various types of works contract.

While fixing the rate of tax it is permissible to fix a uniform rate

of tax for the various goods involved in the execution of a works contract

which rate may be different from the rates of tax fixed in respect of

sales or purchase of those goods as separate article

M/s Gannon Dunkerley & Co. and Another vs. State of Rajasthanand Others (1992 NTN (Vol. 1) 417; 1993 U P T C - 416) (Supreme Court)

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