Larsen & Toubro Ltd. v. Deputy Commissioner, Commercial Taxes, Ernakulam; Assistant Commissioner (Assmt), Sales Tax Special Circle II, Ernakulam; Deputy Tahsildar (RR), Ernakulam; State of Kerala

IN THE HIGH COURT OF KERALA AT ERNAKULAM ## PRESENT: THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE WEDNESDAY, THE 12TH DAY OF APRIL 2017/22ND CHAITHRA, 1939 OP.No. 28388 of 2000 (D) ------------------------- PETITIONER(S): ------------- M/S.LARSEN & TOUBRO LTD. REGISTERED OFFICE, L & T HOUSE, BALLARD ESTATE, MUMBAI 400 001. REPRESENTED BY ITS BRANCH MANAGER, RAVIPURAM BRANCH, COCHIN, MR.C.B.PRADEEP KUMAR. BY ADVS.SRI.M.PATHROSE MATTHAI (SR.) SRI.A.KUMAR RESPONDENT(S): -------------- 1. THE DEPUTY COMMISSIONER, COMMERCIAL TAXES, ERNAKULAM. 2. THE ASSISTANT COMMISSIONER (ASSMT), SALES TAX SPECIAL CIRCLE II, ERNAKULAM. 3. THE DEPUTY TAHSILDAR (RR), ERNAKULAM. 4. STATE OF KERALA, REPRESENTED BY ITS CHIEF SECRETARY TO GOVERNMENT, TRIVANDRUM. R4 BY ADV. SR GOVERNMENT PLEADER SRI.V.K.SHAMSUDHEEN THIS ORIGINAL PETITION HAVING BEEN FINALLY HEARD ON 14-102017, THE COURT ON 12/4/2017 DELIVERED THE FOLLOWING: ## **OP NO.28388/2000** ## **APPENDIX** ## **PETITIONER'S EXHIBITS** **EXT.P1: TRUE COPY OF PROVISIONAL ASSESSMENT ORDER FOR AUGUST 1999 DATED 29.2.2000.** **EXT.P2: TRUE COPY OF PROVISIONAL ASSESSMENT ORDER FOR SEPTEMBER 1999 DATED 29.2.2000.** **EXT.P3: TRUE COPY OF PENALTY NOTICE DT 28.10.99 ISSUED BY THE 2ND RESPONDENT.** **EXT.P4A: TRUE COPY OF REPLY DATED 11.12.1999.** **EXT.P4B: TRUE COPY OF REPLY NOTICE DT 6.1.2000.** **EXT.P4C: TRUE COPY OF REPLY NOTICE DT 23.3.2000.** **EXT.P5: TRUE COPY OF PENALTY ORDER OF THE 2ND RESPONDENT DT 13.4.2000.** **EXT.P6: TRUE COPY OF ORDER IN REVISION OF THE 1ST RESPONDENT DT 26.9.2000.** **EXT.P7: TRUE COPY OF ORDER IN APPEAL DT 18.9.2000 WITHOUT ANNEXURES.** **EXT.P8: TRUE COPY OF THE INVOICE AND SUPPORTING DOCUMENTS FOR INTERSTATE SALE.** **EXT.P9: TRUE COPY OF THE SPECIMEN INVOICE IN RESPECT OF THE GOODS MANUFACTURED BY THE PETITIONER AND SUPPLIED TO CRL.** **EXT.P10: TRUE COPY OF THE SPECIMEN INVOICE AND SUPPORTING DOCUMENTS IN CONNECTION WITH THE IMPORTS EFFECTED RELATING TO THE TRANSACTION.** **EXT.P11: TRUE COPY OF THE INVOICE RAISED IN RESPECT OF RAW MATERIALS.** **EXT.P12: TRUE COPY OF ORDER NO.C3/11634/10/CT DATED 5.4.2011.** **OP NO.28388/2000 -2-** **EXT.P13: TRUE COPY OF ORDER NO.3/38881/14/CT DATED 30.4.2015.** **EXT.P14: TRUE COPY OF THE COMMUNICATION DATED 9.1.2015. EXT.P15: TRUE COPY OF THE SIMILAR COMMUNICATION DT 4.2.2009.** ## **//True Copy//** **PS to Judge** **Rp** ## **A.M. SHAFFIQUE, J.** =============== OP No.28388 of 2000 ================== Dated this, the 12[th] day of April, 2017 ## **J U D G M E N T** The original petition is filed challenging Exts. P5 and P6, by which the respondent authorities have imposed penalty on the petitioner on the allegation that there was suppression in payment of sales-tax under the Kerala General Sales Tax Act, 1963 (hereinafter referred as the KGST Act). 2. The short facts involved in the original petition are as under: Petitioner company entered into a contract with Cochin Refineries Ltd for execution of the work for DHDS/Hydrogen plant and other utilities. The work includes design, engineering, procurement, supply, transportation, fabrication, construction, erection, installation, testing and commissioning. It is stated that the work involved distinct transactions by way of importing hightech equipments, inter-state purchases etc. It is submitted that OP No.28388/2000 -:2:- without taking into consideration the fact that the procurement of the materials were either by way of inter-state supplies or by import, assessment orders were passed by the second respondent for the month of August and September 1999, which are produced as Exts. P1 and P2.The second respondent also issued penalty notices under Section 45A of the KGST Act, alleging suppression of taxable turnover. Though replies were submitted, penalty had been imposed on the petitioner by Ext. P5 order. A revision filed against Ext.P5 was dismissed as per Ext. P6 order. It is stated that as against the assessment orders, appeal was filed and the matter had been remitted back to the assessing authority for a fresh disposal. 3. Petitioner submits that though another revisional remedy is available, in the light of the view taken by the authorities which are contrary to settled position of law, it is necessary that this Court should consider the original petition on merits. Petitioner places reference to the judgement of the Apex Court in _**Builders Association of India v. Union of India**_ (73 STC 370), _**Gannon Dunkerley and Co Ltd v. State of Rajasthan**_ (88 STC 204), and _**Steel Authority of India Ltd v.**_ OP No.28388/2000 -:3:- _**State of Orissa**_ , (118 STC 297) and contends that the levy of works contract tax and the penalty thereon is beyond the legislative competence and powers of the State of Kerala and therefore there cannot be any levy of tax or penalty under the KGST Act. 4. In the counter affidavit filed by respondents 1 and 2 they supported the stand taken by the Department. It is stated that the total consideration of the contract is `436.59 crores. The contract amount was inclusive of all taxes and duties, octroi etc. Perusal of the terms of contract clearly indicates that the intention between the parties is that the materials necessary for execution of the contract will be brought by the assessee in their name and using the same materials the contract will be executed. It is further contended that the materials are brought in the name of the assessee and thereafter a bill is raised against the order and therefore there is no inter-state purchase or import in the matter of execution of the contract. In the monthly returns submitted by the assessee the turnover covered by the invoices is claimed as exemption on the ground that those are inter-state sale. But the Department took the view that the sale to the OP No.28388/2000 -:4:- awarder is not an intrastate sale and therefore it is part of turnover. It is in the said circumstances that proceedings were taken under section 45A. It is contended that inter-state sale is over the moment the goods are received by the branch of the assessee at Ernakulam. 5. Before proceeding further it is better to understand the manner in which Exhibit P5 order had been passed. A notice under section 45A of the KGST Act was issued alleging that there was evasion of tax for August 1999 and September 1999. After considering the objection filed by the assessee, it was held that the contractual provisions indicates that the assessee is the consignee of the goods which were removed from outside the State of Kerala pursuant to an agreement between the assessee and the supplier outside Kerala. That the goods thus purchased were inter-state or imported and delivered at the work site of the owner as per the instructions of the assessee or the entry of the name and address of the owner in the bills and in the lorry receipts does not alter the nature of inter-state sale or import coming under Sections 3 and 5 of the CST Act, because the interstate movement of the goods terminates at the work site of the OP No.28388/2000 ## -:5:- assessee as far as the supplier is concerned. It is further found that the goods so delivered at the work site by the outside supplier is the property of the assessee and the title to the goods so delivered at work site passes to the awarder only at the completion of the works contract and the key is delivered to the owner. It is found that inter-state sale envisaged under section 3 (a) of the CST Act and the subsequent transaction that is, execution of works contract with the goods so delivered at work site is as a result of deemed sale mentioned in the Explanation 3A of Section 2(xxi) of the KGST Act. Further it is observed that the owner had no intention to purchase goods inter-state. It is stated that C Form is not issued by the owner for the purchase of goods. All materials are to be provided by the contractor and all taxes are to be paid by the contractor. The lump sum prize agreed for the contract includes the tax also and therefore the assessee is trying to evade payment of tax actually collected from the awarder. It is also stated that the assessee has raised separate bill for each sales. The revisional authority also concurred with the view expressed by the original authority. 6. Heard the learned counsel for petitioner Sri A.Kumar OP No.28388/2000 ## -:6:- and the learned Government pleader Sri V.K. Shamsudheen. Both sides relied upon various judgments which I shall consider during the course of discussion. 7. In _**Gannon Dunkerley and Co. v. State of Rajasthan,**_ (1993) 1 SCC 364), the Constitution Bench was considering questions relating to imposition of tax on the transfer of property in goods involved in the execution of works contracts. It was held that the power to impose tax became available to the State Legislatures as a result of the amendments introduced in the Constitution by the Constitution (Forty-sixth Amendment) Act, 1982, and the validity of the said amendment has been upheld in _**Builders’ Association of India**_ **v.** _**Union of India**_ (1989) 2 SCC 645) and finally it is held as folllows: _“_ _**51.** The aforesaid discussion leads to the following conclusions:_ • _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_ OP No.28388/2000 -:7:- _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 and 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 366(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 a 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 execution of the 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_ OP No.28388/2000 ## -:8:- _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 subcontractor for labour and services; (iii) charges for 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 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_ OP No.28388/2000 ## -:9:- _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 a separate article.”_ ## 8. In **CVAT v. ABB Ltd.,** (2016) 6 SCC 791, it is held as ## under :- _**“16.** The legal principles enunciated in K.G. Khosla have been reiterated in State of Maharashtra v. Embee Corpn. and stand supported by the judgment in CIT v. Indian Explosives Ltd., as well as in Indure Ltd. v. CTO. In these cases, sale in course of imports was accepted without requiring privity of contract between the foreign supplier and the ultimate consumer in India._ _**17.** The aforesaid conclusion leading to our concurrence with the views of the High Court is also based upon the salient facts, particularly the various conditions in the contract and other related covenants between DMRC and the respondent which have been spelt out in para 31 of the High_ OP No.28388/2000 ## -:10:- _Court judgment, enumerated and described as follows: (ABB Ltd. case, SCC OnLine Del)_ _“(1) Specifications were spelt out by DMRC;_ _(2) Suppliers of the goods were approved by DMRC;_ _(3) Pre-inspection of goods was mandated;_ _(4) The goods were custom made, for use by DMRC in its project;_ _(5) Excise duty and customs duty exemptions were given, specifically to the goods, because of a perceived public interest, and its need by DMRC;_ _(6) The Project Authority certificate issued by DMRC the name of the sub-contractors as well as the equipment/goods to be supplied by them were expressly stipulated;_ _(7) DMRC issued a certificate certifying its approval of foreign suppliers located in Italy, Germany, Korea, etc. from whom the goods were to be procured._ _(8) Packed goods were especially marked as meant for DMRC’s use in its project.”_ _Before us there was no attempt to assail the aforesaid features and to even remotely suggest any factual error on the part of the High Court in noting those features._ _**18.** The salient features flowing out as conditions in the contract and the entire conspectus of law on the issues as noticed earlier, leave us with no option but to hold that the movement of goods by way of imports or by way of inter-State trade in this case was in pursuance of the conditions and/or as an incident of the contract between the assessee and_ OP No.28388/2000 ## -:11:- _DMRC. The goods were of specific quality and description for being used in the works contract awarded on turnkey basis to the assessee and there was no possibility of such goods being diverted by the assessee for any other purpose. Hence the law laid down in_ _**K.G. Khosla case** has rightly been applied to this case by the High Court. We find no reasons to take a different view.”_ 9. In State of _**Kerala v. Unitech Machines Ltd.,**_ [2010 (32) VST 80 (Ker)], a Division Bench of this Court while considering the question whether the goods purchased and brought by the assessee from outside the State of Kerala and used for execution of works contract represent inter-state sales to awarders under Section 3(a) of the Central Sales Tax Act, 1963 or whether the value of the said goods should be included in turnover on works contract assessable under the KGST Act held that in so far as the two contracts were given for supply and installation of fire fighting equipment at the site of the awarder to their satisfaction and the awarder has not contracted for the purchase of any particular equipment, the transfer of said equipment takes place only when the materials are incorporated to the work at site of the customer and the awarder will accept OP No.28388/2000 ## -:12:- the work only when the contractor after installation, commissions the fire fighting equipment to prove its performance of the terms of contract. It is therefore held that the concept of inter state sale does not apply to the facts of the said case and the assessee's argument that the turnover of works contract should be assessed only for the value of materials purchased or made in Kerala after excluding the value of goods brought from outside Kerala cannot be accepted. Similar view has been taken by Division Bench of this Court in _**Dosal Limited v. State of Kerala**_ (2010) 18 KTR 211 (Ker). In this case also, in a short judgment, this Court held that sale becomes interstate sale only if the sale takes place in the course of movement of goods from one State to another or if it is made, by endorsement of title to goods in the course of movement of goods from one State to another. A contractor bringing materials from outside the State, stocking it in their own godown and later appropriating it to the work cannot claim that sale in the execution of works contract is an inter state sale from outside the State. It was held thatthe assessee has not billed the goods to the awarder in Kerala to claim the transaction as interstate sale. Further, the assessee brought the goods to OP No.28388/2000 -:13:- Kerala, stocked it in the godown at their risk and later appropriated it in the works contract. It was therefore held that the transfer of property in goods takes place in Kerala when the goods are appropriated to the contract. It is held that a trader making interstate purchase or bringing goods on stock transfer and selling the same later becomes liable for payment of tax under the KGST Act on sale of such goods and the position is not different as far as contractors are concerned who brings goods from outside the State either as stock transfer or as interstate purchase, stock it in their godown and later use it in the execution of works contract. The Apex Court in _**Binani Bros. (P) Ltd. v. Union of India and others**_ {1974 33 STC 254 (SC)} held at paras 14, 15, 16 as under:- _“14. Be that as it may, in the case under consideration we are concerned with the sales made by the petitioner as principal to the DGS&D. No doubt, for effecting these sales, 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. In other words, the movement of goods was occasioned by the contracts for purchase which the petitioner entered into with the foreign sellers. No_ OP No.28388/2000 ## -:14:- _movement of goods in the course of import took place in pursuance to the contracts of sale made by the petitioner with the DGS&D. The petitioner's sales to DGS&D were distinct and separate from his purchases from foreign sellers. To put it differently, the sales by the petitioner to the DGS&D did not occasion the import. It was purchases made by the petitioner from the foreign sellers which occasioned the import of the goods. The purchases of the goods and import of the goods in pursuance to the contracts of purchases were, no doubt, for sale to the DGS&D. But it would not follow that the sales or contracts of sales to DGS&D occasioned the movement of the goods Into this country. There was no privity of contract between DGS&D and the foreign sellers. The foreign sellers did not enter into any contract by themselves or through the agency of the petitioner to the DGS&D and the movement of goods from the foreign countries was not occasioned on account of the sales by the petitioner to DGS&D._ _15. It was contended on behalf of the Central Government that the contracts of sale between the petitioner and the DGS&D envisaged the import of goods for fulfilling the contracts and it was for that reason that there was first the recommendation for issue of import licences by DGS&D and then the actual issue of import licences and, as the contracts of sale visualised the import of goods for fulfilling them, the movement of goods in the course of import was occasioned by the contracts_ OP No.28388/2000 -:15:- _of sale to the DGS&D, and, therefore, the sales to the DGS&D were the sales which occasioned the movement of goods in the course of import._ _16. There was no obligation under the contracts on the part of the DGS&D to procure import licences for the petitioner. On the other hand, the recommendation for import licence made by DGS&D did not carry with it any imperative obligation upon the Chief Controller of Imports and Exports to issue the import licence. Though under the contract DGS&D undertook to provide all facilities for the import of the goods for fulfilling the contracts including an Import Recommendation Certificate, there was no absolute obligation on the DGS&D to procure these facilities. And, it was the obligation of the petitioner to obtain the import licence. Therefore,even if the contracts envisaged the import of goods and their supply to the DGS&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 contracts of sale by the petitioner with DGS&D.”_ 10. In _**Siemens Ltd v. State of Kerala and another**_ {[2001] 122 STC 1 (Ker)}, a Division Bench of this Court read over Explanation 4(c) to Section 2 (XXI), of the KGST Act, and it was declared that the said provision will not take in sales under Sections 3, 4 and 5 of the Central Sales Tax Act if the assessee is OP No.28388/2000 -:16:- able to prove on the basis of materials that the property in goods transferred in accordance with the principles under Sections 3, 4 and 5 in which event the explanation will not apply. 11. In the light of the above principles, it is rather clear that the liability to pay tax would arise only if the goods are used in a works contract and in the light of the principles mentioned above. 12. The impugned order in the case is a penalty order which had been confirmed in appeal by the Deputy Commissioner. Though it is stated that the terms of the contract clearly envisages that the goods are brought to the State by interstate movement, it gets terminated at the work site resulting in completion of interstate sale envisaged under the CST Act. Learned counsel for the petitioner however would submit that only a few terms of contract had been considered by the authorities whereas the contract contains other terms and conditions which are relevant for a proper adjudication in the matter. Further, this is a case in which penalty had been imposed on the assessee under Section 45A of the KGST Act. Penalty can be imposed only if there is deliberate suppression of turnover. In OP No.28388/2000 ## -:17:- the light of the principles laid down, the question to be considered is whether there was deliberate contumacious conduct on the part of the assessee in declaring the goods as exigible for tax under the works contract. Such an aspect of the matter had not been considered by the authorities. In the said circumstances, the entire gamut of the case law requires to be considered before arriving at a final decision. I am taking this view especially on account of the fact that the assessment order had been remitted back to the assessing authority for fresh consideration. Under such circumstances, this original petition is disposed of as under:- Ext. P6 order of the first revisional authority is set aside and the matter is remitted back to the 1[st] respondent for fresh consideration of the revision petition, who shall consider the same in accordance with the procedure prescribed and also taking note of the observations made in the above judgment. Sd/- ## **A.M. SHAFFIQUE, JUDGE** Rp //True Copy// P.S to Judge