2008 (2) TMI 830 - HC - VAT and Sales Tax

Spare parts and accessories - Held that - Applying the functional test it would be clear that it would be clearly practically not possible to consider establishing a thermal power plant without a power house building and therefore, the Commissioner is clearly in error of law in coming to hold that a power house building is meant to be a place where the business activities were carried on. It would not be possible on the part of the petitioner to engage in the generation of electricity and distribution thereof and therefore, findings of the Commissioner without scrutiny of the law as laid down by the apex court, are also erroneous. Since the petitioner has now limited its claim under this item, i.e., H.S. meters, G.I. pipes, C.I. pipes, street-light fittings which are required for the purpose of construction of power house and control room required for operation and maintenance of the thermal power plant, to such an extent the claim of the petitioner is wholly justified as these items pass the scrutiny of the functional test. Petitioner is fully justified in claiming inclusion of items such as road materials like chips, tars, road rollers, concrete mixer and vibrator, manure, water treatment plant, filtration plants and associated materials, etc., canal materials like gates, stones, earth-moving and cutting machineries, etc.

Issues Involved:
1. Deletion of "construction" from CST registration certificate.
2. Refusal to incorporate certain items in the registration certificate.
3. Application of the "functional test" to determine the necessity of items for power generation and distribution.
4. Reliance on legal precedents and their correct application.

Issue-wise Detailed Analysis:

1. Deletion of "construction" from CST registration certificate:
The petitioner, a Government of Orissa undertaking involved in power generation, was granted a CST registration certificate on March 17, 1987, which included "all machineries and equipment associated with construction, operation and maintenance of large thermal power station." However, six months later, on September 25, 1987, the word "construction" was deleted by the Sales Tax Officer without a request from the petitioner or an opportunity for a hearing. The petitioner challenged this deletion, but the petition remained pending. Subsequently, on October 31, 1988, further deletions were made to the registration certificate, removing items necessary for the construction and operation of the thermal power plant.

2. Refusal to incorporate certain items in the registration certificate:
The petitioner sought to include a long list of items in its registration certificate, but the Commercial Tax Officer allowed only "boiler and cables." The petitioner challenged this decision, and the Commissioner of Commercial Taxes partially allowed the inclusion of certain items while rejecting others. The petitioner filed writ applications, and the court quashed the Commissioner's order, remanding the matter for re-examination. On June 10, 1993, the Additional Commissioner of Commercial Taxes partially allowed the inclusion of some items but rejected most others.

3. Application of the "functional test" to determine the necessity of items for power generation and distribution:
The court emphasized the "functional test" established by the Supreme Court in J.K. Cotton Spinning & Weaving Mills Co. Ltd., which states that goods used in processes integrally connected to the ultimate production of goods qualify for special treatment under section 8(3)(b) of the CST Act. The court found that items necessary for the construction of the power house building and associated civil works were integral to the generation and distribution of electricity and should be included in the registration certificate.

4. Reliance on legal precedents and their correct application:
The court criticized the Commissioner for misapplying judgments under the Income-tax Act and relying on a narrow interpretation of "plant and machinery." The court referenced the Supreme Court's decision in Commercial Taxes Officer, Circle-D, Jaipur v. Rajasthan Electricity Board, which allowed the purchase of items necessary for power generation and distribution at a concessional rate. The court found that the Commissioner had failed to apply the correct legal principles and had taken an overly restrictive view.

Detailed Analysis of Items:

Items Allowed for Inclusion:
- Item No. 1: Survey and drawing instruments for laying the foundation of the power house building.
- Item No. 2: Building materials required for constructing the power house building and associated civil works.
- Item No. 3: H.S. meters, G.I. pipes, C.I. pipes, street-light fittings necessary for the power house and control room.
- Item No. 4: Road materials, water treatment plants, filtration plants, canal materials, and earth-moving machinery for constructing approach roads and water supply systems.
- Items 5(a), 5(b), 5(c), 5(d), and 5(e): Already allowed in the impugned order and require no further consideration.
- Items 5(f) and 5(g): Items necessary for the protection and control of boilers, turbines, generators, and the operation of the switchyard to transmit power.

Conclusion:
The writ application was allowed to the extent indicated, and the court directed the inclusion of the specified items in the petitioner's registration certificate under the CST Act. The court found that the Commissioner had misapplied legal principles and taken an unduly narrow view, leading to erroneous exclusions. There was no order as to costs.

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