TMI Blog1997 (8) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, is a company incorporated under the Indian Companies Act and carries on business of removal of overburden from different mines situated in various parts of the country as a contractor and for the purpose of the said business the petitioner-company uses its heavy earth moving machines (in short HEMM ), such as excavators, dozers, pay-loaders, dumpers, tippers, drills, etc. In 1993 the petitioner was awarded a contract by respondent No. 4, Damodar Valley Corporation (hereinafter to be referred to as the DVC for short) for removal of overburden, namely, earth /loose debris and stone from its Bermo mines in the district of Bokaro. The said contract was awarded pursuant to a public tender. An agreement to that effect was executed by and between the petitioners and the DVC on January 18, 1994 and work order was issued on October 14, 1993. It is stated that upon successful completion of the job awarded under the contract and the expiry of the period of the said contract, the respondent-DVC awarded another contract for a further period of 12 months for the same job subject to certain modification as regards the rate. According to the petitioners, the first contract was given in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource from the running bills of the petitioner-company. However, to the utter surprise the respondent No. 3 directed the respondent No. 4 to deduct Rs. 65,00,000 and odd from the bills of the petitioner-company and to deposit the same with the treasury. On enquiry, the petitioners learnt that respondent No. 3 had taken recourse to section 27 of the Act which provides special mode of recovery without initiating any assessment proceeding under section 17 of the Act or under any other provisions of the Act. Aggrieved by the said order the petitioners moved this Court in C.W.J.C. No. 391 of 1996( R) challenging the demand notice for payment of sales tax and also penalty imposed on it. The petitioners filed another writ application being C.W.J.C. No. 926 of 1996(R) after having learnt that a proceeding under section 17(5) of the Act had been drawn up against the petitioners. Both the aforesaid writ applications were disposed of by this Court by judgment and order dated May 10, 1996. This Court, while quashing the order, gave liberty to the respondent No. 3 to proceed after serving notice on the petitioners. Thereafter respondent No. 3 served notice on the petitioners and in the said a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts as annexures to the counter-affidavit. It is further stated that work of the petitioners is covered under the provision of section 2(t)(iv) of the Act and, therefore, the petitioner-company is liable to pay tax and further that respondent-DVC cannot be estopped from demanding statutory sales tax as payable under section 3(i)(b)(iv) read with section 2(t)(iv) of the said Act. It is further stated in the counter-affidavit that after disposal of the aforementioned two writ applications, namely, C.W.J.C. Nos. 391 of 1996(R) and 926 of 1996(R), a fresh show cause notice under section 17(5) of the Act was issued by the respondents and thereafter hearing of the case was from time to time adjourned on various dates but instead of filing show cause the petitioners filed a petition praying adjournment of hearing of the case in order to enable it to produce records. The petitioner ultimately filed show cause praying therein that it is not liable to pay sales tax on the ground that machineries deployed in executing civil works contract and it is not a hiring contract. The respondents seriously denied the allegation that an ex parte assessment order has been passed against the petitioner. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Gadodia then drew our attention to various documents brought on record and submitted that there is nothing on the record to show that possession and control of heavy machineries were delivered to the respondent-DVC rather it is the petitioners who undertook the job of removal of overburden by using its own machineries which always remained in the control of the petitioners. Learned counsel then submitted that the petitioners never raised bill for hiring charges; rather on the basis of the volume of the debris removed from the site which was the terms of the agreement. Similarly payment received by the petitioner was made on the basis of the cubic metre on the volume of earth/stone removed by the petitioner from the site specified in the contract and not for hiring of machines. According to the learned counsel, had it been a hiring contract then there would have been in the agreement the specification or particulars of the machineries, the number of machineries to be engaged or deployed. In the contract document and other correspondences, the caption hiring of heavy earth removal machine was used, though no hiring of any machine was involved. In fact the word hiring used i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Sales Tax Officer, First Circle, Trivandrum [1997] 104 STC 498 (Ker). Learned counsel lastly submitted that from the impugned order of assessment it would appear that sufficient opportunity was given to the petitioners to prove its case that it was not a hiring agreement and all the documents were demanded from the petitioners and for that purpose hearing of the case was adjourned from time to time. Despite the aforesaid fact, the petitioner-assessee failed to produce all the documents, rather avoided the hearing on one pretext or the other. Ultimately on the basis of the documents produced before the assessing authority it was found that it was a hiring contract and, therefore, the petitioner was liable for payment of sales tax. According to Mrs. Sen Choudhury, therefore, any payment received by the petitioners for hiring of the machineries is exigible to tax and the impugned demand raised by the respondent is perfectly legal and valid. 6.. Before appreciating the rival contentions of the counsel appearing for the parties it would be useful and appropriate to look into the relevant provisions of law which conferred power upon the State Legislature to impose tax in the execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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 other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. After the 46th Amendment of the Constitution came into existence, various State legislators including the State of Bihar amended their sales tax laws for the purpose of making provision for imposition of sales tax in relation to the works contract. In the Bihar Finance Act, 1981 the definition of sale under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the goods at one rate and to have passed them on to his principal at another rate, or (iii) not to have accounted to his principal for the entire collections or deductions made by him in the sales or purchases effected by him or on behalf of his principal, or (iv) to have acted for a fictitious or non-existent principal. 8.. Some other constitutional provisions are necessary to be looked into in order to appreciate the correct position of law. Entry 54 of List II of the Seventh Schedule to the Constitution, which empowers a State to levy sales tax, is as under: Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92-A of List I. Entry 92-A of List I of the Seventh Schedule vests with the Union the power to levy: Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. By the 46th Amendment, clause (3) of article 286 of the Constitution has been substituted by the following: (3) Any law of a State shall, in so far as it imposes, or authorises the imposition of,- (a) a tax on the sale or purchase of goods declared by Parlia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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. (2) 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 366(29A)(b). (3) 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(29A)(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. (4) 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(29A)(b) is levi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of sales or purchase of those goods as a separate article. 10.. In the case of Tripura Bus Syndicate v. State of Tripura [1997] 105 STC 409, a question came for consideration before the Gauhati High Court was as to under what circumstances payment of hire-charges will be exigible to tax. The fact of the case was that during the Parliament election in 1989 a large number of motor vehicles belonging to different operators were requisitioned for election purposes by order passed in exercise of power under section 160(1)(b) of the Representation of the People Act, 1961. The vehicles were requisitioned with drivers. The rates of hire were fixed by the Chief Electoral Officer on the basis of mileage and the cost of fuel was to be borne by the owners. While making payment of hire-charges 4 per cent thereof was withheld as sales tax under section 3 of the Tripura Sales Tax Act, 1976. The Gauhati High Court allowing the writ application held as under: 6. I have considered the submission made by Mr. Saha. His argument is sound legally, however, in the facts of this case, according to me, the provision of the Tripura Sales Tax Act as amended from time to time and the amended rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any change. But vehicle is not only requisitioned, driver of the vehicle were also being asked to assist in running of the said vehicles who is an employee of the operators or the owners. The petrol or diesel is also provided by the operators. As such the operators and/or owners directly control the said vehicles and running of the same through the supervision and control of his driver. In the facts of this case the requisitioned vehicles which were paid on the basis of the rate fixed is pure and simple, a transaction in the nature of hiring or rental charges and nothing else. At no stage any right or interest in the said vehicle evolved or vested or transferred to the respondents. The condition precedent to the imposition of tax is the transfer of the right to use any goods for any purpose. It is not a tax on right to use or the use of vehicle. It is a tax on transfer of the right to use the vehicle. No materials or facts have been brought to the notice of the court that any of the parties to requisition intended any transfer of the right to use of the vehicles. The respondents have been given or forced to give in hire the vehicle for a limited purpose. Like any other hire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to use goods without being accompanied by transfer of ownership in the goods in favour of the hirer. Such a transfer of the right to use goods is a species of bailment. According to section 148 of the Indian Contract Act, a bailment is delivery of goods by one person to another for some purpose upon a contract. Such transfer of the right to use goods, no doubt, produces some of the effects of the sale and also achieves some of the objects for which sales and purchases of goods are made. But unlike sale, in case of a transfer of only right to use goods, proprietary rights in the goods remain with the transferor. Only upon delivery of the goods, the transferee becomes legally possessed of such goods and the hirer or the transferee becomes entitled to enjoy the use of the goods upon periodic payment or other valuable consideration to the transferor. Such transaction of hiring has been described as disguised sale. Absence of transfer of ownership in favour of the hirer distinguishes such a transaction from a sale proper. Since the substance of the right is the enjoyment of the goods, the said transfer is completed only upon the delivery of the goods. In other words, only after acquiri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractor. We have reached this conclusion because the effective control of the machinery even while the machinery is in the use of the contractor is that of the petitioner-company. The contractor is not free to make use of the same for other works or move it out during the period the machinery is in his use. The condition that he will be responsible for the custody of the machinery while the machinery is on the site does not militate against the petitioners possession and control of the machinery. For these reasons, we are of the opinion that the transaction does not involve transfer of the right to use the machinery in favour of the contractor. As the fundamental requirement of section 5-E is absent, the hire charges collected by the petitioner from the contractors are not exigible to sales tax. 13.. Having discussed the law on this subject, we shall now analyse the agreement in the present case and interpret the same in accordance with the principles laid down by the various authorities referred to above in order to find out whether the use of the machineries in the execution of contract was in fact a sale and exigible to sales tax. 14.. Both the petitioners and the respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate for hiring of machineries, namely, drilling machine, dozer, pay-loader, shovel machine. 17.. The next document which forms part of tender notice is annexure A to the tender notice, copies of which have been filed by the respondent and marked as annexures B1 and B2. These documents consist of general terms and conditions. 18.. Annexure B to the counter-affidavit is the copy of the agreement dated January 19, 1994. The agreement states, inter alia, that the contractor has accepted the terms and conditions vide annexures A, B and C, which are made part of the agreement. Annexures A and B of the agreement are general terms and conditions. Annexure C to the agreement (annexed as annexure B-4 to the counteraffidavit) is the special terms and conditions governing the tender. The said document reads as under: Heavy earth moving machineries as detailed in para 2 hereunder shall have to be engaged by the tenderer hereinafter call the agency for the work as detailed in annexure A as follows: (i) Cutting, drilling and excavating earth, stone from places fixed by the colliery manager and the agent. (ii) Loading the same into dumpers. (iii) Transporting and unloading of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e debris and stone up to distance of 1(one) k.m. The quantity so removed shall be calculated by measurement. The rates quoted by the tenderer should be inclusive of all works completed in all respect as detailed in article I of the annexure C (2) to (4)............ (5) It will be the responsibility of the agencies to provide drilling equipment. Clause (15) of the said agreement provides the manner or preparation of bills and payment. Clause (15) is as under: (15) Bills and payment: (i) to (iii)............... (iv) 2 per cent of the value of work done will be deducted from each of the running bills as income-tax as per provision of the Income-tax Act and 4 per cent commercial tax. (v).................. Clause (16) of the said agreement speaks about the responsibility of the agency in relation to machinery and the employees engaged by the contractor/ agency. Clause (16) reads as under: (16). Persons employed in relation to machinery on hire.-(i) All persons engaged by the agency in relation to operation, maintenance, repair and transportation/shifting of machinery from one place to another shall be their responsibility and the management shall have no respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to more than one contractors. (iv) This tender notice further suggests that the contractor was required to deploy his own machineries to carry out the work of removal of overburden. (v) From annexure B-2 it is manifest that the tenderer was required to expose at least 50 per cent of the overburden removed; in other words the successful tenderer shall have to remove overburden in such a manner that 50 per cent of the material is exposed by removing at least 10,000 cubic metre overburden. (vi) The tenderer who has been awarded the work has to bear all the costs of materials, labour charges and expenses for carrying out the work, which means that successful tenderer has to carry out the entire work by meeting all the expenses at his own. (vii) It further reveals that the petitioner-company had to work over an area of 500 metres x 150 metres, and had to remove 8,50,000 (8.5 lakhs) cu. mt. of overburden for which it has to be paid on the basis of per cubic metre at the rate of Rs. 34 for earth and loose debris and Rs. 56 for removal of stone. (viii) It is further evident that the petitioners had to carry out the work of cutting/drilling and excavating the earth/stone from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hire means to obtain the use of something temporarily for an agreed payment, or to obtain the services for an agreed wage. In Readers Digest, Great Encyclopaedia Dictionary, 2nd Edition, the word hiring has the following meaning: Hiring means contract under which movable property is taken for use in return for an agreed or a reasonable sum; the hirer must take reasonable care of the property. From the book-Cheshire and Fifoot s Law of Contract (ninth edition) the following passage is worth to be quoted: The House of Lords held that as X could determine the hiring at any time, he was not under an obligation to buy the piano but had only an option of purchase...........henceforth manufacturers and dealers preferred to adopt not the first but the second form of contract-a bailment coupled with option of purchase. 22.. As stated above, the word bailment has been defined as the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished be returned or otherwise disposed of according to the directions of the person delivering it . 23.. From bare reading of clause (29A) of article 366 of the Constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was liable to pay penalty at 2 per cent on the total monthly bill. 27.. In course of hearing of the writ petition, it was found that the respondent-DVC did not file any affidavit nor take any stand. Accordingly, by order dated July 15, 1997 the respondent-DVC was directed to file affidavit and produce all the documents concerning the contract. In compliance of the said order, the DVC filed an affidavit and produced the documents which have been perused by me. In the affidavit, the DVC took the stand that the agreement of the DVC with the petitioners was for hiring of heavy machineries for removal of earth, loose debris and stone so that the coal may be exposed to enable the employees and officers of the DVC to undertake the mining operation for extraction of coal. However, from perusal of the documents, which are the originals of the annexures filed by the parties, it does not appear that payment was made to the petitionercompany by the DVC for hiring of heavy moving machineries; rather from the bills submitted by the petitioners, it appears that the amount was claimed on the basis of the quantity of overburden removed by using the machineries. On the contrary, after the work w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the word agent or agency and the words buyer and seller are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that that status would be conferred. Thus the mere formal description of a person as an agent or buyer is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent . The apex Court in the aforesaid decision further relied upon its earlier decision in the case of Sri Tirumala Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer [1968] 21 STC 312 (SC) and further held that the true relationship of the parties in such a case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the said relationship. 29.. Learned Standing Counsel put heavy reliance on the decision of the Kerala High Court in Rohini Panicker v. Additional Sales Tax Officer [1997] 104 STC 498 and a decision of the Calcutta High Court in the case of CESC Limited v. Commercial Tax Officer [1995] 99 STC 446. The case of Rohini Panicker [1997] 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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