Component parts brought from different states & assembled in another state, cannot be intra-State sale

Orissa HC: Component parts were brought in one state from different places & assembled in other state, such transaction cannot state as intra-State sale and falls within the ambit of Section 3(a) of the C.S.T. Act

M/S Larsen & Toubro Ltd. vs. State of Orissa; STREV No.469 of 2008; High Court of Orissa; 01.09.2021

Issues for consideration:

• The said Revision Petition dealt with following issues:

i. Whether in the particular facts and circumstances of the case the Full Bench, Orissa Sales Tax Tribunal has acted in accordance with the statutory provision and the settled position of law while disallowing the claim of sales u/S.6(2) of the CST Act and treat it as intra state sale when the selfsame turn over has been assessed under the CST Act for the selfsame year by the STO, Rourkela II Circle?

ii. The Full Bench, Orissa Sales Tax Tribunal having been satisfied with the fact that conditions do not exist for imposition of penalty u/S.12(5) of the Orissa Sales Tax Act, 1947, whether the Tribunal is legally justified in not deleting the penalty imposed entirely?

Facts:

• Petitioner and TRL (M/s. Tata Refractories Ltd) entered into three separate contracts on 25th August, 1992. One was for supply of indigenous equipment including all accessories for the 100 TPD Rotary Kiln. The second was for erection, testing and commissioning of the Rotary Kiln. The third was for the system engineering and design of the 100 TPD Rotary Kiln including all auxiliary equipment.
• Dispute arose on an order passed by the Sales Tax Officer (STO), Rourkela for the assessment year ending 1993-94, where it held that the Petitioner had failed to get itself registered under the Orissa Sales Tax Act (OST Act) leading to a notice under Section 12 (5) of the OST Act being issued to it.

Petitioner’s contentions:

• Out of the three contracts, the one for system engineering and design was purely a service contract and did not attract the provisions of either the OST Act or the Central Sales Tax Act (CST Act).The supply of indigenous equipment was in the course of inter-State trade for which the Petitioner was separately registered.
• The jurisdiction for levying CST on such transaction was, under Section 6(2) of the CST Act, with the STO, Rourkela-II Circle, Rourkela. The agreement for erection and commission was purely a labour and service agreement. The Petitioner produced before the STO invoices, which showed that 4% CST had been collected.
• The STO rejected the above contentions and came to the conclusion that when the component materials and equipments were despatched from outside the State, the property in the complete equipment had not passed yet to the buyer. And it held that the transaction fell “squarely outside the Section 3(a) of the C.S.T. Act”.

Observations:

• The first issue to be considered was whether the Tribunal erred in treating the above transactions as an intra-State sale despite the Petitioner having paid CST on the same transaction.
• In Bharat Heavy Electrical Limited v. Union of India AIR 1996 SC 1854, the Supreme Court was considering a similar question which arose in the background of Bharat Heavy Electrical Limited (BHEL) being awarded a Letter of Intent (LOI) by the National Aluminium Company Limited (NALCO), Bhubaneswar for setting up of five captive power plants (120 MW each) at its Aluminium smelter complex at Angul, Orissa. BHEL paid Central Sales Tax on the value of entire boiler systems manufactured by Tiruchi unit in Tamil Nadu which ultimately became part of the captive power plant. When the sales tax authorities in Orissa sought to levy OST BHEL protested stating that simultaneous taxation in different States for the same transactions was causing it an unbearable burden. The Supreme Court examined the question whether the above sales were intra-State sales? The Supreme Court disagreed with the view of the Tribunal that the transaction was not an inter-State sale since the goods sent (by rail or road) did not answer the description of the goods mentioned in the annexure to the LOI/supply contract. It held as under:
  “Obviously, the annexure mentions only the major items of machinery and equipment. These major items cannot be transported as such; transport has to be effected in sections and parts and assembled at the spot. For that reason, it cannot be said that the goods transported are not the goods agreed to be supplied. It is nobody’s case that BHEL supplied some other goods than the goods agreed upon. Having thus erroneously excluded Section 3 of the Central Sales Tax Act, the Tribunal went to Section 4 and held that in the circumstances, the sales must be held to have taken place inside the State of Orissa. The discussion about endorsement of goods by NALCO to BHEL in Orissa and so on is rather ambiguous.”
• It was observed that in the present case, merely because the component parts were brought from different places outside Orissa and assembled in Orissa, it cannot be said that it was an intra-State sale and that a colourable device was deployed to avoid paying sales tax under the OST Act. This is contrary to the facts. The documents placed on record clearly show that components either manufactured in the Petitioner’s own facilities outside Orissa or brought from outside Orissa were transported to Orissa for erection, testing and commissioning of the 100 TPD Rotary Kiln.
• The goods were indeed supplied in course of inter-State rate, and received by TRL in Orissa. The movement of the goods originated from outside the State. This was considered to be not an intra-Sate sale by any stretch of imagination.

Held:

• The Court therefore, held that the conclusion reached by the authorities at all levels, i.e., STO, ACST and the Tribunal was erroneous and that accordingly all their orders in this regard were set aside. Held that the Tribunal was not justified in declining to delete the penalty imposed in its entirety.