1985 (3) TMI 226 - SC - VAT and Sales Tax

Supreme Court clarifies tax rules on bamboo and trees, ruling out double taxation

The Supreme Court upheld the constitutionality and validity of the impugned provisions related to purchase tax on bamboos and standing trees. It clarified ... Tax on turnover of purchases - taxable event as completed purchase (not agreement to sell) - purchase tax versus sales tax - single point levy / prohibition on taxing same goods at more than one point - profit a prendre as benefit to arise out of land / immovable property - construction of subordinate notifications and effect of 'supersession' - distinction between standing trees/bamboos agreed to be severed and timber/logs as commercial commodities - works contract - test of contract of sale vis a vis contract for serviceTax on turnover of purchases - taxable event as completed purchase (not agreement to sell) - Validity of notifications declaring 'bamboos agreed to be severed' and 'standing trees agreed to be severed' liable to purchase tax - HELD THAT: - The notifications are constitutional and intra vires. Read as a whole, the impugned notifications levy tax on the turnover of purchases of 'bamboos agreed to be severed' and 'standing trees agreed to be severed'. The taxable event is the completed purchase of such goods - i.e. a purchase where property in the specific goods has passed to the buyer - and not an executory agreement to sever. The omission of the words 'before sale or under the contract of sale' is immaterial because the governing language and context show that severance must be under the contract of sale and the purchase must be completed for the notifications to apply.Notifications S.R.O. Nos. 372/77 and 373/77 (23 May 1977) and the corresponding entries of 29 December 1977 are valid; the taxable event is a completed purchase of standing trees or bamboos agreed to be severed.Purchase tax versus sales tax - single point levy / prohibition on taxing same goods at more than one point - double taxation - Whether the impugned provisions unlawfully effect 'double taxation' by taxing the same goods at sale and purchase points - HELD THAT: - The Orissa Act implements a single point levy via section 3 B and section 8 provisos: goods declared liable to purchase tax cease to be liable to sales tax, and the same goods shall not be taxed at more than one point in the same series of sales or purchases. The High Court's view that the notifications produced impermissible double taxation misunderstands the enactment scheme, both before and after 1 January 1978. After the 1978 amendment the State must notify rates; declaring goods liable to purchase tax operates to exclude sales tax on those goods by operation of the proviso.Impugned notifications do not amount to unlawful double taxation and are consistent with the single point scheme under the Act.Construction of subordinate notifications and effect of 'supersession' - Effect of the 29 December 1977 notifications being 'in supersession of' earlier notifications - HELD THAT: - The word 'supersession' in the later notifications operates as repeal and replacement of earlier notifications and is expressly prospective (effective 1 January 1978). It does not wipe out liabilities accrued while earlier notifications were in force. The State's power under sections 3 B and 5(1) to issue notifications 'from time to time' includes the power to repeal or replace prior notifications.Supersession effected repeal/replacement prospectively; it did not extinguish tax liability already incurred under earlier notifications.Distinction between standing trees/bamboos agreed to be severed and timber/logs as commercial commodities - Whether timber and dressed/sized logs are distinct commercial commodities for taxing purposes - HELD THAT: - On statutory definitions and commercial usage, 'timber' includes wood whether felled, sawn, or cut; logs, planks, rafters and beams fall within the concept of timber. Authorities and dictionary meanings support that dressed/sized logs and common structural forms are timber in commercial parlance. Consequently, sales of dressed or sized logs already assessed to sales tax cannot be again taxed at an earlier point as timber without contravening the single point rule.Sized/dressed logs, planks and rafters are the same commercial commodity as timber; they cannot be subjected to tax at an earlier point in the same series of sales.Timber contracts - specific/unascertained goods and passing of property - Whether the timber contracts resulted in passage of property in standing trees (thus attracting purchase tax) or only on severance (thus attracting sales tax) - HELD THAT: - Timber contracts were executed subject to Forest Contract Rules and conditions (ratification, registration of hammer mark, security deposits, coupe declaration, permits, prescribed routes, progressive sectioning, powers to stop work or cancel on default). These conditions meant the contracts were not unconditional sales of specific goods in a deliverable state. Property passed to the contractor only in the trees after felling and inspection (i.e. as timber), not while standing. Hence purchase tax on standing trees under the impugned provisions does not apply to these timber contracts; sales tax on felled timber would be the relevant exigibility.Timber contracts are agreements to sell standing trees but property passes on severance and compliance with contractual conditions; purchase tax under the impugned notifications does not apply to those transactions.Profit a prendre as benefit to arise out of land / immovable property - Nature of the bamboo contract - whether it is a sale of goods exigible to purchase/sales tax or a grant of a profit a prendre - HELD THAT: - The bamboo contract grants extensive rights (exclusive licence to fell/cut/remove bamboos over long periods, minimum royalties, rights to use lands/roads/streams, to construct works, to lease sites for buildings, to extract fuel, to exercise ancillary controls) and is labelled as a 'grant' by the Grantor. Taken as a whole and in light of authorities, such a composite grant confers a 'benefit to arise out of land' (profit a prendre) - an interest in immovable property. A profit a prendre is not a sale of goods; amounts payable under such a grant fall outside the State's competence to tax under entry 54 (sales/purchases of goods).The bamboo contract is a grant of a profit a prendre (a benefit to arise out of land) and is not exigible to sales or purchase tax under the Orissa Act or State taxing power.Works contract - test of contract of sale vis a vis contract for service - Whether the timber contracts or the bamboo contract are works contracts exempting them from sales/purchase tax characterization - HELD THAT: - A works contract involves performance of work/service in which supply of materials is incidental; here the Government did not perform work for consideration - the contractors performed the labour of felling and removal. The timber contracts (and, even if hypothetically treated as movables, the bamboo contract) do not satisfy the works contract characterisation and therefore are not works contracts for the purpose of denying sale/purchase treatment.Neither the timber contracts nor the bamboo contract qualify as works contracts.Final Conclusion: The Court upheld the validity of the impugned notifications (23 May 1977 and the entries of 29 December 1977) declaring bamboos and standing trees agreed to be severed liable to purchase tax, held that the taxable event is a completed purchase (not an agreement to sell), rejected the High Court's double taxation reasoning, held timber contracts did not give property in standing trees (property passed on severance) and therefore deleted purchase tax in the assessment of the forest contractor for April 1, 1977 to March 31, 1978, and held the bamboo contract to be a grant of a profit a prendre (immovable interest) not exigible to sales/purchase tax; consequential reliefs were directed and each party ordered to bear its own costs. Issues Involved:1. Constitutionality and validity of the impugned provisions.2. Interpretation of the taxable event under the impugned provisions.3. Effect of the absence of the words 'before sale or under the contract of sale' in the impugned provisions.4. Determination of the subject-matter of the impugned provisions.5. Double taxation under the Orissa Sales Tax Act.6. Effect of 'supersession' in notifications dated December 29, 1977.7. Nature of timber contracts and their applicability under the impugned provisions.8. Meaning and classification of 'timber' and 'logs' in commercial parlance.9. Exigibility of sales tax on transactions covered by timber contracts.10. Nature of the bamboo contract and its classification as a profit a prendre.11. Validity of the case of Firm Chhotabhai Jethabhai Patel & Co. v. State of Madhya Pradesh.12. Validity of the case of State of Madhya Pradesh v. Orient Paper Mills Ltd.13. Interpretation of the bamboo contract as a works contract.Issue-Wise Detailed Analysis:1. Constitutionality and Validity of the Impugned Provisions:The impugned provisions, namely, Notification S.R.O. No. 372/77 dated May 23, 1977, Notification S.R.O. No. 373/77 dated May 23, 1977, Entries Nos. 2 and 17 in the Schedule to Notification No. 67178-C.T.A. 135/77 (Pt.)-F (S.R.O. No. 900/77) dated December 29, 1977, and Entries Nos. 2 and 17 in the Schedule to Notification No. 67181-C.T.A. 135/77-F (S.R.O. No. 901/77) dated December 29, 1977, levying purchase tax at the rate of ten per cent on the purchase of bamboos agreed to be severed and standing trees agreed to be severed, are constitutional and valid. They do not violate entry 54 in List II in the Seventh Schedule to the Constitution of India or the Orissa Sales Tax Act, 1947.2. Interpretation of the Taxable Event Under the Impugned Provisions:The taxable event is not an agreement to sever standing trees or bamboos but the purchase of standing trees or bamboos agreed to be severed. The provisions apply to a completed purchase of goods.3. Effect of the Absence of the Words 'Before Sale or Under the Contract of Sale':The absence of these words is immaterial as the impugned provisions read as a whole clearly show that the severance of standing trees or bamboos has to be under the contract of sale and before the purchase thereof has been completed and not before the sale of such trees or bamboos.4. Determination of the Subject-Matter of the Impugned Provisions:The subject-matter of the impugned provisions is goods, and the tax levied is on a completed purchase of goods. The provisions do not create a new class of goods not known to law.5. Double Taxation Under the Orissa Sales Tax Act:The High Court's holding that the impugned provisions amounted to double taxation was incorrect. The Orissa Act expressly forbids taxing the same goods at more than one point in the same series of sales or purchases by successive dealers.6. Effect of 'Supersession' in Notifications Dated December 29, 1977:The word 'supersession' is used in the same sense as 'repeal and replacement' and does not wipe out the tax liability under the previous notifications. The previous notifications were repealed and replaced, not nullified.7. Nature of Timber Contracts and Their Applicability Under the Impugned Provisions:The timber contracts are not works contracts but agreements to sell standing timber. The property in the trees passes to the respondent firm only after the trees are felled and removed from the contract area. The impugned provisions do not apply to these transactions.8. Meaning and Classification of 'Timber' and 'Logs' in Commercial Parlance:Timber and sized or dressed logs are the same commercial commodity. Beams, rafters, and planks are also classified as timber.9. Exigibility of Sales Tax on Transactions Covered by Timber Contracts:As the sales of dressed or sized logs by the respondent firm have already been assessed to sales tax, the sales to the first respondent firm of timber by the State Government from which logs were made by the respondent firm cannot be made liable to sales tax again.10. Nature of the Bamboo Contract and Its Classification as a Profit a Prendre:The bamboo contract is not a lease of the contract areas to the respondent company. It is a grant of a profit a prendre, which is an interest in immovable property. Any attempt to tax the amounts payable under the bamboo contract would be ultra vires the Orissa Act and unconstitutional.11. Validity of the Case of Firm Chhotabhai Jethabhai Patel & Co. v. State of Madhya Pradesh:The case is not good law and has been overruled by decisions of larger Benches of this Court.12. Validity of the Case of State of Madhya Pradesh v. Orient Paper Mills Ltd.:The case is also not good law as the decision was given per incuriam and laid down principles of interpretation which are wrong in law.13. Interpretation of the Bamboo Contract as a Works Contract:The bamboo contract is not a works contract. The timber contracts are agreements to sell standing timber, and the bamboo contract is a grant of a profit a prendre, not a works contract.Conclusions:The Supreme Court reversed the High Court's judgment declaring the impugned provisions unconstitutional. The notice dated August 18, 1977, issued against the respondent company was quashed, and the assessment order against the respondent firm was modified to delete the item of purchase tax on the amounts paid under the timber contracts. Each party was directed to bear its own costs.