2016 (4) TMI 534 - SC - VAT and Sales Tax

Supreme Court Affirms Tax Exemption for Goods Movement

The Supreme Court affirmed the High Court's decision that the transactions were exempt from Delhi Value Added Tax under the Central Sales Tax Act. The ... Sale in the course of inter-State trade or commerce - sale in the course of import - movement of goods pursuant to or incidental to contract - privity of contract and its relevance to characterization of sale - application of K.G. Khosla principleSale in the course of inter-State trade or commerce - movement of goods pursuant to or incidental to contract - Inter State movement of goods for the DMRC contract constituted sale in the course of inter State trade and was therefore governed by the CST Act (Section 3(a)) and not chargeable to DVAT. - HELD THAT: - The High Court's finding, affirmed by this Court, is that the contract between the respondent and DMRC expressly contemplated procurement from approved suppliers outside Delhi, with specifications, pre inspection, testing and a right of rejection, and that movement of goods from other States to Delhi was within the contemplation of the parties and in pursuance of the contract. Reliance was placed on precedents (Tata Iron and Steel; Oil India; English Electric; South India Viscose) establishing that where movement of goods results from an express or implied covenant in the contract, or is incidental to it, the sale is in the course of inter State trade. Given the contractual terms (approved suppliers list, specified sources, inspection and acceptance regime and bespoke purpose of goods) there was no realistic possibility of diversion of the goods, and the nexus between movement and the contract satisfies Section 3(a) of the CST Act. [Paras 1, 7, 9, 15, 17]Inter State movements were in pursuance of the contract and amounted to sales in the course of inter State trade; transactions are covered by Section 3(a) of the CST Act and not taxable under DVAT.Sale in the course of import - movement of goods pursuant to or incidental to contract - application of K.G. Khosla principle - Imports effected to fulfil the contractual obligations to DMRC were sales in the course of import within the meaning of Section 5(2) of the CST Act and thus exempt from DVAT. - HELD THAT: - This Court accepted the High Court's conclusion that the contract envisaged goods manufactured or sourced abroad for DMRC, subject to pre inspection, testing and possible rejection, and that such importation was an incident of the integrated contractual obligation. The Constitution Bench decision in K.G. Khosla establishes that Section 5(2) does not require the sale to precede import; it is sufficient that the movement/import be in pursuance of the contract. The facts here (specifications, approved foreign suppliers, inspection and approval regime, bespoke nature and marking for DMRC) align with K.G. Khosla and subsequent authorities accepting sale as in the course of import even without direct privity between foreign manufacturer and ultimate purchaser in India. [Paras 1, 11, 15, 17]Imports were occasioned by the contract and fall within Section 5(2) of the CST Act; such transactions are not taxable under the DVAT Act.Privity of contract and its relevance to characterization of sale - application of K.G. Khosla principle - Binani Bros. did not overrule or displace the K.G. Khosla ratio; Binani is distinguishable on its facts and does not apply to the present contract. - HELD THAT: - The Court analysed Binani Bros. and found it distinguished on facts: in Binani the import was occasioned by the petitioner's purchase from foreign sellers and there was no contractual obligation to supply only to the purchaser, nor an inspection/approval and rejection regime that would render the goods usable solely for the purchaser. By contrast, K.G. Khosla involved integrated transactions with importation in pursuance of the contract and a right of post import rejection, a factual matrix analogous to the present case. Consequently Binani Bros. did not displace K.G. Khosla; the latter remains the applicable principle where import/movement is incidental to or in pursuance of a contract imposing particular obligations and specifications. [Paras 12, 13, 14, 17]Binani Bros. is distinguishable on facts and does not detract from the applicability of K.G. Khosla to the present case; K.G. Khosla controls.Final Conclusion: The High Court was right to hold that the inter State movements and imports were in pursuance of and incidental to the DMRC contract and therefore sales fell under the CST Act (Sections 3(a) and 5(2)) and were not taxable under the DVAT Act; the appeals are dismissed with parties to bear their own costs. Issues Involved:1. Whether the inter-State movement of goods was in pursuance of and incidental to the contract for the supply of goods used in the execution of the works contract.2. Whether the claimed sales should be deemed to have taken place in the course of imports of the goods or inter-state trade.3. Whether the transactions were covered by Section 3(a) and Section 5(2) of the Central Sales Tax Act, 1956 (CST Act) and therefore exempt from taxation under the Delhi Value Added Tax Act, 2004 (DVAT Act).Issue-wise Detailed Analysis:1. Inter-State Movement of Goods:The High Court concluded that the inter-State movement of goods was in pursuance of and incidental to the contract for the supply of goods used in the execution of the works contract between the respondent-assessee and the Delhi Metro Railway Corporation Ltd. (DMRC). The contract required specific goods to be supplied, which necessitated their movement from outside Delhi to the DMRC site. The High Court found that the terms of the contract envisaged inter-state movement of goods, which was within the knowledge of DMRC due to the ban on heavy industries in Delhi and the approval of specific suppliers located outside Delhi.2. Sales in the Course of Imports or Inter-State Trade:The High Court held that the claimed sales should be deemed to have taken place in the course of imports of the goods or inter-state trade. The importation of equipment was strictly as per the requirements and specifications set out by DMRC in the contract, and the goods were imported to meet these requirements. The High Court accepted the respondent's contention that the transactions leading to the import of goods and their inter-state movement were occasioned by the contract awarded by DMRC.3. Applicability of CST Act and DVAT Act:The High Court held that the transactions constituting inter-State trade and those constituting sale or purchase in the course of import were covered by Section 3(a) and Section 5(2) of the CST Act, respectively, and therefore exempt from taxation under the DVAT Act. The High Court's decision was based on the principle of law settled in the case of K.G. Khosla & Co. v. Deputy Commissioner of Commercial Taxes, which was not doubted in any subsequent cases. The High Court found that the movement of goods was in pursuance of the contract and therefore covered by the CST Act.Additional Points:- The Assessing Officer and the Appellate Authority had rejected the respondent's claim for exemption, stating there was no link between DMRC and the supplier of goods imported by the respondent. However, the High Court found that the contract terms demonstrated the importation and inter-state movement of goods were occasioned by the contract.- The High Court noted several material terms in the contract that supported its conclusion, such as DMRC's approval of suppliers, pre-inspection of goods, and the custom-made nature of the goods for DMRC's project.- The Supreme Court affirmed the High Court's judgment, agreeing that the movement of goods by way of imports or inter-state trade was in pursuance of the contract conditions. The Court found no merit in the appeals and dismissed them, leaving the parties to bear their own costs.In conclusion, the Supreme Court upheld the High Court's decision that the transactions were exempt from DVAT under the CST Act, as the movement of goods was in pursuance of the contract with DMRC. The Court found that the High Court correctly applied the legal principles from the K.G. Khosla case, distinguishing it from the Binani Bros. case based on the specific facts and contract terms involved.