2021 (4) TMI 1215 - HC - VAT and Sales Tax

Court rules conversion of corrugated boxes not subject to sales tax, emphasizing labor & skill.

M/s. Penguine Paper Plast (P) Ltd. Versus State of Orissa, represented by the Commissioner of Sales Tax, Odisha

The Court ruled in favor of the Petitioner, determining that the conversion of corrugated boxes constituted job work, not a works contract liable to sales ... Levy of Sales Tax - works contract or not - conversion of corrugated box - addition made only on estimation without having any rational nexus with materials on record - HELD THAT:- A careful perusal of the agreement between the Petitioner and IDL would show that what was entrusted by IDL to the Petitioner was in sum and substance, a job work. The quality of paper and the material to be supplied for making of the corrugated boxes was pre-determined. M/s. IDL also determined the dimensions of the boxes. The minutes of the meeting make it clear that after conversion of the material into corrugated boxes, they had to be sent back to M/s. IDL. What was paid for the job work was the conversion rate of ₹ 5.25 per box. Freight was borne separately by M/s. IDL. At no point in time was there any transfer of property in the boxes to the Petitioner. After referring to the decisions in THE ASSISTANT SALES TAX OFFICER AND OTHERS VERSUS BC. KAME [1976 (12) TMI 164 - SUPREME COURT]; THE STATE OF PUNJAB VERSUS ASSOCIATED HOTELS OF INDIA LTD. [1972 (1) TMI 80 - SUPREME COURT]; HINDUSTAN AERONAUTICS LTD. VERSUS STATE OF KARNATAKA [1983 (12) TMI 259 - SUPREME COURT]; HINDUSTAN AERONAUTICS LIMITED VERSUS STATE OF ORISSA [1983 (12) TMI 260 - SUPREME COURT] and STATE OF TAMIL NADU VERSUS ANANDAM VISWANATHAN [1989 (1) TMI 359 - SUPREME COURT], this Court came to the conclusion that the very wording of the agreement made it clear that it was a job work. It was concluded that the photo identity cards supplied to the CEO are not commercial commodities and the same cannot be used or sold by the Petitioner to any other person. The material purchased and utilized in preparation of photo identity cards was very negligible and incidental. The agreement between the Petitioner and M/s. IDL does not answer the characteristics of a works contract as defined in Section 2 (jj) of the OST act. There is also no element of sale as defined under Section 2 (g) thereof. The dominant object is indeed skill and labour to convert paper and board into corrugated cartons or boxes - Decided in favor of assessee. Appeal allowed. Issues:1. Determination of turnover relating to conversion of corrugated box as works contract for sales tax.2. Legality of addition made on estimation without rational nexus with materials on record.Analysis:1. The three revision petitions raised similar substantial questions of law regarding the turnover amounting to Rs. 19,46,198.04 for conversion of corrugated boxes being treated as a works contract liable to sales tax. The Odisha Sales Tax Tribunal's order was challenged, which affirmed the extra demand raised by the Sales Tax Officer for the period 1996-97. The Petitioner contended that the arrangement with M/s. IDL was a job work, not liable to sales tax, citing relevant legal provisions and precedents.2. The Petitioner's appeals against the Sales Tax Officer's orders were dismissed by the Assistant Commissioner of Commercial Taxes and the Tribunal, leading to the current petitions. The Tribunal concluded it was a works contract, justifying the levy of sales tax. The Petitioner argued that tax was imposed not just on materials but also on labor and service charges. The Court analyzed the agreement between the parties, emphasizing the absence of property transfer, akin to a job work situation, and referred to a similar precedent involving photo identity cards.3. The Court noted that the nature of the agreement was primarily for job work, with no sale or transfer of goods involved. It distinguished between works contract and job work based on the dominant object of the contract, ruling in favor of the Petitioner. The impugned orders by the Tribunal, ACCT, and STO were set aside, and the Petitioner was entitled to a refund of amounts paid during the proceedings. The Court's decision was based on the absence of sale elements and the focus on labor and skill in converting paper and board into boxes.4. The judgment provided detailed analysis of the legal provisions, factual background, and precedents to determine the nature of the agreement between the parties. The Court's decision clarified the distinction between works contract and job work, ultimately ruling in favor of the Petitioner and ordering a refund of the amounts paid. The judgment highlighted the importance of examining the dominant object of the contract to ascertain the applicability of sales tax, ensuring a thorough and comprehensive analysis of the issues involved.