2024 (8) TMI 957 - HC - VAT and Sales Tax

Goods sourced from outside state for works contract remain inter-state sale despite title transfer within state

Kerala HC held that goods sourced from outside the state for a works contract in Kerala constituted inter-state sale despite initial possession/title ... Liability to pay tax under the KGST Act on the value of the goods supplied inter-State for execution of the works contract in Kerala - intra-State sale - HELD THAT:- The scope of the petitioner’s obligation under the contract was to source the goods, forming part of the electric Sub-Station, from specified vendors or from its own manufacturing units outside the State and make them available for incorporation in the works contract carried out in the State. It will also be apparent that the goods in question were ‘non-standard goods’ which had to be in accordance with the designs and specifications supplied by KINFRA. The goods to be supplied were not standard goods which the petitioner company could have fabricated based on its own designs and specifications. It follows therefore that when such goods, as were covered by the contract entered into between the petitioner and KINFRA, were sourced from outside the State, the mere fact that there was an initial transaction whereby the petitioner obtained possession/title of the goods in Kerala from a movement of the goods that originated from outside of Kerala, could not have made a difference while determining the nature of the sale transaction namely ‘inter-State’ or ‘intra-State’. In the instant case, the movement of the goods, in respect of which the petitioner had claimed exemption from tax under the KGST Act, was clearly incidental to their obligations under the contract entered into with KINFRA. The goods themselves were not standard goods but goods that answered to the specifications and make that was prescribed in the contract entered into between the petitioner and KINFRA. Under such circumstances, merely because there was an intervening event that broke the chain of movement of the goods from outside the State to within the State, prior to their incorporation in the works contract, the transaction could not have been viewed as an ‘intra-State sale’. These S.T. Revisions allowed by setting aside the impugned orders of the Appellate Tribunal and answering the questions of law raised in these Revision Petitions in favour of the petitioner assessee and against the Revenue. Issues Involved:1. Tax liability under the KGST Act for goods supplied inter-State for execution of works contract in Kerala.2. Non-production of formal contract and its impact on determining the nature of the transaction.3. Nature of goods supplied and their classification as inter-State or intra-State sales.Detailed Analysis:1. Tax Liability Under the KGST Act for Goods Supplied Inter-State for Execution of Works Contract in Kerala:The petitioner, a company registered under the Companies Act, 1956, with branches in various states, including Kerala, undertook works contracts for KINFRA during the assessment years 2000-01 and 2004-05. The petitioner claimed exemption from tax under the KGST Act for items sourced from outside the State and incorporated into the works contract in Kerala. The Assessing Authority rejected this claim, asserting that the incorporation of goods sourced from outside the State in the works contract in Kerala attracted tax under the KGST Act. The petitioner's appeals to the First Appellate Authority and the Appellate Tribunal were dismissed, leading to the present revision petitions.2. Non-Production of Formal Contract and Its Impact on Determining the Nature of the Transaction:The Tribunal dismissed the petitioner's claim primarily due to the non-production of the formal contract in original, concluding that the inter-State movement of goods had no relation to the petitioner's contractual obligations. However, the High Court noted that the Tribunal had accepted the tender documents as pertaining to the contract between the petitioner and KINFRA. The High Court emphasized that the Tribunal should have considered the clauses in the tender documents in a commercial sense, particularly clauses 4.1.5, 4.31, 5.1.1, 5.3.4, 5.3.5, 5.5, 9.0, and the Schedule of Requirements & Estimate for the 110 kV Sub-station.3. Nature of Goods Supplied and Their Classification as Inter-State or Intra-State Sales:The High Court observed that the petitioner's obligation under the contract was to source specific goods from vendors or its own manufacturing units outside the State and incorporate them into the works contract in Kerala. These goods were non-standard and had to meet the designs and specifications provided by KINFRA, indicating that the goods were not standard items fabricated based on the petitioner's designs. The Court concluded that the movement of goods from outside the State into Kerala was incidental to the contract and that the petitioner's Kerala office acted merely as a conduit. The Court distinguished this from scenarios where standard goods are brought into the State for general sale, which would be considered intra-State sales.The High Court referenced the Supreme Court judgments in Sahney Steel & Press Works Ltd. and Another v. Commercial Tax Officer and Others [(1985) 60 STC 301 (SC)] and Commissioner, Delhi Value Added Tax v. ABB Ltd. [91 VST 188 (SC)], which supported the view that the inter-State movement of goods incidental to a contract should not be classified as intra-State sales.Conclusion:The High Court allowed the S.T. Revisions, set aside the impugned orders of the Appellate Tribunal, and answered the questions of law in favor of the petitioner assessee and against the Revenue. The Court held that the inter-State movement of goods incidental to the execution of the works contract should not attract tax under the KGST Act.