* THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.9683 and 9701 of 2010 % 19.01.2011 # M/s.A.P.Aksh Broad Band Limited, Hyderabad Represented by its Authorised signatory, Mr.D.V.Sivaprasad ...Petitioner VERSUS $ The Commercial Tax Officer, Jubilee Hills Circle, Hyderabad And others ...Respondents < GIST: > HEAD NOTE: ! Counsel for Petitioner: Sri S.R.Ashok ^Counsel for Respondents: Sri A.V.Krishna Kaundinya ? Cases referred 1. (1993) 1 SCC 364 : (1993) 88 STC 208 (SC) 2. (1989) 2 SCC 645 (para 32) : (1989) 73 STC 370 : 3. (2000) 6 SCC 12 : (2000) 119 STC 182 (SC) THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.9683 and 9701 of 2010 19.01.2011 Between: M/s.A.P.Aksh Broad Band Limited, Hyderabad Represented by its Authorised signatory, Mr.D.V.Sivaprasad … Petitioner AND The Commercial Tax Officer, Jubilee Hills Circle, Hyderabad And others … Respondents THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.9683 and 9701 of 2010 COMMON ORDER: (Per Hon’ble Sri Justice V.V.S.Rao) These two writ petitions are filed by M/s.A.P.Aksh Broad Band Limited against two assessment orders passed on 29.3.2010 for the assessment years 2005-06 and 2006-07 under the Andhra Pradesh Value Added Tax Act, 2005 (the VAT Act, for brevity). The factual background and the respondents are the same. Therefore, a common order would be proper. The petitioner company is a VAT dealer on the rolls of the first respondent. It is engaged in the business of undertaking laying of fibre cables required for the Telecom industry. The second respondent, namely, Andhra Pradesh Telecom Department (also referred to as A.P.Technologies Services) entrusted to the petitioner the job for laying of cables in Andhra Pradesh for a consideration of Rs.370 crores. The petitioner entrusted the work on sub-contract to the third respondent. The work was either partially or fully completed during 2005-06 and 2006-07. The second respondent statedly suspended execution of the work, and kept it ‘on hold’. The petitioner allegedly did not submit bills and, therefore, treated the value of the fibre cables laid as part of the work in progress and capitalised the same in the Balance Sheet. For the two assessment years, the petitioner filed returns declaring ‘Nil’ turnover. It was taken up for assessment. A show cause notice dated 10.2.2010 was issued proposing to levy tax under Section 4(7)(a) of the VAT Act at 4% and/or 12.5% on the material used in executing the work of laying cables involved in the works contract entrusted by the second respondent to the petitioner. The petitioner filed objections on 19.3.2010 and 27.3.2010 contending that they did not execute any works for determining output tax for the said assessment years, no running account bills (RA Bills) were raised during the financial years, and there was no transfer of goods in execution of works contract. The petitioner also requested for a personal hearing which was granted on 25.03.2010. After considering the objections, the first respondent passed the impugned assessment orders. The first respondent observed that the petitioner did not produce any account books, Balance Sheet and Profit and Loss Account, RA Bills or any other records in support of their contention, they did not discharge the burden of proof under Section 16(1) of the VAT Act, the sale or purchase effected by them is not liable for any tax; their contention that they had captively consumed material worth Rs.66,58,42,892/- was not supported by any evidence; the third respondent was given sub-contract; and, therefore, it could not be said that the entire material had been captively used without transferring it to the contractee; the assessee was not the owner of the cables laid in Andhra Pradesh as per the agreement entered into with the petitioner; and their contention that they did not execute any works contract, but had captively consumed the material during the assessment years could not be accepted. The first respondent filed his counter affidavit. While opposing the writ petition on the ground of availability of alternative remedy, it is alleged that the petitioner has filed the writ petition to avoid payment of 12.5% of the disputed tax for maintaining the appeal before the appellate authority. It is further stated that though the petitioner objected to the show cause notice of assessment under Section 4(7)(a) of the VAT Act stating that they did not execute any works contract, they had failed to discharge the burden of proving that the absence of sale or purchase effected by the dealer was not liable to tax. Absence of such proof disproved the contention that material worth about Rs.19,94,79,886/- was used for captive consumption, and not in the business of telecom. In the reply affidavit, the following averments and allegations are made by the petitioner. As the work was put ‘on hold’ by the principal employer, the cables laid in the meanwhile by the petitioner could not have been treated as ‘appropriated’ in pursuance of the works contract, and the petitioner had no other option except to capitalise the value of the cables laid by the petitioner on the premise that it was used for self- consumption duly making an entry in the Balance Sheet. The first respondent failed to requisition the Balance Sheet. Non-submission of the same is bona fide on account of lack of proper and appropriate legal advice, and not on account of negligence. The petitioner did not sell or purchase material in the course of business activity either within the State or outside the State and, therefore, the first respondent had no jurisdiction to levy tax on non-existent sale. The senior counsel for the petitioners Sri S.R.Ashok submits that the petitioner did not transfer any material in execution of the works contract, in favour of the contractee, and they did not raise any bills against the contract. Therefore, levy of tax under Section 4(7) is illegal. In the absence of incorporation and consequent appropriation of goods by the employer, namely, the second respondent, the taxable event essential for works contract does not exist. The burden of establishing that there was a sale is on the department, and there is no such material before the first respondent to levy tax. The Special Counsel for Commercial Taxes Sri Krishna Kaundinya submits that the taxable event in a works contract occurs the moment the goods are incorporated whether they are appropriated or not by the employer. He would urge that the plea of non-use or abandonment does not mitigate against the transaction, and it is not relevant for levy of tax under Section 4(7)(a) of the VAT Act. He relies on the Judgment of the Constitution Bench in Gannon Dunkerley and Company v State of Rajasthan[1]. Can the petitioner not be taxed on the material component, under Section 4(7) of the VAT Act, in the absence of sale as defined in Section 2(28) and Explanation VI, excisable to tax under Section 4(7)(a) of the VAT Act? The incidental questions are when would the taxable event in the works contract occur, whether at the time of incorporation of the goods in the works or when such incorporated goods are appropriated by the contractee? The admitted facts are the following. The second respondent, A.P.Telecom Department (in the affidavit, the petitioners often refer to the second respondent as A.P.Technologies Services without disclosing any reasons) entrusted the work of laying fibre cables to the petitioner for a consideration of Rs.370 crores. The petitioner, in turn, entrusted the work to the third respondent on sub-contract. The work involved laying of underground fibre cables. The petitioner commenced the work and completed it partially. The works included purchase of cables from the third respondent which attract either 4% or 12.5% VAT. For the period from December, 2005 to March, 2006, the petitioner filed return showing non-creditable purchase value of Rs.53,11,00,392/-, and purchases taxable at 4% of Rs.1,49,31,451/- as well as purchases taxable at 12.5% of Rs.9,19,244/-. In their VAT return for 2006-07, they revealed non-creditable purchases, purchases taxable at 4% and purchases taxable at 12.5% at Rs.14,78,13,061/-, Rs.5,13,76,585/- and Rs.2,87,240/- respectively. The petitioner, however, did not declare the resultant output tax in the VAT returns. In reply to the show cause notice the petitioner stated that, during 2005-06, the works contract for laying fibre cable was not commenced due to unavoidable reasons, they did not submit the bills and, therefore, levy of tax on works contract does not arise; since they did not execute works contract, during December, 2005 to March, 2006, there is no output tax payable and no RA bills were raised against A.P.Technologies Services Limited; levy of tax at 4% by adding the incorporation value of 10% was not correct as the materials purchased were kept for being used in the works contract, and the proposal to tax non-creditable purchase by adding 10% incorporation value is not correct as the material was purchased in the course of inter- State trade for captive consumption which was capitalised in the books of accounts during 2005-06. It appears, the petitioner did not produce books of accounts, Profit and Loss Account, RA bills or any other record in support of the contention. Therefore, relying on Section 16 of the VAT Act, the first respondent assessed the VAT payable by the petitioner under Section 4(7) of the VAT Act. At the cost of repetition, it may be noticed that the vehement argument of the Senior Counsel is that the material was not appropriated in the works contract; the contractee had abandoned the project and, therefore, levy of tax under Section 4(7) is illegal and without jurisdiction. To appreciate the contention, it is necessary to refer to the definitions of ‘dealer’, ‘purchase price’, ‘sale’, ‘sale price’ and ‘works contract’. 2(10) “Dealer” means any person who carries on the business of buying, selling, supplying or distributing goods or delivering goods on hire purchase or on any system of payment by instalments, or carries on or executes any works contract involving supply or use of material directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration .. (Other portion omitted as not relevant) 2(25) “Purchase Price” means the amount of valuable consideration paid or payable by a person for any purchase made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof. 2(28) “Sale” with all grammatical variations and cognate expressions means every transfer of the property in goods (whether as such goods or in any other form in pursuance of a contract or otherwise) by one person to another in the course of trade or business, for cash, or for deferred payment, or for any other valuable consideration or in the supply distribution of goods by a society (including a cooperative society), club, firm or association to its members, but does not include a mortgage, hypothecation or pledge of, or a charge on goods. (Explanations I to V – Omitted as not relevant) Explanation VI – Whenever any goods are supplied or used in the execution of a works contract, there shall be deemed to be a transfer of property in such goods, whether or not the value of th3 goods so supplied or used in the course of execution of such works contract is shown separately and whether or not the value of such goods or material can be separated from the contract for the service and the work done. (Explanations VII and VIII – Omitted as not relevant) 2(29) “Sale Price” means:- (a) the total amount set out in the tax invoice or bill of sale; or (b) the total amount of consideration for the sale or purchase of goods as may be determined by the assessing authority, if the tax invoice or bill of sale does not set out correctly the amount for which the goods are sold; or (c) if there is no tax invoice or bill of sale, the total amount charged as the consideration for the sale or purchase of goods by a VAT dealer or TOT dealer either directly or through another, on his own account or on account of others, whether such consideration be cash, deferred payment or any other thing of value and shall include:- (i) the value of any goods as determined by the assessing authority:- (a) to have been used or supplied by the dealer in the course of execution of the works contract; or Other portion omitted 2(45) “Works Contract” includes any agreement for carrying out for cash or for deferred payment or for any other valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, laying, fitting out, improvement, modification, repair or commissioning of any movable or immovable property; It is also necessary to read Section 4(7)(a) and (b), which are the charging provisions in respect of works contracts. 4(7) Notwithstanding anything contained in the Act:- (a) every dealer executing works contract shall pay tax on the value of goods at the time of incorporation of such goods in the works executed at the rates applicable to the goods under the Act: Provided that where accounts are not maintained to determine the correct value of goods at the time of incorporation, such dealer shall pay tax at the rate of 12.5% on the total consideration received or receivable subject to such deductions as may be prescribed; (b) any dealer executing any works contract for the Government or local authority may opt to pay tax by way of composition at the rate of 4% on the total value of the contract executed for the Government or local authority. The conspectus of the definitions and the charging provision is as follows. A works contract is a contract for valuable consideration, for building construction, manufacture, processing, fabrication, erection, installation, laying, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. As per Section 2(10) any person, inter alia, who executes any works contract involving supply or use of material directly or otherwise in construction works is also a dealer for the purpose of the VAT Act. When goods are supplied or used in execution of a works contract by a dealer, there shall be deemed to be a transfer of property in such goods and it would be a sale as defined under Section 2(28). The sale price includes the value of any goods which have been used or supplied by the dealer in the course of execution of the contract. The law nowhere requires that the goods used or supplied by the dealer in the execution of a works contract should be appropriated by the contractee or the employer to bring the transaction within the ambit of taxable sale of goods. When once the goods are supplied or used in the execution of a works contract for consideration, the taxable event exists for the purpose of the VAT Act. If only the legislature intended that a sale or deemed sale, in relation to a works contract, would be excisable to tax only when the goods supplied or used are appropriated by the employer, the legislature would have indicated it to be so. Even remotely, there is no such indication nor is any such interpretation possible in view of the law laid down by the Supreme Court. In Builders Association of India v Union of India[2], the validity of the Constitution (Forty-sixth) Amendment Act was upheld. The Constitution Bench of the Supreme Court observed as follows. It refers to a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. The emphasis is on the transfer of property in goods (whether as goods or in some other form). The latter part of clause (29-A) of Article 366 of the Constitution makes the position very clear. While referring to the transfer, delivery or supply of any goods that takes place as per sub- clauses (a) to (f) of clause (29-A), the latter part of clause (29- A) says that “such transfer, delivery or supply of any goods” shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. … … The object of the new definition introduced in clause (29-A) of Article 366 of the Constitution is, therefore, to enlarge the scope of ‘tax on sale or purchase of goods’ wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub- clauses (a) to (f) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. In Gannon Dunkerly, the question relating to imposition of tax and the transfer of property in goods involved in the execution of works contract was considered by the Constitution Bench. It was held. We are in agreement with the submission that measure for the levy of the tax contemplated by Article 366(29-A)(b) is the value of the goods involved in the execution of a works contract. In Builders’ Association case it has been pointed out that in Article 366(29-A)(b), “[t]he emphasis is on the transfer of property in goods (whether as goods or in some other form)”. This indicates that though the tax is imposed on the transfer of property in goods involved in the execution of a works contract, the measure for levy of such imposition is the value of the goods involved in the execution of a works contract. We are, however, unable to agree with the contention urged on behalf of the contractors that the value of such goods for levying the tax can be assessed only on the basis of the cost of acquisition of the goods by the contractor. Since the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works and not the cost of acquisition of the goods by the contractor. We are also unable to accept the contention urged on behalf of the States that in addition to the value of the goods involved in the execution of the works contract the cost of incorporation of the goods in the works can be included in the measure for levy of tax. Incorporation of the goods in the works forms part of the contract relating to work and labour which is distinct from the contract for transfer of property in goods and, therefore, the cost of incorporation of the goods in the works cannot be made a part of the measure for levy of tax contemplated by Article 366(29-A)(b). In 20th Century Finance Corporation Limited v State of Maharashtra[3], interpreting the latter portion of Article 366 (29-A), the Supreme Court held: The various sub-clauses of clause (29-A) of Article 366 permit the imposition of tax thus: sub-clause (a) on transfer of property in goods; sub-clause (b) on transfer of property in goods; sub-clause (c) on delivery of goods; sub-clause (d) on transfer of the right to use goods; sub-clause (e) on supply of goods; and sub-clause (f) on supply of services. The words “and such transfer, delivery or supply ...” in the latter portion of clause (29-A), therefore, refer to the words transfer, delivery and supply, as applicable, used in the various sub-clauses. Thus, the transfer of goods will be a deemed sale in the cases of sub-clauses (a) and (b), the delivery of goods will be a deemed sale in case of sub-clause (c), the supply of goods and services respectively will be deemed sales in the cases of sub- clauses (e) and (f) and the transfer of the right to use any goods will be a deemed sale in the case of sub-clause (d). The expression ‘tax on sale or purchase of goods’, being an inclusive definition, must be given wide meaning. The latter part of clause 29-A of Article 366 of the Constitution of India contemplates that ‘such transfer, delivery or supply of any goods’ shall be deemed to be a sale of those goods. Sub-clauses (a) and (b) use the expression ‘transfer of property in goods’, sub-clause (c) uses “delivery”. Sub- clause (d) uses “transfer of the right to use goods” and sub-clause (e) and (f) use “supply” goods while defining deemed sale. Thus, under sub-clause (b), there would be a deemed sale when the transfer of property in goods, involved in execution of a works contract, is accomplished or completed. It has nothing to do with appropriation. When once the goods are incorporated in execution of the works contract, transfer of property in goods takes place. We are well supported by two decisions of the Supreme Court on this point. The principles of interpretation of a taxing statute are well settled. A taxing statute has to be read and construed as per the intention of the legislature, which has to be determined from the words used in the statute. There is no scope to imply anything nor the Court supply casus omissus. The submission of the Senior Counsel, if accepted, would amount to reading something which is not intended by the Legislature. The Legislature, while enacting Section 4(7)(a) to (d), never intended that a works contract is exigible to tax only when the goods used in such contract are appropriated by the employer. There could be myriad situations when the works contract, after substantial completion, is abandoned in which event the right of the parties to the contract is to claim damages for breach of contract which might include the component of VAT paid by the contractor. Merely because the works are abandoned, or merely because a part of the material was used only by the employer, the works contractor cannot escape VAT liability. In this case, there is no dispute that the petitioner has fully or partially completed the work of laying fibre cables and, even if it is abandoned by the second respondent, the taxable event under Section 4(7)(a) of the VAT Act does not vanish. We are, therefore, not able to accept the submission of the petitioners. In the result, for the above reasons, the writ petitions fail and are accordingly dismissed without any order as to costs. _______________ (V.V.S.RAO, J) ______________________________ (RAMESH RANGANATHAN, J) 19.01.2011 Pln Note: LR copy be marked. (By order) pln [1] (1993) 1 SCC 364 : (1993) 88 STC 208 (SC) [2](1989) 2 SCC 645 (para 32) : (1989) 73 STC 370 [3] (2000) 6 SCC 12 : (2000) 119 STC 182 (SC)