1 mpt IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION SALES TAX APPLICATION NO.12 OF 2006 The Commissioner of Sales Tax Maharashtra State, having their office at Vikrikar Bhavan, Mazgaon Mumbai .. Applicant versus M/s.Auto Comp Corporation J-216 MIDC Bhosari, Pune 411 026 .. Respondent ... Mr. A.S. Saluja, AGP for the applicants. Mr.C.B. Thakkar for respondent CORAM : FI. REBELLO AND D.G. KARNIK, JJ DATED : 29 th July 2009. ORAL JUDGMENT (Per D.G.Karnik, J) 1. By this application under section 61 of the Bombay Sales Tax Act (for short “the Act”) the applicant, Commissioner of Sales Tax prays that the 2 sales tax tribunal be directed to draw a statement of cases and refer the following questions of law to the determination of this court viz. i) Whether on the facts and in the circumstances of the case, the Maharashtra Sales Tax Tribunal was justified in holding that the activity of manufacturing and supply of “Flange Assembly’ to TELCO carried out by M/s.Auto Comp. Corporation is not a transaction of ‘sale’ as contemplated u/s.2(28) of the Bombay Sales Tax Act, 1959? ii) Whether on the facts and in the circumstances of the case, the Maharashtra Sales Tax Tribunal was justified in holding that the activity of manufacturing and supply of ‘flange Assembly’ is a sale u/s.2(1) of the Maharashtra Sales Tax on the transfer of property in goods involved in the execution of Works Contracts (re- enacted) Act, 1989? 2. The relevant facts leading to the present application are briefly stated below:- M/s.Auto Comp Corporation, the respondent herein, is engaged in the manufacture of auto parts and is duly registered as a dealer under the provisions of the Act as also the Central Sales Tax Act 1956. He was assessed to sales tax for the Financial Year 1992-93 to 1997-98 under the Act. The assessment orders passed by Assistant Commissioner of Sales Tax 3 resulted in substantial extra demand mainly on account of disallowance of the respondent’s claim on Works Contracts which were termed as conversion charges in its books of accounts. First Appeals filed by the respondent were dismissed. Aggrieved respondent filed Second Appeals before the Maharashtra Sales Tax Tribunal (for short “the Tribunal”). By the order dated 26th September 2003, the Tribunal allowed the appeals filed by the respondent holding that respondent was not liable to pay sales tax on the conversion charges on the Works Contracts executed by it. Aggrieved by the order, the appellant filed an application to the Tribunal for reference of the aforementioned questions of law. On rejection of the application by the Tribunal, the applicant has approached this court for an order directing the reference to be made. 3. The main dispute between the parties revolves around the claim of the respondent relating to non taxability to sales tax of the amount received by it by way of conversion charges from Tata Engineering and Locomotive Co. Ltd. (for short “Telco”) 4. Under the arrangement between the Telco and the respondent, the Telco supplies the main raw material of imported steel sheets to the respondent who converts them into an auto part known as “Assembly Flange”. The Assembly Flange consists of two parts viz. “outer-flange” and “inner flange”. From the imported steel sheets supplied by Telco, the 4 respondent manufactures outer-flange. So far as inner-flange is concerned, respondent uses its own raw material and prepares the inner-flange which is then welded together to the outer-flange. The welding is so done that the inner-flange and outer-flange cannot be separated from each other and they together constitute and make the auto part i.e. “Assembly-Flange”. The Assembly-Flange so manufactured is then despatched by respondent to Telco. For doing this job work of converting the imported steel sheets supplied by Telco into Assembly-Flange, Telco pays a consolidated price of Rs.27.09 per piece to the respondent. The respondent shows the receipt of this amount in his books under the heading “conversion charges”. It is the contention of the Commissioner of Sales Tax that the respondent is liable to pay sales tax on this amount of Rs.27.09 per piece received by the respondent from Telco. The Tribunal after consideration of all the material available before it held that the imported steel plates which form the main raw material for the Assembly Flange is supplied by Telco. A job work is performed by the respondent on the steel plates supplied by Telco so as to convert the steel plates into an auto part called as Assembly Flange. While doing the job work on the steel plates resulting into production of Assembly Flange, some material belonging to the respondent is attached to the goods of Telco to produce the Assembly Flange. The Assembly Flange is delivered to Telco. In so delivering property of the respondent in some materials used for the manufacture of inner-flange is attached to the outer-flange and passes on to the Telco. The Tribunal held that the passing of such property 5 to Telco was incidental to the main contract viz conversion of imported steel plates into auto part viz. Assembly Flange. 5. The Supreme Court has considered the meaning of the expression “Sale of goods” appearing in Entry 48 of list 2 of Seventh Schedule to the Constitution of India in the case of State of Madras Vs. Gannon Dunkerley & Co. (Madras) Ltd,(9 STC 353 SC). The Supreme Court held that in a building contract which is entire and indivisible, there is no sale of goods by the contractor to the owner and it is not within the competence of the provincial legislature under Entry 48 of list 2 of seventh schedule to the constitutionto impose tax of supply of raw materials used in such contract treating it as a sale. This decision led to the 46th amendment of Constitution of India in 1982 by which the legislature of the states were empowered to levy sales tax on certain transactions described in clause 29- A of Article 366 of the Constitution and conferring power on the State legislature to levy tax on the transfer of property on goods involved in execution of Works Contract referred to sub-clause(b) of clause 29-A of Article 366 of the Constitution. 6. In pursuance of the powers conferred on the state legislatures to impose tax on the transfer of property in the goods involved in the execution of the Works Contract, legislature of Maharashtra has enacted Maharashtra Sales Tax on the transfer of property in goods involved in the 6 execution of Works Contracts (Re-enacted) Act, 1989. (Maharashtra Act No.XXXVI of 1989 (hereinafter referred to as “the Works Contract Act”) Section 2(l) of the Works Contract Act defines “sale” for the purpose of Works Contract Act as follows:- “Sale” means a transfer of property in goods whether as goods or in some other form involved in the execution of a Works Contract in the State, and the word “sell” with all its grammatical variation and cognate expressions shall be construed accordingly;” Section 6 of the Works Contract Act levies a tax on turnover of sales. Obviously, the word “sale” used in section 6 relates to the definition of “sale” appearing in section 2(l) of the Works Contract Act. Looking at the provision of section 2(l) r/w section 6 of the Works Contract Act it may be possible to contend that a portion of the conversion charges received by the respondent by way of a value of the goods transferred by the respondent in preparation of the inner-flange and welding it to the outer-flange amounts to a sale and taxable under the Works Contract Act. However, that cannot be a sale as defined under section 2(28) of the Bombay Sales Tax Act. The contention of the applicant that a part of the conversion charges received by respondent from Telco as conversion price represents the value of the 7 goods (Inner-flange) which are sold and/or transferred by it to Telco and therefore that value is exigible to tax under the Bombay Sales Tax cannot be accepted. 7. In our view, the transfer of the property in the goods (Inner-flange) by respondent to Telco does not amount to sale within the meaning of Bombay Sales Tax Act. Bombay Sales tax defines the word “sale” under section 2 (28) as follows:- “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration, and includes any supply by a society or club or an association to its members on payment of a price or of fees or subscription, but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly; (a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in sub-section (2) of section 4 of the Central Sales Tax Act, 1956; (b) (i) every disposal of goods referred to in the Explanation to clause (11); (ii) a delivery of goods on hire-purchase or any system of payment by instalments; 8 (iii) the supply, by way or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is made or given on or after the 2nd day of February 1983, for cash, deferred payment or other valuable consideration; (iv) the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (v) the supply of goods by any incorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; shall be deemed to be a sale 8. In Hindustan Aeronautics Ltd. Vs. State of Karnataka (1984) 055 STC 314, the Supreme Court was concerned with an agreement between the Hindustan Aeronautics Ltd. (HAL) and President of India whereby HAL had agreed to accomplish the service and maintenance of certain Air Force planes to the specified standard. For the works to be carried out, payment was to be made by the Government at cost plus 10% profit basis or at the HAL’s fixed rates wherever applicable. Clause 3 of the agreement provided that the Government would provide all necessary spare parts and materials (except those expendable such as paints, dopes, cleaning rags etc.) Where, however, there was delay the HAL was to provide them wherever possible either by purchase or manufacture, within the overall expenditure authorized by the Government’s Deputy Financial Adviser. All items 9 supplied by the defence were to be the property of the Government and were to be issued on contract loan and the Government agreed to pay for the items manufactured by the appellant at cost plus 10% and for items purchased from indigenous and overseas sources at actual invoice plus all other charges which HAL had to pay plus 5 percent. As required by the Defence Audit, labour charges and material charges were shown separately by the HAL. The question before the Court was whether the money value of the spare parts of the aircrafts which the appellant had supplied to the Air Force as a result of their use in the process of repairing, servicing and overhauling the aircraft, could be subjected to sales tax. The Tribunal as well as High Court held that the sale of spare parts was clearly in contemplation of the parties and attracted sales tax. Reversing the decision of the High Court, the Supreme Court held that the contract between the parties was to accomplish for the Government the servicing and maintenance of the Air force and the works required maintaining the aircraft according to the specified standard. The Government was to supply materials required for use in the repairs and in case of delay the HAL was to procure the parts. It was held that the spare parts and material were supplied by the appellant in the case of execution of Works Contract and therefore there was no sale exigible to sales tax. In our opinion, the ratio of this case squarely applies to the controversy before us. The main raw material is imported steel plates which are supplied by the Telco. The steel plates belong to Telco and the respondent only converts the said steel plates 10 into the Assembly-Flange. In converting these steel plates into Assembly- Flange the respondent undoubtedly uses some of its own material but the contract of conversion of steel plates under the Assembly-Flange is single and indivisible and the passing of the property in the goods of the respondent used in the said conversion is incidental to the main contract which is the Works Contract. Obviously, passing of such property in the goods is not a sale as defined u/s.2(l) of the Bombay Sales Tax Act. 9. Since the property in the goods (material used for production of inner-flange) by the respondent in the execution of the contract of converting the steel plates into an Assembly-flange is transferred to the Telco, it would undoubtedly amount to a sale as held by the Tribunal. 10. We see no error in the view taken by the Tribunal. The question as framed would not arise. Consequently, we decline the application. 9. Ordered accordingly. (D.G. KARNIK, J) (F.I. REBELLO, J)