COMMISSIONER,DELHI VALUE ADDED TAX Vs. M/S ABB LTD.

Tags Tax/ Tax Settlement, Excise Duty

Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 2989-3008 of 2016, Judgment Date: Apr 05, 2016

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.2989-3008 OF 2016
[Arising out of S.L.P.(C)Nos.30045-30064 of 2013]

Commissioner, Delhi Value Added Tax …..Appellant

Versus

M/s. ABB Ltd. …..Respondent

J U D G M E N T

SHIVA KIRTI SINGH, J.

Instant appeals have been preferred by Commissioner, Delhi Value Added Tax
to assail the judgment and order of the High Court of Delhi dated
28.09.2012 in S.T.A.Nos.51-70 of 2012. The High Court reversed the order
of the VAT Tribunal and of other lower authorities on the basis of its
conclusion 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. (hereinafter referred to as ‘DMRC’). The High
Court further came to hold that claimed sales should be deemed to have
taken place in course of imports of the goods or inter-state trade and that
such import/movement of goods was integrally connected with the contract
for their supply to DMRC. On the basis of such twin findings the High
Court has 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) respectively of the Central Sales Tax Act,
1956 (hereinafter referred to as ‘CST Act’) and, therefore, exempt from
taxation under the Delhi Value Added Tax Act, 2004 (hereinafter referred to
as ‘DVAT Act’).
According to appellant the impugned judgment and order of the High Court is
based upon erroneous interpretation of judgments of this Court particularly
that of the Constitution Bench in the case of M/s. K.G. Khosla & Co. v.
Deputy Commissioner of Commercial Taxes, Madras[1]. The appellant has
placed strong reliance upon a subsequent Constitution Bench judgment in the
case of M/s. Binani Bros. (P) Ltd. v. Union of India & Ors.[2]. On the
other hand, respondent has fully supported the view adopted by the High
Court. Its contention is that ratio in the case of K.G. Khosla1 has not
been doubted in the later judgment in the case of Binani Bros. and the
conclusions drawn by the High Court on the basis of admitted facts are
supported by the principle of law settled in the case of K.G. Khosla which
has not been doubted in any other case. According to respondent the claim
of sale in course of imports occasioned by the contract was negatived in
the case of Binani Bros. on peculiar facts of that case which were quite
different from the facts of the instant case, as correctly noticed by the
High Court.
Before adverting to the main issue as to whether the High Court judgment is
correct in law as well as in facts or not, it would be appropriate to
notice some of the relevant facts. The respondent is a Public Limited
Company engaged, inter alia, in manufacture and sale of engineering goods
including power distribution system and SCADA system. It appears to be a
market leader in power and automation technologies. It is a subsidiary of
ABB Ltd., Zurich Switzerland which has operational presence in over 100
countries and employs around 1,30,000 personnel. On 15.05.2003 DMRC
invited tenders for supply, installation, testing and commissioning of
traction electrification, power supply, power distribution and SCADA system
for Line 3 Barakhamba Road-Connaught Place-Dwarka Section of the DMRC.
Respondent responded.
DMRC short listed the respondent and then executed the contract under which
the respondent had to provide transformers, switch-gears, High Voltage
Cables, SCADA system and also complete electrical solution, including
control room for operation of metro trains on the concerned Section. The
Bid Document contained detailed Bill of Goods, quantities and
specifications for the goods, sources (i.e, name of the
manufacturer/brand), detailed terms and conditions requiring approval of
sub-contractors/suppliers and testing. The goods as also the components of
works required certification as well as acceptance. The NIT required both,
Technical Bid and Financial Bid. Besides the quotation of lumpsum price for
the entire scope of work the Bid Document required individual breakup of
price of goods and other details. Bid submitted by the respondent finally
culminated into a contract on 04.08.2004. The contract document comprised
of Special Conditions of Contract, General Conditions of Contract etc.
In the year 2005-06 the respondent was called upon to pay DVAT on the
deemed sales made by it to DMRC. It denied its liability and claimed
exemption under Section 7(a) and (c) of DVAT Act on the ground that it was
exempted from payment of VAT in respect of sale effected in the course of
import and also in respect of inter-state sale of goods, on account of
provisions in Section 3(a) and 5(2) of the CST Act. The Assessing Officer
vide order dated 25.11.2005 rejected the claim of the respondent and
confirmed the demand of Rs. 47,62,366/- towards VAT, Rs. 3,32,258/- towards
interest and also imposed a penalty of Rs. 1,20,56,196/-. The objections of
the respondent under Section 74 of Delhi VAT Act were also rejected and
hence the respondent preferred an appeal which was rejected by the
Additional Commissioner on 11.03.2008. Further appeals before the VAT
Tribunal, 40 in total in respect of different assessment periods were also
disallowed by the VAT Tribunal by the common judgment dated 07.06.2012. On
the issue of penalty there arose a difference between the two Members of
the Tribunal and hence that was referred to third Member and is supposed to
be pending. The respondent challenged the common judgment and order of the
Tribunal vide STA Nos. 51-70 of 2012 and those appeals have been allowed by
the order under appeal dated 28.09.2012.
The Assessing Officer as well as the Appellate Authority returned a finding
that there was no link between the contractee, DMRC and the supplier of
goods that were imported by the respondent and hence on account of lack of
any privity of contract the requirements of Section 3(a) of the CST Act
were not satisfied in respect of movement of goods from outside Delhi to
the required site of DMRC in Delhi. Similar finding was returned in respect
of movement of the goods under import, i.e., it can not be held to have
been occasioned by the contract between DMRC and the respondent.
The High Court heard the matter in detail and considered all the relevant
facts particularly terms, conditions and stipulations in the contract in
the context of contention on behalf of respondent that the revenue
authorities and tribunal had failed to consider relevant clauses and
conditions of the contract which demonstrate and clarify that the
importation of equipment was strictly as per requirement and specification
set-out by DMRC in the contract and only to meet such requirement of supply
the specified goods were imported and hence the event of import and supply
was clearly occasioned by the contract awarded to the respondent by the
DMRC. There was a similar contention in respect of procurement of goods
within the country and their movement from one state to another. After
carefully considering the relevant provisions of the contract,
specifications of goods, requirement of inspection of goods at more than
one occasion and right of rejecting the goods even on testing after supply,
prompted the High Court to accept the contentions advanced on behalf of
respondent that the transactions leading to import of goods as well as
movement of goods from one state to another were occasioned by the contract
awarded by the DMRC to the respondent and hence the transactions were not
covered by the Delhi VAT Act but the CST Act.
Some of the material terms governing the contract between the respondent
and DMRC which were highlighted before the Tribunal and have been noticed
by the High Court are as follows:
“The Letter of Acceptance issue by DMRC, in terms of the Contract reads as:

“Your proposal to execute OHE works by M/s Best & Crompton Engg. Ltd.
the sub-contractor and control and monitoring (SCADA, AMS, BMS) yourself is
accepted. Other sub-contractor (s)/vendor approval (s) shall be as per
relevant tender conditions.”

The contract specifically required approval of DMRC for sub-
contractors/vendors as evident from the following provisions of the SCC to
the Contract:

“1.1.2.6 “Sub-Contractor” means any person named in the Contract as a
sub-contractor, manufacturer or supplier for a part of the works or any
person to whom a part of the Works has been subcontracted with the approval
of the Employer and the legal successors in tittle to such person, but not
any assignee of such person.” (excerpts from GCC).

Clauses 4 and 4.5 read as follows:

“4. Sub-Contractors

For major sub-contracts (each costing over Rs. Four hundred thousand)
it will be obligatory on the part of the Contractor to obtain approval of
the Employer to the indentity of the sub-contractor. The Employer will give
his approval after assessing and satisfying himself of the capability,
experience and equipment resources of the sub-contractor. In case the
Employer intends to withhold his approval, he shall inform the contractor
in time to enable him to make alternative arrangements.

4.5 The Contractor shall not sub-contract the whole of the Works
unless otherwise stated in the Special Condition of Contract:

(a) the Contractor shall not be required to obtain approval for
purchases of Materials which are in accordance with the standards specified
in the Contract or provisions of labour or for the sub-contracts for which
the Sub–contractor is named in the Contract.

(b) The prior approval of the Engineer shall be obtained for other
proposed Sub-contractors;

(c) Not less than 28 days before the intended date of each Sub-
contractor commencing work, the Contractor shall notify the Engineer of
such intention; and

(d) The contractor shall give fair and reasonable opportunity for
contractors in India to be appointed as Sub-contractors.

The Contractor shall be responsible for observance by all Sub-
contractors of all the provisions of the contract. The Contractor shall be
responsible for the acts or defaults of any Sub-contractor, his
representatives or employees, as fully as if they were the acts or defaults
of the Contractor, his representatives or employees and nothing contained
in sub-clause 4.5 (a) shall constitute a waiver of the Contractor’s
obligations under this Contract.”

38 (c) Approved Sub-contractors:

Approved Sub-contractors shall be appointed in accordance with the
procedure described as hereunder. If the Engineer/Employer instructs, the
letting of a sub-contract for an item of Provisional Sums will be subject
to pre-qualification of tenderers. In such a case, the Contractor shall
prepare documents required for the pre-qualification, (including where
appropriate bills of quantities, quantified schedules of prices or rates,
specifications, drawings and other like documents) for the work, Plant,
Materials or services included in each such Provisional Sum.”

Some of the other terms contained in the contract documents are as follows:

“13. Sub-clause 5.1

Construction and Manufacture Documents

No examination by the Engineer of the drawings or documents submitted
by the Contractor, nor any approval by the Engineer in relation to the
same, with or without amendment, shall absolve the Contractor from any of
his obligations under the Contract or any liability for or arising from
such drawings or documents.

Should it be found at any time after notification of approval that the
relevant drawings or documents do not comply with the Contract or do not
agree with the drawings or documents in relation to which the Engineer has
previously notified his approval, the Contractor shall, at his own expense,
make such alterations or additions as, in the opinion of the Engineer, are
necessary to remedy such non-compliance or non-agreement and shall submit
all such varied or amended drawings or documents for the approval of the
Engineer.

Workmanship, materials and plant

Inspection:

7.3 The employer and the engineer shall be entitled during manufacture,
fabrication and preparation at any places where work is being carried out,
to inspect, examine and test the materials and workmanship, and to check
the progress of manufacture, of all Plant and Materials to be supplied
under the Contract. The contractor shall given them full opportunity to
inspect, examine, measure and test any work on Site or wherever carried
out.

The Contractor shall give due notice to the Engineer whenever such work is
ready, before packaging, covering up or putting out of view. The Engineer
shall then carry out the inspection, examination, measurement or testing
without unreasonable delay. If the Contractor fails to give such notice, he
shall, when required by the Engineer, uncover such work and thereafter
reinstate and make good at his own cost.” The DMRC issued a letter listing
out the approved or authorized list of suppliers which reads as:

“TO WHOMSOEVER IT MAY CONCERN

This is to certify that following is a list of the approved vendors for
3E21 contract entered into between the DMRC Ltd. and ABB Ltd. On 4th August
2004.

So far as the issue in respect of sale in the course of inter-state trade
is concerned, the Tribunal rejected the claim on the ground that there was
no specific order for supply of such goods issued by DMRC nor there was
specific instruction for inter-state movement of goods. The High Court
found that in fact the terms of the contract envisaged inter-state movement
of goods. Such movement of goods was within the knowledge of DMRC because
there was total ban on setting up/ working of heavy industries in Delhi and
the DMRC had approved 18 places within the country from where the
equipments and goods had to be supplied. These included the premises and
factories of the respondent also. On facts, therefore, it was rightly held
by the High Court that the inter-state movement of goods was within the
contemplation of the parties and it can be reasonably presumed that such
movement was to fulfill the terms of the contract and therefore the
transaction was covered by Section 3(a) of the CST Act. The law on this
issue was also considered by the High Court in correct perspective after
noticing the case of Tata Iron and Steel Co. Ltd. v. S.R. Sarkar[3] that
where the goods moved from one state to another as a result of a covenant
in the contract of sale it would be clearly a sale in the course of inter-
state trade. The conclusion of the High on this issue also finds ample
support from the following case laws which were noticed by the High Court
(1) Oil India Ltd. v. The Superintendent of Taxes[4] (2) English Electric
Company of India Ltd. v. The Deputy Commercial Tax Officer[5] (3) South
India Viscose Ltd. v. State of Tamil Nadu[6].
In Oil India Ltd. this Court held that the inter-state movement must
be the result of a covenant, express or implied in the contract of sale or
an incident of the contract. In other words, the covenant regarding inter-
state movement need not be specified in the contract, It would be enough if
the movement was in pursuance of or incidental to the contract of sale. In
English Electric Co. of India Ltd. the law was clarified thus: “if there is
a conceivable link between the movement of the goods and the buyer’s
contract, and if in the course of inter-State movement the goods move only
to reach the buyer in satisfaction of his contract of purchase and such a
nexus is otherwise inexplicable, then the sale or purchase of the
specific/ascertained goods ought to be deemed to have taken place in the
course of inter-State trade or commerce…………”. In South India Viscose Ltd.
it was held that if there is a “conceivable link” between contract of sale
and the movement of goods from one state to another to meet the obligation
under a contract of sale it would amount to an inter-state sale and such
character will not be changed on account of interposition of an agent of
the seller who may temporarily intercept the movement.
On the issue of sale in the course of import it is relevant to extract
Section 3 and 5 of the CST Act, 1956 enacted by the Parliament in exercise
of powers under Article 286(2) of the Constitution of India:
“3. When is a sale or purchase of goods said to take place in the course of
inter-State trade or commerce.- A sale or purchase of goods shall be deemed
to take place in the course of inter-State trade or commerce if the sale or
purchase –

(a) occasions the movement of goods from one State to another; or

(b) is effected by a transfer of documents of title to the goods during
their movement from one State to another.

Explanation1- Where goods are delivered to a carrier or other bailee for
transmission, the movement of the goods shall, for the purposes of clause
(b), be deemed to commence at the time of such delivery and terminate at
the time when delivery is taken from such carrier or bailee.

Explanation 2 – Where the movement of goods commences and terminates in the
same State it shall not be deemed to be a movement of goods from one State
to another by reason merely of the fact that in the course of such movement
the goods pass through the territory of any other State.

5. When is a sale or purchase of goods said to take place in the course
of import or export.

(1) A sale or purchase of goods shall be deemed to take place in the
course of the export of the goods out of the territory of India only if the
sale or purchase either occasions such export or is effected by a transfer
of documents of title to the goods after the goods have crossed the customs
frontiers of India.

(2) A sale or purchase of goods shall be deemed to take place in
the course of the import of the goods into the territory of India only if
the sale or purchase either occasions such import or is effected by a
transfer of documents of title to the goods before the goods have crossed
the customs frontiers of India.

(3) Notwithstanding anything contained in sub-section (1), the last
sale or purchase of any goods preceding the sale or purchase occasioning
the export of those goods out of the territory of India shall also be
deemed to be in the course of such export, if such last sale or purchase
took place after, and was for the purpose of complying with, the agreement
or order for or in relation to such export.”

A Constitution Bench of this Court had the occasion to consider in
the case of M/s. K.G. Khosla & Co. (supra) whether sales in that case were
in the course of imports. The assessee in that case had a contract with the
Director General of Supplies, New Delhi for supply of axle bodies
manufactured by its principals in Belgium. Although goods were inspected
in Belgium also but under the contract they could be rejected on further
inspection in India. After supplying the goods the assessee claimed the
sales to be in course of import. After losing up to High Court, the
assessee succeeded before the Supreme Court. The Constitution Bench held
that Section 5(2) of the CST Act does not prescribe any condition that
before the sale could be said to have occasioned import, it is necessary
that the sale should precede the import. The sale is only required to be
incidental to the contract. In other words the movement of goods from
another country to India should be in pursuance of the conditions of the
contract. The incident was held to be import of goods within Section 5(2)
on the reasoning that the entire transaction was an integrated one by
which a foreign seller through its Indian agent namely the assessee sold
the goods to Indian purchaser namely the Director General of Civil
Supplies. It will be useful to reproduce the passage from that judgment
which is as follows:
“ ……appellant K.G. Khosla & Co., hereinafter referred to as “the assessee”
entered into a contract with the Director-General of Supplies and Disposal,
New Delhi, for the supply of axle-box bodies. According to the contract the
goods were to be manufactured in Belgium, and the D.G.I.S.D., London, or
his representative, was to inspect the goods at the works of the
manufacturers. He was to issue an inspection certificate. Another
Inspection by the Deputy Director of Inspections, Ministry of W.H. & S.,
Madras, was provided for in the contract. It was his duty to issue
inspection notes on Form No. WSB.65 on receipt of a copy of the Inspection
Certificate from the D.G.I.S.D. London and after verification and visual
inspection. The goods were to be manufactured according to specifications
by M/s La Brugeoies. ET. Nivelles, Belgium.

x x x

10. The next question that arises is whether the movement of axle-box
bodies from Belgium into Madras was the result of a covenant in the
contract of sale or an incident of such contract. It seems to us that it is
quite clear from the contract that it was incidental to the contract
that the axle-box bodies would be manufactured in Belgium, inspected there
and imported into India for the consignee. Movement of goods from Belgium
to India was in pursuance of the conditions of the contract between the
assessee and the Director-General of Supplies. There was no possibility of
these goods being diverted by the assessee for any other purpose.
Consequently we hold that the sales took place in the course of import of
goods within Section 5(2) of the Act, and are, therefore, exempt from
taxation.”

For analysing the main contention advanced on behalf of the appellant that
the present case is identical to that of the assessee in the case of Binani
Bros. (supra), we have examined the facts of Binani Bros. (supra) with
meticulous care. In para 13 of that judgment the most peculiar and
conspicuous aspect of K.G. Khosla case (supra) was noticed and highlighted
that “under the contract of sale the goods were liable to be rejected after
a further inspection by the buyer in India.” In the same paragraph it was
further highlighted with the help of a quotation from K.G. Khosla case
(supra) that movement of goods imported to India was in pursuance of the
conditions of the contract between the assessee and the Director General of
Supplies. There was no possibility of such goods being used by the
assessee for any other purpose. In the next paragraph of the Report the
peculiar facts of Binani Bros. (supra) were highlighted in the following
words, “….. the sale by the petitioner to the DGS&D did not occasion the
import. It was purchase made by the petitioner from the foreign sellers
which occasioned the import of the goods”. In paragraph 16 it was further
pointed out that there was no obligation on the DGS&D to procure import
licences for the petitioner.
There is no difficulty in holding that Binani Bros. (supra) did not differ
with the earlier judgment of a Constitution Bench in the case of K.G.
Khosla (supra). A careful analysis of the facts in Binani Bros. (supra)
leads to a conclusion that the case of West Bengal Sales Tax authorities in
that matter that there were two sales involved in the transactions in
question, one by the foreign seller to the assessee and the second by the
assessee to the DGS&D, because there was no privity of contract between the
DGS&D and the foreign sellers, was accepted mainly because the assessee was
found entitled to supply the goods to any person, even other than DGS&D
because there was no specification of the goods in such a way as to render
it useable only by the DGS&D. This was coupled with the fact that the
latter had imposed no obligation on the assessee to supply the goods only
to itself. Further, there were no obligations of testing and approving the
goods during the course of manufacture or for that matter, even at a later
stage with a right of rejection. Such a right of rejecting the specific
goods in the present case is identical to the similar right in respect of
goods in K.G. Khosla case (supra). Hence we are unable to accept the main
contention of the appellant that this case is similar to that of Binani
Bros (supra). To the contrary, we agree with the reasonings of the High
Court for coming to the view that the present case is fit to be governed by
the ratio laid down in K.G. Khosla’s case (supra).
The legal principles enunciated in K.G. Khosla (supra) have been reiterated
in State of Maharashtra vs. Embee Corporation, Bombay[7] and stand
supported by the judgment in the case of Deputy Commissioner of
Agricultural Income Tax and Sales Tax, Ernakulam vs. Indian Explosives
Ltd.[8], as well as in Indure Ltd. and Anr. vs. CTO & Ors.[9]. In these
cases, sale in course of imports was accepted without requiring privity of
contract between the foreign supplier and the ultimate consumer in India.
The aforesaid conclusion leading to our concurrence with the views of the
High Court is also based upon the salient facts, particularly the various
conditions in the contract and other related covenants between DMRC and the
respondent which have been spelt out in paragraph 31 of the High Court
judgment, enumerated and described as follows :

“(1) Specifications were spelt out by DMRC;

(2) Suppliers of the goods were approved by the DMRC;

Pre-inspection of goods was mandated;

The goods were custom made, for use by DMRC in its project;

Excise duty and Customs duty exemptions were given, specifically to the
goods, because of a perceived public interest, and its need by DMRC;

The Project Authority Certificate issued by DMRC the name of the
subcontractors as well as the equipment/goods to be supplied by them were
expressly stipulated;

DMRC issued a Certificate certifying its approval of foreign suppliers
located in Italy, Germany, Korea etc. from whom the goods were to be
procured.

Packed goods were especially marked as meant for DMRC’s use in its
project.”

Before us there was no attempt to assail the aforesaid features and to even
remotely suggest any factual error on the part of the High Court in noting
those features.

The salient features flowing out as conditions in the contract and the
entire conspectus of law on the issues as notice earlier, leave us with no
option but to hold that the movement of goods by way of imports or by way
of inter-state trade in this case was in pursuance of the conditions and/or
as an incident of the contract between the assessee and DMRC. The goods
were of specific quality and description for being used in the works
contract awarded on turn key basis to the assessee and there was no
possibility of such goods being diverted by the assessee for any other
purpose. Hence the law laid down in K.G. Khosla’s (supra) case has rightly
been applied to this case by the High Court. We find no reasons to take a
different view.
In the result the appeals are found without any merit and dismissed as
such. The parties are, however, left to bear their own costs.

.…………………………………….J.
[DIPAK MISRA]

……………………………………..J.
[SHIVA KIRTI SINGH]

New Delhi.
April 05, 2016.
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[1] (1966) 3 SCR 352 = AIR 1966 SC 1216
[2] (1974) 1 SCC 459
[3] (1960) 11 STC 655 = AIR 1961 SC 65
[4] (1975) 35 STC 445 (SC) = (1975) 1 SCC 733
[5] (1976) 38 STC 475 (SC) = (1976) 4 SCC 460
[6] (1981) 48 STC 232 (SC) = (1981) 3 SCC 457
[7] 1997 (7) SCC 190
[8] 1985 (4) SCC 119
[9] 2010 (9) SCC 461

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