Patna High Court Orders Railways To Refund Illegal VAT Deduction from Contractors' Bills

The division bench of Chief Justice K. Vinod Chandran and Justice Partha Sarthy held, “The transaction was purely of an inter-state sale of goods and is not a works contract nor a sale of goods eligible to tax within the State of Bihar. The sale of goods as per Annexure-2 and Annexure-5 agreements constitute an inter-state sale not eligible for tax within the State of Bihar.”

“The Railways had made a deduction on the ground that it is a works contract; which we have negatived. The Railways is bound to refund the illegal tax deduction made from the bills to the petitioner contractor. The Railways could definitely apply for refund from the Bihar Value Added Tax Department,” the bench added.

The writ petition filed by PCM Cement Concrete Pvt. Ltd. sought a direction to the The Deputy Chief Engineer (Construction-I), East Central Railway, The F.A. and C.A.O., East Central Railway, and The Deputy Chief Engineer (Construction), East Central Railway for refund of an amount of Rs. 38,22,897.

It was the petitioner’s contention that the said amounts were illegally deducted and recovered from the bills of the petitioner as advance Value Added Tax purportedly under the provisions of Section 40 and 41 of the Bihar Value Added Tax Act, 2005 (VAT).

The petitioner argued that the VAT Act has absolutely no applicability since the manufacture and supply of the goods by the petitioner to the Railways was an inter-state sale; which is not eligible for sales tax within the State of Bihar either as a sale of goods or as a works contract.

The petitioner entered into two separate agreements with the East Central Railway, the first of which was produced as Annexure-2 and the later one as Annexure-5 respectively dated 26.12.2008 and 19.05.2010.

Annexure-2 agreement was entered into after the petitioner bid successfully in a tender and pursuant to negotiations. The specific contract was for “Manufacturing and transportation of 6.1 m clear span prestressed concrete bridge slabs for MBC loading including RCC ballast retainers conforming to RDSO’s Drawing No. BA 10221 (With latest alteration if any) including stacking and loading into a Railway wagon/Road vehicle at the nearest Railway station/siding/Road under Chief Engineer/Con/NE. E.C. Railway MHX.”

Annexure-5 was a similar contract wherein the specification of the pre-stressed concrete bridge slab is indicated as 6.10 m and 5.48 m clear span with MBG loading 25MT including RCC ballast retainers. Therein also, the contract includes stacking and loading into a railway wagon/ load vehicle at the nearest railway station/siding etc.

Pursuant to the contract, the goods were manufactured and transported on the strength of invoices, two of which are produced as Annexure-6 series along with the writ petition. Annexure-7 is the details of various bills and the deductions made thereunder on which a claim of refund is made.

Satyabir Bharti, the counsel arguing on behalf of the petitioner relied on several judgements of the Apex Court to contend that the transaction was a pure and simple sale of goods and that too an inter-state sale on which Central Sales Tax was paid by the petitioner which was added in the invoice raised against the respondents.

The counsel appearing for the Railways specifically referred to the counter affidavit filed on behalf of the respondent Railways, and pointed out that Clause 34 of the contract document specifically spoke of recovery at source of sales tax for any work executed within the State of Bihar, Jharkhand, MP and UP; the rate of which is also specified as 4% of gross work value. It is the specific contention of the Railways that the work having been executed within the territory of Bihar, the deduction was only proper.

The court at the outset, opined that the essence of the agreements which were not disputed by the Railways, was specifically reduced to writing in its counter affidavit, which speaks only of manufacture and supply of certain goods.

The court further opined that although, these were not goods available in the market, but the petitioner had to manufacture it as per the specification of the Railways, at its manufacturing unit situated in West Bengal and the obligation of the petitioner was insofar as loading and stacking it in a Railway wagon or vehicle at the nearest railway station/siding/road under the Chief Engineer/Con/NE.

“The petitioner does not put/ lay the goods on the proposed construction of the Railways. The agreement is one of pure and simple manufacture and sale of goods; which does not constitute a works contract. We say this quite conscious of the fact that even if there is a works contract, as has been held in Commissioner, Delhi Value Added Tax (supra) there is no question of an inter-state supply pursuant to a sale being taxed within the State in which the works contract is carried out, if the supply of goods originates from another State on the basis of a prior contract and is subjected to accretion in the works,” the court added.

The court observed that a composite contract for supply of goods and labour was absent in the present case.

The court further observed that the issue was simplified insofar as the sale being mere manufacture and supply of goods which was a sale simpliciter of the goods; which goods have also been transported in pursuance to a prior contract of sale which is the reason for the movement of the goods from one State to the other; herein from the State of West Bengal to the State of Bihar.

The court noted that in the present case the contract was one for manufacture and transportation of prestressed concrete slabs and RCC Ballast Retainers of precise and particular specification. There was no works contract involved and it was only a sale pure and simple of goods manufactured by the petitioner, who had been awarded the contract; which was only for manufacture and sale.

The court further noted that the manufactured goods were loaded and stacked in a vehicle or railway wagon, by which it was transported into the site within the State of Bihar for accretion in the works of the Railways; which work or accretion was not the responsibility of the petitioner.

The Standing Counsel for the Railways had pointed out that there was an arbitration clause in the agreement and that the jurisdiction of this Court cannot be invoked under Article 226, especially in a contractual matter.

Replying to the same, the court said, “We do not think that the dispute raised was one which was arbitrable, especially since it involved the consideration as to whether the transaction was an inter-state sale, works contract or sale of goods within the State of Bihar.”

Considering the above circumstances. The court directed the refund, however, confined to the deductions made three years prior to the date of registration of the above writ petition which is on 14.05.2012; giving effect to the limitation as prescribed for recovery of money under the Limitation Act.

“The Railways shall refund the amounts with 6% interest within a period of 4 months from the date of receipt of the certified copy of this judgment. If the refund is not granted within that time then the interest shall run at the rate of 12% from the date of expiry of the 4 month period. The Railways can apply for refund or adjustment to future dues from the State of Bihar,” the court said while allowing the writ petition.

Case Title: PCM Cement Concrete Pvt. Ltd vs. The Union of India and Others

Case Citation: 2023 LiveLaw (Pat) 90

Case No.: Civil Writ Jurisdiction Case No. 10444 of 2012

Appearance :

For the Petitioner/s: Mr. Satyabir Bharti, Advocate Mr. Kishor Singh, Advocate

For the Respondent/s: Mr. Anshay Bahadur Mathur, CGC Mr. Vikash Kumar, SC-11

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