ORDER
K. Chandru, J.
1. Heard the arguments of Mr. C. Natarajan, learned Senior Counsel leading Mr. N. Inbarajan, learned Counsel appearing for the petitioner and Mr. Haja Naziruddin, learned Special Government Pleader (Taxes) representing the respondents and have perused the records.
2. M/s Chitrahar Traders, the petitioners in W.P. No. 15072 of 2007, seek to set aside the order dated 16.4.2007 issued by the Commissioner of Commercial Taxes wherein and by which, they were informed that their purchase of Plant and Machineries of Briquetting and Carbonisation [for short, ‘B&C] from M/s Neyveli Lignite Corporation Limited [for short, ‘NLC’] in an auction sale on ‘as-is-where- is basis’ and ‘no complaint basis’ was taxable at 12% under entry 20 of Part – D of the First Schedule to the Tamil Nadu General Sales Act, 1959 [for short, ‘TNGST Act’] 1959 together with a Surcharge at 5% on Tax and for a direction to the Commercial Tax Officer to restore the sales tax recovered over and above 4% pursuant to the order of the first respondent dated 04.7.2005.
3. In W.P. No. 28254 of 2007, the petitioners Neyveli Lignite Corporation [a wholly owned Public Sector Undertaking of the Central Government] seek to set aside the order dated 16.4.2007 passed by the Commissioner of Commercial Taxes and for a consequential direction to the Commercial Tax Officer to restore the differential tax over and above 4% paid by them on the sale of scrap made by them vide Sale Order dated 16.02.2005.
4. In view of the inter-connectivity between both the writ petitions, they were heard together and are disposed of by a common order.
5. M/s NLC were running a B&C Plant, which was commissioned in the year 1965. As the said Unit was continuously running at loss, it was permanently closed down from April 2001 and the employees were disengaged from the said Unit and were transferred to other Units run by the NLC. The closure of the B&C Unit, which was registered as a factory under the Factories Act 1948 was total and on 15.7.2002, the NLC wrote to the Deputy Chief Inspector of Factories, Vellore and surrendered the Factory Licence. There was no dispute thereafter by the workmen regarding the closure and it became final. Subsequently, as the entire B&C Plant had become unusable to any other activity of the NLC, it was decided to dispose of the said Unit as Iron and Steel scrap.
6. Towards this purpose, the NLC entered into a Selling Agency Agreement with M/s Metals & Scrap Trading Corporation [for short, [MSTC’], which is another Government of India Enterprise, on 03.11.2004. In paragraph 2.0 of the Agreement, it was indicated that the Selling Agent was the MSTC Limited, who will dispose of the Iron and Steel Scrap and rejected/condemned/obsolete secondary arising (ferrous and non-ferrous) as well as surplus obsolete stores, equipments and miscellaneous articles, etc. and paragraph 4.0 covered disposal of all scraps and secondary arising. In the other paragraphs of the agreement, it was also agreed that disposal of the available lots will be done by E-auction/Tender.
7. The said MSTC awarded a Sale Order dated 16.02.2005 to M/s Chitrahar Traders (petitioner in W.P. No. 15072 of 2007). The sale was given on the basis of E- auction and it was stated that the entire B&C Plant and Machineries will be sold as a whole lot on ‘as-is-where-is basis’ and ‘no complaint basis’. The Sales Tax at 12% and 5% Surcharge Charge will be directed to be charged. Further condition was imposed regarding Income Tax and Education Cess on the total value of scrap to be paid. On 05.4.2005, the Income Tax Office at Tirupur, issued a TDS Certificate on account of sale of scrap being Plant and Machineries and materials in the B&C Plant.
8. After the purchase, the Plant and Machineries were dismantled and taken by lorries outside the NLC. In the Delivery – cum – Gate Pass No. 52 issued on 19.5.2005, the goods were noted as B&C Plant and Machineries. However, on the next day i.e., on 20.5.2005, Delivery – cum – Gate Pass No. 53 was issued describing the goods as B&C Plant and Machineries (iron scrap). Subsequently, licence was also obtained from the District Revenue Officer for use of explosives for blasting the Plant and the Machineries and the District Revenue Officer called for remarks from the District Superintendent of Police and finally on 21.02.2006, the District Collector permitted the use of explosives to break the structures of B&C Plant.
9. In the meanwhile, the Commercial Tax Officer [hereinafter referred to as the ‘CTO’], Cuddalore, who is the third respondent in W.P. No. 15072 of 2007 and second respondent in W.P. No. 28254 of 2007, vide order dated 29.4.2005 informed the NLC that if the Plant and Machineries of the B&C Plant were sold as scrap and the bidder was asked to dismantle and transport them as a steel scrap, such sales of scrap was taxable at 4%. Thereafter, M/s. Chitrahar Traders made an application under Section 28-A of the TNGST Act to the first respondent Commissioner of Commercial Taxes and sought for a ruling on the rate of tax payable on the scrap purchased by them.
10. By a proceedings dated 10.5.2005, the Commissioner of Commercial Taxes informed the auctioneer that they were taxable at 4% as per entry No. 4 (XVI) of the Second Schedule of the TNGST Act. On 30.5.2005, an application in Form XIV was made by the NLC to the first respondent stating that the disposal was one lot and the buyers themselves were dismantling, cutting and removing the Plant and Machineries of B&C Plant.
11. On 04.7.2005, the first respondent informed the NLC that since the sale of B&C Plant and Machineries was on ‘as-is-where-is basis’ and ‘no complaint basis’, it is taxable at 12% under entry No. 20 Part – D of the First Schedule to the TNGST Act. They were also informed that if it is imported goods, 20% will be the tax under Entry 9 of XI Schedule. Immediately, the NLC sought for review by a petition dated 10.8.2005 and requested him that the B&C Plant has become a condemned one and as it was sold through MSTC as an agency and that the buyers were only scrap dealers, the stand taken should be reconsidered. On the same day, M/s Chitrahar Traders also sought for a similar review. By a proceedings dated 15.9.2005, the Commissioner of Commercial Taxes sent a letter to the NLC stating that the earlier clarification issued on 04.7.2005 will stand as no fresh grounds were furnished by them.
12. Thereafter, M/s Chitrahar Traders filed a writ petition before this Court being W.P. No. 39784 of 2005 challenging that the order made under Section 28-A of the TNGST Act was a non-speaking order and, therefore, the same should be set aside. This Court, by an order dated 19.12.2006 allowed the writ petition and remitted the matter to the Commissioner of Commercial Taxes for re-consideration and also to take into account the representation of the petitioner dated 07.4.2005 and other materials and pass appropriate orders after giving opportunity to the parties.
13. It was thereafter, by a proceedings dated 16.4.2007, the Commissioner of Commercial Taxes held that since the sale of B&C Plant and Machineries was done on ‘as-is-where-is basis’ and ‘no complaint basis’, it is taxable at 12% under entry 20 of Part – D of the First Schedule to the TNGST Act. It was held that the intention of the NLC was to sell the whole plant and the intention of the buyer was to buy on those terms and the nothings in the Delivery – cum – Gate Passes of the Disposal Wing of the NLC clearly spell out the intention of the parties. It is against this order, both the writ petitions have been filed as noted already.
14. W.P. No. 15072 of 2007 was admitted on 24.4.2007 and W.P. No. 28254 of 2007 was directed to be posted along with the first writ petition. A counter affidavit dated 28.9.2007 was filed by the first respondent. The first respondent Commissioner of Commercial Taxes once again indicated that the sale of whole Plant and Machineries of the B&C Plant was on ‘as-is-where-is basis’ and ‘no complaint basis’ and it was not sold as a scrap. He also refused to take note of the contents of the Sale Order dated 16.02.2005.
15. Reliance was placed by the Revenue on the judgment in N.J. Durairaj v. Joint Commercial Tax Officer 73 STC 199 wherein it was held that the sale of scrap by an assessee after dismantling of a wrecked ship was taxable at the hands of the appellant as a first sale. Further reliance was also placed on the decision of the Bombay High Court in Commissioner of Sales Tax v. Indian Metal Traders 41 STC 169 wherein it was held that the process of breaking up or dismantling a ship would fall within the compass of ‘manufacture’. Therefore, in the present case, breaking and dismantling of B&C Plant by the petitioner will amount to manufacture of scrap which is taxable in its hands as first sale of iron scrap under entry 4 of IInd Schedule to the TNGST Act. On the strength of the same, it was contended that the sale of old plant and machinery by NLC being the first sale of unserviceable plant and machinery, it is taxable at 12% at the hands of NLC under entry 20 of Part D of the Ist Schedule.
16. It was also stated that the transaction between the petitioner and the assessee before the Commercial Tax Officer, Cuddalore, viz., NLC, was purely contractual and the parties were bound by the terms of contract. The Department had no role in the dispute between the NLC and the auction purchaser. It was further stated that the fact that the auction purchaser was a scrap dealer and had purchased the plant and machineries not for the purpose of using as it may not have any significance inasmuch as the vendor, viz., NLC, had never intended or agreed to sell the plant and machinery treating them as scrap. Therefore, the description of the goods in the Delivery Note/Gate Pass reflected the real value of the goods that pass through the gate of the factory premises of NLC. So saying, the respondents wanted this Court to dismiss both the writ petitions.
17. A reply affidavit dated 27.10.2007 was filed by M/s Chitrahar Traders refuting the averments made by the respondents and also distinguished the cases relied on by the Department.
18. Mr. C. Natarajan, learned Senior Counsel appearing for the petitioners contended that originally, in the Sale Order, it was stated that a Sales Tax at 12% and 5% Surcharge on the total value of scrap and after a clarification was sought for by the auction purchaser, the matter was taken up with the Department and thereafter, on 15.4.2005, the auction purchaser paid 4% Sales Tax to NLC and the balance was to be kept as a Bank Guarantee. While the NLC filed Sales Tax Returns, their liability was declared at 4%. In view of the adverse ruling of the Commissioner of Commercial Taxes, the NLC requested the auction purchaser to remit the balance statutory levy and also reminded the auction purchaser to pay the balance. On 22.11.2005, NLC informed the auction purchaser that they are adjusting Rs. 5.22 Crores besides other charges against the security deposit. It was thereafter, NLC paid the difference of 8% Sales Tax over and above the 4% under protest and without prejudice to their rights.
19. It was submitted by Mr. C. Natarajan, learned Senior Counsel appearing for the petitioners that the transaction between the parties was transparent and was an undertaking between two Public Sector Undertakings by the Government of India and there was nothing to hide in respect of the facts before the authorities. He also submitted that B&C Plant commissioned during 1965 became unusable. As a matter of fact, It was closed during April 2001 and the entire work force was also sent to other Units and the Factory Licence had also been surrendered. Thereafter, it was only a junk and it had no resale value. It is for the NLC to decide whether they should dismantle and sale it as a scrap or ask the auction purchaser to do the same. In either way, the contents of the commodity does not get changed and it remains as a scrap. It is open to the NLC to take a pragmatic view on the dismantling and as it involved a skilled exercise and also with a view to save the expenditure on the dismantling, it was indicated to the Agency that it will be sold as an ‘as-is-where-is basis’ so that the NLC is not put to loss. On this exercise, the nature of the goods does not get changed and it was unfair for the Department which originally informed that they are liable to pay tax only at the rate of 4% and even in response to the application dated 06.5.2005, the first respondent Commissioner of Commercial Taxes held that it was taxable at 4%. By no stretch of imagination, the said order can be cancelled and then further demand can be made to pay the so-called difference and through coercive process, the same was also obtained by the Department and they are liable to refund the same. It was also submitted that by this unreasonable demand made by the Revenue, the NLC will have nothing as surplus on the sale of the scrap and it is only a drain on the public exchequer.
20. In this context, the learned Senior Counsel placed reliance upon the judgment of the Gujarat High Court in Commissioner of Sales Tax, Gujarat v. Bharat Iron and Brass Foundaries 28 STC 455 wherein it was held that even though a machinery was purchased, the same did not fall within the residuary entry of 22 of Schedule E of the Bombay Sales Tax Act but fell under Entry 3 of Schedule B of the Act. The issue before the Gujarat High Court was regarding the purchase of old machinery involved in purchase of Iron and Steel or it will amount to scrap. The following passages found in paragraphs 12 and 13 found in the said judgment may be usefully extracted below:
Para 12: …The only contention which is found to have been raised by the assessee before the lower authorities as well as the Tribunal was whether they amounted to “scrap” or not. Under the circumstances, we propose to decide this reference on the hypothesis that the goods were of iron and steel. If that is so, the only question which we are called upon to consider is whether they amounted to “scrap” as contemplated by entry 3. On this question Shri Pathak, who appeared on behalf of the assessee-opponent, contended that the word “scrap” connotes broken parts of machinery and not the machinery, which is found to be unserviceable as machinery. In other words, his contention was that if it is found that the machinery is for some reason not useful as machinery and, therefore, if it is sold away by weight not on the basis that it is machinery, but on the basis that it is an old useless article of machinery, it would not amount to “scrap” as contemplated by entry 3. We find that this argument is not acceptable. In this connection, we may refer to the dictionary meaning of the word “scrap”, which is found in Webster’s Disctionary at page 1626. On that page the dictionary gives 8 different meanings which can be attributed to this word. Out of these eight meanings, only the following are relevant for the purpose of this reference:
(1) a small piece; a little bit; a fragment; as scraps of meat.
(2) discarded metal in the form of machinery, auto parts, etc., suitable only
for reprocessing.
“Scrap” as adjective is defined in this dictionary as: “in the form of fragments, pieces, odds and ends, or left-overs, used and discarded.
It is thus evident from these dictionary meanings that broken parts or fragments of a machinery would undoubtedly be considered as “scrap”. But the contention of Shri Pathak is that if an old and unserviceable machinery is not broken up or dismantled and is found in its original shape then it would not be covered by the meaning of the word “scrap”. We, however, find that this contention is not acceptable because one of the dictionary meanings of the word “scrap” is that it is a discarded metal in the form of a machinery and suitable only for the purpose of reprocessing. Reprocessing here refers to the word “metal” and, therefore, the use to which it can be put is the use as a “material” for the purpose of reprocessing or manufacturing some other article. As a matter of fact, the old machinery and its spare parts, which have been purchased by the assessee, are actually used by the assessee itself for melting and recasting. They have been sold also like that by the vendor of the assessee. It is an admitted fact that these articles have been purchased and sold on the basis of their weight and not on the basis of their utility as machinery. Under the circumstances, we find that discarded machinery of this type which is suitable only for reprocessing or manufacturing some other materials, is scrap within the meaning of entry 3 of Schedule B.
Para 13: Shri Pathak however contended that while appreciating whether this machinery and spare parts amount to “scrap” or not, we should apply the common parlance test, which was applied by the Supreme Court in Ramavatar Budhaiprasad v. The Assistant Sales Tax Officer, Akola. We find that even if this test is applied, the case of the assessee does not improve. Applying this test the question is what is meant by the word “scrap” in common parlance or what the persons, who are usually associated with “scraps” of unserviceable machinery meant when they use the word “scrap” in relation to the said machinery. We are of the opinion that the machinery which is totally unserviceable as such, is referred to even in common parlance as “scrap”. A piece of machinery, which is admittedly unserviceable and which cannot be put to any use even after some repairs, is always referred to as “scrap” in common parlance. When every hope of putting it to its original use even after repair is given up, the only use to which it can be put to use is as a “scrap”. Therefore, when such machinery is made of some metal, it is purchased not as machinery but as metal and is also put to use as metal simplicitor. Speaking of the facts of this case, the old machinery and spare parts on which the assessee is found to have paid tax, at the time of their purchase have actually been put to use as metal and not as machinery because it is an admitted position that they have been melted and recast. Under these circumstances even applying the common parlance test, machinery which is totally unserviceable as machinery can be treated as scrap.
21. Further, the learned Senior Counsel relied upon the Division Bench judgment of this Court in The State of Madras v. Raman & Co. and Ors. 33 STC 1 wherein similar question was also considered. In that case, the assessee purchased in auction condemned Railway Coaches sold by the Railway Department and later dismantled and sold the resultant iron material and timber in bulk. The question came up for consideration was whether the sale of scrap by the assessee was the first sale taxable under the TNGST Act or whether it was a second sale exempted from the tax and the following passages found at pages 2 and 3 may be usefully extracted:
Therefore, the only question that has to be considered in this case is whether the turnover relating to the assessee’s sale of scrap iron is a second sale as contended by the assessee or whether it is a first sale as contended by the revenue. If it is only a first sale of scrap iron it could be taxed under the provisions of the Madras General Sales Tax Act. It is seen that the assessee purchased in auction the condemned railway coaches and Nissen huts which could not be put to any further use. Any purchaser of such condemned articles could not have entertained any idea of putting those articles to any further use. He could not in fact use them except for dismantling and selling the resultant scrap. No doubt the sales by the railways and the Director of Supplies and Disposals are not sales of scrap iron as such. But the intention of the sellers and buyers can easily be taken to sell or buy condemned coaches and condemned Nissen huts only for the purpose of acquiring the property in the old materials contained in those condemned articles. In view of the fact that both the contracting parties had contemplated the dismantling of the coaches and huts and getting the resultant scrap for sale later by the buyer, it has to be taken that the railways as well as the Director of Supplies and Disposals had intended to sell only the scrap iron and the wooden scraps found in the condemned articles sold by them in auction. The Tribunal, therefore, appears to be right in holding that what the assessee purchased in public auction is scrap and that when the sold the scrap later he was only a second seller.
A similar question came up for consideration in T.C. No. 17 of 1964. In that case, certain condemned machineries which cannot be put to use had been sold which was claimed to be scrap iron falling within the Second Schedule of the Act. The revenue contended that the said condemned articles cannot be treated as scrap. But the court rejected that contention and held that any condemned article made of iron which is of no further use can be regarded as iron scrap and that iron scrap in any form wherever it comes from is of special importance to the industry in the country. The court observed thus:
In our view, the condemned articles fall within the description of iron scrap in item 4 of the Second Schedule. It appears to use also impossible to hold that condemned articles come within the purview of item 23 in the First Schedule which relates to machinery including hardware, iron and steel. Hardware, iron and steel referred to there must be in the form of machinery. Iron scrap consisting of condemned articles can hardly be described as machinery under item 23 of the First Schedule.
22. The learned Senior Counsel, thereafter, submitted that the said matter was taken on appeal by the State before the Supreme Court. The decision of the Supreme Court, dismissing the appeal and affirming the opinion of the Division Bench, was also reported in 93 STC 185.
23. The learned Senior Counsel referred to the proceedings dated 10.5.2005 wherein on a specific query by the auction purchaser, the first respondent himself clarified that the goods are liable to be taxed at 4% as they were only scrap. The learned Counsel also referred to voluminous documents including the Gate Passes and submitted that they were only described as scrap and they were taken on piece meal basis.
24. However, Mr. Haja Naziruddin, learned Special Government Pleader (Taxes) submitted that this Court in N.J. Durairaj v. Joint Commercial Tax Officer, Mandaveli Division, Madras 73 STC 199 held that breaking up of a ship and selling it as a scrap will be liable for tax under the First Schedule.
25. Further, reliance was also placed on the Division Bench judgment of the Bombay High Court in 41 STC 169 Commissioner of Sales Tax v. Indian Metal Traders and the relevant passage found in page 174 may be extracted below:
The first contention of Mr. Sheth is that what was purchased by the respondents was not a ship at all but merely iron and steel scrap, and hence there is no new commercial commodity brought into existence by the process applied by the respondents on the said ship. It is contended by him that the ship purchased was a condemned and unserviceable ship and it was purchased on the condition that it had to be scrapped. It is submitted by Mr. Sheth that in these circumstances the ship purchased must be looked upon as scrap itself. We find that there is nothing on the record to support the contention of Mr. Sheth that the ship was purchased as scrap. The instrument of sale which is on the record shows that what the respondents purchased was all the shares in the ship and its boats and appurtenances. The instrument of sale refers to Section 42 of the Merchant Shipping Act, 1958. The relevant portion of Section 42 of that Act provides that no person shall transfer or acquire any Indian ship without the previous approval of the Central Government. Reference to Section 42 of this Act in the instrument of sale would suggest that what was purchased was a ship and not scrap. In the application under Section 52 of the said Act, made on 19th September 1968, what the respondents have stated is that they have purchased a ship and not that they have purchased iron and steel scrap, although it has been stated that the ship was purchased for breaking and scrapping purposes. It has not been urged anywhere by the respondents, either before the Deputy Commissioner of Sales Tax or before the Tribunal, that what they had purchased was scrap and not a ship at all. The mere fact that the respondents had purchased the said ship for the purpose of breaking up and scrapping the same would, in our opinion not convert the ship into scrap. There is nothing on the record to show that the said ship had become unserviceable or had been condemned. As we are of the view that there is nothing on the record to show that the said ship was purchased as scrap or had become unserviceable and, on the other hand, the evidence brought on the record shows that it was purchased as a ship, we need not consider the arguments of Mr. Sheth based on the assumption that the said ship was purchased as scrap.
26. As can be seen from the above underlined portion of the judgment, the case turned out on its own facts and it does not have an universal application. In fact, the judgment of a Division Bench of this Court in Raman and Co.’s case (cited supra) affirmed by the Supreme Court is more apposite on the point in issue.
27. The learned Special Government Pleader also referred to the judgment of the Supreme Court in Rainbow Steels Ltd. and Aer. v. The Commissioner of Sales Tax, Uttar Pradesh and Anr. (1981) 047 STC 0298. In that case, the question came up for consideration was sale of an old thermal power plant, which, at the time of sale by the vendor, was in perfect running condition and, therefore, the sale at that time cannot make the consignment a scrap. There, the question that was considered was, what was the definition of the term ‘old machinery’ and it was held that the meaning should be restricted since it is analogous to expressions like, discarded, unserviceable or obsolete. I do not think that this case is of any assistance to the respondents.
28. Ultimately, the goods being what they are, is a real test and labeling it in one way or the other cannot help either side. In the present cases, B&C Plant had become unusable and the factory had been closed and the factory licence had been surrendered and it had been sold only with the condition that the purchaser will dismantle and sell it. The fact that it is described as B&C Plant and Machinery will in no way, make it either as a plant in running condition or the plant should be shifted to any other place for use. The intention of the parties was to sell it only as a scrap and even in the Gate Pass, it is described only as a scrap. Further, the authorities themselves have initially directed that it was taxable at 4% and accordingly, the parties have also paid that amount. Thereafter, without there being any real basis to describe it as first sale, to refuse to accept it as scrap by the impugned order is clearly impermissible and contrary to the dictum of this Court in Raman and Co.’s case (cited supra), which was also affirmed by the Supreme Court.
29. In the light of the same, both the writ petitions will stand allowed as prayed for and the respondents are hereby directed to restore the tax at 4% and refund the balance to the appropriate parties. This exercise shall be undertaken without a period of eight weeks from the date of receipt of a copy of this order. The parties are directed to bear their own costs. Connected Miscellaneous Petitions will stand closed.