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REPORTABLE IN THE SUPREME COURT OF INDIA  CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2686 OF 2011 (Arising out of SLP(C) No. 34840 of 2010)

COMMR.OF COMMERCIAL TAXES & ORS.                  Appellant(s)

                VERSUS

CHITRAHAR TRADERS                                 Respondent(s)

O R D E R  

Delay condoned.

Leave granted.  

This appeal arises out of the judgment and order passed by  

the Division Bench of the Madras High Court dismissing the writ  

appeal filed by the Appellants herein whereby the Division Bench  

affirmed the judgment and order passed by the learned Single Judge  

allowing the writ petition filed by the respondent herein.  Since  

the facts leading to filing of the aforesaid writ petition by the  

respondent are not disputed, we are not required to set out herein  

the entire factual position at length.  However, for the purpose  

of deciding the present appeal, whatever facts are required to be  

dealt with and stated are being stated hereinafter.  

The  N.L.C.,  namely,  Neyveli  Lignite  Corporation  is  a  

Government of India enterprise and a company, and is involved in  

the  activity  of  generation  and  supply  of  electric  energy  to  

various State Electricity Boards.  The said company set up a plant  

to produce Leco, which is a form of lignite in the year 1965. The

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said  plant,  however,  was  having  frequent  breakdowns  and  was  

incurring huge losses. Consequently, an effort was made to upgrade  

the plant which, however, turned out to be a failure due to which  

the  entire  plant  was  closed  down  on  4.4.2001  as  unviable.  

Thereafter the company proceeded to dispose of the entire plant  

and machinery as according to the company, the plant was of not  

marketable value and also because it had lost its use and outlived  

its utility and had no value except as scrap. The said company  

thereafter appointed M/s. Metal Scrap and Trading Corporation Ltd.  

(hereinafter referred to as 'MSTC') on 3.11.2004, a Government of  

India enterprise, engaged in the business of scrap to arrange for  

disposal of condemned plant.    

An agreement was entered into between the said company and  

MSTC.  Clause 2.0 of the said agreement reads as follows:-

“2.0 Whereas MSTC has approached the Principal with a  request to engage MSTC as Selling Agent for disposal of  Iron  &  Steel  Scrap  and  Rejected/Condemned/obsolete  Secondary arisings (ferrous & non-ferrous) as well as  surplus  obsolete Stores,  equipments and  miscellaneous  articles etc.”

Reference may also be made to Clause 4.1 which reads as  

follows:-

“This  Agreement  covers  disposal  of  all  scraps,secondary arisings, surplus stores and equipment  misc. items etc, as mentioned in Clause 2.0 before.”

Since reliance was also placed on Clause 5.0, we extract  

the same as under:-

“Duration of Contract

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The Contract will remain valid for Three years  from 17-11-2004 to 16-11-2007 which could be extended  for such further period on such terms and conditions as  mutually agreed upon by the parties hereto.”

Pursuant  to  the  aforesaid  agreement  arrived  at,  the  

aforesaid  plant  and  machinery,  which  according  to  the  company  

became  scrap  as  obsolete  and  unviable,  was  sold  through  the  

process of e-auction and the respondent herein offered its bid  

which came to be accepted by the MSTC. The acceptance letter is  

also placed on record. The said letter is dated 16.2.2005 which  

states that the tender offer of respondent was accepted on “as is  

where is” basis for purchase of B & C Plant one lot and machinery  

as a whole lot as per the terms and conditions of the e-auction.  

In the said document it was also indicated that sales tax would be  

charged @ 12% with surcharge @ 5%. It was also made clear therein  

that the sales tax which is being levied would be provisional one  

and subject to any change. It was also specifically indicated  

therein  that  the  material  value  along  with  taxes  and  duties  

including income tax and educational cess on IT would be paid on  

total value of the scrap.  

However, a dispute arose thereafter as to whether sales tax  

is leviable and payable on the said articles @ 4% as the plant and  

machinery was sought to be sold as scrap or whether the respondent  

is liable to pay sales tax @ 12% with 5% surcharge also. In view  

of  the  aforesaid  dispute  which  arose,  the  respondent  wrote  a  

letter  dated  7.4.2005  to  the  sales  tax  authorities  mentioning

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therein about the details and manner of the transaction that had  

taken place regarding purchase of the scrap by the respondent  

pursuant to the e-auction conducted by MSTC. In the said letter  

the  entire  background  facts  leading  to  the  e-auction  and  

acceptance of the tender were stated. A Form being Form No. XIV  

was also filled up by the respondent wherein it was mentioned by  

it that they had purchased plant and machineries as a whole in one  

lot but the same also enclosed another declaration made by the  

respondent herein indicating the full particulars of the goods and  

stating therein that the total sale value ex-taxes and duties as a  

whole in one lot is Rs.70,01,00,019.00. While giving the said  

particulars of the case, it was also specifically mentioned by the  

respondent  that  what  was  purchased  was  scrap  material  and  

thereafter the details of such scrap materials were given in the  

said declaration.   

As against the aforesaid letter written by the respondent,  

the  sales  tax  authorities  sent  a  letter  to  the  respondent  on  

29.4.2005 stating therein that if the plant and machinery has been  

sold as scrap and the bidder was asked to dismantle and transport  

as scrap, such sales of scrap is taxable @ 4% without surcharge  

under Entry IV (1) (a) of the Second Schedule  to the Tamil Nadu  

General Sales Tax Act, 1959.  However, thereafter the Sales Tax  

Department appears to have changed their stand and held that the  

respondent  is  liable  to  pay  sales  tax  @  12%  along  with  5%  

surcharge.  

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Being so situated, two writ petitions came to be filed  

before the Madras High Court, one by the respondent herein and the  

other by Neyveli Lignite Corporation Ltd.  In the writ petition  

filed by the aforesaid Corporation, a stand was taken that what  

was sought to be sold to the respondent company was scrap of the  

condemned plant and machineries, but sales tax and surcharge was  

realized from the respondent @ 12% and 5% on provisional basis,  

and subject to change at later stage.  It was also pointed out  

that  the  aforesaid  parts  of  the  machineries  were  removed  by  

issuance of 100 delivery notes-cum-gate passes.  In paragraph 11  

of the affidavit enclosed with the writ petition, the following  

statement was made by the said company: -

“I state that the items under Sale and Delivery  relates  to  condemned  plant  and  machinery  disposed  as  scrap.  In the impugned order of the First Respondent,  there is an allegation that a few Delivery Notes issued  by the Despatch Section, it was noted that here was sale  of B & C plant machinery on as-is-where-is basis, and  sales  tax  and  surcharge  was  mentioned  at  12%  and  5%  respectively.   There  is an  alleged reference  to more  than 100 Delivery Notes-cum-Gate Passes.  This issue was  never discussed and the preponderance of materials is  entirely to the contrary.  It is respectfully submitted  that  initial  delivery  notes  of  the  Despatch  Section  issued from 05.05.2005 to 19.05.2005 bearing upto Serial  Nos. 52, the description was mechanically states as B &  C plant as-is-where-is with 12% S.T. (based on the sale  order).  The Buyers were all along contesting the rate  of tax since the goods under sale was only condemned  machinery disposed as scrap.  Therefore, from Delivery  Note  Nos.  53  dated  20.05.2005,  apart  from  the  pre- printed words”B & C Plant & Machineries”, it was, inter  alia, specifically remarked by hand “Iron Scrap”.  It  was also mentioned that the goods were delivered in lots  even  from  Delivery  Note  No.1  dated  5.05.2005  with  corresponding loads in the lorry.  The finding that the  sale was a plant and machinery as if there was intention

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to  buy  and  sell  plant  and  machinery  is  perverse  and  overlooks the dispute with regard to 12% sales tax at  every stage between the Petitioners and buyers.  Based  on  the  communication  of  the  Commercial  Tax  Officer,  Cuddalore, the Second Respondent dated 10.05.2005 to the  First Respondent, during the period of sale, only 4% tax  was charged to the Buyers in view of the protest of the  Buyers.  The Petitioners state that the difference over  and above 4% was subsequently recovered on 22.11.2005  from the EMD of the Buyers and paid under protest to the  Second  Respondent,  the  Commercial  Tax  Officer,  Cuddalore,  on  23.11.2005  consequent  to  later  developments.”  

The Sales Tax Department contested the writ petitions and  

the learned Single Judge after hearing the counsel appearing for  

the parties allowed the writ petitions holding that the respondent  

is liable to pay sales tax @ 4% only. Being aggrieved by the  

aforesaid judgment and order passed by the learned Single Judge,  

the Appellants herein filed two writ appeals which were registered  

and  numbered  as  Writ  Appeal  Nos.  639  and  640  of  2008.   The  

Division Bench took notice of the submissions made by the counsel  

appearing  for  the  parties  and  thereafter  dismissed  both  the  

appeals holding that what was sold was scrap and not plant and  

machineries as such and therefore the learned Single Judge was  

justified in holding that the respondent is liable to pay sales  

tax only @ 4%.  The aforesaid findings and conclusions of the  

Division Bench are being assailed in this appeal on which we have  

heard the learned counsel appearing for the parties.   

Counsel  appearing  for  the  Appellants  has  submitted  that  

what was sold was plant and machineries and not scrap at the

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agreement stage as is indicated from the acceptance letter and  

that it is only subsequently and during the post-contract period  

only, the said plant and machineries were removed as scraps after  

dismantling them and dividing the articles into several lots and  

taking  away  the  same  by  getting  100  gate  passes  and  challans  

issued. He has specifically drawn our attention to the acceptance  

letter  which  is  annexed  with  the  paper  book  and  also  to  the  

various communications issued between the parties to substantiate  

his submissions that it was plant and machineries which was sold  

and therefore the respondent is liable to pay tax @ 12% with 5%  

surcharge.  

Counsel appearing for the Appellants also relies upon the  

decision of this Court titled as Rainbow Steels Ltd. & Anr. Vs.  

The Commissioner of Sales Tax, Uttar Pradesh, Lucknow and Anr.  

reported in 1981 (47) STC 298.

Counsel  appearing  for  the  respondent,  however,  drew  our  

attention to the various documents on record and on the basis  

thereof submitted before us that the documents on record clearly  

indicate that what was sought to be sold was scrap and not the  

functional plant and machineries and therefore there should be no  

interference with the judgment and order passed by the Madras High  

Court.

In the light of the submissions of the counsel appearing  

for the parties, we have ourselves scrutinized the records.  We

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have  already  extracted  the  relevant  portion  of  the  agreement  

between Neyveli Lignite Corporation and MSTC. The said agreement  

clearly proves and establishes that what was sought to be sold was  

iron and steel scrap and rejected/condemned and obsolete secondary  

arisings, etc.  The said position is also reiterated in Clause 4.1  

which  also  indicates  that  what  was  being  sold  through  the  e-

auction  was  scraps  and  secondary  arisings.  In  the  acceptance  

letter on which heavy reliance was placed by the counsel appearing  

for  the  Appellants  mentions  the  goods  sold  as  plant  and  

machineries but it is also indicated therein that it is sale of  

plant and machineries as per the terms and conditions of the e-

auction. Terms and conditions of e-auction indicated from  

the agreement indicates that what was being sold was scrap. The  

said position is also reiterated in the said acceptance letter  

when  it  refers  to  the  total  value  of  the  scrap.  In  the  

clarification issued by the Department itself, at one stage, i.e.,  

by their letter dated 29.4.2005, it was clearly mentioned that if  

the plant and machineries has been sold as scrap and the bidder  

was asked to dismantle and transport as scrap, such sales of scrap  

would be taxable @ 4% without surcharge.  

There is yet another important factor which should not be  

lost sight of and that is using of explosives by the respondent  

for removing the aforesaid scrap from the premises in question.  

An application was submitted by the respondent to the District

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Collector for using explosives for the purpose of dismantling the  

machinery.  The  District  Collector  vide  communication  dated  

21.2.2006 permitted the use of explosives consequent upon which  

machineries  were  dismantled  by  using  the  explosives  and  were  

transported out of the premises in trucks as steel scrap.   

The  sale  in  question  was  also  made  by  a  public  sector  

undertaking and the said sale was conducted for and on behalf of  

another  public  sector  undertaking.  The  selling  agent  is  also  

engaged in the business of metal scraps.

The plant and machineries were installed as far back as  

1965 and have to be closed in the year 2001 as it was found that  

even after updating it could not be made functional. The sale has  

taken  place  after  about  36  years  of  the  purchase  of  the  

machineries and the affidavit of the Neyveli Lignite Corporation  

clearly proves and establishes that those machineries have become  

obsolete  and  the  plant  and  machineries  have  become  condemned  

articles. All these contemporaneous documents and factual position  

make it abundantly clear that what was sold and purchased by the  

respondent are nothing else but scrap and, therefore, we find no  

reason to interfere with the findings and conclusions arrived at  

by the Madras High Court. Consequently, we find no merit in this  

appeal, which is dismissed.

We have already referred to the judgment relied upon by the  

counsel appearing for the appellants. A perusal of the aforesaid

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decision  on  which  reliance  is  placed  would  indicate  that  the  

factual situation in which the said judgment was rendered was  

completely different than the facts of the present case. In the  

said case, the decision was rendered in the context of sale of old  

thermal  power  plant  which  was  in  perfect  working  and  running  

condition.  The  same,  however,  is  not  the  case here.  Here  

is a case of sale of a plant and machineries which were condemned.  

It  is also established from the contemporaneous documents that  

the  plant and machineries  had  outlived  its  utility  and  has  

no  value  except  scrap.  Therefore, the aforesaid decision is  

clearly distinguishable on facts and has no application to the  

facts and circumstances of the present case.  

The respondent has paid sales tax and surcharge at the  

higher rate of 12% and 5% while taking out the goods out of the  

factory premises. In view of the present order passed today, the  

respondent becomes entitled for refund of overpaid amount which  

shall  be  assessed  by  the  Department  within  a  period  of  three  

months from today and the amount found due and payable to the  

respondent shall be refunded back to the respondent along with  

interest  as  payable  in  accordance  with  law  within  two  months  

thereafter.  

The appeal is dismissed with the aforesaid observations.  

.......................J (Dr. MUKUNDAKAM SHARMA)

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......................J (ANIL R. DAVE)

NEW DELHI, MARCH 16, 2011.