(The
following post has been contributed by Vinod
Kothari and Nidhi Ladha of Vinod
Kothari & Company. The authors can be contacted at vinod@vinodkothari.com and nidhiladha@vinodkothari.com
respectively.
following post has been contributed by Vinod
Kothari and Nidhi Ladha of Vinod
Kothari & Company. The authors can be contacted at vinod@vinodkothari.com and nidhiladha@vinodkothari.com
respectively.
This
is a continuation from a previous
post where the authors discuss general principles. Here, they discuss
specific cases and conclude)
is a continuation from a previous
post where the authors discuss general principles. Here, they discuss
specific cases and conclude)
Interesting
recent cases pertaining to immovable property:
However,
recently, the question has arisen in some very interesting contexts. That the
question should have arisen in sales-tax or excise duty cases is hardly
surprising. Cases on whether sales-tax or VAT is applicable on sale of a
fixture abound. Recently, interesting cases arose in the context of excise law.
However, one very interesting case arose whereby a telecom tower was claimed to
be a “building”, liable to municipal taxes. We discuss below some of these
cases:
recently, the question has arisen in some very interesting contexts. That the
question should have arisen in sales-tax or excise duty cases is hardly
surprising. Cases on whether sales-tax or VAT is applicable on sale of a
fixture abound. Recently, interesting cases arose in the context of excise law.
However, one very interesting case arose whereby a telecom tower was claimed to
be a “building”, liable to municipal taxes. We discuss below some of these
cases:
Is Central
Excise applicable on making of fixtures?
In Commissioner of Central Excise vs Solid and
Correct Enggg Works [http://indiankanoon.org/doc/1068978/]
the Supreme Court faced a question on whether asphalt drums/hot mix plants made
by the assessee were immovable property, or whether the assessee was engaged in
making of components of such plant. Some of the components of such plant were
bin feeder, conveyor and dryer unit, embedded in earth on a foundation 1.5 feet
deep. It was contended on behalf of the assessee that what was manufactured
could not be said to be “goods” especially when the same could not be
dismantled and re-assembled without undertaking the necessary civil works.
Correct Enggg Works [http://indiankanoon.org/doc/1068978/]
the Supreme Court faced a question on whether asphalt drums/hot mix plants made
by the assessee were immovable property, or whether the assessee was engaged in
making of components of such plant. Some of the components of such plant were
bin feeder, conveyor and dryer unit, embedded in earth on a foundation 1.5 feet
deep. It was contended on behalf of the assessee that what was manufactured
could not be said to be “goods” especially when the same could not be
dismantled and re-assembled without undertaking the necessary civil works.
It was held that
the plants were not per se immovable and they become immovable when embedded in
the earth. The attachment of the plant with nuts and bolts intended to provide
stability and prevent vibration is not covered as attached to earth. The
attachment can be easily detachable from the foundation and is not permanent.
The plant moved after road construction or repair project is completed. The
plants in question are not immovable property and not immune from excise duty.
While deciding the applicability of excise duty on the parts and parcels in the
instant case, the Apex Court has, very clearly, carved out the difference between
movable and immovable machinery. The explanation reads as:
the plants were not per se immovable and they become immovable when embedded in
the earth. The attachment of the plant with nuts and bolts intended to provide
stability and prevent vibration is not covered as attached to earth. The
attachment can be easily detachable from the foundation and is not permanent.
The plant moved after road construction or repair project is completed. The
plants in question are not immovable property and not immune from excise duty.
While deciding the applicability of excise duty on the parts and parcels in the
instant case, the Apex Court has, very clearly, carved out the difference between
movable and immovable machinery. The explanation reads as:
“The machines in question were by their very nature
intended to be fixed permanently to the structures which were embedded in the
earth. The structures were also custom made for the fixing of such machines
without which the same could not become functional. The machines thus becoming
a part and parcel of the structures in which they were fitted were no longer
moveable goods. It was in those peculiar circumstances that the installation
and erection of machines at site were held to be by this Court, to be immovable
property that ceased to remain moveable or marketable as they were at the time
of their purchase. Once such a machine is fixed, embedded or assimilated in a
permanent structure, the movable character of the machine becomes extinct.”
intended to be fixed permanently to the structures which were embedded in the
earth. The structures were also custom made for the fixing of such machines
without which the same could not become functional. The machines thus becoming
a part and parcel of the structures in which they were fitted were no longer
moveable goods. It was in those peculiar circumstances that the installation
and erection of machines at site were held to be by this Court, to be immovable
property that ceased to remain moveable or marketable as they were at the time
of their purchase. Once such a machine is fixed, embedded or assimilated in a
permanent structure, the movable character of the machine becomes extinct.”
Is VAT
applicable on transfer of property in fixtures?
If the fixtures
are movable in nature, VAT shall be applicable on transfer of such goods.
However, if the same is proved to be immovable machinery, the transfer will be
treated as a conveyance and hence, requisite stamp duty will have to be paid.
are movable in nature, VAT shall be applicable on transfer of such goods.
However, if the same is proved to be immovable machinery, the transfer will be
treated as a conveyance and hence, requisite stamp duty will have to be paid.
A Telecom
Tower: a building?
A building in
layman’s vocabulary would mean a structure for protection from forces of
nature, habituated by people or, for the purpose of storage of goods. Recently the question, whether telecom tower
is a building arose before the Delhi High Court in Cellular Operators Association … vs Municipal Corporation Of Delhi
on 29 April, 2011, [http://indiankanoon.org/doc/1370737/].
The petitioners, Cellular Operators, argued on the similar lines that a building is
a structure habitable and thus a telecom tower is “PLANT & MACHINERY” and
is not habitable. However under section 2 (3) the Delhi Municipal Act, under
which this case was filed, building includes metal structure. The definition
has nothing to do with habitability. Taking into consideration the concept of
habitability, once a building is no longer fit to reside will it cease to be a
“building”? The answer can be found in an earlier decision delivered by the
Full Bench of the Delhi High Court in MCD
v. Pradeep Oil Mills P. Ltd [AIR 2010 Delhi 119], where it was held that an
underground storage tank also falls within the definition of building, which
can by no stretch of imagination be habitable.
layman’s vocabulary would mean a structure for protection from forces of
nature, habituated by people or, for the purpose of storage of goods. Recently the question, whether telecom tower
is a building arose before the Delhi High Court in Cellular Operators Association … vs Municipal Corporation Of Delhi
on 29 April, 2011, [http://indiankanoon.org/doc/1370737/].
The petitioners, Cellular Operators, argued on the similar lines that a building is
a structure habitable and thus a telecom tower is “PLANT & MACHINERY” and
is not habitable. However under section 2 (3) the Delhi Municipal Act, under
which this case was filed, building includes metal structure. The definition
has nothing to do with habitability. Taking into consideration the concept of
habitability, once a building is no longer fit to reside will it cease to be a
“building”? The answer can be found in an earlier decision delivered by the
Full Bench of the Delhi High Court in MCD
v. Pradeep Oil Mills P. Ltd [AIR 2010 Delhi 119], where it was held that an
underground storage tank also falls within the definition of building, which
can by no stretch of imagination be habitable.
The High Court
of Delhi was of the view that towers are definitely buildings made of metal or
other materials. It also did not accept the contention of senior counsel that
that which is not habitable is not a building. Also in the case of United Taxi Operators (Urban) Thrift &
Credit Society Ltd. Vs. MCD [2 (1996) DLT 281], the Division Bench of the
Delhi High Court negated the opinion that to be a building , it has to be
habitable and it was held that putting together sheets of steel to install an
underground cellar was a building.
of Delhi was of the view that towers are definitely buildings made of metal or
other materials. It also did not accept the contention of senior counsel that
that which is not habitable is not a building. Also in the case of United Taxi Operators (Urban) Thrift &
Credit Society Ltd. Vs. MCD [2 (1996) DLT 281], the Division Bench of the
Delhi High Court negated the opinion that to be a building , it has to be
habitable and it was held that putting together sheets of steel to install an
underground cellar was a building.
A similar
question had arisen before the High Court of Bombay in Bharti Tele-Ventures Limited Vs. State of Maharashtra [(2007) 109
BomLR 585]. The challenge was to the Notification under the Maharashtra
Regional and Town Planning Act, 1966 authorizing and/or requiring the various
Municipal Corporations in the State to charge retrospectively premium at the
rate of land value for the area occupied by the cabin, the tower height premium
etc. for granting permission for installation of semi-permanent structures,
cabins on top of the buildings for housing Base Station / Telephone Connector
to set up Cellular Mobile Telecommunication system in pursuance to the licences
granted under the Telegraph Act. The Division Bench held such installation to b
a building under the Maharashtra Act (Bombay Provincial Municipal Corporations
Act, 1949) which is similar to the Act in Delhi.
question had arisen before the High Court of Bombay in Bharti Tele-Ventures Limited Vs. State of Maharashtra [(2007) 109
BomLR 585]. The challenge was to the Notification under the Maharashtra
Regional and Town Planning Act, 1966 authorizing and/or requiring the various
Municipal Corporations in the State to charge retrospectively premium at the
rate of land value for the area occupied by the cabin, the tower height premium
etc. for granting permission for installation of semi-permanent structures,
cabins on top of the buildings for housing Base Station / Telephone Connector
to set up Cellular Mobile Telecommunication system in pursuance to the licences
granted under the Telegraph Act. The Division Bench held such installation to b
a building under the Maharashtra Act (Bombay Provincial Municipal Corporations
Act, 1949) which is similar to the Act in Delhi.
A machine
fixed with bolts and nuts: movable or immovable?
A decision of
Allahabad High Court in Official
Liquidator v. Sri Krishna Deo and Ors. [AIR 1959 All. 247], wherein, the Court
held that a machinery fixed to their bases with bolts and nuts although easily
removable are not movable property when they have been set up with definite
object of running an oil mill and not with intention of being removed after a
temporary use.
Allahabad High Court in Official
Liquidator v. Sri Krishna Deo and Ors. [AIR 1959 All. 247], wherein, the Court
held that a machinery fixed to their bases with bolts and nuts although easily
removable are not movable property when they have been set up with definite
object of running an oil mill and not with intention of being removed after a
temporary use.
Installation
of lifts: chargeable to sales tax
In State
Of Andhra Pradesh vs M/S Kone Elevators (India) Ltd [http://indiankanoon.org/doc/994291/],
the Apex Court, while deciding the nature of the
contract for installing a lift, held that the major component of the end-
product is the material consumed in producing the lift to be delivered and the
skill and labour employed for converting the main components into the
end-product was only incidentally used and, therefore, the delivery of the
end-product by the assessee to the customer constituted a “sale”.
Of Andhra Pradesh vs M/S Kone Elevators (India) Ltd [http://indiankanoon.org/doc/994291/],
the Apex Court, while deciding the nature of the
contract for installing a lift, held that the major component of the end-
product is the material consumed in producing the lift to be delivered and the
skill and labour employed for converting the main components into the
end-product was only incidentally used and, therefore, the delivery of the
end-product by the assessee to the customer constituted a “sale”.
The Supreme
Court also differentiated a works contract and a sale contract. In a
“contract of sale”, the main object is the transfer of property and
delivery of possession of the property, whereas the main object in a
“contract for work” is not the transfer of the property but it is one
for work and labour. Another test often to be applied to is: when and how the
property of the dealer in such a transaction passes to the customer: is it by
transfer at the time of delivery of the finished article as a chattel or by
accession during the procession of work on fusion to the movable property of
the customer? If it is the former, it is a “sale”; if it is the
latter, it is a “works- contract”. Therefore, in judging whether the
contract is for a “sale” or for “work and labour”, the
essence of the contract or the reality of the transaction as a whole has to be
taken into consideration.
Court also differentiated a works contract and a sale contract. In a
“contract of sale”, the main object is the transfer of property and
delivery of possession of the property, whereas the main object in a
“contract for work” is not the transfer of the property but it is one
for work and labour. Another test often to be applied to is: when and how the
property of the dealer in such a transaction passes to the customer: is it by
transfer at the time of delivery of the finished article as a chattel or by
accession during the procession of work on fusion to the movable property of
the customer? If it is the former, it is a “sale”; if it is the
latter, it is a “works- contract”. Therefore, in judging whether the
contract is for a “sale” or for “work and labour”, the
essence of the contract or the reality of the transaction as a whole has to be
taken into consideration.
Paper
making machines: movable asset
While considering
the leviability of excise duty on paper-making machines in Sirpur Paper Mills Ltd. v. Collector of Central Excise, Hyderabad
(1998 1 SCC 400), based on the facts of that case, the Supreme Court came to
the conclusion that the machineries involved in that case did not constitute
immovable property. The Tribunal, in this case, had pointed out that it was for
the operational efficiency of the machine that it was attached to earth. If the
appellant wanted to sell the paper-making machine it could always remove it
from its base and sell it. Agreed with the views of the Tribunal, the Apex
Court decided that the paper printing machine, in the given case, was a movable
asset.
the leviability of excise duty on paper-making machines in Sirpur Paper Mills Ltd. v. Collector of Central Excise, Hyderabad
(1998 1 SCC 400), based on the facts of that case, the Supreme Court came to
the conclusion that the machineries involved in that case did not constitute
immovable property. The Tribunal, in this case, had pointed out that it was for
the operational efficiency of the machine that it was attached to earth. If the
appellant wanted to sell the paper-making machine it could always remove it
from its base and sell it. Agreed with the views of the Tribunal, the Apex
Court decided that the paper printing machine, in the given case, was a movable
asset.
Others
The grinding
room made up of metallic enclosures are embedded in the Earth along with civil
work and while removing the same, it becomes a scrap. It was held in Axialo Industries v CCE [2008 (223) ELT
454 (Tri)] that the erection of grinding room/enclosure done piece by piece and
along with civil work and brings into existence immovable property. Duty of excise is not leviable thereon.
room made up of metallic enclosures are embedded in the Earth along with civil
work and while removing the same, it becomes a scrap. It was held in Axialo Industries v CCE [2008 (223) ELT
454 (Tri)] that the erection of grinding room/enclosure done piece by piece and
along with civil work and brings into existence immovable property. Duty of excise is not leviable thereon.
A machine
whether movable or immovable-depends on volume and weight
In T.T.G. Industries Ltd. V. CCE, Raipur [2004
(167) ELT 501 (SC)], the machinery was erected at the site by the assessee on a
specially made concrete platform at a level of 25 ft. height. Considering the
weight and volume of the machine and the processes involved in its erection and
installation, this Court held that the same was immovable property which could
not be shifted without dismantling the same.
(167) ELT 501 (SC)], the machinery was erected at the site by the assessee on a
specially made concrete platform at a level of 25 ft. height. Considering the
weight and volume of the machine and the processes involved in its erection and
installation, this Court held that the same was immovable property which could
not be shifted without dismantling the same.
Conclusion:
English law attaches greater importance to the object of annexation
which is determined by the circumstances of each case. One of the important
considerations is founded on the interest in the land wherein the person who
causes the annexation possesses articles that may be removed without structural
damage and even articles merely resting on their own weight are fixtures only if
they are attached with the intention of permanently improving the premises. In
Wake V. Halt (1883) 8 App Cas 195 Lord Blackburn speaking for the Court of
Appeal observed:
which is determined by the circumstances of each case. One of the important
considerations is founded on the interest in the land wherein the person who
causes the annexation possesses articles that may be removed without structural
damage and even articles merely resting on their own weight are fixtures only if
they are attached with the intention of permanently improving the premises. In
Wake V. Halt (1883) 8 App Cas 195 Lord Blackburn speaking for the Court of
Appeal observed:
“The degree and nature of annexation is an important
element for consideration; for where a chattel is so annexed that it cannot be
removed without great damage to the land, it affords a strong ground for
thinking that it was intended to be annexed in perpetuity to the land.”
element for consideration; for where a chattel is so annexed that it cannot be
removed without great damage to the land, it affords a strong ground for
thinking that it was intended to be annexed in perpetuity to the land.”
Indian law has been
developed on similar lines and the mode of annexation and hence, object of
annexation may be applied as relevant test in this country also. However, in
the absence of express provisions in the extant laws, the confusion as to
whether a subject matter of a particular contract is “goods” or “immovable
property” has serious questions of determination of applicable law. Not that
tax payers are trying to evade or avoid taxes – the uncertainty can be purely
factual or decisional. The proposed subsuming of different taxes into a common
GST may go a long way in removing uncertainties in this regard, but pending
that, a General Clauses Act amendment at least creating clear provisions on
trade fixtures is most important.
developed on similar lines and the mode of annexation and hence, object of
annexation may be applied as relevant test in this country also. However, in
the absence of express provisions in the extant laws, the confusion as to
whether a subject matter of a particular contract is “goods” or “immovable
property” has serious questions of determination of applicable law. Not that
tax payers are trying to evade or avoid taxes – the uncertainty can be purely
factual or decisional. The proposed subsuming of different taxes into a common
GST may go a long way in removing uncertainties in this regard, but pending
that, a General Clauses Act amendment at least creating clear provisions on
trade fixtures is most important.
– Vinod Kothari & Nidhi Ladha