(The following post has been contributed by Vinod Kothari and Nidhi Ladha of Vinod Kothari & Company. The authors can be contacted at email@example.com and firstname.lastname@example.org respectively.
This 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:
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.
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 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.”
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.
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.
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.
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.
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.
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".
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.
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 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.
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.
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:
“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.”
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.- Vinod Kothari & Nidhi Ladha