SALES TAX ON THE PLANT AND MACHINERY EMBEDDED IN EARTH WHEN THE PLANT AND MACHINERY ARE SOLD OR LEASED WITH LAND OR BUILDING AS A WHOLE FOR LUMP SUM ANNUAL CONSIDERATION

THIS ARTICLE WAS WRITTEN BY MANSI KHURANA, A STUDENT OF VIVEKANANDA INSTITUTE OF PROFESSIONAL STUDIES.

Introduction:

Everyday lots of transaction happens wherein the land or the buildings are leased or sold out with the plant and machinery (P & M) or fixtures embedded in earth for one lump sum consideration. But the taxpayers worry about whether these transactions are liable for sale tax or not. However, the answer lies in the question that whether this transfer of P & M or fixtures embedded in earth is movable property or immovable property. Because if this transfer is transfer of movable property then sales tax would be applicable and if this transfer is transfer of immovable property then sales tax would not be applicable. Under sales tax laws, the sales tax is leviable on goods and the only goods are considered as movable and hence liable for sales tax. Therefore leading to the result that sales tax is not leviable on immovable properties.

Legal provisions:

The expression “movable property” has been defined in section 3(36) of the General Clauses Act, 1897. It is as follows:

“3. (36) ‘movable property’, shall mean property of every description, except immovable property;”

From the above definition it is evident that the question whether the P & M embedded in earth are movable property, would depend on whether the same are immovable property.

Section 2(6) of the Registration Act, 1908, defines “immovable property” which is as follows:

(6) “immovable Property” includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth, or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass;

Section 3 of Transfer of Property Act, 1882 does not give an exhaustive definition. It is as follows:

“immovable property” does not include standing timber, growing crops or grass;

Section 3(26) of the General Clauses Act, 1897 similarly, does not provide for an exhaustive definition of immovable property. It is as follows:

“3. (26) ‘immovable property’ shall include land, benefits to arise out of land, an things attached to the earth, or permanently fastened to anything attached to the earth;”

From the above definition it can be observed that section 3(26) of the General Clauses Act includes within the term “immovable property” things attached to the earth or permanently fastened to anything attached to the earth. The term ‘attached to the earth’ has not been defined in the General Clauses Act, 1897. Section 3 of the Transfer of Property Act, 1882 is as follows:

“attached to the earth” means—

(a) rooted in the earth, as in the case of trees and shrubs;

(b) embedded in the earth, as in the case of walls or buildings; or

(c) attached to what is so embedded for the permanent beneficial enjoyment of that to which it is attached;

It is clear from the above that expression ‘attached to earth has three dimensions viz.

• Rooted in the earth as in the case of trees and shrubs,
• Imbedded in the earth as in the case of walls or buildings, or
• Attached to what is imbedded for the permanent beneficial enjoyment that to which it is attached.

Judicial interpretation:

In the English Law the general rule is that what is annexed to the freehold becomes part of the reality under the maxim quicquid plantatur solo, solo credit. This maxim has no application in India. Even so, the question whether a chattel is imbedded in the earth so as to become immovable property is decided on the same principles as those which determine what constitutes an annexation to the land in English Law. The English law has evolved in the twin tests of degree or mode of annexation and the object of the annexation.

In Wake v. Hall[1], the court observed that the degree and nature of the annexation is an important element for consideration; for where a chattel is so annexed that it cannot be removed without greater damage to the land, it affords a strong ground for thinking that it was intended to annex in perpetuity to the land.

However, the Indian law has been developed on the same lines. The courts in this country have applied the test whether the annexation is with the object of permanent beneficial enjoyment of the land or building.

In Official Liquidator v. Sri Krishna Deo[2], the court observed that 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 the intention of being removed after a temporary use.

In Ducans Industries Ltd. v. State of U.P.[3], the court observed that the question whether machinery which is embedded in the earth is movable property or an immovable property, depends upon the facts of the each case. Primarily, the court will have to take into consideration the intention of the party when it decided to embed the machinery, whether such embedment was intended to be temporary or permanent. A careful perusal of the agreement of sale and the conveyance deed and the nature of the machineries involved clearly shows that the machineries which have been embedded in the earth to constitute a fertilizer plant are definitely embedded permanently with a view to utilize the same as a fertilizer plant. They were set up permanently in the land in question with a view to operate a fertilizer plant and the same was not embedded to be dismantled and removed for the purpose of sale as machinery at any point of time.

In C.T.O Sriganganagar v. M/s. Sadulshahar Krai Vikari Sahakari Samiti[4], the P & M to be judged whether it is permanently fastened or attached to the earth is to be seen from the point of utility. If such P & M can be used without being attached to the earth, it can be found to be movable. Heavy machineries are in common used after being fastened to earth. Because unless that is done, their vibration will not only impair the efficiency but would affect them and therefore, any heavy machinery or plant when put to use, it has to be fastened to earth on some foundation. The P & M of a factory does no generally move, unless the factory becomes obsolete or becomes such that it is not possible for the owner to make use of it or he becomes in capable of running the factory. For making use of P & M, the land has to be there and unless, the P & M is imbedded to the land, the use of P & M would not have been to its optimum capacity. In ordinary parlance, nobody conceives the P & M imbedded to earth to be movable property as the P & M is not shifted in routine.

In M/s Kranti Steel Pvt. Ltd. v. Chief Controlling Revenue Authority[5], the court observed that whether chattel attached to the earth or building constitute an immovable property, would depend upon degree, manner, extent and strength of attachment of chattel to earth or building. Broadly speaking, there are certain broad features, which are to be looked into in such cases. The attachment should be such as to partake the character of attachment of trees or shrubs, rooted to earth, or walls or buildings, embedded in that sense, and, further test is whether, such an attachment is for permanent beneficial enjoyment of immovable property to which it: is attached. The term “permanently fastened or attached to earth” has to be read, in the context, for the reason that nothing can be fastened to earth permanently so that it can never be removed, When machines are attached to earth, not only they are attached for beneficial enjoyment of machines but also for beneficial enjoyment of land which is on lease. Scientifically speaking, nothing can be treated immoveable. In the context of P & M, where it is permanently fastened or attached to earth, it has to be seen from the point of utility also. If it cannot be used without being attached to earth, it may be immovable property in the industries like one up for consideration in this matter. Unless, such fastening is there, the P & M cannot be put to a rational use. They generally do not move or taken away unless a particular P & M has become obsolete or when the factory is closed or otherwise circumstances so warrant and the owner decide to remove and sell it. Such contingency do not arise every day. They are very rare and occasional. Removal of P & M from earth in a working unit is a decision which is not normally taken in ordinary circumstances, that too when entire land, building along with machinery is leased out for the purpose of running the same.

In Md. Ibrahim v. The Northern Circars Fibre Trading Company[6], the court observed that the degree and nature of the attachment is no doubt a consideration but only a minor consideration. The more important consideration is the object of the annexation which is a question of fact to be determined by the circumstances in each case.

In Addu Achiar v. Custodian[7], the court observed that The test as to whether a thing would be regarded as being imbedded in the earth in order to constitute immovable property is whether it rests by its own weight on earth land whether it can change places and can change hands and can be removed from one place to another. The test to be applied in order to determine as to whether they are permanent fixtures or not would be to find out whether those fixtures are for the beneficial enjoyment of the property. Another factor also would be taken into consideration as to what the object of the annexation was. In all these cases intention is a very important factor to be taken into consideration.

In Bamadev Padigrahi v. Monoraama Raj[8], the court observed that the tests enunciated by the decided cases to determine the character and nature of the property are:

(i) What are the intendment, object and purpose of installing the machinery i.e. whether it is “the beneficial enjoyment of the building, land or structure, or the enjoyment of the very machinery?

(ii) The degree and manner of attachment or annexation of the machinery to the earth.

Where the machinery and the building or land on which it is installed, are owned by one and the same person, normally it should be inferred, unless the contrary is proved, that the object and purpose of installing the machinery is to have beneficial enjoyment of the entire building or land, but not the sole enjoyment of the very machinery itself.

In Karthik Engineering Works v. State of Karnataka[9], the court observed that under Article 366 of the Constitution of India, legislature have been provided the right to levy tax on the sale or purchase of goods and by inclusive definition under Entry 29A, tax on the transfer of tight to use any goods for any purpose (Whether/or not for a specified period) for cash, deferred payment or other valuable consideration would be subjected to tax. There may be an instance where the machinery has been given under the lease agreement as movable property. Certain machineries can be used as movable while others because of their nature or other reasons cannot be termed as movable but have to be embedded in the earth so as to make it as immovable property. If at the time of entering in to an agreement, the right to use is given of a movable property i.e. the goods, then there would be liability of tax under Section 5C. But if at the time of entering into an agreement the machinery itself is an immovable property then it will be beyond the scope of the goods as defined under Section 2 and also under the definition of ‘goods’ as given in the Sale of Goods Act. There is another point also that the amount of Rs. 44,000/- received was not only in respect of the leasing of machinery but also for the factory premises and it was a composite agreement. Tax has been levied on the entire amounts on the ground that the lease amount cannot be bifurcated. If the agreement is indivisible then it cannot be permitted to be taxed in its entirety.

In Commissioner of Sales Tax v. Bombay sound Service[10], the court observed that undisputedly, recording of songs, background music and dubbing of sound can be done only in studios which are fully equipped for that purpose. It is not possible to undertake these activities anywhere and everywhere even with the aid of the very same machines or equipments which are fitted or installed permanently in the studies. In fact, what is really required is the studio and the instruments for recording of songs, etc., are essential part of the studio. There cannot be any studio without such equipment. The construction of studio is a very sophisticated task and what is taken on hire is the studio and not the recording machines and instruments installed there. The various instruments for recording music, etc., are annexed or embedded to the earth for the purpose of beneficial enjoyment of the studio which is an immoveable property and not for the beneficial enjoyment of those instruments. The instruments are essential fixtures of studios. Therefore, the hiring of studios for the purpose of recording songs, background music and dubbing of sound did not amount to transfer of right to use any movable property and hence such transactions did not fall within the definition of “sale”.

In Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Bobby Rubber Industries[11], the court observed that only movable property is comprehended within the definition of “goods”. The hydraulic press, the use of which was allowed to various customers was part and parcel of the P & M installed by the respondent in its premises. There was no agreement or understanding between the parties that before the grant of permission to use the hydraulic press by various customers it was to be served from the earth. In such circumstances, it could not be held that the hydraulic press was movable property falling within the definition of “goods” and, therefore, the rent received for the use of the hydraulic press by various customers could not be subjected to tax under the Act. Moreover, by allowing the use of the hydraulic press installed in the premises of the respondent by various customers on machine-hour basis it could not be said that there was a transfer of the right to use the hydraulic press by the respondent to various customers so as to attract the provisions of Explanation (3-B) to Section 2(xxi) of the Act. It was at best permission to use and no more, or a fruitful utilisation of an asset otherwise lying idle.

In Commissioner of Central Excise v. Solid & Correct Engineering Works & Ors.[12], the court observed that Attachment of the plant in question with the help of nuts and bolts to a foundation not more than 1½ feet deep intended to provide stability to the working of the plant and prevent vibration/wobble free operation does not qualify for being described as attached to the earth under any one of the three clauses of definition given to the expression ‘attached to earth’. That is because attachment of the plant to the foundation is not comparable or synonymous to trees and shrubs rooted in earth. For an attachment to fall in that category it must be for permanent beneficial enjoyment of that to which the plant is attached. 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. Once such a machine is fixed, embedded or assimilated in a permanent structure, the movable character of the machine becomes extinct. The same cannot thereafter be treated as moveable so as to be dutiable under the Excise Act. But where there is no assimilation of the machine with the structure permanently, would stand on a different footing. In the instant case all that has been said by the assessee is that the machine is fixed by nuts and bolts to a foundation not because the intention was to permanently attach it to the earth but because a foundation was necessary to provide a wobble free operation to the machine. An attachment of this kind without the necessary intent of making the same permanent cannot, in our opinion, constitute permanent fixing, embedding or attachment in the sense that would make the machine a part and parcel of the earth permanently. In that view of the matter we see no difficulty in holding that the plants in question were not immovable property so as to be immune from the levy of excise duty.

Conclusion:

From all of the above mentioned judgments and legal provisions, it can be observed that for determining whether P & M or fixtures embedded in earth are movable property or not, highly depends on the facts and circumstances of the case. The mode and object of annexation are considered as relevant tests in determining the same. The intention for annexation is also considered as relevant test for determining the same. If after the application of the above tests it is observed that the P & M is for the purpose of permanent beneficial for the land or building to which it is attached, then Sales tax would not be applicable. However, there is a dire need for express provisions for removing confusions over categorization of a subject matter of the contract under “movable property” or “immovable property” for the determination of applicable law and to avoid tax evasion.

[1] (1883) 8 AC 195 (HL)

[2] AIR 1959 Allahabad 247

[3] 2000 (1) SCC 633

[4] 2004 (135) STC 90

[5] (2015) 112 ALR 289

[6] AIR 1944 Mad 492

[7] AIR 1953 Hyd 14

[8] AIR 1974 AP 226

[9] 2000 (119) STC 88

[10] (1999) 112 STC 290

[11] (1998) 108 STC 410

[12] 2010 (5) SCC 122