Download - AssessmentOfSalesTaxvisavisWCT-IndianContext

8/14/2019 AssessmentOfSalesTaxvisavisWCT-IndianContext

1/6

indlaw.com

ASSESSMENT OF SALES TAX vis--vis WORKS CONTRACT TAX- Indian context.*

1

arttitle ASSESSMENT OF SALES TAX vis--vis WORKS CONTRACT TAXartauthor artstate artindustry artsubmissiondate 09/07/2002Proposition of law holding the field: in the matter of works contracts:

The entire article is sourced and based on the judge made law and on the clause (29A) was

introduced in Art. 366 of the Indian Constitution by 46th amendment. The readers are requested tobear with complexity of the text of the article as the author was not inclined to adopt shortcuts with

a view to present the true picture and proposition of law the holds the field under context.

Even after the said amendment in the Constitution of India on the subject under context, there still

persists a dispute between the corporate world and the Tax authorities. Time and again the eitherparties disputes related to the subject under context being referred to the courts of law for

adjudication. As stated above this is how the present article has been drafted based on thejudgments.

In theBuilders Association of India and others etc. etc., Petitioners v. Union of India and othersetc. case ofetc., AIR 1989 SC 1371.The Apex court has observed as under:

The 46th Amendment of the Constitution made it possible for the State to levy sales Sales Tax onthe price of the goods and materials used in works contracts as if there was a sale of such goods and

materials. In this Land mark decision it has been held, by the Hon'ble Supreme Court that the SalesTax laws passed by the Legislatures of States levying taxes on the transfer of property in goods(whether as goods or in some other form) involved in the execution of the works contract, are

subject to the restrictions and conditions mentioned in each clause or sub-clause of the Art. 286 ofthe Constitution.

By the 46th Amendment a new clause, namely clause (29A) was introduced in Art. 366 of theConstitution. The Constitutional Amendment in Art. 366(29A) read with the relevant taxation-

entries has enabled the State to exert its taxing power in an important area of Social and economiclife of the community. The object of the new definition introduced in clause (29A) of Art. 366 of

the Constitution is, therefore, to enlarge the scope of 'tax on sale or purchase of goods' wherever itoccurs in the Constitution so that it may include within its scope the transfer, delivery or supply ofgoods that may take place under any of the transactions referred to in sub-clauses (a) to (f) thereof

wherever such transfer, delivery or supply becomes subject to levy of sales tax. Art. 286 is alsoamended. The 46th amendment also validated laws levying tax as also collection by way of tax

under such law subject to the conditions mentioned therein.

On the passing of the 46th Amendment the State Governments after making necessary amendments

in their laws commenced to levy sales tax on the turnover of the works contracts entered into by thebuilding contractors for constructing houses, factories, bridges etc. In some States taxable turnover

was determined by deducting the money spent on labour engaged in connection with the executionof the works contracts from the amount received by the contractor for the execution of the workscontracts. In some other States a certain fixed percentage of the total turnover was deducted from

1

* Shivaji Rao, Executive (Legal), NDDB, INDIA


2/6

indlaw.com

the total turnover as labour charges before arriving at the taxable turnover. Each State adopted itsown method of determining taxable turnover either by framing rules under its sales tax law or by

issuing administrative directions. The methods adopted by the States for determining taxableturnover relating to works contracts for purposes of levy of sales tax were such that sales tax to bepaid by the building contractors not merely on the value of materials supplied by them in

connection with the works contracts but also on the expenditure they had incurred in securing theservices of architects and engineers who had supervised the execution of the works and also on the

amount which they were entitled to receive for supervising the execution of the works. Whilelevying sales tax on the price of the material supplied for the construction of houses, factories,bridges etc. the sales tax authorities of the States did not take into account the conditions and

restrictions imposed by Art. 286 of the Constitution and the provisions of the Central Sales TaxAct, 1956. The assessing authorities did not make any attempt to ascertain whether the sales of the

goods involved in a execution or works contract had taken place in favour of the person who hadassigned the contract outside the State in which the works contract was being executed or whether

any part of the goods so used in a works contract had been imported from abroad on account of theperson who had assigned the contract or whether any part of the goods, such as, iron and steel etc.which were declared goods, had already suffered sales tax at an earlier point in the State and

whether on such goods the tax which was being levied exceeded the limit prescribed by Section 15of the Central Sales Tax Act, 1956. They did not also take into consideration whether the sale of thegoods in question had been exempted under the sales tax laws of the State from payment of sales

tax or whether it had already suffered payment of tax earlier where the sales tax of the State hadprescribed that the sale of such goods could be subjected to the levy of sales tax at a single point.

In this case the petitioners challenged the levy of sales tax on the turnover relating to workscontracts. The Hon'ble Court held that the sales tax laws passed by the Legislatures of the States

levying tax on the transfer of property of goods (whether as goods or in some other form) involvedin the execution of a works contract are subject to restrictions and conditions mentioned in each

clause or sub-clause of Art. 286 of the Constitution. It was also observed by the Hon'ble Court thatafter the 46th Amendment it is not possible to accede to the plea of the State that what is transferredin a works contract is the right in the immovable property. On passing of the 46th amendment it

could not be said that the Constitution had conferred on the States a larger freedom than what theyhad before in regard to their power to levy sales tax under Entry 54 of the State list. The 46th

amendment does no more than making it possible for the States to levy sales tax on the price ofgoods and materials used in works contracts as if there was a sale of such goods and materials.

The Hon'ble Court also observed that in exerting this power particularly in relation to transfer of

property in goods involved in the execution of "works contracts" in building activity, in so far as itaffects the housing projects of the under privileged and weaker sections of the society, the Statemight perhaps, be pushing its taxation power to the peripheries of the social limits of that powerand, perhaps, even of the constitutional limits of that power in dealing with unequals. In such class

of cases "Building-Activity" really relates to a basic subsistential necessity. It would be wise andappropriate for the State to consider whether the requisite and appropriate classifications should not

be made on such building activity attendant with such social purposes for appropriate separatetreatment.

Works contract - Transfer of property in goods involved in its execution - Levy of Sales Tax thereon - Valid. - - The Sales Tax laws passed by the Legislatures of States levying taxes on the


3/6

indlaw.com

transfer of property in goods (whether as goods or in some other form) involved in the execution ofa works contract are subject to the restrictions and conditions mentioned in each clause or sub-

clause of Art. 286 of the Constitution. In view of the passing of the property in goods which areinvolved in works contract and the legal fiction created by cl. (29-A) of Art. 366 of the Constitutionit cannot be said that the properties that are transferred to the owner in the execution of a works

contract are not the goods involved in the execution of the works contract, but a conglomerate, thatis the entire building that is actually constructed. After the 46th Amendment it is not possible to

accede to the plea of the States that what is transferred in a works contract is the right in theimmovable property. It cannot be said that on the passing of the 46th Amendment the Constitutionhad conferred on the States a larger freedom than what they had before in regard to their power to

levy sales tax under Entry 54 of the States List. The 46th Amendment does no more than making itpossible for the States to levy sales tax on the price of goods and materials used in works contracts

as if there was a sale of such goods and materials. The sub-cl. (b) of Art. 366(29-A) could not beread as being equivalent to a separate entry in List II of the Seventh Schedule to the Constitution

enabling the States to levy tax on sales and purchases independent of Entry 54 thereof. As theConstitution exists today the power of the States to levy taxes on sales and purchases of goodsincluding the "deemed" sales and purchases of goods under cl. (29-A) of Art. 366 is to be found

only in Entry 54 and not outside it.

After the 46th Amendment the works contract which was an indivisible one is by a legal fiction

altered into a contract which is divisible into one for sale of goods and the other for supply oflabour and services. After the 46th Amendment, it has become possible for the States to levy sales

tax on the value of goods involved in a works contract in the same way in which the sales tax wasleviable on the price of the goods and materials supplied in a building contract which had beenentered into in two distinct and separate parts. It could not have been the contention of the revenue

prior to the 46th Amendment that when the goods and materials had been supplied under a distinctand separate contract by the contractor for the purpose of construction of a building the assessment

of sales tax could be made ignoring the restrictions and conditions incorporated in Art. 286 of theConstitution. If that was the position can the States contend after the 46th Amendment under whichby a legal fiction the transfer of property in goods involved in a works contract was made liable to

payment of sales tax that they are not governed by Art. 286 while levying sales tax on sale of goodsinvolved in a works contract? They cannot do so. When the law creates a legal fiction such fiction

should be carried to its logical end. There should not be any hesitation in giving full effect to it. Ifthe power to tax a sale in an ordinary sense is subject to certain conditions and restrictions imposedby the Constitution, the power to tax a transaction which is deemed to be a sale under Art. 366 (29-

A) of the Constitution should also be subject to the same restrictions and conditions. Ordinarily

unless there is a contract to the contrary in the case of a works contract the property in the goodsused in the construction of a building passes to the owner of the land on which the building isconstructed, when the goods or materials used are incorporated in the building. The contractorbecomes liable to pay the sales tax ordinarily when the goods or materials are so used in the

construction of the building and it is not necessary to wait till the final bill is prepared for the entirework.

In exerting the power under Art. 366 (29 A) particularly in relation to transfer of property in goodsinvolved in the execution of 'works-contracts' in building activity, in so far as it affects the housing-

projects of the under-privileged and weaker sections of society, the State might perhaps, bepushing the taxation-power to the peripheries of the social limits of that power and, perhaps, even


4/6


5/6

indlaw.com

" 'Works Contract' includes any agreement for carrying out for cash or for deferred payment or for

any other valuable consideration, the building construction, manufacture, processing, fabrication,erection, installation, fitting out, improvement, modification, repair or commissioning of anymovable or immovable property."

The distinction between a contract of sale and a works contract is not free from difficulty and has

been subject-matter of several judicial decisions. No strait-jacket formula can be made availablenor can such quick-witted tests devised as would be infallible. It is all a question of determining theintention of the parties by culling out the same on an overall reading of the several terms and

conditions of a contract. In State of Gujarat v. Variety Body Builders, (1976) 38 STC 176 : (AIR1976 SC 2108 : 1976 Tax LR 1928) the Supreme Court observed that there is no standard formula

by which one can distinguish a contract of sale from a contract for work and labour. There may bemany common features in both the contracts, some neutral in a particular contract, and yet certain

clinching terms in a given case may fortify a conclusion one way or the other. It will depend uponthe facts and circumstances of each case. The question is not always easy and has for all timesvexed jurists all over.

In the case of State of Orissa and others, Vs. Titaghur Paper Mills Company Limited and another, AIR 1985 SC 1293, The Apex court observed with regard to works contract A works

contract is a compendious term to describe conveniently a contract for the performance of work orservices in which the supply of materials or some other goods is incidental. The simplest example

of this type of contract would be where an order is given to a tailor to make a suit from suitingsupplied by the customer This would be a contract of work or services in which the supply ofmaterials, namely, thread, lining, and buttons used in making the suit, would be merely incidental.

Similarly, if an artist is commissioned to paint a portrait, it would be a contract of work andservices in which the canvas on which the portrait is painted and the paint used in painting the

portrait would be merely incidental. In Commr of Sales Tax., M. P v Purshottam Premji (1970- 26- STC 38), this Court pointed out the distinction between a works contract and a contract for thesale of goods as follows (at page 41) "The primary difference between a contract for work or

service and a contract for sale of goods is that in the former there is in the person performing workor rendering service no property in the thing produced as a whole notwithstanding that a part or

even the whole of the materials used by him may have been his property In the case of a contractfor sale, the thing produced as a whole has individual existence as the sole property of the partywho produced it, at some time before delivery and the property therein passes only under the

contract relating thereto to the other party for price."

The Apex court has clarified all the doubts which may arise, in its catena of judgments that if the dominant purpose of contract between the parties is predominantly for labour and service innature, and the deployment / transfer of goods are incidental in nature, then by virtue of Article 366

(26 A) read with respective entries in the center and state lists of the Constitution, the appropriategovts., may impose applicable tax on works contract. IF NOT, an assessee will be made liable to

remit applicable tax on two counts viz;

(1) sales tax for deemed / factual sale of goods

(2) tax for works contract for the services rendered.


6/6

indlaw.com

The issue of making up a case of dominant purpose of the contract is for labour and service innature, and the deployment / transfer of goods are incidental in nature is depends on facts and

circumstances of each and every case .

Incidentally, in the case of state of Gujarat Vs. Elecon Engineering Co. (Sales Tax Cases Vol.90,

1993 page 74) the Gujarat High court has observed that

the fact that the price for equipment and the price for the services were shownseparately, it is also indicative of the fact that though it was a composite contact itwas divisible. It consisted of two contracts one of the sale of equipments and

another for erection and other such incidental services.

Notwithstanding the said observations, whatever nature of words, terms phrases deployed in theagreements and deeds, to decide the dominant purpose and nature of the contract depends upon

constituent factors viz: the entirety , purpose, nature of work drawn in, volume of work to bedone by the supplier (service oriented supply of material is incidental). Therefore, it is suggestedthat if at all any person(s) save themselves from the Sales Tax and to make out the case of works

contract, the following are imperative on their part:

a) To establish dominant purpose of the contract is works contract , as quoted supra.

b) Supply / transfer of material is incidental to the dominant purpose.

c) It is a composite / umbrella contract and it is distinct contract for services. Supply ofmaterial is incidental and it is not divisible.

Other such reasons to show it as works contract, contract cannot be divisible etc.