1998 (8) TMI 588 - AT - VAT and Sales Tax

Issues Involved:
1. Whether the works contract arising from the agreements is an indivisible contract or a divisible one.
2. Whether the applicant-company is liable to pay tax at the rate of 12% on the cost of the pipes or 2% on the turnover of the works contract.

Detailed Analysis:

Point No. 1: Nature of the Works Contract

The primary issue was to determine whether the works contract was indivisible or divisible into parts for supply of pipes and supply of labor and services. The applicant contended that the contract was indivisible and hence not subject to sales tax under the Rajasthan Sales Tax Act. This argument was based on historical precedents, including the Madras High Court's decision in Gannon Dunkerley & Co. (Madras) Ltd. v. State of Madras, which held that construction works contracts were not contracts for the sale of materials used therein.

However, the Tribunal rejected this contention, citing the Constitution (Forty-sixth) Amendment Act, 1982, which altered the legal landscape by introducing clause (29-A) in Article 366. This clause allowed the State Legislatures to levy a tax on the transfer of property in goods involved in the execution of a works contract, whether the contract was divisible or indivisible. The Tribunal referenced the Supreme Court decisions in Builders Association of India v. Union of India and Gannon Dunkerley & Co. v. State of Rajasthan, which upheld the validity of this amendment and clarified that an indivisible contract could be treated as consisting of two parts for tax purposes.

The Tribunal further noted that the agreements specified that 75% payment was to be made against the cost of pipes, indicating that the supply of pipes was a significant part of the contract. Additionally, the contract included a clause for the deduction of 2% for sales tax, further supporting the view that there was an element of sale involved.

In conclusion, the Tribunal held that the works contract was not indivisible. Even if it were considered indivisible, the supply of pipes was deemed a sale involved in the execution of the works contract and thus subject to sales tax.

Point No. 2: Rate of Tax Applicable

The second issue concerned the rate of tax applicable to the supply of materials in the works contract. The applicant argued that they had already paid 2% on the amount of running bills towards sales tax, which had been deducted at source by the PHED. The department, however, contended that the tax rate should be 12%.

The Tribunal examined three relevant notifications:
1. Notification dated May 28, 1987, which prescribed a 2% tax rate for works contracts.
2. Notification dated March 8, 1988, which superseded the earlier notification and prescribed different rates for various types of works contracts.
3. Notification dated June 28, 1989, which was in force at the time of the agreements and provided that the contractor should pay tax on the value of goods involved in the execution of the works contract at the rates notified under Section 5 of the Act, which was 12%.

The Tribunal concluded that the applicable notification was the one dated June 28, 1989, which prescribed a 12% tax rate on the value of goods involved in the execution of the works contract. Therefore, the applicant-company was liable to pay tax at this rate, and the amount deducted at source at 2% would be adjusted against the outstanding tax amount.

Conclusion:

The applications were dismissed, with the Tribunal holding that the works contract was subject to sales tax at the rate of 12% on the value of the goods involved, and the applicant-company could not claim relief based on the 2% deduction at source.

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