2003 (9) TMI 720 - HC - VAT and Sales Tax

Issues Involved:
1. Liability to tax on the turnover of tin ingots used in the execution of works contracts.
2. Estimation of sales turnover of tin ingots by adding 25% gross profit.
3. Applicable rate of tax on tin ingots used in the manufacture of tins.

Issue-wise Detailed Analysis:

1. Liability to Tax on the Turnover of Tin Ingots Used in the Execution of Works Contracts:

The main question involved in all these cases is regarding the liability to tax on the turnover of ingots which have been used in the execution of works contract, namely, the manufacture of empty tins. The assessee contended that the tin ingots consumed in the process of manufacture of empty tins are not exigible to tax under the Act since there is no transfer of property in the sheets. The assessing authority rejected the claim and brought the purchase value of tin ingots by making an addition of 25 per cent towards gross profit to tax at the rate of 10 per cent under the Act. The Tribunal noted that the assessing authority had levied tax on the turnover of ingots used for fabricating sheets supplied by third parties for conversion and returned empty tins. The Tribunal further considered the legality of the levy of tax on the turnover of tin ingots under explanation (3A) to section 2(xxi) of the Act and observed that tin sheets are supplied by third parties. For the conversion of tin sheet into tins, tin ingots are essential ingredients and thus there is transfer of tin ingots to complete the work entrusted and the fabrication receipt is inclusive of the value of tin ingots. The Tribunal held that the levy of tax made to the turnover of tin ingots consumed for the conversion process for all the years is quite in order.

The Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan observed that keeping in view the legal fiction introduced by the Forty-sixth Amendment, whereby the works contract which was entire and indivisible has been altered into a contract which is divisible into one for sale of goods and other for supply of labour and services, the value of the goods involved in the execution of a works contract on which tax is leviable must exclude the charges which appertain to the contract for supply of labour and services. In the present case, the tin ingots used for the manufacture of tins do not disappear as in the case of electricity, oil, fuel, etc., from the end-product. The tin ingots are absolutely necessary for fabricating the tin sheets into tins. The tin ingots, unlike in the case of fuel, chemical, or oil, continue to be part of the tins manufactured. Therefore, the authorities and the Tribunal were justified in levying tax on the turnover of tin ingots used by the assessee in the execution of the works contract.

2. Estimation of Sales Turnover of Tin Ingots by Adding 25% Gross Profit:

The Tribunal held that the sale value fixed by the assessing authority by adding gross profit of 25 per cent is also reasonable. The Tribunal accordingly sustained the levy of tax on the turnover of tin ingots as well as the estimation of turnover of tin ingots. The Tribunal, however, did not interfere with the order of the first appellate authority with respect to other additions. The learned Government Pleader submitted that the gross profit addition at 25 per cent made to the purchase value of tin ingots is also reasonable and does not call for any interference by this Court. The Court upheld the estimation of sales turnover of ingots by adding 25 per cent gross profit to the purchase value of tin ingots as reasonable.

3. Applicable Rate of Tax on Tin Ingots Used in the Manufacture of Tins:

The assessing authority had levied tax at the rate of 10 per cent which is the rate applicable to tins and metals. The Supreme Court in Gannon Dunkerley & Co.'s case held that it would be permissible for the State Legislature to tax all the goods involved in the execution of a works contract at a uniform rate which may be different from the rates applicable to individual goods because the goods which are involved in the execution of the works contract when incorporated in the works can be classified into a separate category for the purpose of imposing the tax and a uniform rate may be imposed on such goods. Under section 5(1) of the Act in the case of goods specified in the First or Second Schedule, the tax must be levied at the rates and only at the points specified against such goods in the said Schedules. So far as works contract is concerned, section 5(1)(iv) of the Act as amended by the Finance Act, 1991 provides for a separate rate of tax. Sub-clause (a) of clause (iv) says that in the case of transfer of goods involved in the execution of works contract where transfer is in the form of goods, the rate of tax is as provided for such goods in the First, Second, or Fifth Schedule. Under sub-clause (b) of clause (iv), in the case of transfer of goods involved in the execution of works contract, where the transfer is not in the form of goods but in some other form specified in the Fourth Schedule, at the rate specified against such contract in the said Schedule. In the present case, the goods which are transferred in the execution of the works contract, viz., the manufacture of tins is tin ingots only, the tin sheets being supplied by the awarder. The expression "goods involved in the execution of works contract" and the expression "in the form of goods" occurring in clauses (a) and (b) of section 5(1)(iv) relate to the same goods, viz., the goods transferred, in the instant case are "tin ingots". The expression "in the form of goods" occurring in sub-clause (a) cannot be considered as referring to the product of works contract. In that view of the matter, the present cases fall within sub-clause (b) of clause (iv) of section 5 of the Act. However, for the assessment year 1990-91 there was no distinction as provided under clauses (a) and (b) in respect of tax on transfer of goods in the execution of works contract. The rate of tax on works contract was provided in the Fourth Schedule. Thus for all the assessment years Fourth Schedule applies.

In the above circumstances, while upholding the levy of tax on the turnover of tin ingots in the execution of job-works, the Court directed the assessing authority to levy tax on the said turnover at the rate applicable to contract for fabrication of metals by applying the residuary entry 22 of the Fourth Schedule to the Act.

These tax revision cases are disposed of as above.

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