2003 (3) TMI 699 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Nature of the agreement: works contract or contract for sale.
2. Tax liability on the amount received under the contract.

Issue-wise Detailed Analysis:

1. Nature of the Agreement: Works Contract or Contract for Sale

The primary issue for consideration is whether the agreement dated February 28, 1984, between the applicant and M/s. Gunkar Electrodes Pvt. Ltd., Rampur, was in the nature of a works contract or a contract for sale. The agreement involved the design, manufacture, fabrication, and installation of a complete electrode plant for Rs. 5,15,000.

The Tribunal had concluded that the contract was primarily for the supply of materials, with the work or service rendered in installation being incidental. They reasoned that the property in the plant and machinery remained with the applicant until installation and passed to the customer only after successful installation and performance testing. This indicated that the contract was for the sale of materials with incidental work or service.

However, the High Court referred to various Supreme Court decisions to determine the nature of the contract. In cases like *Commissioner of Sales Tax, Madhya Pradesh v. Purshottam Premji*, *State of Rajasthan v. Man Industrial Corporation Ltd.*, and *Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax*, the Supreme Court had established that if the contract's main object is the transfer of property in a chattel as a chattel, it is a sale. Conversely, if the contract involves significant work and labor, resulting in the creation of a new item that only comes into existence upon completion of the work, it is a works contract.

Applying these principles, the High Court observed that the agreement in question involved a single indivisible process of manufacturing, fabricating, and installing the electrode plant. The plant came into existence only upon complete fabrication and installation, making the installation a fundamental and integral part of the contract. Therefore, the contract was for work and labor, not for the sale of materials.

2. Tax Liability on the Amount Received Under the Contract

The applicant claimed that the amount received for executing the contract was not liable to tax as it was a works contract. The assessing authority, Assistant Commissioner (Judicial), and the Tribunal had rejected this claim, treating the agreement as a contract for sale and levying tax on the amount of Rs. 5,15,000.

The High Court, however, held that the work executed by the applicant was in the nature of a works contract and not a contract for sale. Consequently, the amount received for the execution of the contract was not liable to tax during the assessment year 1984-85.

Conclusion

The revision was allowed, and the order of the Tribunal dated March 8, 1991, was set aside. The High Court concluded that the contract executed by the applicant for designing, manufacturing, and installing the complete machinery and equipment of the electrode plant was in the nature of a works contract and, therefore, not liable to tax. The petition was allowed.