2010 (9) TMI 982 - HC - VAT and Sales Tax

Whether the Sales Tax Appellate Tribunal committed an error of law in confirming the tax demand under section 3B of the Tamil Nadu General Sales Tax Act, 1959 on the income received by the petitioners for the performance of annual maintenance contracts executed by the petitioners, while failing to note that the same were purely service agreements entered into by the petitioners with the users of computers, no part of the income being attributable to sale of goods? Whether the Sales Tax Appellate Tribunal committed an error of law in holding that the chartered accountant certificate filed by the petitioners to show the actual consumption of spares used in the annual maintenance contract could not be relied upon to determine the value of material used in the contract for the purpose of determining liability under section 3B of the Tamil Nadu General Sales Tax Act, 1959 when in fact the provision did not prevent the filing of a chartered accountant certificate to establish the cost of material used in the contract? Held that - After the period of nearly 20 years, it would be a futile exercise for the assessing authority to examine the materials placed by the petitioner for arriving at the cost of parts used and instead fixing such cost of materials at 25 per cent of the value of the annual maintenance contract, would meet the ends of justice and that such fixation of 25 per cent can be held to be exclusively for the assessment years concerned in these revisions and not quoting it as a precedent for any other assessment years and thereby put a finality to the assessment to be made in the case on hand. In that view, we dispose of all these revisions holding that the learned counsel for the petitioner also agrees for fixing the percentage of value of spares involved at 25 per cent of the value of annual maintenance contract of the respective assessment years. We, therefore, dispose of all these revisions by holding that annual maintenance contract would fall under section 3B of the TNGST Act and as far as the actual value of material property transferred in the course of execution of such annual maintenance contract, the assessment years covered by these revisions are concerned, we fix it at 25 per cent. and direct the respondent to levy tax on that basis.

Summary

Issues:
1. Whether the Sales Tax Appellate Tribunal erred in confirming tax demand under section 3B of the Tamil Nadu General Sales Tax Act on income received for annual maintenance contracts?
2. Whether the Tribunal erred in not accepting the chartered accountant certificate to determine the value of materials used in the contract?

Analysis:
1. The first issue pertains to the tax demand under section 3B of the Tamil Nadu General Sales Tax Act on income received for annual maintenance contracts. The petitioner argued that the contracts were purely service agreements with no part of the income attributable to the sale of goods. However, referencing a Supreme Court decision, it was established that even in service contracts, if there is a transfer of title in movables for a price, it constitutes a sale. The Supreme Court held that there is a sale of parts in such contracts, and the tax is on the sale of goods. Therefore, the first question was answered against the petitioner-assessee based on the Supreme Court's interpretation.

2. The second issue revolves around the acceptance of a chartered accountant certificate to determine the value of materials used in the contract. The assessing authority initially assessed the transfer of property involved in the maintenance work at 50%, while the petitioner claimed it to be 6.5% based on the auditor's certificate. The matter was remitted back to determine the actual value of materials used. The Tribunal rejected the appeal, emphasizing the need to reassess based on the actual cost of parts replaced or transferred in the contract. Eventually, the court decided to fix the value of materials at 25% of the annual maintenance contract value for the assessment years in question, considering the futility of examining materials after nearly 20 years. This decision aimed to provide finality to the assessment and avoid prolonged remand processes. The petitioner agreed to this percentage, leading to the disposal of the revisions with a directive for the respondent to levy tax based on this fixed percentage.

In conclusion, the judgment addressed the issues related to tax demands on income from annual maintenance contracts and the determination of material values in such contracts, providing a comprehensive analysis based on legal interpretations and practical considerations.