2009 (9) TMI 933 - HC - VAT and Sales Tax

Works contract - expenses incurred by the contractor for providing labour and other services - deduction - principles of interpretation

Issues Involved:
1. Deduction of depreciation on plant and machinery.
2. Deduction of interest charged by clients, postage, telephone, telex expenses, and vehicle tax.
3. Levy of turnover tax (TOT) on materials supplied by clients.
4. Restrictive legal scope of charging provisions under Section 5B of the Act read with Rule 6(1)(c) of the Rules.

Detailed Analysis:

1. Deduction of Depreciation on Plant and Machinery:
The petitioner argued that depreciation on plant and machinery should be deductible as it is akin to hire charges for machinery used in the execution of works contracts. The Tribunal had disallowed this deduction, but the court found the argument persuasive. The court noted that the value of the machinery's wear and tear, quantified as depreciation, should be considered a deductible expense under Rule 6(4)(n)(iv) Explanation I, which includes "charges for obtaining on hire or otherwise machinery and tools used for execution of works contract." The court concluded that the depreciation claim is valid and should be allowed as it aligns with the statutory provisions and the principles laid down in the Supreme Court's judgment in Gannon Dunkerley & Co.

2. Deduction of Interest Charged by Clients, Postage, Telephone, Telex Expenses, and Vehicle Tax:
The petitioner claimed deductions for interest charged by clients, postage, telephone, telex expenses, and vehicle tax. The Tribunal did not address these deductions, but the court found that these expenses fall within the scope of "cost of establishment to the extent relatable to supply of labour and services" as per Explanation I to Rule 6(4)(n)(iv). The court held that these deductions should be allowed to avoid taxing amounts over and above the actual value of the goods, ensuring compliance with constitutional limitations.

3. Levy of Turnover Tax (TOT) on Materials Supplied by Clients:
The Tribunal upheld the levy of TOT on materials supplied by clients for use in the execution of works contracts, following the Supreme Court's judgment in Karya Palak Engineer, CPWD, Bikaner vs. Rajasthan Taxation Board, Ajmer. The court agreed with this position, stating that the value of materials supplied by the client, which goes into the execution of the works contract, should be included in the taxable turnover of the contractor.

4. Restrictive Legal Scope of Charging Provisions under Section 5B of the Act read with Rule 6(1)(c) of the Rules:
The court examined the restrictive legal scope of the charging provisions under Section 5B of the Act read with Rule 6(1)(c) of the Rules. The court emphasized that the charge under Section 5B should be confined to the value of the goods involved in the execution of the works contract and not exceed this value. The court interpreted Rule 6 in a manner that aligns with this principle, ensuring that the taxable turnover reflects only the value of the goods and not other components of the works contract.

Conclusion:
The court allowed the petition, setting aside the Tribunal's judgment to the extent it disallowed deductions for depreciation, interest charged by clients, postage, telephone, telex expenses, and vehicle tax. The court affirmed the levy of TOT on materials supplied by clients. The court's interpretation aimed to ensure that the taxable turnover under Section 5B reflects only the value of the goods involved in the execution of the works contract, in line with constitutional provisions and the Supreme Court's guidance in Gannon Dunkerley & Co.

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