2014 (9) TMI 110 - HC - VAT and Sales Tax

Works Contract - Point of taxation - Valuation - computation of taxable turnover - Interpretation of section 5F of the Act read with rule 6(2) and 6(3)(i) of the Rules - Exemption from tax - Held that - Rule 6(3) (i) merely provides another method, a direct manner, of determining the turnover on the basis of the value of the goods purchased and supplied or used in the execution of works contracts in that year, instead of arriving at the turnover under rule 6(2) by deducting certain items of expenditure from the gross receipts paid or payable to the contractor-dealer. As rule 6(3)(i) must be read harmoniously with section 5(1) or 5F of the Act, and as the charge to tax under the Act is similar to the charging provision in the Rajasthan Sales Tax Act, i.e., on the transfer of property in the goods involved in the execution of works contract, the law laid down by the Supreme Court in Gannon Dunkerley 1993 88 STC 204 (SC) would equally apply to the provisions of the Act, and the Rules made thereunder. A fortiori the value of goods, for the purposes of rule 6(3)(i), would not only include the cost of acquisition of goods by the contractordealer but also the transportation charges incurred by him to deliver the goods to the situs of the works wherein they are incorporated; cost of establishment relatable to the supply of material involved in the execution of the works contract; other charges borne by the contractor-dealer in relation to these goods till its incorporation in the works; the profits relatable to the value of such goods; etc. However profits on the labour component of, and the actual cost of incorporation in, the works would stand excluded as the value of the goods is only its value till the stage of its incorporation in the works, and not thereafter. The deemed turnover under rule 6(3)(i), (liable to tax under the Act), would be more or less the same as determined under rule 6(2) of the Rules. Where books of accounts are separately maintained, for works contracts, each year ascertaining profits arising therefrom would present no difficulty. Unlike other components, the profit element in the value of the goods may necessitate estimation in cases where the books of accounts are not maintained annually, but project-wise. Estimation of profit would then be a matter for determination by the assessing authority after taking into consideration all relevant factors including the profits which are, ordinarily, made in similar works executed by other contractors; profits earned by the contractor-dealer in works contracts executed by him in the previous years; the profit percentage norms accepted in the industry for works contracts of a similar kind; etc. While the assessing authority may adopt any other reasonable method, judicial pronouncements and authoritative texts would serve as a useful guide in such estimation. The charge to tax under section 5(1) read with Explanation VI to section 2(n) and section 2(s)(iii)(a)(i) of the Act, and under section 5F of the Act, is on the transfer of property in the goods involved in the execution of works contract - As the taxable event is the transfer of property in goods involved in the execution of a works contract, and the transfer of property in such goods takes place when the goods are incorporated in the works, the value of goods which would constitute the measure of tax is the value of goods at the time of its incorporation in the works - The turnover under rule 6(3)(i), for the purposes of rule 6(2), is the value of goods purchased and supplied or used in the execution of works contracts, i.e., the value of the goods when it is incorporated in the works - The word purchased in rule 6(3)(i) qualifies the word goods and only means that the contractor, executing the works, has purchased goods which are supplied or used in the works, and nothing more. The word purchased cannot be read in a manner as to elevate rule 6(3)(i), by implication, to that of a charging provision. While the assessing authority may adopt any other reasonable method, judicial pronouncements and authoritative texts, wherein the manner of estimation of profits for different works contracts have been dealt with, would serve as a useful guide in such estimation. A few of them have been referred to in para 41 supra. While the percentage of profits estimated at 15 per cent has been accepted as being reasonable in some of those cases, we may not be understood to have held that in all cases 15 per cent should invariably be accepted as the norm. We have merely indicated broadly the factors which the assessing authority should bear in mind while estimating the profit percentage in the facts and circumstances of the case before him - As the law now declared by us would operate from the inception, and since the exercise of revisional jurisdiction under section 20(2) of the Act is in accordance with the construction placed by us on rule 6(3)(i), the jurisdictional bar under section 20(2A) will not apply - Decided in favour of Revenue.

Summary

Issues Involved:

1. Scope and ambit of Rule 6(3)(i) of the Andhra Pradesh General Sales Tax Rules, 1957.
2. Whether revisional proceedings initiated by the Deputy Commissioner under Section 20(2) of the APGST Act, 1957 were barred by Section 20(2A) of the Act.
3. Interpretation of Section 5F of the APGST Act read with Rule 6(2) and 6(3)(i) of the Rules.
4. Whether Rule 6(3)(i) is an exception to Rule 6(2) for works contracts extending beyond one year.
5. Whether the word "purchase" in Rule 6(3)(i) signifies the cost of goods purchased by the assessee from the vendor.
6. Whether Rule 6(3)(i) deviates from the Supreme Court's judgment in Gannon Dunkerley & Co. v. State of Rajasthan.
7. Effect of the doctrine of "stare decisis" on the interpretation of Rule 6(3)(i).
8. Whether the orders of the STAT interpreting Rule 6(3)(i) bar the exercise of revisional jurisdiction under Section 20(2).

Issue-wise Detailed Analysis:

I. Scope and Ambit of Rule 6(3)(i):

Rule 6(3)(i) is not an exception but an extension of Rule 6(2). It provides another method of determining the turnover based on the value of goods purchased and supplied or used in the execution of works contracts in that year. The turnover under Rule 6(3)(i) includes the value of goods when incorporated in the works, not merely the purchase cost. The Division Bench in Media Communications [1997] 105 STC 227 (AP) read down Rule 6(3)(i) to mean the value of goods purchased and supplied or used in the execution of such contracts in that year.

II. Bar on Revisional Proceedings:

The revisional proceedings under Section 20(2) of the Act were not barred by Section 20(2A) as the orders of the STAT had conflicting views on the scope of Rule 6(3)(i). The law declared by the court operates retrospectively, and the exercise of revisional jurisdiction under Section 20(2) is in accordance with the construction placed on Rule 6(3)(i).

III. Interpretation of Section 5F:

Section 5F of the Act charges tax on the transfer of property in goods involved in the execution of works contracts. The value of goods constituting the measure of tax is the value at the time of incorporation in the works. Rule 6(3)(i) should be read harmoniously with Section 5F and Rule 6(2).

IV. Rule 6(3)(i) as an Exception:

Rule 6(3)(i) is not a beneficial provision or an exception to Rule 6(2). It is an extension providing another method of determining turnover. The word "purchase" in Rule 6(3)(i) qualifies the word "goods" and does not elevate the rule to a charging provision.

V. Word "Purchase" in Rule 6(3)(i):

The word "purchase" in Rule 6(3)(i) signifies that the contractor has purchased goods supplied or used in the works. It does not mean that the cost of acquisition of goods is the measure of tax. The value of goods at the time of incorporation in the works is the measure of tax.

VI. Deviation from Gannon Dunkerley Judgment:

Rule 6(3)(i) does not deviate from the Supreme Court's judgment in Gannon Dunkerley [1993] 88 STC 204 (SC). The value of goods for Rule 6(3)(i) includes the cost of acquisition, transportation charges, cost of establishment, and other charges till incorporation in the works. The profit element in the value of goods may necessitate estimation if books of accounts are not maintained annually.

VII. Doctrine of "Stare Decisis":

The doctrine of "stare decisis" does not apply as the Division Bench in Media Communications [1997] 105 STC 227 (AP) did not examine whether the purchase cost or the value at incorporation is the measure of tax. The law declared by the court is presumed to be the law from inception.

VIII. Orders of STAT and Revisional Jurisdiction:

The orders of the STAT interpreting Rule 6(3)(i) do not bar the exercise of revisional jurisdiction under Section 20(2). The law declared by the court applies retrospectively, and the jurisdictional bar under Section 20(2A) will not apply.

Conclusion:

1. The charge to tax is on the transfer of property in goods involved in the execution of works contracts.
2. The value of goods at the time of incorporation in the works is the measure of tax.
3. Rule 6(3)(i) provides another method of determining turnover based on the value of goods purchased and supplied or used in the execution of works contracts.
4. The word "purchase" in Rule 6(3)(i) qualifies the word "goods" and does not elevate the rule to a charging provision.
5. The value of goods includes the cost of acquisition, transportation charges, cost of establishment, and other charges till incorporation in the works.
6. The doctrine of "stare decisis" does not apply as the law declared by the court operates retrospectively.
7. The orders of the STAT do not bar the exercise of revisional jurisdiction under Section 20(2).

The reference is answered accordingly, and the cases shall be listed before the Division Bench hearing tax matters for further proceedings.