2016 (1) TMI 873 - HC - VAT and Sales Tax

Demand of composition tax on service contract involving supply of labour, trenching and excavation works - Delhi Value Added Tax (DVAT) - Held that - The stand of the AA that, once the dealer opts for composition, he is required to pay tax on the aggregate value of all the contracts, including pure labour contracts does not appear to be based on a correct understanding of the provisions of the Act. When the provisions are read as a whole, and in the context of the object and purpose of the Act, it is seen that the legislative intention was not to bring pure labour contracts within the purview of the Act, much less within the purview of Section 6 (1) of the Act. - pure labour contracts would not be subject to levy of tax under Section 5 or 6 of the Act. - Decided in favor of assessee. Change in the nature of contract from works contract to service contract - Held that - Assessee did not produce copies of the composite works contract executed by it on which it paid the reduced amount of 4% tax in terms of Section 6(1) of the Act. - The Court is of the view that an opportunity ought to be given to the Assessee to produce all the relevant contracts before the AA to enable the AA to pass a fresh order on the issue. This would not unduly prejudice the Respondent. - Matter remanded back on the second issue.

Summary

Issues Involved:
1. Whether the labour contracts in question could be subject to levy of sales tax under Sections 4, 5, and 6 of the Delhi Sales Tax on Works Contract Act, 1999.
2. Whether the Tribunal erred in including receipts on account of supply of manpower/labour in the gross turnover of the Appellant.

Issue-wise Detailed Analysis:

1. Levy of Sales Tax on Labour Contracts:
The primary issue was whether pure labour contracts could be subjected to sales tax under the relevant sections of the Delhi Sales Tax on Works Contract Act, 1999. The court examined the provisions of the Act, particularly the definitions of 'works contract' and 'dealer' under Sections 2(1)(u) and 2(1)(f), respectively. It noted that the Act was intended to tax the transfer of property in goods involved in the execution of works contracts. Section 6(1) of the Act allowed for a composition scheme where dealers could pay a lump sum tax at 4% of the total contract value. However, the court clarified that the legislative intent was not to tax pure labour contracts. The court referred to similar interpretations by other High Courts, such as in the cases of H. S. Chandra Shekhar Hande v. State of Karnataka and Geogy George v. State of Kerala, which held that pure labour contracts were not liable to tax under analogous provisions in their respective states. Consequently, the court held that pure labour contracts would not be subject to levy of tax under Sections 5 or 6 of the Act.

2. Inclusion of Labour Receipts in Gross Turnover:
The second issue was whether the Tribunal erred in including receipts from the supply of manpower/labour in the gross turnover of the Assessee. The court noted that the Assessee initially declared a higher turnover, which included amounts from pure labour contracts, and later contended that these amounts were not taxable. The Tribunal had upheld the Assessing Authority's (AA) view that the Assessee, having opted for composition, had to pay tax on the entire turnover, including pure labour contracts. The court observed that the Assessee had not produced copies of the relevant contracts before the Tribunal, which led to confusion. During the hearing, the Assessee produced a copy of a composite works contract and expressed willingness to produce all relevant contracts before the AA. The court decided to remand the matter to the AA for a fresh examination, allowing the Assessee to present the necessary documents to distinguish between pure labour contracts and composite works contracts. The court set aside the assessment order dated 22nd March 2006 and the corresponding orders of the Appellate Authority and the Tribunal to the extent necessary for a fresh examination by the AA.

Conclusion:
The court concluded that pure labour contracts are not subject to sales tax under the Act. It remanded the matter to the AA for a fresh examination, allowing the Assessee to produce relevant contracts to clarify the nature of the contracts executed during the assessment year in question. The appeal was disposed of with these directions.