2016 (7) TMI 588 - HC - VAT and Sales Tax

Classification - Levy of vat on goods used in execution of works contract - manufacturer of construction equipment - The assessee also re-sells machines used in execution of works contract after purchasing the same in case of inter-state sale. - GVAT - Central question is whether such goods would fall under entry 35 pertaining to machinery including parts and accessories thereof used in the execution of works contract and invited tax at the rate of 4% and additional rate of 1% or the goods would fall under residuary entry inviting tax at higher rate. Held that - Entry 35, we may recall, pertains to machinery including parts and accessories thereof used in the execution of the works contract. Admittedly, there is no separate entry for motor vehicles. Therefore, when a question arises where certain equipment is a machinery which is used in the execution of the works contract, the fact that it also happens to be a motor vehicle, would be wholly insignificant. In other words, if an equipment satisfies description of being a machinery used in execution of works contract, the fact that it also happens to be a motor vehicle, would not change this fundamental feature which would be sufficient to bring the equipment within the purview of entry 35. In absence of any specific entry pertaining to motor vehicle, merely because a certain equipment satisfies description of being a motor vehicle, in addition to being a machinery used in execution of works contract, cannot carry it to the residuary clause. Prior to 15.2.2010, any construction equipment which was a machinery used for execution of works contract even if it happened to be a vehicle would fall within entry 35. - Decided in favor of assessee.

Issues Involved:
1. Whether the Tribunal erred in classifying all the equipment, goods, products, and vehicle machinery used in the execution of works contracts under entry 35 of the VAT notification and thus liable to tax at the prescribed rate.
2. Whether the Tribunal failed to independently verify if the items were actually used for the execution of works contracts as required by entry 35 of the notification.
3. Whether the Tribunal erred in not classifying the equipment and products resold by the opponent as "Motor Vehicle Machineries/Equipments" and thus applicable under entry 87 (Residuary Entry) of Schedule II of the VAT Act.

Detailed Analysis:

Issue 1: Classification under Entry 35
The primary issue was whether the equipment and machinery used in the execution of works contracts should fall under entry 35 of the notification issued under section 5(2) of the Gujarat Value Added Tax Act, 2003, and thus be taxed at a lower rate. The Tribunal concluded that the equipment was machinery used for works contracts and should be classified under entry 35, which attracted a lower tax rate. The Tribunal rejected the State's argument that these were motor vehicles and should be taxed under the residuary entry, which had a higher tax rate. The Tribunal's decision was based on the extensive literature and evidence provided by the assessee, showing that the equipment was indeed used for construction-related projects.

Issue 2: Independent Verification of Use
The Tribunal did not provide an independent finding on whether each item was used for the execution of works contracts. The State argued that this omission was an error. However, the Tribunal relied on the fact that the equipment was used in construction projects and thus qualified as machinery used in works contracts. The Tribunal's decision was supported by the fact that the assessee had applied to the competent authority under section 80 of the Act for determination of disputed questions, which included the specific query about the equipment's use.

Issue 3: Classification as Motor Vehicle Machinery
The State contended that the equipment should be classified as "Motor Vehicle Machineries/Equipments" and taxed under the residuary entry. The Tribunal, however, found that even if the equipment was categorized as motor vehicles under the Motor Vehicles Act, it did not exclude them from entry 35 if they were used for executing works contracts. The Tribunal noted that the competent authority had not disputed that the equipment was machinery or that it was used in works contracts. The Tribunal's decision was reinforced by the fact that the government had amended entry 35 in 2010 to explicitly exclude machinery in the form of motor vehicles, indicating that prior to the amendment, such machinery was included under entry 35.

Conclusion:
The High Court upheld the Tribunal's decision, agreeing that the equipment used in works contracts should be classified under entry 35 and not the residuary entry. The Court noted that the equipment's classification as motor vehicles under the Motor Vehicles Act was irrelevant to their classification under the VAT Act. The Court also highlighted that the 2010 amendment to entry 35, which excluded motor vehicles, indicated that such vehicles were previously included under entry 35 if they were used in works contracts. The Court dismissed the State's appeal, ruling in favor of the assessee.

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