2017 (8) TMI 1148 - SC - VAT and Sales Tax

Works contract - levy of sales tax - case of appellant is that being a single indivisible contract, it was not permissible for the State to extract divisibility component therein and impose sales tax on the purported sale of goods - whether Works contract given to the assessee is divisible in nature, in the facts of the case, and hence the imposition of tax and penalty made under Section 7AA of the Rajasthan Sales Tax Act, 1954 is justifiable and sustainable in law? - Held that - there is no dispute that the contract in question was a works contract. The issue is altogether different, namely, that of divisibility. It may be mentioned that before Article 366(29A) of the Constitution was amended with effect from March 01, 1983, the test applicable was dominant nature test or degree of intention or overwhelming component test or degree of labour and service test - It is also made clear that the works contract is an indivisible contract, but, by legal fiction, is divided into two parts, one for the sale of goods and the other for supply of labour and services - This Court in Larsen and Toubro Limited and Another v. State of Karnataka and Another 2013 (9) TMI 853 - SUPREME COURT clarified that post amendment, i.e. with effect from March 01, 1983, these tests are no longer applicable. By virtue of the Forty Sixth Amendment to the Constitution, a single and indivisible contract is now brought on par with a contract containing two separate agreements. It has also now become a settled position in law that the State Governments have power to levy sales tax on value of material in execution of the works contract. This position is brought about by creating friction whereby the transfer of moveable property in a works contract is deemed to be sale, even though it may not be well within the meaning of Sale of Goods Act. In the present case, the assessing authority, after scrutinising the agreement in question between the assessee and the State Government, returned a finding of fact that manufacture and supply of PSC pipes, jointing material specials, valves, anchor blocks, etc. do not fall within the scopes of buildings, bridges, dams, roads and canals. It was also held that the agreement was clearly in two parts, namely, (i) sale and supply of PSC pipes, jointing material specials, valves, anchor blocks, etc. and (ii) the remaining part being supply of labour and services - the assessee has, in fact, admitted that it had no grievance against the finding that supply of pipes was nothing but the sale of pipes involved in the execution of the contracts and, therefore, it was excisable to sales tax - appeal dismissed - decided against appellant.

Issues Involved:
1. Whether the works contract given to the assessee is divisible in nature.
2. Whether the imposition of tax and penalty under Section 7AA of the Rajasthan Sales Tax Act, 1954, is justifiable and sustainable in law.

Detailed Analysis:

Issue 1: Divisibility of the Works Contract

Background and Facts:
The assessee, M/s. India Hume Pipe Co. Ltd., engaged in manufacturing and laying pipelines, entered into contracts with the Public Health and Engineering Department (PHED) of the State Government of Rajasthan for providing and laying pipelines. The contracts included manufacturing PSC pipes, laying them, and performing civil works. The Commercial Tax Officer determined that the contract was divisible, treating 75% of the contract value as consideration for the sale of goods, which was upheld by the appellate authority and the High Court.

Arguments by the Assessee:
The assessee argued that the contract was a single, composite contract for the supply of goods, labour, and services, and thus should be treated as an indivisible works contract. They relied on the Supreme Court judgment in Kone Elevator India Private Limited v. State of Tamil Nadu (2014) 7 SCC 1, which held that a composite contract for supply of goods, labour, and services should be treated as a works contract and not divisible.

Arguments by the Respondent:
The respondent contended that the works contract was rightly held to be divisible. They argued that two types of work orders were issued: one for the supply of pipes (considered a sale of goods) and another for civil work. They maintained that the supply of PSC pipes fell within the definition of 'sale of goods' under the Act, and thus, the contract was divisible.

Court's Analysis and Conclusion:
The Supreme Court agreed with the High Court's approach, noting that the contract's substantial part pertained to the cost of PSC pipes and other materials manufactured and supplied by the assessee. The Court held that the works contract executed by the assessee was indeed divisible. The Court distinguished the case from Kone Elevator India Private Limited, emphasizing that in the present case, the contract was found to be divisible based on factual findings. The Court reiterated that post the Forty-Sixth Amendment to the Constitution, a single and indivisible contract could be bifurcated into a contract for the sale of goods and another for services.

Issue 2: Imposition of Tax and Penalty under Section 7AA

Background and Facts:
The Commercial Tax Officer rejected the assessee's application for tax exemption, holding that the pipes supplied fell within the definition of 'sale of goods.' This decision was upheld by the appellate authority and the High Court.

Arguments by the Assessee:
The assessee argued that the contract should be treated as a single, indivisible works contract, and thus, the imposition of tax and penalties under Section 7AA was unjustifiable.

Arguments by the Respondent:
The respondent maintained that the imposition of tax and penalties was justified as the works contract was divisible, with the supply of pipes being considered a sale of goods. They cited the judgment in State of Karnataka and Others v. Pro Lab and Others (2015) 8 SCC 557, which supported the divisibility of contracts and the imposition of sales tax on the goods component.

Court's Analysis and Conclusion:
The Supreme Court upheld the findings of the lower authorities and the High Court, agreeing that the contract was divisible and that the supply of pipes constituted a sale of goods. The Court noted that the legislative and constitutional amendments allowed the State to levy sales tax on the value of materials in execution of works contracts. The Court found no fault with the High Court's judgment and dismissed the appeals with costs.

Conclusion:
The Supreme Court dismissed the appeals, holding that the works contract was divisible, and the imposition of tax and penalties under Section 7AA of the Rajasthan Sales Tax Act, 1954, was justified and sustainable in law. The Court emphasized the legal position post the Forty-Sixth Amendment, allowing the State to bifurcate a single contract into components for the sale of goods and services for tax purposes.

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