2017 (12) TMI 1074 - HC - VAT and Sales Tax

Works contract or contract for Sale - M/s. Rashtriya Chemicals & Fertilizers Ltd. (RCF) had engaged the applicant apparently for designing, engineering, supplying, erection, installation and Commissioning of the Trombay V Expansion Project at RCF site for a total price of about ₹ 22 crores under a contract - The Assistant Commissioner of Sales Tax Assessment treated the transaction as a transaction of sale - The applicant produced the relevant documents and correspondence before the Deputy Commissioner of Sales Tax claiming that the contract was a divisible contract for supply of labour and could not be treated as a contract for sale. Held that - in the facts of the present case the contract was clearly one for supply and erection of equipment, supply of equipment being dominant purpose. No doubt the State of Maharashtra had enacted the Maharashtra Sales Tax on Transfer of property of goods involved in works contract Act only in 1982 but the contention that during the period under consideration 1979 80 and 1980 81 the State had no power to levy the tax on Works contract will not be of any assistance to the applicant - the contract in the instant case is predominantly for supply of equipment, erection and installation. FPDIL was required to carry out all preparation work , provide foundation, provide all civil works required, the equipment was merely supplied and installed. In the instant case, even assuming a contract was a works contract, we are of the view that the labour element was only incidental. The contract is itself described as a divisible contract. The intention of parties as derived from the diverse contractual provisions set out above leaves us in no manner of doubt that the contract in question was not a works contract but the dominant intention was of sale of equipment. Having reached that conclusion the question referred for our opinion is answered in the affirmative, in favor of Revenue. Appeal dismissed - decided against assessee.

Summary

Issues Involved:
1. Whether the impugned supplies of materials were sales liable to tax under the Bombay Sales Tax Act, 1959.
2. Whether the contract between the applicant and RCF was a works contract or a sales transaction.

Issue-wise Detailed Analysis:

1. Whether the impugned supplies of materials were sales liable to tax under the Bombay Sales Tax Act, 1959:

The primary question was whether the supplies made by the applicant's Mumbai unit to RCF were sales liable to tax under the Bombay Sales Tax Act, 1959. The Tribunal had concluded that the transaction was a sales transaction. The applicant contended that the contract was for design, erection, and commissioning of the plant, which should not be susceptible to sales tax. However, the Tribunal found that the transaction involved a clear breakup of the total contract price into costs of materials, compressors, and other related costs, thus treating it as a sales transaction liable to tax under the said Act. The Tribunal's decision was based on the nature of the contract and the breakup of the total contract price, which indicated a sale of goods rather than a works contract.

2. Whether the contract between the applicant and RCF was a works contract or a sales transaction:

The applicant argued that the contract was a works contract, involving design, engineering, manufacture, testing, supply, transportation, erection, and pre-commissioning of compressors, and hence not liable to sales tax. The applicant relied on several judgments to support their claim, including cases where contracts for installation and erection were considered works contracts.

However, the respondent argued that the contract was essentially for the supply of equipment, with the erection and commissioning being secondary. The contract was described as a "divisible works contract," indicating separate components for supply and installation. The respondent pointed to various clauses in the contract that supported the view that the primary transaction was the supply of equipment.

Upon examining the contractual provisions, it was found that the contract largely involved the manufacture, inspection, shipping, clearance, and dispatch of equipment, with a significant portion of the contract price attributed to the cost of compressors and related equipment. The erection and installation costs were relatively minor in comparison. The contract also included detailed provisions for the supply of equipment and performance guarantees related to the equipment, rather than the installation work.

The court considered the dominant nature test and other relevant tests from the Kone Elevator judgment to determine the nature of the contract. It concluded that the contract was predominantly for the supply of equipment, with the erection and installation being incidental. The contract was described as a "divisible contract," further supporting the view that it was not a works contract.

Based on the analysis of the contractual provisions and the application of relevant legal tests, the court held that the contract was not a works contract but a sales transaction. The question referred to the court was answered in the affirmative, in favor of the revenue and against the applicant, confirming that the supplies were liable to tax under the Bombay Sales Tax Act, 1959.

Conclusion:

The court concluded that the contract between the applicant and RCF was a sales transaction, not a works contract, and the supplies made under the contract were liable to tax under the Bombay Sales Tax Act, 1959. The question referred to the court was answered in the affirmative, in favor of the revenue, with no order as to costs.