2014 (5) TMI 457 - HC - VAT and Sales Tax

Nature of agreement - Works contract or contract of sales - supply, laying and polishing of the mosaic tiles - involvement of manufacturing activity - definition of works contract u/s 2(u) of the TN GST Act, 1959, which includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture , of any moveable or immoveable property and the conclusion of the AO and first appellate authority - Held that - When the dealer purchases a commodity, which had already suffered tax and out of such commodity, manufactures another commercial commodity and uses the commercial commodity in the execution of works contract, if such commercial commodity purchased by the dealer is not used in the execution of the works contract in the same form in which it was purchased, in such case, what is used in the execution of works contract is a distinct and different commodity. Assessee has admittedly purchased sand, cement, colour and so on, which goods had suffered tax - But when these goods were used in the manufacturing activity, those goods are transformed into another commercial commodity, namely, mosaic - The transaction would be considered as one of sale - Relying upon Apparels and Handloom Exporters Association and Others v. State of Tamil Nadu and Others 2001 (9) TMI 1114 - MADRAS HIGH COURT this Court considered the meaning of whether as goods or in some other form employed in Article 366 (29-A) of the Constitution of India and Observed that whether the goods purchased by the dealer are used in the works contract in the same form and even after such use, the commodities used lose their character are the test to determine as to whether it is a works contract or sale. In a case of manufacture of mosaic tiles, in our opinion, the same yardstick cannot be applied inasmuch as the goods used by the dealer transformed into a different good, viz., mosaic and the cement, colour, sand and chips lose their individual identity by that transformation. In that sense, the transaction of a mosaic to the contractor would amount to sale and not works contract. - All the questions raised are answered against the assessee - Revisions are dismissed - Decided against assessee.

Summary

Issues:
1. Interpretation of works contract under Section 2(u) of the Tamil Nadu General Sales Tax Act, 1959.
2. Entitlement to deduction under Section 3B(2)(b) of the Tamil Nadu General Sales Tax Act, 1959.
3. Appreciation of statutory mandatory deduction under Section 3B(2)(b) for goods used in works contract.

Issue 1:
The primary issue in this case revolves around the interpretation of a works contract under Section 2(u) of the Tamil Nadu General Sales Tax Act, 1959. The question raised was whether the contract for "supply, laying and polishing of mosaic tiles" qualified as a works contract, considering the involvement of "manufacture." The Assessing Officer initially denied exemption, considering the transformation of raw materials into mosaic tiles as a sale. The first appellate authority granted exemption only for certain goods, while the Appellate Tribunal ruled in favor of the Revenue, deeming the transactions as sales, not works contracts. The Court referred to precedents and emphasized that for a transaction to be classified as a works contract, the goods used must retain their original form or character after being used in the contract. In this case, the transformation of raw materials into mosaic tiles led to a distinct commercial commodity, indicating a sale rather than a works contract.

Issue 2:
The second issue pertains to the entitlement of the petitioner to a deduction under Section 3B(2)(b) of the Tamil Nadu General Sales Tax Act, 1959. The petitioner claimed the deduction based on purchasing goods locally from registered dealers and using them in the works contract in the same form as purchased. However, the Tribunal's decision to disallow the deduction was upheld by the Court. The Court highlighted the importance of the goods retaining their original form in determining eligibility for deductions under the Act, emphasizing that the transformation of goods into a different commodity would negate the entitlement to such deductions.

Issue 3:
The final issue concerns the appreciation of the statutory mandatory deduction under Section 3B(2)(b) for goods used in works contracts. The Tribunal's interpretation of the provision was upheld by the Court, emphasizing that the language of the statute required goods to be used in the works contract in the same form as purchased to qualify for the deduction. The Court reiterated that the distinct transformation of goods into a different commercial commodity indicated a sale rather than a works contract, thereby justifying the Tribunal's decision.

In conclusion, the Court dismissed the Tax Case Revisions, upholding the Tribunal's decision that the transactions in question constituted sales rather than works contracts. The judgment extensively discussed the legal principles surrounding works contracts, deductions under the Sales Tax Act, and the importance of goods retaining their original form in determining tax implications.