2020 (3) TMI 6 - HC - VAT and Sales Tax

Classification of goods - 'hot mix material' transferred in a works contract - Whether the 'hot mix material' transferred in a works contract is to be taxed under the Act at the prescribed rates of its constituents or at general rate under the residuary clause? HELD THAT - From the decisions relied, M/S. LARSEN TOUBRO LIMITED ANOTHER VERSUS STATE OF KARNATAKA ANOTHER 2013 (9) TMI 853 - SUPREME COURT , the position emerges that the goods involved in the works contract are taxed as deemed sales. The restrictions under Article 286 of the Constitution of India would apply on the State Legislature while taxing the works contract. The State Legislature has power to prescribe uniform rate of tax on the goods involved in the works contract inspite of the fact that different rates are prescribed under the Act for the constituents involved therein. Further that identity of the goods transferred is lost in the process does not prevent them from being goods. The contention of learned counsel for the State that the goods when being incorporated were transferred in some other form and hence ingredients lose their identity, cannot be accepted, as there is a deemed sale of the ingredients of 'hot mix material' and the loss of identity of goods does not prevent them from being goods for the purpose of deemed sale. The State of Haryana has not prescribed any uniform rate for material used in the works contract. Cement, bitumen, rori etc. which are to be deemed to be sold cannot be taxed at general rate by resorting to residuary clause, these are to be taxed as per the rates prescribed. The residuary clause will come into play only in case the goods are not covered under any of the Schedule to the Act. Even otherwise it would restrict the full play to be given to the deeming fiction of sale of goods involved in works contract. There is another angle to view the contention of the State, if the argument is taken to the logical conclusion and it is held that transfer in works contract is not of the ingredients of hot mix material but of the new product, in that eventuality the restrictions of Article 286 of the Constitution of India and Sections 14 and 15 of the Central Sales Tax Act, 1956 would not apply for taxing the deemed sale - Such an eventuality would be against the law laid down by the Apex Court that restrictions of Article 286 of the Constitution of India will apply and that 46th amendment of the Constitution of India has only given a deeming fiction of sale of goods involved in the works contract and has not given separate or equivalent Entry in List II for levy of tax on sale or purchase of goods. Thus, it is held that the goods transferred in execution of works contract will not be taxed at general rate but as per the rates prescribed of constituents of the 'hot mix material'. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
- Whether the 'hot mix material' transferred in a works contract is to be taxed under the Haryana Value Added Tax Act, 2003 at the prescribed rates of its constituents or at the general rate under the residuary clause.

Detailed Analysis:

Issue 1: Taxation of 'Hot Mix Material' in Works Contracts

The core issue revolves around the appropriate tax rate for 'hot mix material' used in works contracts. The appellant, engaged in road and bridge construction, contested the assessment order that taxed 'hot mix material' under the residuary clause at a general rate.

Legal Framework:
- Article 286 of the Constitution of India restricts the imposition of state taxes on sales or purchases that occur outside the state or in the course of import/export.
- Section 7 of the Haryana Value Added Tax Act, 2003 specifies tax rates for different categories of goods, with a general rate for unspecified items.

Judicial Precedents:
1. Builders Association of India v. Union of India (1989):
- Upheld the constitutional validity of the 46th Amendment, which introduced the concept of deemed sales in works contracts.
- Emphasized that the transfer of property in goods involved in works contracts is subject to the same restrictions as any other sale under Article 286.

2. Gannon Dunkerley & Co. v. State of Rajasthan (1993):
- Clarified that even in indivisible works contracts, there is a deemed sale of goods involved.
- Allowed state legislatures to prescribe a uniform tax rate for goods used in works contracts, distinct from rates for individual goods.

3. Larsen and Toubro Limited v. State of Karnataka (2014):
- Summarized that for a deemed sale in a works contract, there must be a transfer of property in goods, which can be taxed even if the goods lose their identity.
- Reinforced that the nature of the contract (whether for sale or service) does not affect the applicability of sales tax on materials used.

4. State of Karnataka v. Durga Projects Inc. (2018):
- Rejected the notion that a residuary entry could imply a uniform rate for goods in works contracts.
- Highlighted that specific rates for goods in schedules take precedence over general rates.

Court's Analysis:
- The court noted that the 46th Amendment and subsequent judicial interpretations established a deemed sale for materials in works contracts.
- The State of Haryana had not prescribed a uniform rate for materials in works contracts. Therefore, materials like cement, bitumen, and rori should be taxed at their prescribed rates, not the general rate.
- The court rejected the state's argument that the transformation of materials into 'hot mix material' negates their individual tax rates, emphasizing that the loss of identity does not prevent the materials from being taxed as goods.

Conclusion:
- The court concluded that the 'hot mix material' used in works contracts should be taxed according to the rates prescribed for its constituents, not under the general rate of the residuary clause.
- The appeal was allowed, setting aside the orders that taxed 'hot mix material' at the general rate.

Final Judgment:
The appeals were allowed, and it was held that the goods transferred in the execution of works contracts should be taxed at the rates prescribed for the constituents of the 'hot mix material'.