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TMI Blog2017 (8) TMI 1148X X X X Extracts X X X X X X X X Extracts X X X X ..... that has arisen in these appeals is as to 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. 3) In order to have clarity in the matter and better grasp of the lis, it is necessary to glance through the relevant facts under which the aforesaid issue has arisen for consideration. 4) In the year 1954, the State Government of Rajasthan enacted the Rajasthan Sales Tax Act in order to tax the sales and purchase of any goods. The assessee is a company engaged in manufacturing and laying of pipelines for water supply schemes. The Public Health and Engineering Department (for short, 'PHED') of the State Government invited tenders for providing and laying of pipes complete with suitable jointing material specials, valves and construction of valve chamber, anchor blocks table crossing, including testing and commissioning of pipelines. On August 23, 1988, a work order was issued by PHED in favour of the assessee and the assessee, under the contracts/agreement dated January 11, 1989, agreed to provide PSC p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that it is not permissible to label a contract as a contract of sale of goods or as a Works contract depending on the proportion the component of supply of goods bears to the component of supply of labour and service. Unless there are clearly two contracts, one for supply of goods and the second for supply of labour and services, they cannot be treated separately. 9) Describing the nature of the contract awarded to the assessee, Mr. Datar emphasized that it was for the manufacture, supply and commissioning of pipelines for the supply of water to cities and towns from certain specified dams and the Indira Gandhi Canal by PHED. In this composite works contract, the assessee was inter alia required to: (i) establish a factory near the working site for manufacturing pipes of specified dimensions; (ii) test the pipes; (iii) undertake civil works like digging of trenches, etc.; (iv) lay the pipes with welding, jointing, etc. and fill up the trenches; and (v) sectional testing and commissioning of complete pipeline and other ancillary works. In support, he also referred to certain clauses of the work order which, according to him, amply demonstrate that the assessee was sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee in their factory at Kekri and were supplied to the State Government. It was, thus, submitted that the High Court has rightly interpreted the contract and arrived at a correct conclusion and on these facts, the judgment of this Court in Kone Elevator India Private Limited is not applicable. Instead he relied upon the judgment of this Court in the matter of State of Karnataka and Others v. Pro Lab and Others (2015) 8 SCC 557 in support of his submissions. 13) We have given due consideration to the submissions made by counsel for both the parties. 14) Thrust of the arguments of the counsel for the appellants is that the contract in question was a single, composite contract for laying pipelines for supply of water from dams and canals to certain cities and towns in the State of Rajasthan and it cannot be treated as divisible contract. In other words, the submission was 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. 15) In the first instance, it may be mentioned that the High Court has examined the nature of contract in question and has com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibility. 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'. This Court in Larsen and Toubro Limited and Another v. State of Karnataka and Another (2014) 1 SCC 708 clarified that post amendment, i.e. with effect from March 01, 1983, these tests are no longer applicable. 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. Affirming the aforesaid dicta in Larsen and Toubro Limited, this Court in Kone Elevator India Private Limited summarised the legal position in the following manner: "37. Having dealt with the aforesaid authorities, as advised at present, we shall refer to certain authorities as to how the term "works contract" has been understood in the contextual perspective post the constitutional amendment. In Hindustan Shipyard Ltd., the Court observed that the distinction between a contract of sale and a works contract is not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument, which is advanced in this case, was repelled and in the process judgment in Kone Elevator India Private Limited was also discussed and taken note of, in the following manner: "22. It was also argued that photograph service can be exigible to sales tax only when the same is classifiable as works contract. For being classified as works contract the transaction under consideration has to be a composite transaction involving both goods and services. If a transaction involves only service i.e. work and labour then the same cannot be treated as works contract. It was contended that processing of photography was a contract for service simpliciter with no elements of goods at all and, therefore, Entry 25 could not be saved by taking shelter under clause (29-A) of Article 366 of the Constitution. For this proposition, umbrage under the judgment in B.C. Kame case was sought to be taken wherein this Court held that the work involving taking a photograph, developing the negative or doing other photographic work could not be treated as contract for sale of goods. Our attention was drawn to that portion of the judgment where the Court held that such a contract is for use of skill and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or elements of works contract are satisfied in a contract then irrespective of additional obligations, such contract would be covered by the term "works contract" [because] nothing in Article 366(29-A)(b) limits the term "works contract" to contract for labour and service only.'" 19) The history of legislative and constitutional amendment pertaining to works contract is well known, which has been stated and restated by this Court in number of cases. The entire position is summarised in Pro Lab case as well and, therefore, it is not necessary to burden this judgment by repeating the same. Purpose would be served by reproducing paragraph 20 of the said judgment wherein the legal position is summarised as follows: "20. To sum up, it follows from the reading of the aforesaid judgment in Larsen and Toubro case that after insertion of clause (29-A) in Article 366, the works contract which was indivisible one by legal fiction, altered into a contract, which is permitted to be bifurcated into two: one for "sale of goods" and the other for "services", thereby making goods component of the contract exigible to sales tax. Further, while going into this exercise of divisibility, dominant in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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