June 2019

WORKS CONTRACT VIS-A-VIS VALUE OF TAXABLE TURNOVER

G. G. GOYAL | Chartered Accountant
C. B. THAKAR | Advocate

INTRODUCTION

The taxation of a works contract under sales tax has been the subject of much debate in the pre-GST era. The issues arising therefrom are manifold. One such issue is the valuation of taxable turnover under a works contract.

 

A ‘Works Contract’ is a composite contract involving both goods and labour. As per the statutory provisions only value relating to goods can be taxed under sales tax laws. But determining the value of goods has remained mired in controversy.

 

GOODS USED BUT NOT GETTING TRANSFERRED

This is one of the issues being hotly discussed. The case of Commissioner of Sales Tax vs. Matushree Textiles Limited (132 STC 539)(Bom) is, amongst others, one of the earliest judgements, laying down that even if goods are not getting transferred physically but their effect gets transferred, it will be considered a works contract.

 

In this case, dyes and chemicals were used for dyeing of cloth. And one of the arguments was that since the dyes /chemicals are washed away there is no transfer of property in goods for it to become a part of a works contract.

 

But the Bombay High Court turned down this argument, holding that even passing on of colour, in the form of a colour shade on cloth, is transfer of property in goods, and thus it comes under a works contract. However, valuation was not discussed in this judgement.

 

A case where the issue of valuation arose was that of Enviro Chemicals vs. State of Kerala (39 VST 434)(Ker). The activity involved here was the treatment of effluent water. The dealer used chemicals to purify water and such purified water was then allowed to flow into a river. The argument was that since there is no transfer of property to the employer in any form, there is no taxable value as the use of materials is only as consumables.

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