WORKS CONTRACT VIS-A-VIS VALUE OF TAXABLE TURNOVER
G. G. GOYAL | Chartered Accountant C. B. THAKAR | Advocate
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
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.