Introduction
Under Sales Tax Laws, there are certain
provisions whereby a dealer can discharge his tax liability by way of a
simple method, called ‘composition scheme’, instead of the regular
method of working out liability to pay tax. Such ‘composition scheme/s’
are normally designed for smooth sailing, particularly in relation to
works contracts.
However, sometimes a method, which looks simple
and easy, may become very heavy and burdensome, just because of its
interpretation. Dealer/s opting for compositions scheme/s have to be
very careful. One recent judgment on interpretation of a ‘construction
contract’ may be an example.
Construction Contract
Under
erstwhile Maharashtra Works Contract Act,1989, a composition scheme of
5% was announced for ‘Construction Contract/s’. In other words, if the
contract executed by the contractor was covered by a notified
construction contract, then the contractor could adopt this composition
scheme, attracting a composition rate of 5%.
Notification
The
relevant notification, notifying ‘construction contract’ under Works
Contract Act, was dated 8.3.2000, which is reproduced below for ready
reference:
“Notification No.WCA -25.00/C.R.-39/Taxation-1 dated the 8 th March,2000.
In
exercise of the powers conferred by sub-section (1) of Section 6A of
the Maharashtra Sales Tax on the Transfer of Property in Goods involved
in the Execution of Works Contracts (Re-enacted) Act, 1989 (Mah.XXXVI of
1989), the Government of Maharashtra hereby notifies the following
contracts to be the construction contracts for the purpose of
sub-section (1) of the said section 6A, namely: –
A. Contracts for construction of –
(1)
Building, (2) Roads, (3) Runways, (4) Bridges, Flyover bridges, Railway
overbridges, (5) Dams, (6) Tunnels, (7) Canals, (8) Barrages, (9)
diversions, (10) Rail tracks, (11) Causeways, Subways, Spillways, (12)
Water supply schemes, (13) Sewerage Works, (14) Drainage works, (15)
Swimming pools, (16) Water purification plants.
B. Any
contract incidental or ancillary to the contracts mentioned in paragraph
A above, if such contracts are awarded and executed before the
completion of the said contracts mentioned in A above.”
A look
at the above notification shows that two categories of transactions were
covered by above notification. One category was Part (A), which was
relating to main activity of construction, and, the other category i.e.
Part (B) covered incidental contracts to above main contract, subject to
the condition that they should be executed prior to completion of main
contract.
Controversy in case of Permasteelisa (India) Pvt. Ltd. (Sales Tax Reference No.55 of 2014 dated 6.5.2016) (BHC)
The facts leading to above judgment are noted by the Hon. High Court in para (4) of judgment as under:
“4
The Applicant is a Private Limited Company incorporated under the
Companies Act, 1956. It is also a registered dealer under the MVAT Act.
The Applicant is engaged in activity of fixation of glass walls. It is
the case of the Applicant that these glass walls also known as curtain
walls are used in the construction of modern buildings. These glass
walls are permanent walls and are constructed instead of usual brick
walls. In the modern age of architecture these glass walls have replaced
the traditional brick walls and many buildings are constructed and
developed using glass walls. If the glass walls are erected for a
building, then brick walls are not required as these glass walls have
all the characteristics of traditional brick walls as a result of which
there are modern high rise buildings and skyscrapers. In applying the
rates as applicable under the Work Contracts Act, the Applicant has
relied upon the Notification dated 8 March 2000 in terms of which
certain contracts specified therein are identified as construction
contract eligible for beneficial rate of tax. According to the
Applicant, the activities it undertakes are in respect of construction
contracts or contracts incidental or ancillary to the construction
contracts as set out in the Notification dated 8 March 2000 and it has
raised invoices and filed returns accordingly.”
Contention of dealer
As
the Maharashtra Sales Tax Appellate Tribunal, held that the activity
undertaken by the dealer did not fall within the said notification of
‘construction contract’, the dealer preferred a reference to Bombay High
Court and submitted that the glass walls are replacing traditional
bricks walls.
The arguments were two fold. One, it was a
contract for construction of building covered by Part A. In the
alternative, it was argued that it was covered by Part B as an
incidental contract. The meaning of ‘building’ in Development Control
Regulation for Greater Mumbai,1991 (DCR) was cited. Further literature
was submitted explaining the “glass walls” concept. On behalf of
department the submission was that the contract for glass walls was
neither a building construction contract nor incidental contract.
Observation of High Court
Hon. High Court referred to the contract terms for given transaction. In para 12 the Hon. High Court observed as under.
“12.
We are of the view that the contracts for construction of glass walls
executed by the Applicant would not constitute ‘contracts for
construction of buildings’ as mentioned in paragraph ‘A’ of the
Notification dated 8 March 2000 nor would they constitute contracts
incidental or ancillary to any contract as mentioned in paragraph ‘B’ of
the Notification dated 8 March 2000 issued under section 6A(I) of the
Works Contract Act and would not be covered by the said Notification. In
the judgment and order dated 9 July 2010 of the Tribunal in Second
Appeal No.106 of 2007, the case of the Applicant is interalia recorded.
In paragraph 3 it is stated as follows: “…
The work is carried out as under:
“i) Contract for structural glazing is entered into on completion of foundation and plinth.
ii) O n signing of the contracts intensive planning and designing is undertaken by Architect and Structural Engineers.
iii) A luminum, silicon and glass of the desired prescription is ordered.
iv) U pon completion of 5th Slab, structural glazing commences from the bottom i.e. first slab.
v) Structural glazing gets completed along with concrete construction.
vi) I nstead of convention brick wall, glass walls are used.
vii)
Structural glazing of the building is something without `brick walls’.
Instead of “brick wall” a “glass wall” is constructed.
It is
further recorded in paragraph 4 that in respect of the assessment, the
Applicant’s case was that it had undertaken the contract of fabrication
and erection of structural glazing works and the work of aluminum
glazing contract would qualify as a construction contract made for
building liable to composition rate of tax. Being aggrieved by the
Assessment Order passed by the Sales Tax Officer, the Applicant had
filed an Appeal before the Deputy Sales Tax Commissioner (Appeals) and
in the order dated 1 November 2006, the Commissioner of Sales Tax
(Appeals) has recorded that the Applicant contended that “he is a dealer
dealing in structural glazing aluminum cladding, doors and windows and
doors of buildings in Corporate Offices.”
After referring to
further judgments cited and an order of Advance Ruling in Karnataka on
the very same activity, in para 17 the Hon. High Court concluded its
decision as under:
“17 The fabricated structural glazings
prepared by the Applicant are transported to the site by the Applicant
and affixed on the exterior portion of the building, which building is
constructed by the building contractor who is a third party. There is no
dispute that Applicant is not a building contractor, in that, it is not
in the business of construction and erection of buildings. The activity
of affixing glass and erecting glass walls with aluminium frame work
requires an altogether different expertise, and is ordinarily
sub-contracted by the building contractor. The contention that some of
the walls in the building are not required to be constructed by laying
bricks and they are substituted by affixing the glass would not carry
the case of the Applicant further. We are also unable to accept the
contention that the work of the Applicant would be covered under the
term “incidental or ancillary activity to the construction of the
building” as that would have to have a direct nexus to the construction
of the building itself. Therefore, the alternative argument that the
contract would get covered by paragraph B of the said Notification which
includes incidental or ancillary contract to the contract of
construction also cannot be accepted. What meaning is to be attached to
the word “building” as mentioned in the Notification would have to be
determined considering the facts and circumstances of each case. In our
view, the reliance on the definition of ‘building’ in the Regulation
2(3)(11) of DCR is misplaced and would not assist the Applicant in any
manner. That definition is in the context and purposes of DCR and cannot
be imported and applied in the facts and circumstances of the present
case.”
The Hon. High Court has rejected the plea of the dealer about its contract being covered by category of Construction contract.
Conclusion
While
effecting the transaction, a dealer contemplates liability by making
reference to available provisions. The composition schemes are meant for
easy method of working of tax liability on works contracts. The dealer
may not be seeking any tax saving, but basically looks at an easy and
smooth method of working.
Under above circumstances, if the
dealer is caught in litigation in regard to interpretation litigation,
it may cost him heavily as the tax liability may exceed even his profit
margin.
It is pertinent to note that under present MVAT Act also
there is almost a similar notification for ‘construction contracts’.
Dealers will have to interpret its scope in terms of this judgment. It
may be suggested that the Government should clarify the scope of such
notifications in more specific terms so that dealers (contractors) can
compute their liability with certainty.
