Introduction Under Sales Tax Laws, the transactions of ‘sale’ are liable to tax. The transaction of ‘sale’ is to be understood as per Sale of Goods Act, as held by Hon’ble Supreme Court in case of Gannon Dunkerly & Co. (9 STC 353)(SC). In this case, Hon’ble Supreme Court has interpreted the term ‘sale’ and has held that the transaction to be a sale, it should fulfill the minimum criteria as laid down in Sale of Goods Act. In fact, Hon’ble Supreme Court has observed as under in relation to transaction of sale:-
“Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods ……”
From above passage it is clear that to be a ‘sale’ following criteria should be fulfilled.
(i) There should be two parties to contract i.e. seller/ purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) There must be money consideration and
(iv) Transfer of property i.e. transfer of ownership from seller to purchaser.
Deemed sale by way of works contract
By 46th Amendment to the constitution, the concept of deemed sales was introduced which can be taxed under sales tax laws. One of the deemed sales is ‘works contract’ which has been introduced by Article 366 (29A)(b) in the Constitution of India.
A question arose as to whether the whole works contract price is liable to tax or only value relating to the goods. While analyzing the taxability of above deemed sale category of works contract, Hon’ble Supreme Court in case of Builders Association of India (73 STC 370)(SC) stated as under:
“Hence, a transfer of property in goods under sub-clause (b) of clause (29-A) is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. The object of the new definition introduced in clause (29-A) of article 366 of the Constitution is, therefore, to enlarge the scope of “tax on the sale or purchase of goods” wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub-clauses (a) to (f) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression “tax on the sale or purchase of goods” in entry 54 of the State List, therefore, includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract also. The tax leviable by virtue of sub-clause (b) of clause (29-A) of article 366 of the Constitution thus becomes subject to the same discipline to which any levy under entry 54 of the State List is made subject to under the Constitution..”
It can be seen that works contract is nothing but composite transaction for supply of goods and for supply of services. By the constitution amendment the composite transaction is notionally divided between goods and services.
It is also clear that to the extent of supply of goods the nature and character of supply is at par with normal sale of goods. In other words, all the criteria as applicable to normal sale i.e. as discussed above in Gannon Dunkerly & Co. (73 STC 370)(SC) are equally applicable to this deemed sale under works contract.
Therefore, even under works contract, the transaction should be against money consideration and if it is against any other consideration in form of goods or property etc., it cannot be a taxable transaction under sales tax laws, as it will not fall in the category of ‘sale’ but in the category of ‘barter’ or ‘exchange’.
Definition of ‘sale’ under MVAT Act, 2002
The definition of ‘sale’ in section 2(24) of MVAT Act, 2002 is as under;
“(24) “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly;
Explanation,-—For the purposes of this clause,—
(a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in section 4 of the Central Sales Tax Act, 1956;
(b) (i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration;
(ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of’ a works contract including , an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property….”
(emphasis supplied)
It can be seen that even under MVAT Act, 2002, the works contract transaction should be against cash/deferred payment or other valuable consideration.
‘Other valuable consideration’
The term ‘other valuable consideration’, in relation to sales tax laws, is also well understood by judicial pronouncements. Reference can be made to the judgment of Kerala High Court in case of M. Jaihind vs. State of Kerala (111 STC 374)(Ker).
“The essence of a sale lies in the transfer of property “for cash or for deferred payment or for other valuable consideration”. The definition of “sale” contained in the Kerala General Sales Tax Act, 1963 cannot be construed to include within its ambit those transactions which do not fall within the definition of “sale” as contained in the Sale of Goods Act, 1930 and the definition in the Kerala General Sales Tax Act, must therefore be construed accordingly. Section 4 of the Sale of Goods Act defines “sale” as a transaction whereby there is transfer of property in goods to the buyer for a price. Section 2(10) of the Sale of Goods Act defines “price as money consideration for ‘sale of goods’”. Thus, in order that a transaction may amount to a sale in accordance with the Sale of Goods Act, the consideration has to be money. The expression “cash or deferred payment or other valuable consideration” used in the definition of “sale” in section 2(xxi) of the Kerala General Sales Tax Act has to be construed to mean cash or some other monetary payment. The words “other valuable consideration”, which occur in section 2(xxi) of the Act can be interpreted by rules of ejusdem generis, as the payment by cheque, bills of exchange or other negotiable instruments. The words “deferred payment or other valuable consideration” used in section 2(xxi) of the Kerala General Sales Tax Act merely enlarge the ambit of the consideration beyond cash, but do not carry it outside the scope of the term “money”. If, the consideration is not money, but for other valuable consideration, it cannot then be a sale.”
Thus, the ‘other valuable consideration’ should also be in money terms like Bill of Exchange or Cheque etc..
Recent judgment of MST Tribunal in relation to SRA Project Hon’ble MST Tribunal had an occasion to decide one of the important issues in relation to alleged works contract transaction. The judgment is in the case of M/s Sumer Corporation (VAT SA No. 335 of 2015 dtd 3.5.2016).
In this case, the facts noted by the Tribunal are as under; “2. Appellant contends that he is engaged in the business of construction of buildings and tenements for Slum Rehabilitation Authority (SRA). He was assessed by the Assistant Commissioner of Sales Tax, (INV- 7), Investigation-A, Mumbai for the period 2006-07 under MVAT Act vide order dated 12/05/2014. It is alleged that in the said assessment, assessing authority levied tax on a transaction which is not a sale within the meaning of MVAT Act.
Appellant states that he has constructed buildings for SRA for which he did not receive any money consideration. No contract value in terms of money was fixed. According to him, as per agreement, he has received TDR (Transferable Development Rights), which he has sold and realised money out of that. He claims that the transaction was barter and cannot be taxed under MVAT Act.
He states that assessing authority assessed him as unregistered dealer (URD). He contends that the assessing authority has committed illegality by holding the sale value of TDR and proposed value of TDR as turnover and tax is calculated on the same. He states that TDR itself is not taxable under the MVAT Act. Hence, he contended that appeal be allowed.”
Appellant had submitted that the transfer of property in the given transaction was against allotment of TDR which itself was immovable property or goods but not money consideration. Therefore, it is barter or exchange and not a sale by works contract. The department had considered the money received by sale of TDR as receipt from SRA and levied tax on the same. This was objected to on the ground that sale of TDR is separate transaction and cannot be directly linked as money consideration from SRA.
It was also submitted that if at all the TDR is to be considered as consideration, there was no mechanism given in the law to convert the same in money consideration on which tax could be levied. Relevant judgments were cited.
Hon’ble Tribunal came to the conclusion as under:
“19. Taking into consideration the definition of sale under the MVAT Act as defined in section 2(24) the word ‘other valuable consideration’ would include anything that would directly or indirectly fetch some element of money or any other consideration. In the present case, TDR which is mentioned as Transfer Development Rights can be converted into money and in the present case already appellant has en-cashed some TDR and obtained considerable amount therein and, therefore, TDR would be a valuable consideration. Under these circumstances, the contention of the appellant that the transaction is barter or free of cost or without consideration cannot be accepted.”
Thus Tribunal has departed from settled position that there should be consideration in money terms from the buyer itself. Hon. Tribunal has expanded the meaning of ‘other valuable consideration’ in relation to contracts observing that the earlier judgments are now not relevant after 46th Amendment.
Hon’ble Tribunal has also not appreciated that there is no procedure laid down for conversion of TDR in to money term to compute tax. Hon’ble Tribunal has applied its own theory and held that the monetary value can be ascertained as market value by reference to ready reckoner for stamp duty at the relevant time of agreement. Thus the Tribunal held that transaction is taxable but changed the mode of computation. Lower authorities have levied tax on amount received against sale of TDR, whereas Tribunal has shifted it to market value on the date of agreement. The tax computation is left to the lower authorities.
Conclusion
Though works contract transactions are made taxable, it is equally important that all the criteria, as required to make a transaction a sale transaction, are also applicable to works contract. Further, assuming that consideration in form of other property is also valid than there should be a procedure, prescribed by law, to convert the value of such consideration in money terms. Like, under Service Tax, there are provisions to arrive at monetary value for levy of service tax when the consideration is other than money. Unless such provisions are available under MVAT Act itself, no tax can be attracted on barter transactions. Therefore, the judgment of Hon. Tribunal cannot be said to be final. A decision by higher judicial forums will lay down the correct position.
