By G. G. Goyal
Chartered Accountant
C. B. Thakar
Advocate
Introduction
Taxation of Works Contract
has always remained a debatable issue even under the VAT era. As per the position
prior to GST, Works contract was separate subject by itself as it was
considered as deemed sale. Article 366 (29A)(b) provided the definition of
‘works contract’ which is as under:
(29A) tax on the sale or
purchase of goods includes:-
(a) …
(b) a tax on the transfer of property in
goods (whether as goods or in some other form) invoked in the execution of a
works contract;
As per the definition,
‘transfer of property in goods’ is considered as deemed sale. The issue arose
whether it is single transaction attracting one rate of tax on the total
contract value or transfer of various goods involved in the same so as to
attract respective rates on the goods so transferred? There are a number of
judgements throwing light on the given disputable issue.
Recent judgement of M.S.T. Tribunal
Recently, similar issue
arose before Hon. M.S.T. Tribunal in case of Sai Construction (S.A.No.375
of 2016 dated 31.8.2017) and the period involved was 2008-2009. The
short facts of the appeal narrated by the Hon. Tribunal can be reproduced as
under:
4. Shri V. P. Patkar,
learned Advocate, has explained the entire case and process of work done by the
appellant. The appellant is engaged in execution of works contract in general
and construction contract in special. During the period under assessment,
appellant has constructed road bridges. Contracts were awarded by Executive
Engineer Public Works Department, Miraj. For the purpose of construction of
said bridge, appellant purchased cement,
and metals. Said material is mixed together which is normally called
mortar and used in the construction of bridge. Appellant is assessed u/s. 23(3)
and taxable sale of goods is calculated according to the provisions u/r. 58.
According to Shri Patkar, lower authorities have erred in levying tax @ 12.5%
on sale of ‘sand’ and ‘khadi’ used in the execution of contract. According to
the appellant, sand and khadi is taxable @ 4%. Hence, it should be taxed
accordingly. Concrete prepared from sand and khadi is not purchased. It is
prepared during the process for use in the construction of bridge. Hence
concrete is not purchased by the dealer and not liable to tax @ 12.5%. Shri
Patkar, learned Advocate relied upon various judgments and authorities. We will
mention and discuss the same as we proceed further.
The arguments of the
department are also narrated by the Tribunal as under:
5. Shri S. S. Pawar,
learned Asst Commissioner of Sales Tax (Legal), appeared on behalf of revenue,
he has vehemently argued the case and also relied on various judgments of
different High Courts and Apex Courts. According to Shri S. S. Pawar, it is
important to ascertain what are the goods actually used in the execution of
said contract. The goods used in the contract are liable to tax u/s. 6 of MVAT
Act. The appellant has purchased sand, khadi, cement and they are mixed in
specified proportion. This mixture is called ‘concrete’ or ‘mortar’. Mortar is
then poured in the designed patterns at site. Then what is used in contract is
important. Shri Pawar further stated that, according to the theory of
accretion, goods accreted at the site are subject matter of tax according to
the deeming provisions as promulgated in sub clause (b) of clause 29A of
Article 366 of the Constitution. Transfer of property in the goods under clause
29A(b) of Article 366 is deemed to be sale of the goods involved in the
execution of works contract by the person making the transfer and the purchases
of those goods by the persons to whom such transfer is made. It is not
necessary to ascertain what dominant intention of the contract is.
Based on above two sets of
arguments, the Tribunal referred to historical background of the works contract
taxation and also analysed various judgements cited before it. After having all
the discussion, the Tribunal observed as under:
10. Considering all judgments
and authorities, we have come to the conclusion that, after 46th
amendment to the constitution it has become possible for the state to levy
sales tax on the value of goods involved in the works contract in the same way
in which the sales tax was leviable on the price of the goods and material
supplied in a building contract which has been entered into two distinct and
separate parties as goods and services (Builders Association of India,
1989)(SC) provisions in section 2(24)(b)(ii) clearly interpret that, sales
means “transfer of property in goods whether as goods or in some other form
involved in the execution of works contract.” It clearly shows that, goods can
be used as goods in the same form or in some other form, it does not make
difference. It clearly indicates that, the goods which are appropriated to the
contract in which property is transferred are liable to tax in the State. When
the property is transferred to the buyer, it may be in some other form.
According to lower authorities, the theory of accretion is important. In the
present case, movable goods in the form of mortar is accreted as per section 6
of the W.C.T. Act, 1989, but not under the MVAT Act, 2002. We do not agree with
this contention of the revenue. Sand and Khadi purchased and appropriated to
the contract of construction of bridge is important aspect for levy of tax.
When transfer of property in the goods is to be held liable to tax then, goods
appropriated to the contract are important. In the present case, sand and khadi
are appropriated to the contract, in which property is transferred, as these
are the goods involved in the execution of bridge construction contract. In
W.C.T. Act, 1989, levy of tax explained in section 6. In section 6 goods were
liable to tax as per their form. Whether goods are sold in the same form or
otherwise was an important aspect but under the provisions of the MVAT Act and
as held by the Apex Court in Builders Association case (cited supra)
state is entitled to levy tax on the value of goods involved in the execution
of contract in the same way in which sales tax was leviable on the price of
goods and material supplied in building contract.
11. Considering all these
aspects and discussions made above, lower authorities have erred in applying
the rate of tax on the goods involved in the execution of contract. In our
considered opinion, in the present case, sand and khadi involved in the
execution of contract is liable to tax at price as arrived at after deducting
various items as per Rule 58 of MVAT Rules. Sand and khadi is used in the form
of mortar and thereafter the transfer of property takes place in the form of
bridge does not make any difference. Constitution article 366(29A)(b) clearly
says that, it is a deemed sale of goods involved in the execution of contract
whether as goods or in some other form. Hence, the tax levied @ 12.5% on
concrete/mortar is liable to be set aside. It requires fresh calculation at
specified rate of sand and khadi. Hence, the matter is required to be remanded
back to the first appellate authority.
Thus, the Tribunal has
provided useful guidelines about nature of goods transferred in a works
contract. It will be useful for discharging correct tax liability.
Conclusion
Under Works Contract, there
are a number of disputes including whether the transaction is a works contract
or not? Similarly, there are disputes about valuation of goods transferred. As
far as rate of tax is concerned, there are also a number of disputes. However,
by the above judgement, there is a very useful guideline to interpret nature of
goods for the purpose of applying rate of tax. _
