CA. O.P. Agarwalla
15 January 2008
I think my following writeup (written before the order of Guwahati High Court) may also help you:-
Whether denying the benefit of restrictions of section 15 of the CST Act in finding the taxable value of property in goods transferred during the execution of works contract is valid?
Reiterating the decision of the Supreme Court in Builders association’s case (1989), the five judges constitution bench in Gannon Dunkerley’s case (1993) has declared that:- “The provisions of sections 3, 4, 5 and sections 14 and 15 of the Central Sales Tax Act, 1956, are applicable to a transfer of property in goods involved in the execution of a works contract covered by article 366(29-A)(b).”
Section 15 of the CST Act, 1956 reads as under:-
Restrictions and conditions in regard to tax on sale or purchase of declared goods within a State.-Every sales tax law of a State shall, in so far as it imposes or authorises the imposition of a tax on the sale or purchase of declared goods, be subject to the following restrictions and conditions, namely:-
(a) the tax payable under that law in respect of any sale or purchase of such goods inside the State shall not exceed four per cent of the sale or purchase price thereof ;
(b) where a tax has been levied under that law in respect of the sale or purchase inside the State of any declared goods and such goods are sold in the course of inter-State trade or commerce, and tax has been paid under this Act in respect of the sale of such goods in the course of inter-State trade or commerce, the tax levied under such law shall be reimbursed to the person making such sale in the course of inter-State trade or commerce in such manner and subject to such conditions as may be provided in any law in force in that State;
(c) where a tax has been levied under that law in respect of the sale or purchase inside the State of any paddy referred to in sub-clause (i) of clause (i) of section 14, the tax leviable on rice procured out of such paddy shall be reduced by the amount of tax levied on such paddy;
(ca) where a tax on sale or purchase of paddy referred to in sub-clause (i) of clause (i) of
section 14 is leviable under the law and the rice procured out of such paddy is exported out of India, then, for the purposes of sub-section (3) of section 5, the paddy and rice shall be treated as a single commodity;
(d) each of the pulses referred to in clause (via) of section 14, whether whole or separated, and whether with or without husk, shall be treated as a single commodity for the purposes of levy of tax under that law.
The argument raised by the revenue is:- “The restrictions of section 15 of CST Act is only on sales and purchased of declared goods, but in case of works contract, when property of declared goods are transferred in works contract, due to change in form the goods ceases to remain declared goods.”
In AVAT Act, there is no provision for charging tax at the prescribed lower rate in case of transfer of property in declared goods in the execution of works contract. Unless and otherwise, it can be proved that in execution of works contract, transfer of property in goods can not be occurred in the form of declared goods, the such lapse of ignoring section 5 of CST Act may be challenged as ultra-vires.
Now, let us find out, whether there is any probability of the transfer of property in goods in the form of declared goods, we should first consider few decisions in the related issues:-
 097 STC 0503- - Tamil Nadu Mosaic Manufacturers Association Vs. State of Tamil Nadu and Another
“The assessing authorities under the Act, while computing the taxable turnover of a dealer under sub-section (2)(b) of section 3-B of the Act in individual cases, are bound to bear in mind the above principles laid down by the Supreme Court in Pyare Lal's case  37 STC 319 and Telangana Steel Industries' case  93 STC 187 and what we have said in the preceding paras 10 and 11. For all the reasons stated above, we have no hesitation in holding that the condition prescribed by section 3-B(2)(b), that in order to claim deduction from the total turnover in respect of the amounts for which the goods specified under First or Second Schedule are purchased, such goods must be used in the execution of the works contract in the same form in which they were purchased, will not result in levying sales tax at more than one stage contravening section 15(a) of the Central Sales Tax Act and article 286(3) of the Constitution and on that ground section 3-B is not liable to be struck down. Point No. 1 is answered accordingly.”
(In this case the question raised before the court was that whether such restrictions regarding goods used in the works contract should be in the same form, for getting the benefit of section 15 of CST Act, 1956.)
 132 STC 539--Commissioner of Sales Tax v. Matushree Textile Ltd.
". . . To constitute sale under the (Maharashtra Sales Tax on the Transfer of Property in Goods involved in the Execution of Works Contracts Act, 1989), the test is whether the materials used in the execution of a works contract pass to the contractee either in its original form or in some other form? If it passes, then there is deemed sale of the materials used in the execution of the works contract even if there is no specific agreement between the parties for sale of materials, even if the price for such sale is not agreed between the parties and even though the materials are not delivered as materials".
(From the above para, it is clear that the court is agreeing that even in works contract, the materials used in works contract may pass in its original form. If there is such probability, are the provisions of AVAT Act ,denying benefit of restrictions of section 15 of the CST Act, 1956 in case of property transferred in execution of works contract can be challenged as ultra vires of the Constitution?)
In the opinion of author, the argument that “Benefit of section 15 of the CST Act can not be `provided in case of works contract, because after transfer of property of declared goods such goods ceases to remain declared goods” is not sustainable.
As discussed earlier, the clause 29(A) (b) of Article 366 means that :- Tax on the sale or purchase of goods" 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; and such transfer of any goods shall be deemed to be a sale of those goods by the person making the transfer to whom such transfer, delivery or supply is made.
Here the phrase ‘those goods’ only means goods involved or used in the works contract. The tax is to be imposed on ‘transfer of property of goods involved in works contract’ and not on “transferred property in the works contract”. For example, if a contractor brings MS Pipe to the work place and use the MS Pipe in the construction of a building”, on which goods the tax will be charged? Certainly, on the MS Pipe and not on the Building.
At this stage, it is prudent to quote few lines from the decision of the Apex Court in the case of Builders’ Association (1989), which are as under:-
“The 46th Amendment does no more than making it possible for the States to levy sales tax on the price of goods and materials used in works contracts as if there was a sale of such goods and materials.”
“In view of the foregoing statements with regard to the passing of the property in goods which are involved in works contract and the legal fiction created by clause (29-A) of article 366 of the Constitution it is difficult to agree with the contention of the States that the properties that are transferred to the owner in the execution of a works contract are not the goods involved in the execution of the works contract, but a conglomerate”
“Ordinarily unless there is a contract to the contrary in the case of a works contract the property in the goods used in the construction of a building passes to the owner of the land on which the building is constructed, when the goods or materials used are incorporated in the building. The contractor becomes liable to pay the sales tax ordinarily when the goods or materials are so used in the construction of the building and it is not necessary to wait till the final bill is prepared for the entire work.”
“The restrictions and conditions contained in section 15 of the Central Sales Tax Act, 1956, on the power of the States to levy tax on the sale of declared goods apply equally and fully to transfer of property in goods under works contracts, even as they apply to ordinary sales. Therefore, if there is a transfer of property in declared goods-for example steel products-in the process of execution of works contract, the State can levy tax only at 4 per cent and only at one stage.”
Few lines from the decision of the Constitution bench in the case of Gannon Dunkerley (1993), are quoted below, which are also establishing the theory applied in Builders’ Association (1989) case.
“The position of a contractor in relation to a transfer of property in goods in the execution of a works contract is not different from that of a dealer in goods who is liable to pay sales tax on the sale price charged by him from the customer for the goods sold. The said price includes the cost of bringing the goods to the place of sale. Similarly, for the purpose of ascertaining the value of goods which are involved in the execution of a works contract for the purpose of imposition of tax, the cost of transportation of the goods to the place of works has to be taken as part of the value of the said goods”
It is pertinent to quote few lines from the same judgment, which says “…the goods which are involved in the execution of the works contract when incorporated in the works can be classified into a separate category for the purpose of imposing the tax”
Though, apparently these lines seems to be in conflict with the earlier quote, but in authors’ opinion, after going through para-232 to para-238 in totality, it become clear that the there is no conflict between these two quotes of the decision.
Even after going through the discussion, before we come to the conclusion, we should go through the clarification of the Learned Commissioner of Taxes, Govt. of Assam vide order no. CTS- 40A/2005/106 dated 10/04/2007, wherein it is declared that “It has been judicially settled that the state can levy tax on works contract by treating the same as distinct species apart from the constituent materials undergoing bodily transfer”. However, no clue have been provided in the order regarding source of such finding about settlement of law.
Hence, the author excluding himself from giving any opinion about the clarification of the authority, left the question ‘whether denying the benefit of restrictions of section 15 of the CST Act in finding the taxable value of property in goods transferred during the execution of works contract is valid’ unanswered.
opg_fca @ sify.com