TMI Blog2014 (10) TMI 765X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of ownership at a later point of time is permissible as held in Larsen and Toubro Limited's case [2013 (9) TMI 853 - SUPREME COURT] On a combined reading of the terms and conditions of the contact dated 29.6.2002 with reference to the object sought to be achieved, it appears to us that the contract in question involves both a contract of service and a contract of sale of goods. It is a composite contract and by legal fiction provided under Article 366 (29-A) (b) of the Constitution it is permissible to separate the transfer of property in goods (as goods or in some other form) from the contract of service. It is also explained in Larsen and Toubro Limited's case (2013 (9) TMI 853 - SUPREME COURT) that the term 'works contract' cannot be confined to a particular form and it encompasses a wide range of many varieties of contract. It is also laid down in the said decision that for sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract three conditions must be fulfilled namely (i) there must be a works contract, (ii) the goods should have been involved in the execution of a works contract, and (iii) the property in those goods must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notices, the petitioner submitted replies dated 10.02.2005 contending inter alia that the tax proposed under Section 5F is without any basis and illegal. However the petitioner's objections were not accepted and accordingly the 1st respondent held that the turnover of the work executed by the petitioner for the Government under the contract dated 29.06.2002 is exigible to tax under the provisions of Section 5F of the APGST Act. Thus by two separate orders dated 8.6.2005 the assessment for the years 2002-03 and 2003-04 was revised adding the tax payable on the turnover of the execution of works contract during the said period. Aggrieved by the said orders, dated 8.6.2005, W.P.Nos.15207and 15208 of 2005 are filed in respect of the assessment years 2002-03 and 2003-04 respectively. While admitting the said writ petitions, this Court by order dated 14.07.2005 granted interim stay of operation of the impugned orders on condition of the petitioner furnishing security by way of Bank guarantee for a sum of ₹ 50 lakhs in each writ petition within four (4) weeks. In the meanwhile, the petitioner was also served with the show-cause notice dated 18.01.2005 calling upon to submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orks contract and it does not involve any 'sale' taxable under the APGST Act. According to the learned counsel, the said contract is a service contract and that the Government has to reimburse the service tax if it is levied. On the other hand, Sri P. Balaji Varma, the learned Senior Standing Counsel for Commercial Taxes appearing for the respondents supported the impugned orders and contended that the same do not warrant interference by this Court. In the light of the rival submissions made by the learned counsel, the common question that arises for consideration in all these writ petitions is:- Whether the contract dated 29.6.2002 can be construed and interpreted as a 'works contract' within the meaning of Section 2 (1) (f) of APGST Act, 1957 and whether it is exigible to tax under Section 5-F of the said Act? It is contended by Sri C.R. Sridharan, the learned counsel for the petitioner that the contract dated 29.6.2002 is a simple contract for imparting computer education in the schools and it does not involve the element of 'sale' as defined in Section 2 (1) (n) of the APGST Act. It is submitted by the learned counsel that though the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned. 5-F. Levy of tax on transfer of property in goods involved in the execution of works contract:- Notwithstanding anything contained in Section 5 or Section 6 every dealer shall pay a tax under this Act for each year on his turnover of transfer of property in goods whether as goods or in some other form involved in the execution of works contract at the rate of 8 paise on every rupee of his turnover. Provided that......... Works Contract is defined under Section 2(1)(t) of APGST Act and reads as under:- 2(1)(t) 'works contract' includes any agreement for carrying out for cash or for deferred payment or for any other valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. It may be mentioned that Section 5-F providing for imposition of sales tax in relation to works contract has been inserted by Act 22 of 1995 with effect from 01.04.1995 in terms of the 46th amendment to the Constitution of India in the year 1982 inserting Clause (29A) to Article 366 of the Constitution of India defining Tax on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d down in Builders' Association of India's case has been affirmed by a Constitution Bench in GANNON DUNKERLEY and CO. v. STATE OF RAJASTHAN (1993) 1 SCC 364 and with regard to the measure for levying the tax on goods involved in the execution of a works contract it is observed:- Since the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works and not the cost of acquisition of the goods by the contractor. In BSNL and Ors. v. Union of India and Ors. (2006) 3 SCC 1 while considering the question whether the nature of the transaction by which mobile phone connections are enjoyed is a sale or is it a service or is it both, the Supreme Court explained the legal position that was existing prior to 46th amendment to the Constitution of India and thereafter as under:- All the clauses of Article 366 (29A) serve to bring transactions where one or more of the ess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a works contract within the meaning of the term in the said Act. All that this means is that if there is a termination and that particular unit is not resold but retained by the appellants, there would be no works contract to that extent. But so long as there is no termination the construction is for and on behalf of purchaser. Therefore, it remains a works contract within the meaning of the term as defined under the said Act. It must be clarified that if the agreement is entered into after the flat or unit is already constructed, then there would be no works contract. But so long as the agreement is entered into before the construction is complete it would be a works contract. The correctness of the legal position laid down in K. Raheja Development Corporations' case (4 supra) was considered by a three-judge Bench of the Supreme Court in a recent decision in Larsen and Toubro Limited v. State of Karnataka and after reviewing all the decided cases on the issue, it is explained:- 87. It seems to us (and that is the view taken in some of the decisions) that a contract may involve both a contract of work and labour and a contract of sale of goods. In our opinion, the distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g works contract insofar as construction part is concerned. 89. For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, in our opinion, three conditions must be fulfilled: (i) there must be a works contract, (ii) the goods should have been involved in the execution of a works contract, and (iii) the property in those goods must be transferred to a third party either as goods or in some other form. In a building contract or any contract to do construction, the above three things are fully met. In a contract to build a flat there will necessarily be a sale of goods element. Works contracts also include building contracts and therefore without any fear of contradiction it can be stated that building contracts are species of the works contract. 118. The value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later. Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative. 97.7. A transfer of property in goods under clause (29-A)(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. 97.8. Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract. What is 'works contract' has also been elaborately discussed in Larsen and Toubro Limited's case (5 supra). In Para-72 of the said decision it is explained:- 72. In our opinion, the term works contract in Article 366(29-A)(b) is amply wide and cannot be confined to a particular understanding of the term or to a particular form. The term encompasses a wide range and many varieties of contract. Parliament had such wide meaning of works contract in its view at the time of the Forty-sixth Amendment. The object of insertion of clause (29-A) in Article 366 was to enlarge the scope of the expression tax on sale or purchase of goods and overcome Gannon Dunkerley. Seen thus, even if in a contract, besides the obligations of supply of goods and materials and performance of labour and services, some additional obligations are imposed, such contract does not cease to be works contract. The additional obligations in the contract would not alter the nature of contract so long as the contract provides for a contract for works and satisfies the primary description of works contract. Once the characteristics or elements of works contract are satisfied in a contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the same may be extracted hereunder:- 3.0 Period of contract: 3.1 The Contract shall be in force for a period of five years from the date of signing of this contract. 3.2 Normally the Schools open in the month of June and academic year continues till the month of April of next year. Normal school hours are between 9.00 am to 5.30 pm subject to any variations as may be notified from time to time. However the computer classes can be conducted in between 11.00 am to 7.00 pm in case of residential schools. The working days will be from Monday to Friday on full day basis and Saturday on half-day basis. The contractor would be permitted to use the computer centre before and after the school hours and also during holidays on a commercial basis to teach their own courses to general public after obtaining permission from the Head of the Institution. A rent of ₹ 1,000/- per month per school will have to be paid to the Department for such use. 4.0 Provision for Computer education including equipment for the same: 4.1 The contractor shall provide, install, commission the equipment and maintain the same against all risks during the contract period by way of lease on B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hree phase electric power connection of adequate capacity in each school, to be converted into the computer centre, to the Contractor within 15 days of signing the contract. The Contractor shall complete the provision, installation and commissioning of all equipment as per Annexure-3 at each school within 45 days of handing over of the rooms as above. In case of any delay by releasing the rooms in any schools, the final installation date would get shifted by proportional duration without any penalty/damages to the Contractor. The Department and the Contractor will workout an implementation plan on a mutually agreed basis. 5.2 The equipments are to be provided at the place specified by the Department in such quantities and numbers indicated in the tender document. 6.0 Provision of all services without interruption: 6.1 The computer education shall be provided in all the contracted schools by the Contractor, without interruption as per the Department's requirements specified elsewhere in this contract. 6.2 The equipment provided for computer education shall be guaranteed for proper operations for the contract period of 5 years after installation, commissioning and acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consumables, Internet connectivity and telephone charges when the centre is used by it for non-computer education work. The payment of Electricity charges will be the responsibility of the contractor. No part of the equipment, software license/ CD, Floppy, courseware, manuals will be removed from the computer Centre without the consent of the Contractor. As could be seen from the clauses of the Agreement, the principal object is to impart computer education to students in various schools. For the said purpose, the petitioner installs computers (sets up a computer centre) in each school, engages trained faculty who teach the students about computers and how to use the same. The petitioner is also required to provide the operational manual, text books and training material free of cost. After the expiry of the contract period of five years the petitioner is bound to transfer to the department the equipment and software installed at each school without any consideration. So far as the terms of payment are concerned, the total fee per school will be paid to the petitioner in ten (10) equal half-yearly instalments as specified in clause 7.1 of the agreement. According to the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... division of the contract after Forty-sixth Amendment can be made only if the works contract involved a dominant intention to transfer the property in goods and not in contracts where the transfer of property takes place as an incident of contract of service is no longer good law, Rainbow Colour Lab has been expressly overruled by a three-Judge Bench in Associated Cement Companies Ltd. V. Commr. of Customs (2001) 4 SCC 593. 63. In view of the statement of law in Associated Cement Companies Ltd. and BSNL. v. Union of India, the argument advanced on behalf of the appellants that dominant nature test must be applied to find out the true nature of transaction as to whether there is a contract for sale of goods or the contract of service in a composite transaction covered by the clauses of Article 366 (29-A) has no merit and the same is rejected. On a careful analysis of the recitals and terms and conditions of the contract dated 29.06.2002, there cannot be any doubt that it involves certain goods in execution of the contract and that the same would be transferred to the schools in which the equipment is installed for imparting the computer education. It is no doubt true that the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end of the contract in our considered opinion makes no difference. As held in Gannon Dunkerly and Company's case (2 supra) while explaining the measure for levy of tax on goods involved in the execution of a works contract, the transfer of property in goods involved in execution of the works contract takes place when the goods are incorporated in the works. As held in Larsen and Toubro Limited's case (5 supra) the traditional decisions which hold that the substance of the contract must be seen, have lost their significance and what was viewed traditionally has to be now understood in the light of the philosophy of Article 366 (29-A) of the Constitution of India. It is also explained in Larsen and Toubro Limited's case (5 supra) that the term 'works contract' cannot be confined to a particular form and it encompasses a wide range of many varieties of contract. It is also laid down in the said decision that for sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract three conditions must be fulfilled namely (i) there must be a works contract, (ii) the goods should have been involved in the execution of a works contra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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