2014 (9) TMI 110 - ANDHRA PRADESH HIGH COURT

Works Contract - Point of taxation - Valuation - computation of taxable turnover - Interpretation of section 5F of the Act read with rule 6(2) and 6(3)(i) of the Rules - Exemption from tax - Held that:- Rule 6(3) (i) merely provides another method, a direct manner, of determining the turnover on the basis of the value of the goods purchased and supplied or used in the execution of works contracts in that year, instead of arriving at the turnover under rule 6(2) by deducting certain items of expenditure from the gross receipts paid or payable to the contractor-dealer. As rule 6(3)(i) must be read harmoniously with section 5(1) or 5F of the Act, and as the charge to tax under the Act is similar to the charging provision in the Rajasthan Sales Tax Act, i.e., on the transfer of property in the goods involved in the execution of works contract, the law laid down by the Supreme Court in Gannon Dunkerley [1993] 88 STC 204 (SC) would equally apply to the provisions of the Act, and the Rules made thereunder. A fortiori the value of goods, for the purposes of rule 6(3)(i), would not only include the cost of acquisition of goods by the contractordealer but also the transportation charges incurred by him to deliver the goods to the situs of the works wherein they are incorporated; cost of establishment relatable to the supply of material involved in the execution of the works contract; other charges borne by the contractor-dealer in relation to these goods till its incorporation in the works; the profits relatable to the value of such goods; etc. However profits on the labour component of, and the actual cost of incorporation in, the works would stand excluded as the value of the goods is only its value till the stage of its incorporation in the works, and not thereafter. The deemed turnover under rule 6(3)(i), (liable to tax under the Act), would be more or less the same as determined under rule 6(2) of the Rules.

Where books of accounts are separately maintained, for works contracts, each year ascertaining profits arising therefrom would present no difficulty. Unlike other components, the profit element in the value of the goods may necessitate estimation in cases where the books of accounts are not maintained annually, but project-wise. Estimation of profit would then be a matter for determination by the assessing authority after taking into consideration all relevant factors including the profits which are, ordinarily, made in similar works executed by other contractors; profits earned by the contractor-dealer in works contracts executed by him in the previous years; the profit percentage norms accepted in the industry for works contracts of a similar kind; etc. While the assessing authority may adopt any other reasonable method, judicial pronouncements and authoritative texts would serve as a useful guide in such estimation.

The charge to tax under section 5(1) read with Explanation VI to section 2(n) and section 2(s)(iii)(a)(i) of the Act, and under section 5F of the Act, is on the transfer of property in the goods involved in the execution of works contract - As the taxable event is the transfer of property in goods involved in the execution of a works contract, and the transfer of property in such goods takes place when the goods are incorporated in the works, the value of goods which would constitute the measure of tax is the value of goods at the time of its incorporation in the works - The turnover under rule 6(3)(i), for the purposes of rule 6(2), is the value of goods purchased and supplied or used in the execution of works contracts, i.e., the value of the goods when it is incorporated in the works - The word "purchased" in rule 6(3)(i) qualifies the word "goods" and only means that the contractor, executing the works, has purchased goods which are supplied or used in the works, and nothing more. The word "purchased" cannot be read in a manner as to elevate rule 6(3)(i), by implication, to that of a charging provision.

While the assessing authority may adopt any other reasonable method, judicial pronouncements and authoritative texts, wherein the manner of estimation of profits for different works contracts have been dealt with, would serve as a useful guide in such estimation. A few of them have been referred to in para 41 supra. While the percentage of profits estimated at 15 per cent has been accepted as being reasonable in some of those cases, we may not be understood to have held that in all cases 15 per cent should invariably be accepted as the norm. We have merely indicated broadly the factors which the assessing authority should bear in mind while estimating the profit percentage in the facts and circumstances of the case before him - As the law now declared by us would operate from the inception, and since the exercise of revisional jurisdiction under section 20(2) of the Act is in accordance with the construction placed by us on rule 6(3)(i), the jurisdictional bar under section 20(2A) will not apply - Decided in favour of Revenue.