AUGUST 26, 2014

By Abhijit Saha, Director (Indirect Tax), BDO India

"WORKS Contract" is a very interesting, complex and confusing term and the scope of the same is very much elastic. Take for instance, sale of flat or sale of lift. Apex Court has ultimately held that they are works contract and not a sale contract. In fact the reach of the word "works contract" is to the extent there is any element of goods involved and retained in whatsoever form and in whatsoever quantity in the service contract. There is no concept of discernibility of the goods from the commercial point of view although the word "works contract" is used in commercial context. That is the purport of the definition of deemed sales under works contract as per Article 366(29A) of the Constitution. The said article is reproduced below for easy understanding:

"366 (29A) "tax on the sale or purchase of goods" includes -

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) 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;

(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;"

In view of the above definition, Hon'ble Supreme Court in the case of BSNL vs UOI - 2006-TIOL-15-SC-CT-LB held that in the execution of works contract splitting of the service and supply has been Constitutionally permitted in Clauses (b) of Clause 29A of Article 366. Now the question is what is works contract? Is it any contract explicit or implicit wherein both goods and services are involved in whatsoever manner and whatsoever combination? If that is so then if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client. Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.

Hon'ble Supreme Court held that splitting of service and goods is not permissible in the above cases because it is not works contract falling under Article 366(29A)(b) of the Constitution. Hence as per the dominant intention theory it is service contract and not a sale contract and the transfer of the property in goods takes place as an incidence of contract of service. Accordingly no sale tax is applicable.

In case of works contract such splitting is permissible and dominant intention theory is not applicable. Accordingly sales tax is applicable on the value of the goods transferred in course of the execution of works contract. In this respect it may be mentioned that in case of Xerox, it has been held it to be works contract and hence sales tax is to be paid on the value of the ink / toner/ paper etc. although the dominant intention is to provide service and the ink / toner/ paper are incidental for providing the service.

In the case of Commissioner of Sales Tax, Mumbai v. Hari and Company [2006] 148 STC 92 (Bom), the Hon'ble High Court held that the object of the Constitutional amendment introduced in the year 1982 by the Constitution (Forty Sixth Amendment) Act, 1982 was to create a legal fiction of transfer of goods within the works contract in order to levy a tax on the goods involved in the execution of works contract. Hence, irrespective of whether the transfer of property is incidental or ancillary to a works contract, once a works contract involves transfer of property, the provisions of Article 366(29A) of the Constitution of India are attracted not withstanding that the value of the goods may represent a small percentage of the amount paid for the execution of works contract .

In view of the above it may be stated that supply of Xerox copy is a works contract not withstanding that an insignificant value of the goods has been transferred and the dominant intention is provision of service.

Maharashtra Value Added Tax Act (MVAT) does not define Works contract separately. In the definition of sale under section 2(24) of the MVAT, it has been mentioned that the following transaction would constitute as sale:

"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"

In view of the above definition it may be stated that the definition of works contract is very wide and includes any transaction whatsoever that involves a provision of service along with an element of supply of goods. Accordingly hospital giving a medicine to the patient in course of treatment or a doctor giving a prescription while treating a patient or lawyer or tax consultant giving an opinion on papers may also get covered by the above definition of works contract and then the same may be liable to works contract VAT. Hon'ble Supreme Court has stated that these services are not works contract but the Hon'ble Supreme Court has not explained as to why it does not qualify as works contract in the light of the definition given in Article 366(29A)(b) of the Constitution and also the definition as per MVAT as mentioned above. When Xerox and photography can qualify as works contract inspite of the fact that as per dominant intention theory they qualify as service contract and the value of the material involved is insignificant, then it is not understandable as to why doctors, hospital, lawyers, tax consultants etc. service will not qualify as works contract.

I would request netizens to throw light upon the issue.