By TIOL News Service

JAIPUR, MAR 05, 2015: THE issues before the High Court are - Whether transfer of property in goods involved in the execution of a works contract, will constitute "sale" and attracts levy of sales tax and Whether a composite works contract for 'supply of pipes' and 'contract of civil work' is liable to be classified as divisible contracts, and accordingly attracts levy of sales tax separately on leviable item. And the verdict goes in favour of the Revenue.

Facts of the case

The assessee company is engaged in the business of manufacturing and laying of pipelines for water supply schemes of various State Governments including the State of Rajasthan. During the relevant year, the Public Health & Engineering Department (PHED), Government of Rajasthan, invited tenders for providing and laying of pipes complete with suitable jointing material specials, valves and construction of valve chamber, anchor blocks table crossing including testing and commissioning of pipelines. The assessee accepted the tender and entered into a contract with the State government for providing and laying PSC pipes manufactured by it. Thereafter, the assessee filed application praying for grant of exemption certificate under Rule 10A in respect of work orders. The AO however, rejected such application on the ground that the contract was a divisible contract, in which two types of work orders had been issued by the PHED. The AO was of the view that the work of supply of pipes and the works for contract of civil work, were different contracts, in which the first part was concerned with the sale of pipes, on which tax had been imposed in accordance with the rates applicable to the pipes, and for which exemption certificate could not be issued, as supply in such cases falls within the definition of 'sale'. The work performed by assessee was not an undivided work contract.

On appeal, the DCCT upheld the order of AO, on the findings that the contract work executed by assessee was a contract, which was divisible under work orders, and on which imposition of tax and penalties was made u/s 7AA. On further appeal, the Rajasthan Taxation Tribunal held that no interference was required to be made with the order of DCCT. However, an interim order was passed by the Tribunal restraining the Revenue from initiating any proceedings for recovery. This interim order was extended from time to time. Meanwhile, an appeal was preferred before the Single Judge Bench of this Court, wherein it was held that this matter was wrongly treated as revision petition. The Single Judge observed that the only question which remains to be considered, was whether the assessee was entitled to exemption, which in fact was a scheme of composition of tax payable in respect of sale of goods, the property which passes as a result of execution of work contract at the fixed rate, notified by the State Government under Rule 10B. The Single Judge held that while deciding a part of issue, the Tribunal had held the works contract in question to be divisible one, and thus, supply of pipes was nothing but the sale of pipes involved in the execution of works contract and therefore, it was exigible to sales tax. There was no grievance raised by the assessee against this finding. The Single Judge also observed that, while deciding second part of issue, the Tribunal had held that the assessee was liable to pay the tax at the rate of 12% and his liability was not confined to 2% of the turnover deducted at source. Against this finding also, the assessee was not aggrieved. However the contention of the counsel for assessee was that tax liability in respect of transfer of property involved in the works contract was to be worked out in accordance with the provisions of Section 2(38) r/w Rule 25, and, therefore, the impugned order passed by the Tribunal was required to be reviewed. However, before reviewing the said order, the Tribunal itself has been abolished and these review petitions stood transferred to this Court. The Single Judge thereafter held that the impugned order passed by the Tribunal did not make any reference of the fact whether this question was raised before it or not.

Having heard the parties, the High Court held that,

++ it is pertinent to note that the Rajasthan Taxation Tribunal, constituted under the Rajasthan Taxation Tribunal Act, 1995, was constituted exercising powers under Article 226 and 227 of the Constitution of India. The Act was found to be constitutionally invalid, and was thus repealed by the State of Rajasthan by the Rajasthan Taxation Tribunal(Repeal) Act, 1999. Section 5 of the Repealed Act, provides that all matters and proceedings pending before the Tribunal on the date of commencement of this Act shall stand transferred to the High Court for disposal. The review petitions pending in the Tribunal were thus transferred to the High Court, and were decided and dismissed;

++ this court does not find any good ground to interfere in the order of Single Judge on the issue of supply of pipes, as the counsel for assessee had admitted that he had no grievance against the finding that supply of pipes was nothing but the sale of pipes, involved in the execution of works contract and, therefore, it was exigible to sales tax. These review petitions, are thus dismissed. It is also found that the Single Judge has dismissed the writ petitions, arising out of the assessment orders and demand notices, on the ground that works contract which was the subject matter of the writ petitions, was divisible one consisting of two parts, namely one for the supply of material, and the other for the supply of labour and services. The first part of the works contract would be treated as a contract for sale. The assessment orders and demand notices were issued in accordance with law and the assessee is liable to pay sales tax on the price of the pipes supplied by it to the PHED in the course of execution of the works contract. It was further held that a new Notification cannot be applied retrospectively and no relief can be granted to the assessee on the basis of the said Notification in the matters. The Single Judge had relied upon the Notification issued by the State of Rajasthan, whereby laying of pipeline with material was specifically and categorically categorised/terms as works contract, issued u/s 15 of the 1994 Act. It was clarificatory in nature and had retrospective effect. It is noticed that the assessee had filed an application u/s 40 of 1994 Act for grant of exemption in terms of the said Notification in respect of the contract for laying of pipelines awarded to the assessee by the PHED, which was granted by the ACCT. However, the AO and the DCCT treated the supply of pipes by the assessee to the PHED, to be sale within the meaning of Section 2(o) of 1994 Act;

++ the Single Judge held that substantial part i.e. 75% of the material supplied by the assessee, constituted a sale within the meaning of Section 2(o), on which the assessee was liable to pay sales tax. If the assessee had paid any works contract sales tax to the PHED, if and when any certificate from the Department is produced before the Sales Tax Department, the AO was required to adjust that amount against the total amount of sales tax. The AO as well as the DCCT had applied their mind to the contents of the Notification and Rule 10(B) and had rightly held that manufacturing and supply of PSC pipes, jointing material specials and valves anchor blocks do not fall within the scope of buildings, bridges, dams, roads and canals. The agreement was clearly in two parts, namely sale and supply of PSC pipes, jointing material specials, valves anchor blocks etc., and the remaining part being supply of labour and services. The assessee was thus under statutory obligation to pay sales tax on the materials sold to the Department. He had sold the items manufactured by him to the PHED and, therefore, he was required to pay the sales tax. The Single Judge had noticed the legal effect of the amended Section 2(38) of 1994 Act, by which a transfer of property in goods involved in the execution of a works contract, was included as sub-clause (2), in the definition of sale. The Single Judge, thereafter, held that the exemption Notification will apply only prospectively from the year 2001-2002 onwards. The assessee had challenged the assessment for the year 1999-2000, and therefore, the Notification was not applicable to the dispute involved in the matter. The assessee had even not submitted counter part of the Form ST-18A, inviting penalty u/s 58 of 1994 Act;

++ the legal proposition with regard to definition of 'works contract' in Article 366(29A)(b) of the Constitution of India, has been explained in the recent judgment of Supreme Court in Larsen and Toubro Limited and Anr. vs. State of Karnataka and Anr. For sustaining levy of tax on goods, deemed to have been sold in execution of a works contract, three conditions namely (i) there must be a works contract; (ii) goods should have been involved in execution of a works contract; and (iii) property in those goods must be transferred to a third party, either as goods or in some other form, have been amply clarified. A contract may involve both, a contract of work and labour, and a contract for sale. A transfer of property in goods under Article 366(29A)(b) is deemed to be sale of goods involved in execution of a works contract by a person making transfer and purchase of those goods to a person, to whim such transfer is made. A single and indivisible contract has been brought on par with a contract containing two separate agreements, empowering the State to levy sales tax on value of material in execution of works contract. In view of the clarification of law with regard to imposition of tax on the sale of goods in the works contract, in the judgment of Larsen and Toubro Limited and Anr. vs. State of Karnataka and Anr., the question of law, does not require any further discussion for its determination. The findings with regard to sale of pipes involved in the works contract, are findings of fact, which do not required any interference by this court in these matters. So far as the exemption is concerned, this court founds no error in the finding recorded by the Single Judge, that the exemption Notification having been issued in 2001, will only apply prospectively from the year 2001-2002, and that the benefit of exemption can be availed by a firm only after issuance of the Notification.

(See 2015-TIOL-548-HC-RAJ-CT)