LEVY OF TAX ON WORKS CONTRACT AND TRANSFER OF RIGHT TO USE THE GOODS
Judge Allahabad High Court President of this Session, Shri Bharat Ji Agrawal, learned Senior Advocate of Allahabad High Court, Chairman of the Conference Shri Arvind Agrawal, convener of the conference Sri Anand Kumar Singhal, V. N. Rai, the eminent speakers, ladies and gentleman. It is indeed a matter of proud and privilege for me to be with all of you and to address the august gathering present here. Since I was associated with the Advocates and the Chartered Accountants practicing in tax side, therefore, an opportunity to meet all of you is a matter of immense pleasure for me. I am very thankful for the organizer of the conference for inviting me on the occasion and giving me an opportunity to speak few words.
Subject of the Seminar “Levy of tax on Works Contract and transfer of right to use the goods” though has become old by passage of time but still has its significance due to the various unsettled issues relating thereto. Through the Seminars we get an opportunity to educate our self on the subject and to update our knowledge.
In the case of State of Madras vs. Gannon Dunkerley & Company and others, (Madras), reported in 9 STC, 353, Apex Court had a occasion to consider whether in the building contract which was in the nature of composite and indivisible works contract, there was a sale of goods. Apex Court held that there was no sale of goods. Likewise, the goods provided on lease for use was not liable to tax because it was not sale within the definition of Section 4 of the Sale of Goods Act.
After the decision in the case of State of Madras Vs. Gannon Dunkerley & Company (supra), the matter with regard to taxability of goods involved in the execution of works contract, was examined by the Law Commission, in its 61st report. As a result of the recommendations by the Law’ Commission to levy the tax on the goods used in the execution of the works contract and on the leasing transactions, clause (29-A) has been added in Article 366 of the Constitution of India by the 46th Constitutional Amendment, enlarging the definition of sale. As a result of the Constitutional Amendment States have also amended their Trade Tax laws, and enlarge the definition of sale and levied the tax on the value of the goods involved in the execution of the works contract and transfer of right to use the goods. Under the U.P.2 Trade Tax Act definition of sale in section 2 (h) has been amended and by Section 3-F of U.P. Trade Tax Act tax has been levied. The validity of the Constitutional Amendment has been upheld by the Constitution Bench of the Apex Court in the case of Builders Association of India vs. Union of India, reported in 1989 UPTC, 645 (SC). In brief, Apex Court held that by fiction, indivisible contract has been made as divisible contract and the value of the goods involved in the execution of contract have been subjected to tax. Apex Court held that under the law only the value of the goods used in the execution of the works contract is liable to tax and not the building as a whole. It has been further held that the levy would be subject to the restriction and conditions mentioned in each clause or sub-clause of Article 286of the Constitution of India.
Law laid down by the Apex Court has been further elaborated by the Constitution Bench of the Apex Court in the case of Gannon Dunkerley and Co. vs. State of Rajasthan, reported in 1992 NTN (Vol. 1) 417J; 1993 UPTC 416. On the basis of the aforesaid decisions, Section 3-F of U.P. Trade Tax Act which has been initially introduced has been held as ultravires by the Division Bench of Allahabad High Court in the case of V.K.Singhal Vs. State of U.P., reported in 1995 NTN (Vol. 6) 17; 1995 UPTC, 337, inasmuch as it purported to levy the tax on the inter State transactions also. As a result of Division Bench decision of this Court, Section 3-F has been amended with retrospective effect in the year 1995 by U.P. Act No.31 of 1995. Under the new amended Section 3-F of the Act transactions relating to Sections 3, 4 and 5 of the Central Sales Tax Act have been excluded. Initially only 15 works contracts have been subjected to tax by the notification no. ST-II-2399 dated 27.04.1987. Subsequently, time to time some more works contracts have been taxed.
Now all the works contracts have been subjected to tax. On the point of levy of tax on the inter-State transactions, several decisions have been given by Allahabad High Court namely, Santosh & Company vs. Commissioner of Trade Tax, reported in 1999 NTN (Vol. 15) 604 ; 1999 UPTC 823, Commissioner of Trade Tax Vs. S/S Indian Railway Construction Company, Agra, reported in 2005 UPTC, 984. The law appears to be settled but has to be applied on the facts of the case. It is made clear that aforesaid amendment applies to only composite indivisible works contract, the concept of works contract as laid down by the Apex Court in the case of State of Madras Vs. Gannon Dunkerley & Company and others, (Madras), reported in 9 STC, 353, Commissioner of Sales Tax, M.P. Vs. Purshottam Premji, reported in 26 STC 38, Hindustan Aeronautics Vs. State of Karnataka, reported in (1984) 1 SCC 707, Sentinel Rolling Shutters & Engineering Co. (P) Ltd. Vs. Commissioner of Sales Tax, Maharashtra, reported in 1979 UPTC, 872, Everest Copiers Vs. State of Tamil Nadu, reported in 1996 NTN (Vol.9)
By Justice Rajes Kumar
Judge Allahabad High Court