Article Series – Theories of Deemed Sales
| In this article series we shall cover the various theories propounded while deliberating on the issues concerning deemed sales without which it may be difficult to comprehend the various court judgements. Lets start with a basic theory:- |
Theory of Accretion
In the year 1958, Hon’ble Supreme Court gave its first landmark verdict on the issues concerning Works Contracts. It was in the case of Gannon Dunkerley& Co., that the apex court held that there is no sale of goods involved in works contracts as the goods are being transferred in an immovable form. And sales tax could only be levied upon goods in a movable form. The court also mentioned the fact that the constitution did not permit such a levy.
What followed then was a spirited effort from every dealer to term their activity as work contract to come out of the domain of sales tax. Several other landmark judgments came in the process like Rolling Shutters, Hindustan Shipyard which discussed the concept of Works Contracts in great details. Many organisations enjoyed the exemption by making sales through works contract till 1982.In this year of constitutional amendment, government introduced Article 366(29-A) to give power to state to levy sales tax on several transactions which were hitherto not being covered directly within the definition of sales and were therefore covered by defining them as deemed sales. So apart from works contracts, several other sub-clauses of the amended article included other categories of transfer of goods i.e. sale by way of transfer of right to use, sale under catering contracts, sale through unincorporated organisations etc. This plugged a major gap and stopped several tax plannings which were resorted to under the sales tax.
The reasoning given behind the introduction of sales tax on works contract was that in works contract the property passes by theory of accretion. That is as and when the goods say cement and steel are being affixed on the land belonging to the owner, at that very moment the sales takes place i.e. when the goods are still in a movable form. It is only for the sake of convenience that the contractor chooses to raise his invoice at the end of the period which could be a month or even a quarter. And because of the fact that the property lies in an immovable form at the time of raising the invoice, the same could-not determine the taxability of the goods under sales tax.
The theory was adopted by all the states by amending their respective definition of sales to include all the deemed categories as discussed above. The amendment was also challenged by the Builders Association of India but to no avail.
However as time went on, the theory cemented its position and a very beautiful perspective of this theory was brought out in the Apex court judgement delivered by Former Chief Justice SH Kapadia in the case of Larsen & Toubro vs. The state of Andhra Pradesh. In the given case L&T subletted a portion of their work to a sub-contractor and claimed exemption from sales tax of the portion subletted. We shall discuss this interesting judgement in the next bulletin.