Allahabad High Court
Bharat Sanchar Nigam Ltd. Thru' Asst. ... vs The Commissioner Of Trade Tax U.P. ... on 31 August, 2016
Author: Yashwant Varma
Bench: Yashwant Varma
HIGH COURT OF JUDICATURE AT ALLAHABAD
AFR
Reserved on 29.7.2016
Delivered on 31.8.2016
Case :- SALES/TRADE TAX REVISION No. - 883 of 2006
Applicant :- Bharat Sanchar Nigam Ltd. Thru' Asst. G.M. (Admin.)
Opposite Party :- The Commissioner Of Trade Tax U.P. Lucknow
Counsel for Applicant :- Piyush Agrawal,Amit Jaitley,Bharat Ji Agarwal
Counsel for Opposite Party :- S.C.
WITH
Case :- SALES/TRADE TAX REVISION No. - 882 of 2006
Applicant :- Bharat Sanchar Nigam Ltd. Thru' Asst. G.M. (Admin.)
Opposite Party :- The Commissioner Of Trade Tax U.P. Lucknow
Counsel for Applicant :- Piyush Agrawal,Amit Jaitley,Bharat Ji Agarwal
Counsel for Opposite Party :- S.C.
WITH
Case :- SALES/TRADE TAX REVISION No. - 884 of 2006
Applicant :- Bharat Sanchar Nigam Ltd. Thru' Asst. G.M. (Admin.)
Opposite Party :- The Commissioner Of Trade Tax U.P. Lucknow
Counsel for Applicant :- Piyush Agrawal,Amit Jaitley,Bharat Ji Agarwal
Counsel for Opposite Party :- S.C.
Hon'ble Yashwant Varma, J.
This batch of revisions, which raise identical issues have with the consent of parties been taken up for disposal together. The issue itself relates to the validity of the action taken against the revisionist on an alleged breach of the provisions of Section 8D of the U.P. Trade Tax Act, 19481.
Briefly stated, the revisionist has been held liable to pay a penalty in terms of Section 8-D(6) of the 1948 Act as consequence of its failure to deduct tax in respect of a works contract awarded by it. For the purposes of laying cables, the revisionist is stated to have awarded contracts to various parties. One such contract and the terms upon which the same was to be executed stands enshrined in an agreement dated 24 January 2002. The relevant terms of the said contract are as under:
"Whereas it has been decided to award the work of laying underground cable falling in the jurisdiction of Telecom District Bareilly to M/s A.A. Cables Layers Ltd., 25-A, Model Town Bareilly. M/s A.A. Cable Layers Ltd., 25-A, Model Town Bareilly.....
3. The contractor will co-ordinate between the BSNL and agencies like PWD/ Municipality/BDA/UPSEB etc. for road cutting. Until road cutting permission is obtained, contractor will not get cable issued for laying.
4. The cable and other stores will be supplied by the BSNL. The contractor will execute the work strictly according to the work order and diagram supplied by the BSNL as per BSNL specifications and standards under the supervision of BSNL officers.
5. The BSNL will not take any responsibility for providing any facility to the labours employed by the contractor. The BSNL will supply underground cable, joining kits, DP boxes, cabinets and other store items required for the job. The contractor will be responsible for their safety and in case of loss to BSNL property, the contractor will have to pay for the losses or the same will be adjusted towards his bills or security money etc.
6. digging or trenching should be made at a standard depth of one meter or 1.65 meter (as the case may be.)........
10. The cable is to be laid as soon as trenches are ready and should not be left till the whole length is dug up..........
13. The contractor has to abide by the terms & conditions of trenching/cable laying/joining and termination of laid cables fixed by GMTD, BR. 90% payment of the value of the work done will be made against bills in support of actual physical work completed and put to use certified by unit officer........... GMTD, BR however, shall reserve the right to pay the balance 10% amount amount of a particular work, after the completion of work, if he is satisfied with the performance of the contractor."
By a notice which stands appended as Annexure-2 to the revision, the assessee was called upon to show cause why penalty be not imposed upon it in terms of sub section (6) consequent to a failure on its part to deduct tax from payments made to the contractor in the course of execution of a works contract. The revisionist furnished a reply whereafter an order was passed on 23 September 2003 holding it liable to pay a sum of Rs. 12,79,033/- as penalty in terms of Section 8-D(6). The order notes that in the execution of the works contract, the contractor while laying cables also utilized stone, bajri and other like items, the property in which goods, is stated to have been transferred to the revisionist in the execution of the works contract. It was therefore, held that the revisionist had failed to deduct tax and was consequently liable to suffer a levy of penalty. The issue was taken by the revisionist in appeal wherein it was asserted that all materials including underground cables, joining kits, DP boxes, cabinets etc. were provided by the revisionist itself to the contractors. It was contended that the contract in essence was not a works contract and did not involve any building, construction or manufacturing process. It was submitted that the contract in essence was one which related to job work and therefore, the provisions of Section 8-D had no application. These contentions did not find favour with the first appellate authority, which accordingly proceeded to dismiss the appeal on 16 December 2003. The matter was taken to the Tribunal, which by its judgment and order dated 4 May 2006, has proceeded to affirm the view taken by the assessing authority and the first appellate authority. It is in the above backdrop that the instant revisions have come to be preferred before this Court.
Sri Bharatji Agrawal, learned Senior Counsel appearing in support of these revisions has contended that the contract awarded was for job work and would not fall within the meaning of a works contract as defined by the 1948 Act. He has further submitted that even if it were assumed that the property in goods utilized for execution of any civil work stood transferred in terms of the contract, the levy of penalty with reference to the entire payment made under the contract would be wholly unjustified. He submits that the levy of penalty was liable to be restricted only to the value of the goods, which in the opinion of the department, stood transferred in the execution of the works contract. Sri Agrawal further contends that no exercise of bifurcation was undertaken by the department nor was any enquiry instituted in order to ascertain the value of the goods, the property in which may be stated to have been transferred in the course of execution of the contract. Referring to the provisions of Section 3-F (2)(b) he submits that the stone, bricks and other material utilized for completion of the civil work elements of the contract were not liable to be included while determining the net turnover relating to the works contract. For the aforesaid reasons, it was his submission that the levy of penalty was unjustified.
Sri B.K. Pandey, the learned Standing Counsel while refuting the above submissions has drawn the attention of the Court to the fact that neither before the assessing authority nor before the first appellate authority were any details furnished by the revisionist to indicate the bifurcation of items utilized in the civil work undertaken by the contractors. He further submits that the issue of bifurcation of items itself would be an issue which was liable to be inquired into during the assessment of the contractor. He submits that in the absence of any details in respect of assessment proceedings taken out in respect of the contractor, the contentions advanced on behalf of the revisionist are not liable to be countenanced. He lastly submits that the provisions of Section 8-D place an unambiguous obligation upon a dealer while making payment to a contractor for discharge of any liability under a works contract to make a statutory deduction at the rate of 4% with reference to the tax payable under the Act on account of such works contract. He submits that sub-section (6) comes into play immediately upon a failure on the part of the dealer to make such a deduction. In view of the above, Sri Pandey submits that no interference is warranted in the orders passed by the authorities.
It is these rival submissions that fall for consideration. However, before ruling upon the rival contentions, it would be apposite to refer to some of the relevant statutory provisions. Section 2(m) of the 1948 Act defines a 'works contract' in the following terms:
"2(m)' Works contract' includes any 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;"
A dealer is made liable to pay tax on the net turnover on a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract in terms of section 3-F. While determining the net turnover in terms of sub section (2), various deductions are allowed to be made from the total amount received or receivable under the works contract. Sub section (2) insofar as is relevant for our purposes reads as under:
"(2) For the purposes of determining the net turnover referred to in sub-section (1), the following amounts shall be deducted from the total amount received or receivable by a dealer in respect of a--
(a) xxxxxxxxxxxxx
(b) transfer referred to in clause (b) of sub-section (1),--
(i) the amount representing the sales value of the goods covered by Sections 3, 4 and 5 of the Central Sales Tax Act, 1956;
(ii) the amount representing the value of the goods exempted under Section 4;
(iii) the amount representing the value of the goods, on the sale or purchase whereof tax has been levied or is leviable under this Act at some earlier stage;
(iv) the amount representing the value of the goods manufactured in a new unit exempted under Section 4-A or Section 4-AAA;
(v) the amount representing the value of the goods supplied to the contractor by the contractee:
Provided that the ownership of such goods remains with the contractee under the terms of the contract;
(vi) the amount representing the labour charges for the execution of the works contract;
(vii) all amounts paid to the sub-contractor as the consideration for execution of the works contract, whether wholly or in part:
Provided that no deduction under this sub-clause shall be allowed unless the dealer claiming deduction produces proof that the sub-contractor is a registered dealer liable to tax under this Act and that such amount is included in the return of turnover filed by such sub-contractor under the provisions of this Act;
(viii) the amount representing the charges for planning, designing and architect's fees;
(ix) the amount representing the charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract;
(x) the amount representing the cost of consumables used in the execution of the works contract, the property in which is not transferred in the execution of the works contract;
(xi) the amount representing the cost of establishment and other similar expenses of the contractor to the extent it is relatable to supply of labour and services;
(xii) the amount representing the profit earned by the contractor to the extent it is relatable to the supply of labour and services."
The obligation to deduct tax from the amount payable to a work contractor stands enshrined in Section 8-D. Sub sections (1) and (6) which are relevant for our purpose are extracted hereinbelow:
"Section 8-D - Tax deduction from the amount payable to Works Contractor. - (1) Notwithstanding anything contained in sub-section (2) of Section 8-A, every person responsible for making payment to any dealer (hereinafter in this section referred to as the contractor) for discharge of any liability on account of valuable consideration payable for the transfer of property in goods (whether as goods or in any other form) in pursuance, of a works contract, not being a building contract of such class or value as may be notified by the State Government in public interest in this behalf, shall, at the time of making such payment to the contractor, either in cash or in any other manner, deduct an amount equal to four per centum of such sum towards part or, as the case may be, full satisfaction of the tax payable under this Act on account of such works contract:
Provided that the Assessing Authority may, if satisfied, that it is expedient in the public interest so to do and for reasons to be recorded in writing order that in any case or class of cases no such deduction shall be made or, as the case may be, such deduction shall be made at lesser rate:
Provided further that where any deduction has been made by a contractor from the payments made to his sub-contractor in accordance with sub-section (2), the amount of such payments shall be deducted from the amount on which deduction is to be made under this sub-section:
Provided also that where the goods referred in this sub-section are covered by Sections 3, 4 or 5 of the Central Sales Tax Act, 1956, no amount shall be deducted under this sub-section in respect of such goods.
(6) If any such person, as is referred to in sub-section (1) or subsection (2), fails to make the deduction or, after deducting, fails to deposit the amount so deducted, as required by sub-section (3), the Assessing Authority may, after giving to such person an opportunity of being heard, by order in writing, direct that such person shall pay, by way of penalty, a sum not exceeding twice the amount deductible under this section but not so deducted and, if deducted, not so deposited into the Government Treasury."
Dealing with the submission that the contract in question would not fall within the meaning of a 'works contract' as defined under the 1948 Act, it would first be apposite to refer to the terms of the agreement. The essential obligation placed upon the contractor under the contract was of laying underground cables. Although the underground cables, joining kits and other apparatus were to be supplied by the revisionist, the contractor was also obliged to undertake the activity of road cutting, digging of trenches and preparing the ground for laying of cables. The contractor was further obliged to clear surplus earth and road spills and restore the metalled roads to their original condition. The trenches themselves were to be prepared in accordance with the specifications laid down in the agreement. It is in the backdrop of the above obligations that the contention of Sri Agrawal is liable to be tested. As noted above, the essence of the submission of Sri Agarwal was that the contract in question was essentially one of providing labour and service and not a works contract. It becomes relevant to note that the respondents have while passing the orders impugned herein noted that the contractor engaged by the revisionist utilized stone ballast, bajri and other articles in order to construct platforms as also to strengthen the trenches created. It is on this strength that they came to conclude that the contract in question was a works contract. Now the 1948 Act gives an expansive meaning to the phrase 'works contract' to include any agreement which may involves: -
(a) building;
(b) constructions;
(c) manufacture;
(d) processing;
(e) fabrication;
(f) erection;
(g) installation;
(h) fitting out;
(i) improvement;
(j) modification;
(k) repair;
(l) commissioning of any movable or immovable property.
Bearing in mind the ordinary meaning assigned to the words installation, fitting out, fabrication and commissioning, it cannot be said that the contractor did not engage in any of the above-mentioned endeavors. The contract as noted above in essence required the contractor to install, lay out and commission the underground cable. The work also required him to bear all costs and expenses relating to the digging of trenches, construction of pillars in and upon which the underground cable was to rest. The payment terms as agreed to between the parties was linked to the work done. In fact clause 13 in specific terms provided that 90% of the payment would be released against bills in support of actual physical work completed. Regard may also be had to the approved rates for laying of cables which formed part of this agreement and classified the rates at which the contractor would obtain payment for the following activities: -
(a) digging and reinstating trenches;
(b) supply of bricks;
(c) horizontal boring of road crossing;
(d) laying and fixing of GI pipes;
(e) construction of cement-concrete foundation; and
(g) making of joint pits.
The tacit admission of the revisionist in respect of the above activities being undertaken and performed by the contractor is further evident from what was submitted before the appellate authority as part of its grounds of appeal. In fact and as would be evident from a reading of the submission made it is evident that the transfer of property in goods in the course of execution of the works contract was admitted. The said ground in appeal was in the following words: -
"Because in view of the facts mentioned above it is clear that the transfer of property in goods is strictly confined to the cost of bricks and its placement. These important aspects have not been taken into consideration by the learned Assessing Authority and the assessment order has been passed in a cursory manner without application of mind."
The above provisions of the agreement, the stand of the revisionist, have been referred to in some detail in order to highlight that the contract, its essential obligations and characteristics were not restricted to mere job work. The payment terms were in no manner connected to the cost that may have been incurred by the contractor for the purpose of engaging men and labour. The contract was a composite contract, which entailed the laying of cables after undertaking civil works which have been detailed above. The contract cannot be read as one which was confined to the provision of labour. On an overall conspectus of the facts it is clear that the contract in question was not merely one for supply of labour and service as is sought to be contended and portrayed but clearly fell in the species of a works contract as defined by Section 2(m) of the 1948 Act.
The submission of the learned Senior Counsel in this regard is not liable to be accepted for another fundamental reason. By virtue of the provisions of Article 366 (29A) of the Constitution and the corresponding amendments made in the 1948 Act, a works contract, which was earlier treated as an indivisible contract, has by way of a legal fiction been divided into two parts- one for the sale of goods and the other for supply of labour and services. Consequent to the insertion of Article 366 (29A) in the Constitution and the expansion of the meaning of the phrase 'tax on the sale or purchase of goods', the issue of whether the contract involved a "dominant intention" to transfer property in goods is no longer material. In fact the Supreme Court has consistently held that the dominant intention theory or test is not liable to be employed in the case of contracts which stand covered and fall within the scope and ambit of Article 366 (29A). To put this issue beyond the pale of controversy, one may usefully refer to what a Constitution Bench of the Supreme Court held in Kone Elevator India Private Limited Vs. State of Tamil Nadu2: -
"37. Having dealt with the aforesaid authorities, as advised at present, we shall refer to certain authorities as to how the term "works contract" has been understood in the contextual perspective post the constitutional amendment. In Hindustan Shipyard Ltd. (supra), the Court observed that the distinction between a contract of sale and a works contract is not free from difficulty and has been the subject-matter of several judicial decisions. It is further observed that neither any straitjacket formula can be made available nor can such quick-witted tests devised as would be infallible, for it is all a question of determining the intention of the parties by culling out the same on an overall reading of the several terms and conditions of a contract. Thereafter, the two-Judge Bench set out three categories of contracts and explained the contours, namely, (i) the contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (ii) it may be a contract for work in which the use of the materials is accessory or incidental to the execution of the work; and (iii) it may be a contract for supply of goods where some work is required to be done as incidental to the sale. Thereafter, it opined that the first contract is a composite contract consisting of two contracts, one of which is for the sale of goods and the other is for work and labour; the second is clearly a contract for work and labour not involving sale of goods; and the third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale.
43. The essential characteristics have been elucidated by a three-Judge Bench in Larsen and Toubro (supra) thus:
" 56. ............As the very title of Article 366 shows, it is the definition clause. It starts by saying that in the Constitution unless the context otherwise requires the expressions defined in that article shall have the meanings respectively assigned to them in the article. The definition of expression "tax on sale or purchase of the goods" is contained in Clause (29-A). If the first part of Clause (29-A) is read with Sub-clause (b) along with latter part of this clause, it reads like this: "tax on the sale or purchase of the goods" includes 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 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. The definition of "goods" in Clause (12) is inclusive. It includes all materials, commodities and articles. The expression "goods" has a broader meaning than merchandise. Chattels or movables are goods within the meaning of Clause (12). Sub-clause (b) refers to transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. The expression "in some other form" in the bracket is of utmost significance as by this expression the ordinary understanding of the term "goods" has been enlarged by bringing within its fold goods in a form other than goods. Goods in some other form would thus mean goods which have ceased to be chattels or movables or merchandise and become attached or embedded to earth. In other words, goods which have by incorporation become part of immovable property are deemed as goods. The definition of "tax on the sale or purchase of goods" includes a tax on the transfer of property in the goods as goods or which have lost its form as goods and have acquired some other form involved in the execution of a works contract."
44. On the basis of the aforesaid elucidation, it has been deduced that a transfer of property in goods under Clause (29A)(b) of Article 366 is deemed to be a sale of goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. One thing is significant to note that in Larsen and Toubro (supra), it has been stated that after the constitutional amendment, the narrow meaning given to the term "works contract" in Gannon Dunkerley-I (supra) no longer survives at present. It has been observed in the said case that: (Larsen and Toubro Ltd. Case, SCC p. 750, para 72) "72. ... even if in a contract, besides the obligations of supply of goods and materials and performance of labour and services, some additional obligations are imposed, such contract does not cease to be works contract, for the additional obligations in the contract would not alter the nature of the contract so long as the contract provides for a contract for works and satisfies the primary description of works contract."
It has been further held that: (Larsen and Toubro Ltd. Case, SCC p. 750, para 72) "72. ...once the characteristics or elements of works contract are satisfied in a contract, then irrespective of additional obligations, such contract would be covered by the term "works contract" because nothing in Article 366(29-A)(b) limits the term "works contract" to contract for labour and service only."
45. In the said case, another significant aspect has been considered. That relates to the "dominant nature test". We think it apt to reproduce what has been stated in Larsen and Toubro (supra):
"60. Whether the contract involved a dominant intention to transfer the property in goods, in our view, is not at all material. It is not necessary to ascertain what is the dominant intention of the contract. Even if the dominant intention of the contract is not to transfer the property in goods and rather it is the rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if it otherwise has elements of works contract...
46. At this juncture, it is condign to state that four concepts have clearly emerged. They are:
(i) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services;
(ii) the concept of "dominant nature test" or, for that matter, the "degree of intention test" or "overwhelming component test" for treating a contract as a works contract is not applicable;
(iii) the term "works contract" as used in Clause (29A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and
(iv) once the characteristics of works contract are met with in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract." (emphasis supplied) Bearing in mind the principles elucidated by the Constitution Bench, it is clear that the submission of the learned Senior Counsel cannot be accepted. In fact the acceptance of the submissions advanced would lead to the introduction and application of the dominant intention theory to a works contract which stands forbidden in light of the provisions of Article 366 (29A).
Having thus found that the contract in question was a works contract, the Court then proceeds to consider the impact of the provisions of Section 8D. Section 8-D (1) imposes an unequivocal obligation upon a person making payment to a contractor engaged in a works contract to deduct tax. The tax which is liable to be deducted is with reference to the liability discharged on account of valuable consideration paid for the transfer of property in goods in pursuance of a works contract. The civil work element undertaken by the contractor would necessarily entail a transfer of property in goods involved in the execution of a works contract. Sub-section (6) then provides for the imposition of penalty if a person fails to make deductions before making payment to the contractor. Sub-section (6) does not defer the imposition of penalty nor does it make the payment of penalty dependent upon the intent of the person responsible. The payment of penalty is also not contingent upon it being found that there was a design to evade payment of tax or any unlawful intent not to deduct tax. Sub-section (6) therefore, stands attracted immediately upon a failure on the part of the person responsible to deduct tax from payments made to a contractor. In the present case, there has admittedly been a failure on the part of the revisionist to deduct tax. Consequently, the provisions of sub-section (6) stood attracted and the levy of penalty, therefore, followed and was in fact a necessary corollary.
Learned Senior Counsel referring to the provisions of Section 3-F of the 1948 Act has then submitted that the penalty could not have been imposed on the entire amount of payment made under the contract. It was his submission that the penalty was liable to be restricted to the tax liability, which in turn was to be computed in accordance with the provisions of Section 3-F (2)(b). Sub-section (2) of Section 3F makes a provision for the identification of items which are liable to be included or excluded while computing the net turnover which is liable to be taxed in respect of a works contract. This Court however, finds that neither before the authorities below nor even before this Court has the revisionist furnished any details in respect of the taxable turnover liable to be computed in accordance with the provisions of Section 3-F (2)(b). In absence of the said material and as a consequence of the failure of the revisionist to provide such details, the learned Standing Counsel has rightly contended that the respondents committed no illegality in levying penalty upon the revisionist.
More importantly, the provisions of Section 3F deal with the computation and determination of net turnover of the works contractor. The identification of the valuable consideration paid in respect of a transfer of property in goods in the execution of a works contract is an exercise which was liable to be undertaken during the course of assessment of the works contractor. At this stage and in the absence of any material before this Court, no exercise of bifurcation can possibly be undertaken. It becomes relevant to note that despite pointed queries in this respect the details of assessments undertaken in respect of the works contractor were neither produced, referred or adverted to. This Court, therefore, finds no material or ground to interfere with the imposition of penalty or to upset the decisions rendered by the authorities below.
Accordingly and for the reasons aforementioned, this and connected revisions shall stand dismissed.
Order date: 31.8.2016 LA/-