State Taxation Tribunal - Rajasthan
Indian Hume Pipe Co. Ltd. vs State Of Rajasthan And Ors. on 27 August, 1998
JUDGMENT
J.P. Bansal, Judicial Member
1. All these five applications which have been filed under Section 8(1) of the Rajasthan Taxation Tribunal Act, 1995 arise on facts and in the circumstances to be mentioned in the paragraphs that follow. Since they involve the consideration of common questions of fact and law they are being disposed of by a common judgment.
2. For the sake of convenience we put on record the facts of the Application No. 250 of 1997 for our examination and consideration. The applicant-company which is engaged in the execution of civil construction works including laying of pipelines for water supply schemes entered into a contract with the State of Rajasthan through its Chief Engineer, Public Health Engineering Department (PHED), Ajmer Region, Ajmer, for providing and laying of pipes complete with suitable jointing materials, specials, valves and construction of valve chamber, anchor blocks table crossing including testing and commissioning of pipelines, etc., in respect of Ajmer, Kishangarh, Beawar Water Supply Reorganisation Scheme from Bisalpur Dam pursuant to a notice inviting tenders dated September 8, 1997. The applicant-company submitted its tender which was accepted. It was chosen as the contractor to execute the foregoing works. The work orders which were issued on August 23, 1988 and My 10, 1989 culminated into agreements between the applicant-company and the PHED on January 11, 1989 and July 23, 1989. As per the terms of agreements the requisite pipes were to be manufactured, supplied, laid and jointed by the applicant-company. It was to establish a factory near the working site for the manufacture of pipes and the specials. Trench excavation was also to be done by the applicant-company. Submission of completion drawings was also the work which was entrusted to be done by the applicant-company. The entire scheme was to be commissioned and successfully operated for a period of at least 30 days at designed flow and pressure. It was a turnkey project. The quotation given by the applicant-company was inclusive of all taxes, levies and octroi, etc. It was also provided that statutory variations in taxes and duties shall be allowed as per the actual payment. As per the terms of the agreement the PHED was to deduct 2 per cent of the amount of the running bills for sales tax purposes. This deduction of 2 per cent towards sales tax was in line with the Notification No. G.S.R. 12 dated May 28, 1987. This 2 per cent was relatable to entire turnover of the works contract. As regards the nature of contract it was an indivisible works contract for supply of material, work and labour. During the year 1989-90 corresponding to the period from April 1, 1989 to March 31, 1990 a sum of Rs. 4,03,43,028 inclusive of a sum of Rs. 11,75,043 on account of tax was received by the applicant-company from the PHED on account of the running bills. The applicant-company during this relevant assessment year received a sum of Rs. 3,91,68,085 from PHED as part payment for composite works contract undertaken by it. In spite of all this the non-applicant No. 4, Commercial Taxes Officer, Special Circle, Ajmer (assessing authority) on May 6, 1996 framed the assessment order whereby it levied sales tax at the rate of 12 per cent amounting to Rs. 42,32,921 on a sum of Rs. 3,52,74,345 treating it to be the amount towards sale of pipes, which amount was arrived at after deducting a sum of Rs. 38,93,740 towards labour charges from the foregoing sum of Rs. 3,91,68,085 received by the applicant-company on account of the running bills during the year. Penalty under Section 7AA of the Rajasthan Sales Tax Act, 1954 (for short, "the Act") was levied. Interest under Section 11B of the Act was also levied. Thus a demand notice dated May 6, 1996 for a sum of Rs, 87,63,561 was issued against the applicant-company. This assessment order dated May 6, 1996 was challenged by the applicant-company before the non-applicant No. 3, Deputy Commissioner (Appeals), Ajmer, who on May 24, 1997 dismissed it and set his seal of approval on the assessment order dated May 6, 1996. The supply of pipes was treated as sale of pipes by the assessing authority as also the first appellate authority and sales tax was levied besides penalty and interest thereon as mentioned above. It has been averred that the contract was an indivisible one. There was no sale of pipes and since it was an indivisible contract no sales tax could be levied on the total amount of works contract. This view has been taken by the Orissa High Court as also by the apex Court in simitar matters. It was prayed that the impugned order dated May 24, 1997 be quashed. It may be declared that the agreements dated August 23, 1988 and July 10, 1989 are indivisible works contracts. The applicant-company is not liable to pay sales tax over and above 2 per cent which has already been deducted by PHED at source from the running bills.
3. In the counter filed on behalf of the non-applicants Nos. 1 to 4 the factual position with regard to the issuance of notice inviting tenders and work orders, execution of agreements, framing of the assessment order and the passing of the appellate order has been admitted. It is alleged that a works contract cannot be treated to be an indivisible contract after coming into the force of the Constitution (Forty-sixth) Amendment Act, 1982 (Amendment Act). A works contract is to be treated as a divisible one consisting of two parts--one for the supply of material and the other for the supply of labour and services. The first part of the works contract is to be treated as a contract for sale. The assessment order as also the first appellate order are just and proper. The applicant-company is liable to pay sales tax on the price of the pipes supplied by it to PHED in the course of execution of the works contract.
4. The non-applicant No. 5 (PHED) has also put in a separate reply wherein it has virtually adopted the case as put forth by the non-applicants Nos. 1 to 4 in their counter. There is nothing which deserves any special mention.
5. We have heard the arguments and examined the material on record.
6. The pleadings of the parties and the submissions made before us by their learned counsel gave rise to the following points :
1. Whether the works contract arising from the agreements dated January 11, 1989 and July 23, 1989 is an indivisible contract as alleged by the applicant-company or a divisible one consisting of two parts--one for the supply of pipes and the other for the supply of labour and services--as alleged by the non-applicants.
2. Whether the applicant-company is not liable to pay tax at the rate of 12 per cent as is charged on the cost of the pipes. Contrariwise, it is liable to pay tax at the rate of 2 per cent on the turnover of the works contract which has already been deducted at source by the PHED.
7. Point No, 1 :
The learned counsel for the applicant-company has contended before us that the works contract being indivisible is not a contract for sale and as such is not exigible to tax under the Act. This contention seems to have been advanced only to be rejected as a result of the provisions inserted in the Constitution by the amendment Act in 1982 as also the precedential law which developed thereon, especially in Builders Association of India v. Union of India [1989] 73 STC 370 (SC) ; [1989] 2 SCR 320 and Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204 (SC). A few sentences about the historical background are in order here. The High Court of Madras in Gannon Dunkerley & Co. (Madras) Ltd. v. State of Madras [1954] 5 STC 216 ; AIR 1954 Mad. 1130, took the view that the expression "sale of goods" in entry 48 of List II of the Government of India Act, 1935, and entry 54 in List II of the Constitution had the same meaning as it had in the Sale of Goods Act, 1930, and that construction works contracts were not contracts for sale of the material used therein and that the contract, being entire and indivisible, could not be broken into a contract for sale of material and a contract for payment for works done. On that view it was held that no tax could be charged on the value of the works contracts. A contrary view was taken by the Kerala High Court in Gannon Dunkerley and Co. Madras (Private) Ltd. v. Sales Tax Officer, Mattancheri [1957] 8 STC 347 ; AIR 1957 Ker 146. The view taken by the Madras High Court was upheld by the apex Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353 (SC) ; [1959] SCR 379. The position was that if the works contract was indivisible it was not exigible to tax. Until the amendment Act came on the scene the position all along was that no sales tax could be charged on a works contract unless it was shown that it consisted of two parts--one for the sale of material and the other for the supply of labour and services. If it was shown that it consisted of two parts then the first part of the contract with regard to the sale or supply of material used for the execution of works contract was exigible to tax. If not, not. The amendment Act brought this branch of law concerning works contract out of the state of uncertainly and put it on to the uplands of clarity in that it provided in clause (29-A) of Article 466 for the levy of the tax on the sale or purchase of goods in clause (b) as hereunder :
(a).........................
(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.
8. This amendment made it clear that the State Legislatures were free to make law authorising the levy of tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. In other words, the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract was considered to be a sale or a deemed sale. It was immaterial whether the contract was divisible into two parts or an indivisible one. An indivisible contract was converted into a contract which consisted of two parts--one for the transfer of the property in goods (whether as goods or in some other form) and the other for the supply of labour and services. This was the legal position which was introduced by the amendment Act in the Constitution itself. The validity of this amendment Act was under challenge in Builders Association case [1989] 73 STC 370 (SC) ; [1989] 2 SCR 320, wherein the honourable Supreme Court upheld it. While construing the provisions of sub-clause (b) of clause (29-A) of Article 466 the apex Court observed thus :
"Sub-clause (b) of clause (29-A) states that 'tax on the sale or purchase of goods' includes among other things 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. It does not say that a tax on the sale or purchase of goods included a tax on the amount paid for the execution of a works contract. It refers to 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. The emphasis is on the transfer of property in goods (whether as goods or in some other form). The latter part of clause (29-A) of Article 466 of the Constitution makes the position very clear. While referring to the transfer, delivery or supply of any goods that takes place as per sub-clauses (a) to (f) of clause (29-A), the latter part of clause (29-A) says that '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. Hence, a transfer of property in goods under sub-clause (b) of clause (29-A) is deemed to be a sale of the goods involved in the execution of works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. The object of the new definition introduced in clause (29-A) of Article 466 of the Constitution is, therefore, to enlarge the scope of 'tax on sale or purchase of goods' wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub-clauses (a) to (f), thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression 'tax on the sale or purchase of goods' in entry 54 of the State List, therefore, 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 also. The tax leviable by virtue of sub-clause (b) of clause (29-A) of Article 466 of the Constitution thus becomes subject to the same discipline to which any levy under entry 54 of the State List is made subject to under the Constitution." (pages 396-397 of STC ; 347-348 of SCR).
9. Dealing with the effect of the amendment Act on the powers of the State Legislature to levy sales tax the apex Court held thus :
"Even after the decision of this Court in State of Madras v, Gannon Dunker-ley & Co. (Madras) Ltd. [1958] 9 STC 353 ; [1959] SCR 379 it was quite possible that where a contract entered into in connection with the construction of a building consisted of two parts, namely, one part relating to the sale of materials used in the construction of the building by the contractor to the person who had assigned the contract and another part dealing with the supply of labour and services, sales tax was leviable on the goods which were agreed to be sold under the first part. But sales tax could not be levied when the contract in question was a single and indivisible works contract. After the 46th Amendment the works contract which was an indivisible one is by a legal fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labour and services. After the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into in two distinct and separate parts as stated above. It could not have been the contention of the Revenue prior to the 46th Amendment that when the goods and materials had been supplied under a distinct and separate contract by the contractor for the purpose of construction of a building the assessment of sales tax could be made ignoring the restrictions and conditions incorporated in Article 286 of the Constitution. If that was the position can the States contend after the 46th Amendment under which by a legal fiction the transfer of property in goods involved in a works contract was made liable to payment of sales tax that they are not governed by Article 286 while levying sales tax on sale of goods involved in a works contract ? They cannot do so. When the law creates a legal fiction such fiction should be carried to its logical end. There should not be any hesitation in giving full effect to it. If the power to tax a sale in an ordinary sense is subject to certain conditions and restrictions imposed by the Constitution, the power to tax a transaction which is deemed to be a sale under Article 466(29-A) of the Constitution should also be subject to the same restrictions and conditions." (page 400 of STC ; pages 351 and 352 of SCR).
10. The decision in Builders Association case [1989] 73 STC 370 (SC) ; [1989] 2 SCR 320 was reiterated in Gannon Dunkerley & Co. case [1993] 88 STC 204 (SC). Now we proceed to have a look at the relevant provisions contained in Section 2(o) and (u) of the Act. Section 2(o) of the Act so far as it is relevant for our purposes is as hereunder :
"2(o) 'sale', with all its grammatical variations and cognate expressions, means every transfer of the property in goods (other than by way of mortgage, hypothecation, charge or pledge) by one person to another for cash or deferred payment or other valuable consideration and includes :
(i)..............................
(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract ;
Explanation I.--The transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to take place within the State of Rajasthan if the goods are within the State at the time of their appropriation or application or use for the execution of the works contract irrespective of the place where the agreement for such works is made or from where the goods are transferred or delivered for use in the works contract.
Section 2(u) is as hereunder :
" 'works contract' includes any agreement for the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, over-hauling, repair, improvement, modification, white-washing, painting, varnishing and other similar activities or commissioning of any movable or immovable property for cash, deferred payment or other valuable consideration but excludes a works contract purely of labour or service.
11. The State had the constitutional mandate to levy sales tax on works contract whether or not the contract itself was divisible into two parts or an indivisible one. The definition between a divisible contract and an indivisible one was washed out in 1982 when the amendment Act came into force. It introduced a legal fiction which cannot but be taken to its logical conclusion. The law was no longer res integra. Section 2(o)(ii) read with explanation I makes it clear that the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract was treated to be a sale and thus exigible to tax.
12. Even if we look at the factual position as detailed in agreements dated January 11, 1989 and July 23, 1989 we find that the works contract was in part for the supply of pipes. It was clearly mentioned that 75 per cent payment was to be made against the cost of pipes and specials ready at factory site. The cost of the pipes constituted a substantial portion of the price of the works contract. Apart from this the applicant-company has alleged in its application that Clause 7.4 of the works orders provided that 2 per cent shall be deducted for sales tax. If there was no element of sale or deemed sale there was no necessity for inserting this clause in the works contract that the PHED would be deducting 2 per cent from the amount of running bills towards the payment of sales tax.
13. The learned counsel for the applicant has placed his reliance upon a judgment of the High Court of Orissa, Cuttack, in Indian Hume Pipe Company Ltd. v. State of Orissa decided on December 10, 1991 a copy of which has been placed on record as annexure 10. This judgment is of no help to the case of the applicant-company. The works contract in that case related to a period prior to the coming into force of the amendment Act in 1982. As mentioned earlier the position has undergone a sea change after the amendment Act. Shri Gupta further contends that the Civil Appeals Nos. 3411-3413 of 1984 filed by the State of Orissa against the judgment were dismissed by the honourable Supreme Court on September 24, 1995. The order dismissing the appeals is as hereunder :
"Learned counsel for the appellant fairly states that it cannot be argued, having regard to the agreement in question, that it was divisible into one of sale and one of works. The period involved was prior to the 46th Constitution Amendment so that the benefit thereof is not available to the appellant. The appeals are, therefore, dismissed with no order as to costs."
14. A perusal of this order of the apex Court gives a quietus to the contention of the learned counsel Shri Gupta that this order is of some help to the applicant-company. It is clear from this order that the works contract was not found divisible into one of sale and one of works. The works contract related to the period prior to the amendment Act. It is because of these reasons that the appeals failed and were dismissed. The present matters before us related to the period subsequent to the amendment Act. Shri Gupta has placed his reliance on another judgment of Allahabad High Court, Bench Lucknow, in S.T.R. No. 16/1991, Commissioner of Sales Tax, Uttar Pradesh v. Indian Hume Pipe Company Ltd. decided on July 21, 1995. This judgment is of no help to the case of the applicant-company. On the facts it was held that the works contract when read as a whole was an indivisible one. Here the position is different from what it was before the Lucknow Bench of the Allahabad High Court.
15. On a consideration of the factual as well as legal aspects of the matter we come to the conclusion that the works contract was not an indivisible one on facts. Even considering but not admitting for the sake of argument that it was an indivisible one even then the supply of pipes was nothing but the sale of pipes involved in the execution of the works contract. It was exigible to sales tax.
Point No. 2 ;
16. This point concerns the rate of tax which is to be made applicable to that portion of the works contract which related to the supply of material in which there was a transfer of property. The case of the applicant-company is that it has paid 2 per cent on the amount of running bills towards the payment of sales tax. This amount has already been deducted at source. The case of the department is that the tax at the rate of 12 per cent is to be charged. The relevant notifications in this connection are three in number which are as hereunder :
S.No. 682 : F.4(80) FD/Gr. IV/81-43 dated May 28, 1987.
G.S.R. 12.--In exercise of the powers conferred by Section 5 of the Rajasthan Sales Tax Act, 1954 (Rajasthan Act 29 of 1954), the State Government hereby notifies with immediate effect that the rate of tax payable by a contractor on his turnover of the works contracts specified in column (2) of the list annexed hereto shall be as shown against them in column (3) of the said list.
List Sl. No. Nature of works contract Rate of tax (1) (2) (3) 1 Works contracts relating to any kind of construction.
2% 2 Works contracts relating to any kind of installation, fitting out, improvement, overhaul or repairs.
4% Superseded by S.No. 712 dated March 8, 1988 S.No. 712 : F.4(5) FD/Gr. IV/88-27 dated March 8, 1988.
S.O. 258.--In exercise of the powers conferred by Section 5 of the Rajasthan Sales Tax Act, 1954 (Rajasthan Act 29 of 1954) 'and in supersession of this Department Notification No. F.4(80) FD/Group-IV/81-43 dated May 28, 1987, the State Government hereby notifies that the rates of tax payable by a contractor on his turnover of the works contracts as specified in column (2) of the list annexed hereto, shall be as shown against them in column (3) of the said list :
List S.No Nature of the works contracts Rate of tax (1)1 (2) All works contracts relating to immovable property (3) 2.5% 2 All works contracts relating to installation and fitting-out :
(a) if the goods involved in the execution of the works contracts have suffered tax at the flill rate under the Act.
2.5%
(b) in case not covered by (a) above.
At the rate notified for the goods installed or fitted out.
3All works contracts relating to movable property : (a) if the goods involved in the execution of the works contracts have suffered tax at the full rate under the Act.
2.5%
(b) in case not covered by (a) above At the rate notified for the goods involved in the execution of the works contract.
S. No. 761 : F.4(80) FD/Gr. IV/81-33 dated June 28, 1989, Pub. July 1, 1989 S.O. 51.--In exercise of the powers conferred by Section 5 of the Rajasthan Sales Tax Act, 1954 (Rajasthan Act No. 29 of 1954) and in supersession of all previous notifications issued in this behalf in respect of works contracts, the State Government being of the opinion that it is expedient in the public interest to do so, hereby provides that a contractor shall pay tax on the value of the goods involved in the execution of works contract at the rates notified for such goods under Section 5 of the Act.
17. The learned counsel for the applicant-company, Shri Gupta, has placed his reliance upon notification dated May 28, 1987 which provides for the levy of tax on works contract at the rate of 2 per cent. This notification does not render any help to the case of the applicant-company because it was superseded by Notification No. 712 dated March 8, 1988 which in turn was superseded by the Notification serial No. 761 dated June 28, 1989 which was in force when the agreement dated July 23, 1989 was entered into between the parties. This notification continues to be in force until today. The lax has to be levied at the rate prescribed in this notification. It makes it clear that the contractor shall pay tax on the value of the goods involved in the execution of the works contract at the rates notified for such goods under Section 5 of the Act. The rate prescribed is 12 per cent. The value of the goods involved in the execution of works contract is thus exigible to tax at the rate of 12 per cent. Whatever amount has been deducted at source shall be adjusted against the amount outstanding against the applicant-company. The applicant-company cannot be given any relief merely on the ground that the tax deducted at source was at the rate of 2 per cent only. This point is also decided against the applicant-company.
18. In view of the discussion of the facts and circumstances made in the preceding paragraphs we disallow these applications Nos. 248, 249, 250. 251 and 252 of 1997 with no order as to costs.