Indian Hume Pipe Co. Ltd. Vs. State of Rajasthan and Ors. - (Supreme Court) (28 Aug 2017)

State Governments have power to levy sales tax on value of material in execution of the works contract

MANU/SC/1053/2017

Sales Tax/VAT

In facts of present case, in the year 1954, the State Government of Rajasthan enacted Rajasthan Sales Tax Act in order to tax the sales and purchase of any goods. The Assessee is a company engaged in manufacturing and laying of pipelines for water supply schemes. The Public Health and Engineering Department ('PHED') of the State Government 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. On August 23, 1988, a work order was issued by PHED in favour of the Assessee and the Assessee, under the contracts/agreement dated January 11, 1989, agreed to provide PSC pipes manufactured by it and had entered into the contracts with PHED for providing and laying of pipelines. The issue that, has arisen in instant appeals is as to whether works contract given to the Assessee is divisible in nature, in facts of the case, and hence, the imposition of tax and penalty made under Section 7AA of the Rajasthan Sales Tax Act, 1954 is justifiable and sustainable in law.

In instant case, there is no dispute that, contract in question was a works contract. The issue is altogether different, namely, that of divisibility. It may be mentioned that, before Article 366(29A) of the Constitution was amended with effect from March 01, 1983, the test applicable was 'dominant nature test' or 'degree of intention' or 'overwhelming component test' or 'degree of labour and service test'. This Court in Larsen and Toubro Limited and Anr. v. State of Karnataka and Anr. clarified that, post amendment, i.e. with effect from March 01, 1983, these tests are no longer applicable. It is also made clear that, the works contract is an indivisible contract, but, by legal fiction, is divided into two parts, one for the sale of goods and the other for supply of labour and services.

The history of legislative and constitutional amendment pertaining to works contract is well known, which has been stated and restated by this Court in number of cases. The entire position is summarised in State of Karnataka and Ors. v. Pro Lab case wherein it was summed up that, it follows from the reading of the judgment in Larsen and Toubro case that, after insertion of Clause (29-A) in Article 366, the works contract which was indivisible one by legal fiction, altered into a contract, which is permitted to be bifurcated into two: one for "sale of goods" and the other for "services", thereby making goods component of the contract exigible to sales tax. Further, while going into this exercise of divisibility, dominant intention behind such a contract, namely, whether it was for sale of goods or for services, is rendered otiose or immaterial. It follows, as a sequitur, that by virtue of Clause (29-A) of Article 366, the State Legislature is now empowered to segregate the goods part of the works contract and impose sales tax thereupon. It may be noted that, Entry 54 of List II of Schedule VII to the Constitution of India empowers the State Legislature to enact a law taxing sale of goods. Sales tax, being a subject-matter of the State List, the State Legislature has the competency to legislate over the subject.

It clearly follows from the above that, by virtue of the Forty Sixth Amendment to the Constitution, a single and indivisible contract is now brought on par with a contract containing two separate agreements. It has also now become a settled position in law that, the State Governments have power to levy sales tax on value of material in execution of the works contract. This position is brought about by creating friction whereby the transfer of moveable property in a works contract is deemed to be sale, even though it may not be well within the meaning of Sale of Goods Act. In Larsen and Toubro case, it was further held that, value of goods which can constitute a measure of levy of the tax has to be the value of goods at the time of incorporation of the goods in the works even though property in goods passes later. Taxing the sale of goods element in a works contract is permissible even after incorporation of goods, provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property.

In present case, assessing authority, after scrutinising the agreement in question between the Assessee and the State Government, returned a finding of fact that, manufacture and supply of PSC pipes, jointing material specials, valves, anchor blocks, etc. do not fall within the scopes of buildings, bridges, dams, roads and canals. It was also held that, the agreement was clearly in two parts, namely, (i) sale and supply of PSC pipes, jointing material specials, valves, anchor blocks, etc. and (ii) the remaining part being supply of labour and services. These findings are upheld not only by the appellate authority but also by the Single Judge of the High Court as well as the Division Bench of the High Court. At this stage that the Assessee has, in fact, admitted that, it had no grievance against the finding that, supply of pipes was nothing but the sale of pipes involved in the execution of the contracts and, therefore, it was excisable to sales tax. In view of the findings recorded by the authorities below, this element of sale of goods shall apply to jointing material specials, valves, anchor blocks, etc. as well. Thus, there is no infirmity in impugned judgment of the High Court.

Relevant : State of Karnataka and Ors. v. Pro Lab and Ors. MANU/SC/0084/2015: (2015) 8 SCC 557; Larsen and Toubro Limited and Anr. v. State of Karnataka and Anr. MANU/SC/0985/2013: (2014) 1 SCC 708

Tags : WORKS CONTRACT EXEMPTION ENTITLEMENT