In this article an attempt has been made to clarify the position in regard to the levy of VAT or CST on inter-state works contracts. The State Governments have the power under entry 54 of the State List of the Seventh Schedule to the Constitution of India, to levy tax on the sale and purchase of goods within the jurisdiction of such States.
In works contracts there is a deemed sales of the goods incorporated in such contracts to the contractee, hence the tax on such deemed sales of goods can also be levied by States if such
deemed sales happen within the jurisdiction of the States.
The definition of sale in the CST Act was amended in 2002 so as to include within its purview the concept of deemed sales involved in the works contracts. Hence Central Government can also levy CST on such deemed sales involved in the works contracts if such deemed sales is an interstate sales.
Taxable event in works contracts
It should be noted that taxable event in case of works contracts is the deemed sales and such deemed sales is considered to have taken place when the goods are incorporated in the works contract.
How an inter-state deemed sales may arise in case of works contracts. This question was also raised in Gannon Dunkerley& Co. Vs State of Rajasthan (1993) 88 STC 204 (SC) , the relevant decision of Apex Court the judgement is being produced herebelow::
The Supreme Court observed as follows:
“We do not propose to go into this controversy because the question whether a deemed sale resulting from transfer of a particular works contract amounts to a sale in the cource of inter-state trade or commerce under section 3 of the Central Sales Tax Act or an outside sale under section 4 of the Central Sales Tax Act or sale in the cource of import under section 5 of Central Sales Tax Act, has to be decided in the light of the particular terms of the works contract and it cannot be decided in the abstract.
As at present advised,we are not in a position to say that in no case, can there be a sale in the cource of inter-state trade or commerce or an outside sale or a sale in the cource of import in respect of a deemed sale resulting from transfer of property in goods involved in the execution of a works contract falling within the ambit of sub-clause (b) of clause (29A) of Article 366 of the Constitution.”
It should be noted that at the time when the above judgement was delivered although the deemed sales involved in the works contracts was included in sub-clause (b) of clause (29A) of article 366 of the Constitution, but at the same time definition of sale as contained in CST Act, 1956 was not amended to provide for the deemed sales in the works contract within its purview, still the Supreme court held that there can be an inter-state deemed sales in works contract but the same cannot be decided in abstract but can be decided in the light of particular terms of every contract.
In 2002 the definition of sales under CST Act was amended to include deemed sales in works contracts, which made the position crystal clear that there can be an inter-state deemed sales in the works contracts.
The Punjab & Haryana High Court in Thomson Press (India) Ltd. Vs. State of Haryana (1996) 100 STC 417 (P&H) held that if the inter-state movement of goods arises due to a pre-existing contract then inputs and goods involved in the execution of the works contract shall also be deemed to have moved and the State Government cannot levy tax on deemed sales of such goods. The relevant extracts of the said judgment is being produced herebelow to further understand this issue:
The High Court in the above case made it clear that if a pre-existing works contract occasions the interstate movement of goods then such goods shall be deemed to have been incorporated in such works contract inter-state, on which no tax can be levied by the State Governments. Hence the deduction of inter-state sale or purchase of goods in pursuance of a pre-existing works contract should be allowed while calculating the deemed sales within the State jurisdiction, if such contract has occasioned such interstate movement of goods.
Now the question is when a contract can said to be occasioning the inter-state movement of goods incorporated in the works contract. Some case laws are provided herebelow to answer when a works contract occasions the interstate movement of goods:
The assessee received gray fabric from outside the State to process into dyed and printing fabric and after processing, it dispatched the same to the dispatching State. It was held that movement of cloth is occasioned by the contract of sale within the meaning of section
3 of the CST Act and the transaction amounts to an inter-state sale- East India Cotton Mfg. Co. Ltd. Vs. State of Haryana (1993) 90STC 221 (P&H).
If the purchases are made specifically for the execution of the contract, then the intervention of the branch office of a contractor in the movement of the goods from outside the State, for the execution of the contract inside the State, will not change the character of a transaction and it will remain as an inter-state sale- Sahney Steel and Press Works Ltd. Vs. CTO (1985) 60 STC 301 (SC).
The petitioner entered into an agreement for supply and installations of elevators at a site in Punjab, Goods moved from Delhi to Punjab in semi-knocked down condition for installation at site kept ready as per drawings and designed by the consignee. It was held that it is an agrerement for sale between the parties instead of works contract. Further installation of lift was incidental to sale and it is an inter-state sale from Delhi, not taxable under The Punjab VAT Act.-E.C.E Industries Ltd. Vs State of Punjab (2008) 14 VST 40(P&H).
From the above discussion and cases referred, it can be safely concluded that the inter-state sale or purchase of goods made in pursuance of a pre-existing works contract and executed in such works contract, shall be deemed as sale or purchase in the course of inter-state trade and there cannot be any local deemed sales in such case, hence the deduction of such sale or purchase should be allowed while calculating local deemed sales.
However the terms of contract and facts of each case play a decisive role in determining the inter-state deemed sales in works contracts. Therefore it is advisable that contracts should be drafted with utmost care and help of an expert tax professional in the field of works contract must be taken while drafting such contracts, which can be invaluable and can also help avoiding unnecessary litigation to a great extent.
These are Personal Views of the Author and Shall be Taken just for Educational Purposes
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