1996 (9) TMI 510 - SC - VAT and Sales Tax

Supreme Court Upholds Decision on Contractual Transfer Price and Royalty Inclusion

Cooch Behar Contractors Association and Others Versus State of West Bengal and Others

The Supreme Court upheld the Tribunal's decision in a case involving discrimination under Article 14 of the Constitution, inclusion of materials supplied ... Liability to payment of tax on the transfer of property in goods involved in the execution of works contract and rate thereof Held that:- Appeal dismissed. An agreement with the conclusion reached by the Tribunal that 'having considered all aspects of the matter, a sale within the meaning of section 2(g) of the 1941 Act, namely, a transfer of property in goods supplied by the owner/contractee to the contractor for use in the execution of a works contract takes place in the cases under our consideration, when such goods are actually used in the construction work provided prices of such goods are deducted from or adjusted against bills or dues of the contractor. Thus we do not think there is any case for interference under article 136 of the Constitution. Issues Involved:1. Discrimination under Article 14 of the Constitution.2. Inclusion of value of materials supplied by the contractee in the 'contractual transfer price.'3. Inclusion of royalty paid by contractors in the 'contractual transfer price.'4. Inclusion of cost of freight and delivery in the 'contractual transfer price.'Detailed Analysis:1. Discrimination under Article 14 of the Constitution:The appellants contended that Section 6D of the Bengal Finance (Sales Tax) Act, 1941, unjustly discriminates against dealers by denying them the advantage of using declaration forms, thus violating Article 14 of the Constitution. The Tribunal held that contractors under Section 6D form a distinct class and cannot compare themselves with other dealers under Sections 4 or 5. The Supreme Court concurred, noting that Section 6D is a self-contained code for dealers in works contracts, and the Legislature's classification is valid. The Court cited the decision in Gannon Dunkerley & Co. v. State of Rajasthan, which supports the view that different tax rates for goods sold separately and those involved in works contracts are permissible. Thus, the Court held that there is no discrimination violating Article 14.2. Inclusion of value of materials supplied by the contractee in the 'contractual transfer price':The appellants argued that the value of materials supplied by the contractee should not be included in the 'contractual transfer price' as there is no transfer of property. The Tribunal found that contractors pay for these goods through adjustments, implying a transfer of property. The Supreme Court referenced Builders Association of India v. Union of India, which established that property in goods used in construction transfers to the contractee when incorporated into the building. The Court also cited N.M. Goel & Co. v. Sales Tax Officer, which held that the use or consumption of materials in construction constitutes a sale. Thus, the Court agreed with the Tribunal that the value of such goods should be included in the 'contractual transfer price.'3. Inclusion of royalty paid by contractors in the 'contractual transfer price':The appellants contended that royalty paid for procuring materials should not be included in the 'contractual transfer price.' The Supreme Court, referencing State of Madhya Pradesh v. Orient Paper Mills Ltd., held that royalty is a form of price for goods obtained from government departments and used in works contracts. Thus, the Court found no merit in the appellants' argument and upheld the inclusion of royalty in the 'contractual transfer price.'4. Inclusion of cost of freight and delivery in the 'contractual transfer price':The appellants argued that the cost of freight and delivery should not be included in the 'contractual transfer price.' The Tribunal did not make a final decision on this issue, leaving it open for determination based on the facts of each case. The Tribunal noted that expenses incurred on labor, unless related to the cost of freight or delivery, should not form part of the 'contractual transfer price.' The Supreme Court agreed that it was unnecessary to address this issue further as it remained unresolved by the Tribunal.Conclusion:The Supreme Court found no grounds for interference under Article 136 of the Constitution and dismissed the appeals, affirming the Tribunal's judgment. No costs were awarded.