2006 (2) TMI 593 - HC - Indian Laws

Sales Tax Upheld on Works Contracts: Court Rules in Favor of Tax Authorities

SS. Photographic Lab. Pvt. Ltd. Versus State Of Assam And Ors.

The court upheld the assessments and demands made by the respondent authorities under the Assam General Sales Tax Act, 1993, in a case involving the ... Contract is to render a service, if such a contract is a works contract, the States are empowered to levy a sales tax on the material used therein. Issues Involved:1. Imposed liability to tax under the Assam General Sales Tax Act, 1993.2. Whether the petitioners' business transactions constitute a 'works contract' under the Act.3. Applicability of Article 366(29A) of the Constitution of India.4. Validity of the assessments and demands made by the respondent authorities.Issue-wise Detailed Analysis:1. Imposed liability to tax under the Assam General Sales Tax Act, 1993:The petitioners challenged the tax liability imposed under the Assam General Sales Tax Act, 1993, for different assessment periods. They argued that their business transactions did not involve any sale of goods or transfer of property in goods as understood under Section 8(1)(e) of the Act. Despite their contentions, the respondent authorities assessed and raised demands for various amounts for the years 1993-94 to 1998-99 based on the materials available from their books of accounts.2. Whether the petitioners' business transactions constitute a 'works contract' under the Act:The petitioners contended that their business transactions were exclusively service-based and did not involve any transfer of property in goods. They argued that the activities in their laboratory were service contracts inseparable from the materials like paper and chemicals used in the process. However, the respondent authorities held that the petitioners were engaged in 'works contract' as defined under Section 2(38)(iv) of the Act, and thus chargeable to tax under Section 8(1)(e) of the Act, in view of Article 366(29A) of the Constitution of India and entry No. 24 of Schedule VI of the Act.3. Applicability of Article 366(29A) of the Constitution of India:The petitioners argued that their business transactions did not involve any transfer of property in goods and thus were not taxable under the Act. However, the respondent authorities maintained that following the Constitution (Forty-sixth Amendment) Act, 1982, Clause (29A) of Article 366 was inserted, defining 'tax on sale or purchase of goods' to include a tax on the transfer of property in goods involved in the execution of a works contract. This amendment empowered the State to levy sales tax on the value of goods involved in a works contract, even if the dominant intention of the contract was the rendering of a service.4. Validity of the assessments and demands made by the respondent authorities:The court referred to the decision in Associated Cement Companies Ltd., where it was held that even if the dominant intention of the contract is the rendering of a service, the State is empowered to levy sales tax on the materials used in such a contract after the Forty-sixth Amendment. The court concluded that the decision in Rainbow Colour Lab, which the petitioners relied upon, was no longer good law in light of the subsequent decision in Associated Cement Companies Ltd. Consequently, the court upheld the assessments and demands made by the respondent authorities, dismissing the petitions as without merit.Conclusion:The court dismissed the petitions, upholding the assessments and demands made by the respondent authorities under the Assam General Sales Tax Act, 1993. The court found that the petitioners' business transactions constituted a 'works contract' and were thus taxable under the Act, in view of Article 366(29A) of the Constitution of India. The court also noted that the decision in Rainbow Colour Lab was overruled by implication by the decision in Associated Cement Companies Ltd., which allowed the State to levy sales tax on materials used in a works contract even if the dominant intention was the rendering of a service.