Composite works contract treatment bars sales tax on embedded materials and does not, by itself, make the contractor a dealer.

A composite building or repair works contract, where materials are inseparably embedded in the completed work, is not treated as a sale of goods unless there is a distinct transfer of property in those materials for a price. On that reasoning, the turnover attributable to materials in such contracts could not be subjected to sales tax under the Hyderabad General Sales Tax Act, 1950, and the deeming provision in the turnover definition with Rule 5(3) was held invalid to that extent. The contractor was also not regarded as a dealer or casual trader merely by executing such works contracts, because the transactions did not amount to independent trading in goods.

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Issues: (i) Whether the turnover attributable to materials used in the execution of building and repair works contracts could be subjected to sales tax under the Hyderabad General Sales Tax Act, 1950, and whether the deeming provision in the turnover definition and Rule 5(3) were valid; (ii) Whether the assessee, being a building contractor executing such works contracts, could be treated as a dealer or casual trader within the meaning of the Act.

Issue (i): Whether the turnover attributable to materials used in the execution of building and repair works contracts could be subjected to sales tax under the Hyderabad General Sales Tax Act, 1950, and whether the deeming provision in the turnover definition and Rule 5(3) were valid.

Analysis: Entry 54 of List II of the Seventh Schedule empowers taxation only on the sale or purchase of goods. A works contract for construction or repair is a composite contract of service and labour in which materials are inseparably embedded in the finished work. Where the contract does not contemplate a separate sale of materials, no transfer of property in the goods as such takes place for a price in the sense required by the taxing entry. The Court also held that the artificial apportionment adopted by the deeming provision in section 2(m) and Rule 5(3), by fixing a presumed value of goods on a labour-material ratio, could not validly convert a works contract into a sale transaction for taxation purposes.

Conclusion: The levy of sales tax on the works contract turnover was not sustainable, and section 2(m) read with Rule 5(3) was held ultra vires to that extent.

Issue (ii): Whether the assessee, being a building contractor executing such works contracts, could be treated as a dealer or casual trader within the meaning of the Act.

Analysis: The definitions of dealer and casual trader require engagement in the business of buying, selling, or supplying goods. A building contractor executing works contracts does not, by that activity alone, carry on a business of selling materials to the customer; the materials are used in the course of completing the work and not sold as independent goods in the ordinary sense required by the Act. The isolated execution of construction and repair contracts therefore did not bring the assessee within those definitions for the disputed transactions.

Conclusion: The assessee was not liable to be treated as a dealer or casual trader in respect of the works contract transactions.

Final Conclusion: The assessment could not be sustained on the disputed construction and repair contracts, and the writ issued to restrain collection of sales tax on those transactions.

Ratio Decidendi: A composite works contract in which materials are inseparably integrated into the completed work is not a sale of goods unless there is a distinct transfer of property in those materials for a price, and the mere use of goods in executing the work does not make the contractor a dealer for sales tax purposes.

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