2007 (5) TMI 18 - SC - VAT and Sales Tax

Supreme Court clarifies taxation principles for works contracts, limits assessment orders after remand to six years.

STATE OF JHARKHAND Versus VOLTAS LTD.

The Supreme Court dismissed the appeal, upholding the judgment. It clarified the taxation principles for works contracts, emphasizing taxation on the ... Works Contract – Appellant engage in the activity of “Work Contract “and liable to pay sales tax only on the value of goods sold Issues Involved:1. Interpretation of works contracts for taxation purposes.2. Applicability of sales tax on works contracts.3. Determination of taxable turnover and deductions.4. Time limitation for assessment orders in sales tax matters.Issue 1: Interpretation of Works Contracts for Taxation Purposes:The case involved the interpretation of works contracts for taxation purposes. The respondent, a company engaged in executing works contracts for air-conditioning plants, faced a dispute regarding the imposition of sales tax. The Court referred to the decision in State of Madras v. Gannon Dunkerley & Co., where it was established that sales tax cannot be levied on a works contract as it is not considered a sale. Subsequently, the Constitution was amended to include a provision allowing taxation on the transfer of property in goods involved in the execution of a works contract.Issue 2: Applicability of Sales Tax on Works Contracts:The Court referred to the case of Gannon Dunkerley and Co. v. State of Rajasthan, which outlined the principles for taxing works contracts. It was emphasized that only the value of goods involved in the works contract could be taxed, excluding charges for labor, services, machinery, tools, consumables, establishment costs, and contractor's profit. The State legislature could only tax the sale or purchase of goods, as per the Seventh Schedule of the Constitution.Issue 3: Determination of Taxable Turnover and Deductions:The case involved a dispute over the interpretation of Section 21 of the Bihar Sales Tax Act and Rule 13A of the Bihar Sales Tax Rules. The Court agreed with the Patna High Court's decision that deductions should not be limited to labor charges but should also include all other charges except the value of goods sold in the works contract. It was clarified that only the value of goods sold could be subject to sales tax.Issue 4: Time Limitation for Assessment Orders in Sales Tax Matters:The Court addressed the issue of time limitation for assessment orders in sales tax matters. It was found that the assessment order made after a remand was time-barred as it was completed more than six years after the communication of the appellate order. The Court held that the assessment order and the demand notice raised in pursuance of the re-assessment were time-barred under Section 24 of the Bihar Finance Act.In conclusion, the Supreme Court dismissed the appeal, upholding the impugned judgment and finding no infirmity in it. The Court emphasized the principles governing the taxation of works contracts, deductions applicable, and the importance of adhering to time limitations in sales tax assessments.