Works contract goods component taxable as deemed sale; prevailing notification, not TDS deduction, fixed the applicable rate.

Post-Forty-sixth Amendment, transfer of property in goods involved in execution of a works contract is taxable as a deemed sale under article 366(29-A)(b), and the Rajasthan Sales Tax Act similarly treats such transfers within the definition of sale. On the contractual terms, supply of pipes formed a separable part of the arrangement; in any event, even if the contract were treated as indivisible, the goods component remained taxable. For the relevant period, the prevailing notification governed the tax rate on the value of goods involved in the works contract, and tax deducted at source at 2% was only adjustable against the assessed liability. The assessment sustaining sales tax on the goods component was upheld.

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Issues: (i) Whether the contracts for supply, laying and commissioning of pipes were indivisible works contracts or were divisible into a sale component and labour and services component; (ii) Whether the value of pipes involved in execution of the works contract was liable to sales tax at 12% or only at the rate already deducted at source.

Issue (i): Whether the contracts for supply, laying and commissioning of pipes were indivisible works contracts or were divisible into a sale component and labour and services component.

Analysis: After the Forty-sixth Constitutional Amendment, article 366(29-A)(b) treats transfer of property in goods involved in the execution of a works contract as a deemed sale. The statutory definition in section 2(o)(ii) of the Rajasthan Sales Tax Act, 1954 similarly includes such transfer within "sale", and section 2(u) recognises works contracts covering construction, fabrication, installation and allied activities. On the contractual terms and the nature of the transaction, the supply of pipes formed a substantial and separable part of the arrangement; in any event, the legal fiction created by the constitutional amendment made the transfer of property in goods taxable even if the contract was treated as indivisible.

Conclusion: The contracts were not exempt from sales tax on the ground that they were indivisible; the supply of pipes was exigible to tax as a transfer of property in goods involved in execution of the works contract.

Issue (ii): Whether the value of pipes involved in execution of the works contract was liable to sales tax at 12% or only at the rate already deducted at source.

Analysis: The earlier notification of 28 May 1987 prescribing 2% for certain works contracts had been superseded first by the notification of 8 March 1988 and then by Notification No. S.O. 51 dated 28 June 1989, which governed the relevant period. Under the prevailing notification, tax on the value of goods involved in execution of works contracts was payable at the rate notified for such goods under section 5 of the Rajasthan Sales Tax Act, 1954. The tax deducted at source at 2% did not determine the final liability and was only adjustable against the assessed amount.

Conclusion: The applicable rate was 12% on the value of the goods involved, subject to adjustment of tax already deducted at source.

Final Conclusion: The applications failed in entirety, and the assessment and appellate orders imposing sales tax on the goods component of the works contract were sustained.

Ratio Decidendi: Post-Forty-sixth Amendment, property in goods transferred in the execution of a works contract is taxable as a deemed sale under article 366(29-A)(b), and the applicable rate is governed by the prevailing statutory notification for the goods component rather than by an earlier TDS deduction.

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