Inter-State works contract principle applied to tyre retreading turnover, with movement of goods integral to the contract.

Turnover from retreading and recapping tyres under contracts placed by customers outside Tamil Nadu was treated as an inter-State works contract because the contract, read as a whole, required receipt of worn-out tyres from outside the State, processing them in Tamil Nadu, and returning the retreaded tyres outside the State. Article 366(29A)(b) deems the transfer of property in goods involved in a works contract to be a sale, but the character of the transaction still depends on the contract as a whole. The movement of goods was integral to performance and occasioned by the contract, so the situs of the retreading work was not decisive. The turnover therefore fell within the inter-State trade or commerce exclusion in section 3-B(2)(a) and was not taxable under section 3-B of the Tamil Nadu General Sales Tax Act, 1959.

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Issues: Whether the turnover arising from retreading and recapping of tyres undertaken in Tamil Nadu pursuant to contracts placed by customers outside the State constituted an inter-State works contract, so as to fall outside the State's taxing power and qualify for deduction under section 3-B(2)(a) of the Tamil Nadu General Sales Tax Act, 1959.

Analysis: The constitutional fiction introduced by article 366(29A)(b) treats transfer of property in goods involved in a works contract as a deemed sale, but the character of the transaction must still be determined from the contract as a whole. The contract here required receipt of worn-out tyres from customers outside Tamil Nadu, retreading them in Tamil Nadu, and sending the retreaded tyres back outside the State. The movement of goods was therefore inseparably linked with the contract and was an incident of its performance. The State authorities erred in isolating the place where the retreading work was done and in treating the situs of incorporation alone as decisive. For inter-State transactions, the situs of sale is not material; what matters is whether the movement of goods was occasioned by the contract. Since the contract contemplated movement from Tamil Nadu to another State as an integral part of the bargain, the turnover fell within the inter-State trade or commerce exclusion in section 3-B(2)(a).

Conclusion: The transaction was an inter-State works contract and the turnover was not taxable under section 3-B of the Tamil Nadu General Sales Tax Act, 1959.

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