Works contract deduction denied for transformed raw materials, while penalty was deleted on the facts.

Raw materials converted into mosaic tiles were treated as a different commercial commodity, so deduction under section 3B(2)(b) of the Tamil Nadu General Sales Tax Act was not available because the purchased materials were not used in the same form in execution of the works contract. As the assessee had not separately charged for manufacture and labour, the assessment was sustained with statutory deduction applied only for labour and service components. Penalty, however, was deleted because the facts did not justify automatic imposition and the turnover dispute concerned assessment computation rather than deliberate default.

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Issues: (i) Whether raw materials purchased and used in the manufacture of mosaic tiles, which were supplied, laid and polished under a works contract, were eligible for deduction under section 3B(2)(b) of the Tamil Nadu General Sales Tax Act. (ii) Whether the levy of penalty was justified on the facts of the case.

Issue (i): Whether raw materials purchased and used in the manufacture of mosaic tiles, which were supplied, laid and polished under a works contract, were eligible for deduction under section 3B(2)(b) of the Tamil Nadu General Sales Tax Act.

Analysis: The materials purchased were not used in the same form in which they were bought. They were processed into mosaic tiles, which constituted a different commercial commodity from the raw materials such as white cement, oxide, chips and stone powder. In the absence of use of the purchased materials in the same form in the execution of the works contract, the statutory deduction could not be extended. Since the assessee did not separately charge for manufacture and labour, the assessment was rightly worked out by applying the statutory deduction for labour and service components.

Conclusion: The deduction under section 3B(2)(b) was not available and the assessment was upheld in favour of Revenue.

Issue (ii): Whether the levy of penalty was justified on the facts of the case.

Analysis: Although the assessment was sustained, the facts did not warrant penalty. The decision relied on for penalty showed that penalty is not automatic where the dispute turns on the nature of turnover and assessment computation.

Conclusion: The penalty was not sustainable and was deleted in favour of the assessee.

Final Conclusion: The assessment was sustained, but the penalty was set aside, resulting in a partial allowance of the tax case revision.

Ratio Decidendi: Where raw materials are transformed into a distinct commercial commodity and are not used in the same form in the execution of a works contract, deduction limited to such purchased materials is not available under section 3B(2)(b); penalty is not automatic and depends on the facts of the case.

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