2015 (1) TMI 452 - HC - VAT and Sales Tax

High Court rules on transfer of property in works contracts post-46th Amendment

The High Court ruled in favor of the applicant-Revenue and against the respondent-assessee, concluding that there was a transfer of property in ink and ... Works Contract - Transfer of property in ink and lacquer in the transaction effected in post-46th Amendment era or not – Whether the Transfer of Property in Goods involved in the Execution of Works Contracts (Re-enacted) Act, 1989, read with the 46th Amendment of the Constitution of India - Held that:- Following the decision in Commissioner of Sales Tax Versus Matushree Textile Limited [2003 (8) TMI 478 - BOMBAY HIGH COURT] wherein it has been held that there is a transfer of property in goods, i.e., materials used for dying and bleaching under the Works Contracts Act - the colored shade is passed to the fabrics due to the chemical reaction of the materials used in the process of dyeing - Coloured shade may be due to the chemical reaction of one or more materials - The coloured shade represents the inherent chemical property of the materials used - once there is passing of the chemical property of the materials used in the execution of works contract, then under the Works Contracts Act, there is a deemed sale of the materials used in the execution of the works contract - in the process of dyeing, the coloured shade passed on to the fabrics constitutes sale of the materials used in dyeing, under the Works Contracts Act. To constitute sale, either under the Sale of Goods Act, or under the BST Act, the intention of the parties to transfer the goods by an agreement, determination of price of the goods to be transferred and the actual transfer of goods as per the agreement is necessary - However, under the Works Contracts Act, the concept of deemed sale has been introduced, as a result, irrespective of the criteria laid down under the Sale of Goods Act or the BST Act, if, in the execution of a works contract, the property of the materials used in the execution of that contract passes either in its original form or in some other form, then, there is deemed sale of those materials under the Works Contracts Act - The definition of 'sale' under the Sale of Goods Act and under the BST Act is materially different from the definition given under the Works Contracts Act - to constitute sale under the Works Contracts Act, the only criteria required to be fulfilled is the transfer of property in goods used in the execution of works contract either in its original form or in some other form and not the criteria laid down under the Sale of Goods Act or under the BST Act – lacquer and ink are the materials used in plate making and the property in the same is passed on in the execution of the contract of plate making under the Works Contracts Act – thus, there was a transfer of property in ink and lacquer – Decided in favour of appellant revenue. Issues Involved:1. Whether there is a transfer of property in ink and lacquer during the execution of works contracts post-46th Amendment.2. Applicability of the decision in Commissioner of Sales Tax v. Matushree Textile Limited.3. Relevance of dominant intention in determining the nature of the contract.Detailed Analysis:1. Transfer of Property in Ink and Lacquer:The primary issue was whether the Tribunal was justified in holding that there is no transfer of property in ink and lacquer in the transaction effected post-46th Amendment. The Tribunal concluded that no transfer of property occurred because the thickness of the plates remained unchanged before and after the application of ink and lacquer. However, the High Court disagreed, referencing the definition of 'sale' under Section 2(1)(l) of the Works Contracts Act, which includes the transfer of property in goods involved in the execution of a works contract, whether in physical or chemical form. The court emphasized that the ink and lacquer used in plate making become part of the plates, thus constituting a transfer of property.2. Applicability of Commissioner of Sales Tax v. Matushree Textile Limited:The High Court referred to its earlier decision in Matushree Textile Limited, which dealt with the transfer of property in materials used for dyeing and bleaching fabrics. The court held that the transfer of property in goods, whether in physical or chemical form, constitutes a sale under the Works Contracts Act. The Tribunal's reliance on the decision in Commissioner of Sales Tax v. R.M.D.C. Press Pvt. Ltd. was rejected as it had been deemed per incuriam in the Matushree Textile case. The court reiterated that the transfer of property in ink and lacquer used in the execution of works contracts falls under the definition of 'sale.'3. Dominant Intention of the Contract:The respondent-assessee argued that the dominant intention of the contract was to render services, not to transfer goods, citing the Supreme Court's decisions in Bharat Sanchar Nigam Ltd. and Idea Mobile Communication Ltd. However, the High Court noted that the dominant intention test is not applicable post-46th Amendment, as clarified in the Associated Cement Companies Ltd. case. The court held that even if the dominant intention is to provide services, the transfer of property in goods used in the execution of the contract would still be deemed a sale under the Works Contracts Act.Conclusion:The High Court concluded that there was a transfer of property in ink and lacquer in the present case, thereby answering the question in the negative, i.e., in favor of the applicant-Revenue and against the respondent-assessee. The reference was disposed of accordingly, with no order as to costs.