Works contract VAT remains subject to Article 286 limits on inter-State sales, outside-State sales, and imports.

State VAT on works contracts is limited by Article 286, so tax cannot be levied on the component of a transaction that amounts to an inter-State sale, a sale outside the State, or an import. Although a works contract may be treated as divisible by legal fiction after the Forty-sixth Amendment, the taxing power still cannot extend beyond these constitutional limits. In the turnkey-contract dispute, the assessing authority treated the arrangement as a composite works contract, but the record lacked adequate findings on the true nature of the transactions reflected in the books and returns. The assessment was therefore set aside and the matter remanded for fresh consideration and findings in accordance with law.

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Issues: Whether the assessing authority could treat the transactions under the turnkey contracts as a composite works contract exigible to VAT, and whether transactions relating to inter-State sale or import could be brought within the State taxing power.

Analysis: The statutory power of the State to levy tax on transfer of property in goods involved in the execution of a works contract operates subject to the constitutional limitations in Article 286 of the Constitution of India. After the Forty-sixth Amendment, a works contract may be treated as divisible by legal fiction, but the State cannot levy tax on the component which constitutes a sale in the course of inter-State trade or commerce, outside the State, or in the course of import. The authority's order proceeded on the premise that the separate contracts formed one turnkey arrangement, but no adequate finding was recorded on the nature of the transactions reflected in the books and returns. As the assessment involved scrutiny of voluminous materials, the Court declined to finally determine the taxability on the existing record and directed reconsideration.

Conclusion: The assessment order was set aside and the matter was remanded to the Deputy Commissioner for fresh consideration in accordance with law, with findings to be recorded on the nature of the transactions and the applicability of VAT.

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