Works contract divisibility under sales tax law upheld for pipeline supply contracts; goods component remained taxable.

After the Forty-sixth Amendment, a works contract may be bifurcated into goods and service elements for sales tax purposes, and the dominant nature test is no longer decisive. On the facts, the contract for manufacture, supply and laying of pipelines was found divisible into a goods component, comprising pipes and other materials, and a labour and service component. That factual divisibility justified treating the goods component as exigible to tax, and the penalty levied on that component was also upheld. The challenge therefore failed.

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Issues: Whether the contract for manufacture, supply and laying of pipelines was divisible so as to justify levy of tax and penalty on the goods component under Section 7AA of the Rajasthan Sales Tax Act, 1954.

Analysis: The contract was examined on its terms and the factual findings recorded by the authorities below and affirmed by the High Court showed two distinct components, namely, supply of PSC pipes, jointing material, valves, anchor blocks and similar goods, and the remaining labour and service component. The post-amendment constitutional position under Article 366(29A)(b) permits bifurcation of a works contract into goods and services for the purpose of sales tax, and the dominant nature test is no longer applicable. The earlier decision relied upon by the assessee did not assist because the present case turned on factual divisibility, not on whether a composite contract could be characterised as a works contract.

Conclusion: The contract was rightly treated as divisible, and the levy of tax and penalty on the goods component was valid; the challenge failed.

Ratio Decidendi: After the Forty-sixth Amendment, a works contract may be bifurcated into goods and service elements, and where the contract is found on facts to be divisible, the goods component is exigible to sales tax notwithstanding the overall works contract character.

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