2017 (8) TMI 1148 - SC - VAT / Sales Tax

Works Contract Divided into Goods Sale and Services; Sales Tax on Materials Upheld Under Section 3 of Sales Tax Act

M/s. Indian Hume Pipe Co. Ltd. Versus State of Rajasthan & Ors.

M/s. Indian Hume Pipe Co. Ltd. Versus State of Rajasthan & Ors. - (2019) 14 SCC 584 Issues Involved:1. Whether the works contract given to the assessee is divisible in nature.2. Whether the imposition of tax and penalty under Section 7AA of the Rajasthan Sales Tax Act, 1954, is justifiable and sustainable in law.Detailed Analysis:Issue 1: Divisibility of the Works ContractBackground and Facts:The assessee, M/s. India Hume Pipe Co. Ltd., engaged in manufacturing and laying pipelines, entered into contracts with the Public Health and Engineering Department (PHED) of the State Government of Rajasthan for providing and laying pipelines. The contracts included manufacturing PSC pipes, laying them, and performing civil works. The Commercial Tax Officer determined that the contract was divisible, treating 75% of the contract value as consideration for the sale of goods, which was upheld by the appellate authority and the High Court.Arguments by the Assessee:The assessee argued that the contract was a single, composite contract for the supply of goods, labour, and services, and thus should be treated as an indivisible works contract. They relied on the Supreme Court judgment in Kone Elevator India Private Limited v. State of Tamil Nadu (2014) 7 SCC 1, which held that a composite contract for supply of goods, labour, and services should be treated as a works contract and not divisible.Arguments by the Respondent:The respondent contended that the works contract was rightly held to be divisible. They argued that two types of work orders were issued: one for the supply of pipes (considered a sale of goods) and another for civil work. They maintained that the supply of PSC pipes fell within the definition of 'sale of goods' under the Act, and thus, the contract was divisible.Court's Analysis and Conclusion:The Supreme Court agreed with the High Court's approach, noting that the contract's substantial part pertained to the cost of PSC pipes and other materials manufactured and supplied by the assessee. The Court held that the works contract executed by the assessee was indeed divisible. The Court distinguished the case from Kone Elevator India Private Limited, emphasizing that in the present case, the contract was found to be divisible based on factual findings. The Court reiterated that post the Forty-Sixth Amendment to the Constitution, a single and indivisible contract could be bifurcated into a contract for the sale of goods and another for services.Issue 2: Imposition of Tax and Penalty under Section 7AABackground and Facts:The Commercial Tax Officer rejected the assessee's application for tax exemption, holding that the pipes supplied fell within the definition of 'sale of goods.' This decision was upheld by the appellate authority and the High Court.Arguments by the Assessee:The assessee argued that the contract should be treated as a single, indivisible works contract, and thus, the imposition of tax and penalties under Section 7AA was unjustifiable.Arguments by the Respondent:The respondent maintained that the imposition of tax and penalties was justified as the works contract was divisible, with the supply of pipes being considered a sale of goods. They cited the judgment in State of Karnataka and Others v. Pro Lab and Others (2015) 8 SCC 557, which supported the divisibility of contracts and the imposition of sales tax on the goods component.Court's Analysis and Conclusion:The Supreme Court upheld the findings of the lower authorities and the High Court, agreeing that the contract was divisible and that the supply of pipes constituted a sale of goods. The Court noted that the legislative and constitutional amendments allowed the State to levy sales tax on the value of materials in execution of works contracts. The Court found no fault with the High Court's judgment and dismissed the appeals with costs.Conclusion:The Supreme Court dismissed the appeals, holding that the works contract was divisible, and the imposition of tax and penalties under Section 7AA of the Rajasthan Sales Tax Act, 1954, was justified and sustainable in law. The Court emphasized the legal position post the Forty-Sixth Amendment, allowing the State to bifurcate a single contract into components for the sale of goods and services for tax purposes.