Divisible works contract principles permit tax on the goods element where supply and labour components are separately identifiable.

A works contract for manufacture, supply and laying of pipelines may be taxed on its goods component where the agreement is found on facts to be divisible into separate supply and labour/service elements. The Forty-sixth Constitutional Amendment permits bifurcation of a works contract, so the State may levy tax on the sale element of goods used in execution. On the facts discussed, the contract was treated as separable rather than an indivisible composite contract, because the substantial value related to manufactured pipes and allied materials supplied for the work. The cited Kone Elevator principle was said not to apply where divisibility was established on the record.

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

Analysis: The contract was examined on its terms and the findings recorded below showed that the substantial value pertained to PSC pipes, jointing material, specials, valves and allied items manufactured by the assessee and supplied for execution of the work. The authorities and the High Court found that the agreement comprised two separable components, namely, supply of goods and supply of labour and services. The constitutional position after the Forty-sixth Amendment permits bifurcation of a works contract into goods and service components and the State can levy tax on the goods element. On the facts found, the contract was not treated as a single indivisible composite contract. The decision in Kone Elevator India Private Limited did not assist the assessee because the dispute there concerned characterization of a composite contract, whereas here the factual finding was of divisibility.

Conclusion: The contract was rightly treated as divisible and the levy of tax and penalty under Section 7AA was upheld.

Ratio Decidendi: After the Forty-sixth Constitutional Amendment, the goods component of a works contract may be segregated and taxed, and where the contract is found on facts to be divisible into supply of goods and supply of labour and services, it is open to the State to levy tax on the sale element.

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