2017 (12) TMI 1074 - HC - VAT and Sales Tax

Sales Transaction Tax Liability Upheld under Bombay Sales Tax Act

The court held that the contract between the parties was a sales transaction, not a works contract, and the supplies were liable to tax under the Bombay ... Works contract - divisible works contract - dominant nature test - supply and erection - transfer of property - sale liable to sales tax - performance guaranteeWorks contract - divisible works contract - dominant nature test - sale liable to sales tax - Supplies of materials made by the applicant to RCF pursuant to the work order dated 20-10-1978 were sales liable to tax under the Bombay Sales Tax Act, 1959. - HELD THAT: - The Court examined the contractual terms and ancillary documents and applied the tests articulated in Kone Elevator, including the dominant nature inquiry. The agreement expressly described the engagement as a 'divisible works contract' and the schedules show that the substantial portion of the contract price represented supply of equipment while only a small fraction related to transportation, handling, erection, testing and pre-commissioning. Contractual clauses considered material included import licence and supply obligations, inspection and testing at contractor's works, final acceptance after erection and commercial running, phased schedule emphasising manufacture, inspection, shipping and dispatch, payment/invoice requirements and performance guarantees conditioned on proper installation. The fourth and sixth schedules and specific owner obligations demonstrate that FPDIL/owner was to provide foundations, undertake all civil works and furnish site facilities, leaving the contractor to supply and fix equipment on prepared foundations. Guarantees and workmanship obligations were confined to equipment specifications and performance, not to comprehensive turnkey erection. Invoices addressed to the owner and provision for Central Sales Tax on specified equipment further supported characterization as supply. Applying the dominant nature test and taking an overall view of the contractual matrix, the Court concluded that the contract was predominantly for supply of compressors and allied equipment with only a minuscule element of erection, and therefore the transactions amounted to sales liable to sales tax.Answered in the affirmative in favour of the revenue and against the assessee; the supplies are sales liable to tax under the Bombay Sales Tax Act, 1959.Final Conclusion: The reference is answered in the affirmative: the work order transactions are taxable sales (supply and erection where supply is dominant); no order as to costs. Issues Involved:1. Whether the impugned supplies of materials were sales liable to tax under the Bombay Sales Tax Act, 1959.2. Whether the contract between the applicant and RCF was a works contract or a sales transaction.Issue-wise Detailed Analysis:1. Whether the impugned supplies of materials were sales liable to tax under the Bombay Sales Tax Act, 1959:The primary question was whether the supplies made by the applicant's Mumbai unit to RCF were sales liable to tax under the Bombay Sales Tax Act, 1959. The Tribunal had concluded that the transaction was a sales transaction. The applicant contended that the contract was for design, erection, and commissioning of the plant, which should not be susceptible to sales tax. However, the Tribunal found that the transaction involved a clear breakup of the total contract price into costs of materials, compressors, and other related costs, thus treating it as a sales transaction liable to tax under the said Act. The Tribunal's decision was based on the nature of the contract and the breakup of the total contract price, which indicated a sale of goods rather than a works contract.2. Whether the contract between the applicant and RCF was a works contract or a sales transaction:The applicant argued that the contract was a works contract, involving design, engineering, manufacture, testing, supply, transportation, erection, and pre-commissioning of compressors, and hence not liable to sales tax. The applicant relied on several judgments to support their claim, including cases where contracts for installation and erection were considered works contracts.However, the respondent argued that the contract was essentially for the supply of equipment, with the erection and commissioning being secondary. The contract was described as a 'divisible works contract,' indicating separate components for supply and installation. The respondent pointed to various clauses in the contract that supported the view that the primary transaction was the supply of equipment.Upon examining the contractual provisions, it was found that the contract largely involved the manufacture, inspection, shipping, clearance, and dispatch of equipment, with a significant portion of the contract price attributed to the cost of compressors and related equipment. The erection and installation costs were relatively minor in comparison. The contract also included detailed provisions for the supply of equipment and performance guarantees related to the equipment, rather than the installation work.The court considered the dominant nature test and other relevant tests from the Kone Elevator judgment to determine the nature of the contract. It concluded that the contract was predominantly for the supply of equipment, with the erection and installation being incidental. The contract was described as a 'divisible contract,' further supporting the view that it was not a works contract.Based on the analysis of the contractual provisions and the application of relevant legal tests, the court held that the contract was not a works contract but a sales transaction. The question referred to the court was answered in the affirmative, in favor of the revenue and against the applicant, confirming that the supplies were liable to tax under the Bombay Sales Tax Act, 1959.Conclusion:The court concluded that the contract between the applicant and RCF was a sales transaction, not a works contract, and the supplies made under the contract were liable to tax under the Bombay Sales Tax Act, 1959. The question referred to the court was answered in the affirmative, in favor of the revenue, with no order as to costs.