TaxTMI 
TaxTMI 
2014 (10) TMI 765
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....s for imparting computer education in High Schools in the State of Andhra Pradesh, including leasing of computer hardware, software and connected accessories on Build Own Operate Transfer (BOOT) basis, the petitioner company was selected and awarded the contract for execution of the said contract in 105 schools. Accordingly, the 4th respondent-State Project Director, District Primary Education Programme (DPEP), Government of A.P. executed an agreement dated 29.6.2002 in favour of the petitioner which shall be in force for a period of five years and the petitioner company commenced the work. While so, the Deputy Commissioner (Commercial Taxes)-respondent No.1 issued two showcause notices dated 18.1.2005 purportedly under Section 20 (2) of the APGST Act, 1957 proposing to revise the assessment orders dated 9.1.2004 and 19.11.2004 made for the Assessment Years 2002-03 and 2003-04 respectively. It was claimed in the show-cause notices that the work executed by the petitioner under the contract dated 29.6.2002 is a "works contract" and therefore the turnover of property involved in the execution of the said works contract is liable to be taxed at 8% under Section 5F of the APGST Act, 1....
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....puted amount. The said order was made absolute on 15.02.2007 and the main appeal is pending before the Supreme Court. While the matters stood thus, the Commercial Tax Officer issued a fresh show-cause notice dated 18.02.2008 calling upon the petitioner to show-cause as to why the final assessment order should not be made for the assessment year 2004-05. The petitioner submitted its explanation dated 10.03.2008 stating inter alia that the assessment for the year 2004-05 was already finalized by order dated 16.06.2005 and W.P.No.16694 of 2005 is pending against the said order. However, the Commercial Tax Officer proceeded further and passed the order dated 24.03.2008 reiterating the very same reasoning given in the assessment order dated 16.06.2005 followed by the demand notice in Form-B3. Aggrieved by the same, the petitioner filed W.P.No.8871 of 2008. Since common questions of fact and law arise for consideration, all the four writ petitions are heard and decided together by this common order. Sri C.R. Sridharan, the learned counsel appearing for the petitioner made elaborate submissions to substantiate the petitioner's claim that the contract dated 29.06.2002 is not a contr....
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....for the petitioner that no sale is involved even with regard to transfer of those assets. It is also contended that even assuming that the said transfer would amount to sale, the same would come into operation only at the end of the contract and for the purpose of the assessment for the years 2002-03 to 2004-05 the petitioner continues to be the owner of all those assets. On the other hand, the contention of the respondents is that since the contract is on BOOT basis and it includes providing computers, hardware and software and connected accessories apart from transferring the equipment to the department in good working condition, there is transfer of property from the petitioner to the Government. It is also pointed out that the petitioner who is being paid fees by the Government on instalment basis both for imparting computer education and for subsequent transfer of the equipment, is not doing any free service and therefore it is nothing but a works contract. For proper appreciation of the rival submissions made by the learned counsel for the parties, it is necessary to refer to Section 5-F of A.P. General Sales Tax Act which is the charging provision so far as works contract ....
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....e power conferred on the legislatures of State under Entry 54 of the State List was considered in BUILDERS' ASSOCIATION OF INDIA v. UNION OF INDIA (1989) 2 SCC 645 and it was held:- "The object of the new definition introduced in Clause (29-A) of Article 366 of the Constitution is, therefore, to enlarge the scope of 'tax on sale or purchase of goods' wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in Sub-Clauses (a) to (f) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression 'tax on the sale or purchase of goods' in Entry 54 of the State List, therefore, includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract also. The tax leviable by virtue of sub-clause (b) of clause (29-A) of Article 366 of the Constitution thus becomes subject to the same discipline to which any levy under Entry 54 of the State List is made subject to under the Constitution" The ratio laid down in Builders' A....
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....vy of tax on transfer of property in goods involved in the execution of works contract is in pari materia to Section 5-F of the APGST Act, 1957. The contention on behalf of the State was that any agreement wherein a party has agreed to construct or build for cash, deferred payment or other valuable consideration would be covered by the definition of the term "works contract" and therefore the appellants were liable to pay turnover tax on the transfer of property in goods involved in such works contract. After referring to the various clauses of the agreement that the appellants had entered into with the purchasers, it was held by the Supreme Court that "Thus the appellants are undertaking to build as developers for the prospective purchaser. Such construction/ development is to be on payment of a price in various instalments set out in the agreement. As the appellants are not the owners they claim a "lien" on the property. of course, under clause 7 they have right to terminate the agreement and to dispose off the unit if a breach is committed by the purchaser. However, merely having such a clause does not mean that the agreement ceases to be a works contract within the meaning of ....
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....l the flat with the fraction of land, it is obvious that such transaction involves the activity of construction inasmuch as it is only when the flat is constructed then it can be conveyed. We, therefore, think that there is no reason why such activity of construction is not covered by the term "works contract". After all, the term "works contract" is nothing but a contract in which one of the parties is obliged to undertake or to execute works. Such activity of construction has all the characteristics or elements of works contract. The ultimate transaction between the parties may be sale of flat but it cannot be said that the characteristics of works contract are not involved in that transaction. When the transaction involves the activity of construction, the factors such as, the flat purchaser has no control over the type and standard of the material to be used in the construction of the building or he does not get any right to monitor or supervise the construction activity or he has no say in the designing or layout of the building, in our view, are not of much significance and in any case these factors do not detract the contract being works contract insofar as construction part....
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....hree things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks, etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods. 97.3. Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term "works contract" in Article 366(29-A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term "works contract". 97.4. Building contracts are a species of the works contract. 97.5. A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished. 97.6. The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their....
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....able property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods. (emphasis supplied) The ratio laid down in BSNL v. Union of India (3 supra) was extensively referred to and followed while arriving at the above conclusions in Larsen and Toubro Limited'S case (5 supra). From the law laid down in the above decisions it is clear that after the forty-sixth amendment to the Constitution of India it is open to the States to divide the works contract into two separate contracts by a legal fiction (i) contract for sale of goods involved in the said works contract and (ii) for supply of labour and service. As held in Larsen and Toubro Limited'S case (5 supra) even if the dominant intention of the contract is not to transfer the property in goods, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. What is 'works contract' has also been elaborately discussed i....
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....under Section 5-F of the APGST Act. That being the substance of a combined reading of Section 2 (1) (t) and Section 5-F of the APGST Act, the twin questions that require consideration are whether the contract dated 29.6.2002 satisfies the elements of works contract and if the characteristics or elements of works contract are satisfied, whether the execution of the work under the said agreement involved transfer of property in goods, whether as goods or in some other form. The preamble to the agreement, dated 29.6.2002, reads as under:- "Government of Andhra Pradesh as part of its IT vision to harness the potential of IT in improving the quality services to citizens has decided to impart computer education in 1000 schools in the State. To achieve this objective, Government of Andhra Pradesh decided to select agencies for imparting computer education in the schools including leasing of computer hardware, software and connected accessories on Build Own Operate Transfer basis." The clauses 3, 4, 5, 6, 7, 9 and 14 of the Agreement are also relevant to ascertain the nature of the contract and the same may be extracted hereunder:- "3.0 Period of contract: 3.1 The Contract shall be i....
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....in future such as excise duty, Sales Tax, Surcharges, Freight, Octroi, and Insurance, installation and commissioning charges and such other levies that may be applicable from time to time and the cost of training to teachers and students except service tax. The Department shall reimburse service tax at actuals to the Contractor as and when the tax becomes payable to Government. 4.4. Web site for each Group: The Contractor shall create a web site for each group of schools providing comprehensive information about all the schools in that group. The running and maintenance of the web site will also be the responsibility of the Contractor. 4.5 Requirements of software: The Contractor shall provide the required software for teaching the syllabus to the students from 6th to 10th class as per the syllabus, which requires additional effort, software licenses and charges on the part of the Contractor will be worked out on mutually agreed terms and conditions. 5.0 Implementation 5.1 The Department will hand over one leak proof room with secure windows and doors and three phase electric power connection of adequate capacity in each school, to be converted into the computer centre, to the ....
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....r shall handover all the computer hardware and software and other equipment installed and commissioned as per the provisions of this contract in good working condition to the concerned school at the end of contract period of five years. The Contractor shall also handover at the end of contract period, all the operational and maintenance manuals, compact discs/floppies etc. of all equipment to the concerned School. The acknowledgement of receipt will be taken from each school and provided to the Department. 14.0 Right of Dept. to use computer centre: 14.1 The Department in consultation with the Contractor will work out the scope of usage for using the computer centre for the purpose of department work during school hours, without affecting the computer education services/obligations to be provided by the Contractor as per this contract. The Department wilfully indemnify the Contractor for any damages caused by usage by the Department against the advise of the Contractor or his representative. The Department will bear the expenses towards consumables, Internet connectivity and telephone charges when the centre is used by it for non-computer education work. The payment of Electricit....
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....ity executed under the contract. The above contentions of the learned counsel for the petitioner, according to us, have no merit in the light of the settled legal position noticed above. In fact, in Larsen and Toubro Limited's case (5 supra) an identical contention that the substance and dominant intention of the contract has to be looked into was negatived observing as under:- 60. Whether the contract involved a dominant intention to transfer the property in goods, in our view, is not at all material. It is not necessary to ascertain what is the dominant intention of the contract. Even if the dominant intention of the contract is not to transfer the property in goods and rather it is the rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if it otherwise has elements of works contract. The view taken by a two-Judge Bench of this Court in Rainbow Colour Lab v. State of M.P. [(2000) 2 SCC 385] that the division of the contract after Forty-sixth Amendment can be made only if the works contract involved a dominant intention to transfer the property in goods....
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....computer education according to us are incidental. As held in Bihar State Electricity Board and Others v. M/s. Green Rubber Industries and Others Air 1990 SC 699 every contract is to be considered with reference to its object and the core of its terms and accordingly the core context must be considered to find out the intention of the parties. On a combined reading of the terms and conditions of the contact dated 29.6.2002 with reference to the object sought to be achieved, it appears to us that the contract in question involves both a contract of service and a contract of sale of goods. It is a composite contract and by legal fiction provided under Article 366 (29-A) (b) of the Constitution it is permissible to separate the transfer of property in goods (as goods or in some other form) from the contract of service. It is also relevant to note that the agreement dated 29.6.2002 is on BOOT basis and the petitioner is paid the fees stipulated in the agreement. The mere fact that the equipment is transferred at the end of the contract in our considered opinion makes no difference. As held in Gannon Dunkerly and Company's case (2 supra) while explaining the measure for levy of t....