Divisible Contract is Taxable under the Bombay Sales Tax Act since the predominant intention was Sale of Equipment: Bombay HC [Read Judgment]

A two-judge bench of the High Court of Bombay held that the sales component in a works contract where sales of the goods are predominant and divisible from the services, is subject to sales tax under the Bombay Sales Tax Act 1959.

Justice A.S. Oka and Justice A.K. Menon dealing with a Sales Tax reference in M/s. Bharat Heavy Electricals Ltd. vs. The State of Maharashtra categorically clarified that when a Works Contract having the express words “divisible works contract” and in which the value of money spent for the services as compared to the supply of the goods, is miniscule, cannot be treated as works contract and the transaction should be taxed under the concerned sales tax act.

The assessee- M/s. Bharat Heavy Electricals Ltd. was approached by M/s. Rashtriya Chemicals & Fertilizers Ltd. (“RCF”) for designing, engineering, supplying, erection, installation and Commissioning of the Trombay V Expansion Project at RCF site for a total price of about Rs.22 crores under a contract. The Assistant Commissioner of Sales Tax Assessment treated the transaction as a transaction of sale. The Deputy Commissioner held the transaction to be one of sale and not of the nature of a works contract. The Sales Tax Officer levied penalty under Section 36(3) of the Bombay Sales Tax Act, 1959 apparently without giving an opportunity of being heard.

Aggrieved, the assessee filed appeals before the Tribunal. The main issue raised in the appeals was whether the transactions between the applicant and the RCF were a works contract transaction or a sales transaction.

The Tribunal found that the transaction was a Sales transaction and there was clear cut breakup therein of the total contract price of Rs. 22 crores being cost of the material, compressors supplied and other costs of transportation. Rectification Applications filed were rejected.

That is how the assessee filed Reference Application under Section 61 of the Bombay Sales Tax Act, 1959 before the two-judge bench of Bombay High Court.

Upholding the findings of the Tribunal, the Court observed ” In our view considering the factual matrix and the law and after applying the tests in Kone Elevator, it is evident that in the facts of the present case the contract was clearly one for supply and erection of equipment, supply of equipment being dominant purpose. No doubt the State of Maharashtra had enacted the Maharashtra Sales Tax on “Transfer” of property of goods involved in works contract Act only in 1982 but the contention that during the period under consideration 1979-80 and 1980-81 the State had no power to levy the tax on Works contract will not be of any assistance to the applicant. In our view the contract in the instant case is predominantly for supply of equipment, erection and installation. FPDIL was required to carry out all preparation work, provide foundation, provide all civil works required, the equipment was merely supplied and installed.”

“Applying the dominant nature test to the facts of the case we have no hesitation in concluding that reading the terms of the contract referred to herein above merely because there are small elements of work in the contract, it cannot be concluded that the contract in the present case is a works contract. It is essentially a contract for supply of compressors and allied equipment with a minuscule amount of work.” said the Bench

The question referred to the Court was answered in the affirmative, in favour of the revenue and against the assessee.