In a significant ruling, a two-judge bench of the Supreme Court categorically held that sales component in a works contract where sales and services are divisible, is subject to sales tax under the Rajasthan Sales Tax Act.
Justices A.K Sikri and Ashok Bhushan had clarified that the sales component in the works contract of laying pipes is divisible and can be subjected to sales tax under the Act.
Assessee-Company engaged in manufacturing and laying of pipelines for water supply schemes, got a work order from PHED. As per the agreement, assesse agreed to provide PSC pipes manufactured by it and had entered into the contracts with PHED for providing and laying of pipelines.
Assessee claimed tax exemption by relying on various notifications wherein the Government had granted relief to works contracts. However, the claim was rejected by the department by finding that the pipes manufactured and supplied by it fall within the definition of ‘sale of goods’ and that the contract is divisible in nature. The department was of the view that sales tax is leviable on the sales component in the contract
Accordingly, 75% value of the contract was treated as consideration for sale of goods.
However, the assessment was upheld by the High Court. Dissatisfied by the orders, Assessee knocked the doors of the Apex Court.
Upholding the above orders, the Top- Court said that there was no legal infirmity in severing the sales component from a composite contract of sale of goods and supply of services. After the insertion of Article 366(29A) vide the forty-sixth amendment to Constitution, the transfer of property in goods in execution of a works contract is treated as a ‘deemed sale’. The contention of the company that a composite contract for sale of goods and supply of services cannot be divided was rejected.
“When it is found on facts that the works contract executed by the assessee is a divisible contract, the argument of the assessee that it is to be treated as one single and composite contract needs to be rejected,” the bench said.
“In Larsen and Toubro case it was further held that the value of gods which can constitute a measure of levy of the tax has to be the value of goods at the time of incorporation of the goods in the works even though property in goods passes later. Taxing the sale of goods element in a works contract is permissible even after incorporation of gods, provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property.”
Read the full text of the Judgment below.
