The Madras High Court has ruled that the work involving ‘powder coating’ of yokes, links, and tubes constitutes a works contract and is therefore liable for Value Added Tax ( VAT ).
The Commercial Tax Department field petition to revise an order from the VAT tribunal that had previously favoured the assessee. The case pertained to assessment years 2007-08 through 2009-10, during which the assessee received unfavourable assessment orders under the Puducherry Value Added Tax (PVAT) Act, 2007.
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The Appellate Tribunal had overturned the Appellate Assistant Commissioner’s order, which had affirmed the assessment orders passed by the Commercial Tax Officer. The tribunal’s ruling was based on the assertion that the assessment orders were made beyond the three-year limitation period set forth in Section 24(5) of the PVAT Act, 2007.
The High Court framed key questions regarding whether the powder coating work amounted to a works contract and whether it involved the transfer of property.
The assessee had previously filed nil returns, claiming that its activities were merely job work that did not involve any sales. However, the Commercial Tax Department challenged this assertion, noting that the materials procured for the powder coating process—including pre-cleaning chemicals, powders, and touch-up sprays—were used in a manner that indicated a transfer of property during the execution of the works contract.
Consequently, the department deemed the assessee liable to pay tax under Section 15(1) of the PVAT Act, 2007, proposing to reject the nil returns filed by the assessee.
Justice C. Saravanan observed that the powder coating process is inherently linked to the definition of a works contract as per Section 2(zp) of the PVAT Act, which encompasses a wide range of activities related to the improvement or modification of movable or immovable property.
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The court referred to the Supreme Court’s clarification in Larsen and Toubro Ltd. v. State of Karnataka, where it was held that 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 and nothing in Article 366(29-A)(b) limits the term “works contract”, wherein 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. It was further held that 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 significance where transactions are of the nature contemplated in Article 366(29-A).”
The Madras High Court concluded that the activities carried out by the assessee indeed constituted a works contract, involving a transfer of property as part of the execution process.
Consequently, the assessee is liable to pay VAT, concurring the decision of Commercial Tax Department’s and reversing the VAT tribunal’s ruling. Thus, the petition was ruled in favour of the petitioner – department, reaffirming the applicability of VAT to the powder coating operations conducted by the respondent-assessee.
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