Situs of sale under Central Sales Tax Act 1956 with reference to Works Contract
 
Sandeep Goyal, Advocate

 

Levy of tax on composite contract in the shape of works contract has always been a matter of dispute and has led to huge litigation before every level of adjudication including the Apex Court. The very fact that the transaction includes the supply of goods as well as labour, has resulted in complications on account of levy as well as calculation of quantum of taxable turnover for the purpose of levy of VAT/Sales Tax. Not only the bifurcation of the goods and services is required to be made for the purpose of calculation of works contract but the other factors like situs of sale, the time of accrual of sale, the receipts relating to the works contract, the TDS deducted on the payments, the amount of work certified by the engineers and many other factors lead to serious disputes which have always been a bone of contention between taxpayer and the revenue. It is seen of late that the assessing officers have adopted different methods for different persons and in some cases for different years of the same assessee and have levied the tax in a highly arbitrary manner by not
following the law laid down by courts from time to time.

Situs of sale

One of the most problematic area for the levy of tax on works contract is to determine the situs of sale of goods which have been incorporated in the works contract by the contractor. It has been observed by the Hon'ble Supreme Court in the case of Accordingly, the State Governments are not competent to levy tax on the transfer of property in goods involved in the works contract if such sales are in the course of export out of/import into India, sales which have taken place outside the State and the sales which have taken place in the course of inter-State trade and commerce as defined under section 3(a) of the Central Sales Tax Act, 1956.

Some of the States had evolved a unique method of levying the tax on such goods which are sold in the course of inter-Statetrade and commerce by including some provisions in their respective local Acts, which were the deeming fictions. The States had provided that the situs of sale would be deemed to be in that State where the transfer of property has been passed on to the buyer and if at that time the goods are in a particular State then the tax would be levied in that State. Such provisions were challenged before the Hon'ble Supreme Court of India in the landmark case of In a case relating to job work which constituted works contract, was subject matter of litigation before Punjab and Haryana High Court wherein the State had levied tax on the material used in the dyeing of fabricated cloth by pressing into operation the deeming provision whereby such sales were presumed to be intra-State sale as the goods were in  the State when the transfer of property in the goods had taken place. It was held by the Hon'ble Court that in a case where the grey cloth is sent by contractees from outside the State of Haryana and is processed in the State of Haryana into finished cloth by being subjected to processes such as bleaching, dyeing. sizing and printing and is thereafter sent back to the contractees outside the State the movement of cloth is occasioned by the contract of sale and the transaction amounts to inter-State sale within the meaning of section 3 of the Central Sales Tax Act. Since there was no levy of tax on works contract under the Central Sales Tax Act, the State was not found competent to levy tax on such transactions even by applying the law under the Central Sales Tax Act.

Some of such decisions had led to the amendment in Central Sales Tax w.e.f. 11-5-2002 when section 2(g) of the Central Sales Tax was amended so as to include the transfer of property in the goods involved in execution of a works contract as to be sales. By way of making this specific amendment in the definition of sales, the scope of sales had been enlarged and the States became competent to charge tax on such transactions. The question of determination of the situs of sale still remains a problematic area as the State of origin as well as the State where the goods are being consumed both claim that those States are competent to levy tax on such sales. The States from where the goods had originated claim such transaction as to be inter-State sale whereas the State where the goods were consumed, claim the same as to be intra-State sale as according to them the goods have not moved in pursuance to the contract of sale which has taken place inside the State. For the determination of the situs of the sale involving works contract, it is important to see the facts of each contract as well as the actual execution thereof. In a given case where the goods have moved in pursuance of a specific contract and have been used for that very contract then such transaction would be inter-State sale and the State from where the goods have originated would be competent to levy tax on such transactions. Similarly, in the course of an import, if the goods have been brought inside the customer frontiers of India for the purpose of being used in a particular contract and were specifically imported for this purpose, then it would amount to a transaction in the course of import and no tax would be leviable on such purchase. In this regard, the Hon'ble Supreme Court of India in the case of In other words, in the following circumstances, the tax would be leviable as on inter-State sale from the State of origin under section 3 on Central Sales Tax Act, 1956.

(1)       In the case of movable property when the finished goods are sent to a different State in pursuance to a contract of sale, the said works contract would be treated as an inter-State sale.

(2)       In a case where the goods are manufactured or assembled by the contractor in accordance with the conditions of the contract and for the purpose of contract only, then the transfer of goods from manufacturing facility to the State where these are incorporated in the works contract would  be treated as inter state sale.

(3)       Where the goods are procured on inter-state purchase basis and are subsequently sold as in­ transit sale under Section 3(b) read with section 6(2) of the Central Sales Tax Act and the delivery of the goods is taken by the contractee himself.

In sum and substance, the inter-State works contract would take place where the goods have moved from one place to another specifically for the purposes of execution of a works contract in another State and where the delivery has been given directly to the contractee. However, in a case where the goods are sent by the contractor from his own place in one State to another, the sale would be considered as inter-State sale irrespective of the fact that the delivery and possession of the goods remained with the contractor in the State where the works contract had been executed. However, in a case where the goods are received by the contractor which are not specifically meant for use in a particular contract but are used by him out of stock then it would amount to a local sale.

Appropriate State for collection of tax

It is seen that in case of inter-state sale, there had been a lot of dispute as to which State would collect the tax. In the case of works contract, this dispute has arisen all the more. In practice, it is seen that all the State Govts. who are connected with a transaction of inter-State sale in works contract invariably demand the tax on the same in one manner or the other. However, in terms of section 9(1), it is only the State of origin , i.e. from where the movement of goods start, who is entitled to collect tax on the same. However, in a case where the sale is a subsequent sale under section 3(b), the levy of tax has to be determined with reference to 1st proviso to section  9( I ) which provides for two different conditions. In the first condition, the tax is to be collected by the State from where the registered dealer who has made the second sale, has obtained or could have obtained the forms (C Forms) in connection with the purchase of such goods. In case where the subsequent sale has been made by an unregistered dealer,  tax is to be calculated by the State from where such subsequent sale has been affected.

It has come to light that the Assessing Authorities have not understood the concept of section 9(1) in the real sense. In fact, most of the Assessing Authorities do not even refer to Section 9(1) which authorises the collection of tax by their State as there is no other provision under the Act by virtue of which the Assessing Authority becomes competent to levy tax. In a case of subsequent sale, the Assessing Authorities have been observing that subsequent sale made under section 3(b) is rejected on the ground that there was no subsequent sale and therefore the same does not fall under section 3(b). However, while doing so, the Assessing Authorities lose sight of the fact that in case of rejection of second sale as 3(b) sale, then the said sale would be treated as a sale under section 3(a) and it is only the State from where the movement of goods has started who would be competent to collect tax on such sales.

For example, if there is first sale by dealer A in Mumbai to dealer B in Punjab, who makes a subsequent sale of the same goods to dealer C in Punjab. Even though all the formalities with regard to Form C and E-1, etc. are fulfilled but the Assessing Authority of dealer B in Punjab rejects the sale on the ground that there was a pre-existing contract between B and C before the movement of goods (even though it is immaterial) and holds that the subsequent sale does not fall under section 3(b). In such a scenario, the only State who is competent to levy the tax on the sale between B and C would be the State of Maharashtra and not the State of Punjab as section 9(1) provides for the collection of tax by such State. State of Punjab can collect tax only in case the Assessing Authority holds that the sale between B and C is a subsequent sale covered under section 3(b) but dealer B has failed to produce C forms from dealer C or E-1 forms from dealer A. Such like misunderstandings on the part of Assessing Authorities have led to unnecessary litigation before the courts.

The Haryana Tax Tribunal has, however laid down certain guidelines with regard to the determination of tax in such a scenario in the case of 1.         Situs of sale both in case of a sale, as defined in the Sale of the Goods Act, 1930, and a sale taking place by the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, is to be determined in accordance with the provisions of sections 3, 4 and 5 of the Central Sales Tax Act.

2.         A sale or purchase (of goods) is taxable under the Local Sales Tax Law (Haryana Value Added Tax Act) only if it is a sale or purchase inside the State as defined in section 4 of the Central Sales Tax Act Act and is not an inter-State sale or purchase as defined in section 3 or an export/import sale or purchase as defined in section 5 of the said Act.

3.         A sale in the course of inter-State trade is either section 3(a) sale, when such sale occasions the movement of the goods from one State to another, or section 3(b) sale, when it is effected by transfer of documents of title to the goods in the course of the movement of the goods from one State to another.

4.         After first sale in the course of inter-State trade, a second sale effected by transfer of documents of title to the goods during the course of the movement of the goods is a subsequent sale in the course of inter State trade. A subsequent sale can be only section 3(b) sale as it can be effected only by transfer of documents of title to the goods. Such sale can be effected any number of times duringthe course of the movement of the goods. Existence of a prior agreement with the subsequent purchaser with or without the consent of the first seller will not come in the way of subsequent sale being an inter-State sale under section 3(b).

5.         An inter-State sale, which is not a subsequent sale, is taxable in the State, 6.         A subsequent inter-State sale is exempt from tax, vide section 6(2) of the Central Sales Tax Act, subject to production of both (i) a certificate in Form E-1 (given by the first seller in the course of inter-State trade to the purchasing dealer/E-11 (Given by the subsequent seller in the course of inter-State trade to the purchasing dealer) and (ii) declaration in Form C (Sale to a registered dealer/certificate in Form D (Sale to a Government Department).

7.         In case E- l/E-11 and C/D forms are not produced, the subsequent inter-State sale is taxable in the State, Levy of tax on real estate transactions under the provisions of VAT

The recent ruling of Hon1ble Supreme Court of India in the case of but still a general understanding amongst all the persons was that the real estate transactions are not taxable as it does not constitute works contract but is a sale of chattel as a chattel. The result of this continuous dispute was that the Hon'ble Supreme Court in the case of The Larger Bench of the Hon'ble Supreme Court repelled the contentions raised by the builders in this regard and held that the activity of construction is covered by the term 'works contract' as the term 'works contract' is nothing but a contract in which one of the parties is obliged to undertake or to execute works . It was held that even though 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. The Hon'ble Bench summarises the legalposition in para 101 as under:

(i)        For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled (one) there must be a works contract (two) the goods should have been involved in the execution of a works contract and (three) the property in those goods must be transferred to a third party either as goods or in some other form.

(ii)       For the purpose of Article 366(29A)(b), in a building contract or any contract to do construction if the developer has received or is entitled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of buildings, the goods (chattels) like cement, concrete, still, 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.

(iii)     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(29A)(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(29A)(b) limits the term "works contract".

(iv)      Building contracts are species of the works contract.

(v)       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).

(vi)      The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen to have lost their significance where transactions are of the nature contemplated in Article 366(29A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is 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 such contract otherwise has elements of works contract. The enforceability test is also not determinative.

(vii)    A transfer of property in goods under clause (29A)(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made.

(viii)   Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services. In other words, the single and indivisible contract, now by the Forty-sixth Amendment has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material in the execution of works contract.

(ix)      The expression "tax on the sale or purchase of goods" in Entry 54 in List II of the Seventh Schedule when read with the definition clause (29A) of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract.

(x)       Article 366(29A)(b) served to bring transactions where essential ingredients of "sale" defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be sale within the meaning of the Sale of Goods Act.

Taxing the sale of goods element in a works contract under Article 366(29A)(b) read with Entry 54, List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable 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.

Even though the conclusion given byApex Court is binding in so far as the dealers are concerned but at the same time, there are some unanswered questions even after the aforesaid judgment which still bothers the tax professionals, the dealers affected by it and the common man who has to bear the burden of this tax. Some of those issues are summarised as under:

1.         It appears that a specific argument had been raised before the Hon'ble Bench that in case the contention of the States is to be accepted that the transfer of flats after construction would amount to works contract, then the levy of stamp duty on the entire value of building at the time of its sale is not legally justified as it would amount to levying the tax on the same transaction as a sale  of movable as well as immovable property which would be contradictory to each other. It appears that the Hon'ble Supreme Court has not dealt with this issue which has bearing on the entire controversy.

2.         Even though it has been held. by the Hon'ble Apex Court that the builders are the contractors and are covered under the definition of works contract but it has also been held that the levy of tax would start from the date when the prospective buyer enters into an agreement with the real estate developer.It has also been clearly held that no tax would be payable in case the agreement is entered into after the completion of contract as it would amount to sale of immovable property.This position has resulted into levy of tax upon customers who make the booking in advance whereas no tax would be levied on the person who buys the property after its completion. This position has resulted into an anamalous situation as the burden of tax on a person who books the property in advance would be more than the person who buys the property after its completion.

3.         It has come to notice that the appropriation of tax liability upon the customers is a daunting task. It becomes almost impossible to appropriate the element of tax between the customers as the actual liability of tax for each customer would be different. In-so-far as the builder is concerned,it is almost next to impossible to find out as to how much exact liability should be recovered from every single customer as the project undertaken by him is joint in nature.

4.         It has not been clarified as to what would be the position with regard to the common areas as the property in goods involved in the execution of those common areas is never passed on to the prospective buyer even though the cost of such goods is always recovered from the prospective buyers.

The aforesaid questions have arisen after the judgment of Hon'ble Supreme Court of India but it appears that the tax-payers are bound to be involved in another round of litigation on the issue of levy of tax on the flats built by builders for the prospective buyers.