Q.1 Local Sales Tax Law provides for grant of interest on refund arising out of assessment order, like section 43A of Bombay Sales Tax Act, 1959. Under CST Act, 1956 there is no speaking provision for grant of such interest. A dealer has become entitled to refund under CST Act. Whether he can claim interest on refund read with provisions under the Local Act?

Ans. It is true that in CST Act, 1956 there is no speaking provision for grant of interest on refund arising out of assessment order. The similar issue arose in Maharashtra. Under BST Act, 1959 the interest on refund is made eligible by virtue of section 43A. However on the ground that there is no substantive provision under the CST Act, 1956 the interest on such refund under CST Act was denied. The issue came before the Maharashtra Sales Tax Tribunal. The M.S.T. Tribunal has settled the above issue vide judgment in case of Priya Dyes & Chemicals (S.A. 139 of 2001 dt. 21-8-2007). The short gist of judgment can be as under.

On 9-1-2004 the Commissioner of Sales Tax issued Trade Circular by which it was informed that since there is no substantive provision for grant of interest in Central Sales Tax Act, the grant of interest on refund is not permissible. The S.C. judgment in India Carbon Ltd. (106 STC 460) relied upon by the Commissioner to give above circular. The matters came before Tribunal either out of rejection of interest or withdrawal of interest.

Before Tribunal elaborate arguments were made by various representatives appearing on behalf of appellants. The main arguments on both sides can be summarized as under. Arguments on behalf of appellant dealers:

The provision for grant of refund cannot be said to be substantive provision. It is substantive provision under procedural law. The grant of refund cannot be compared with levy section. The provisions for levy of penalty/interest are of different nature and of substantive nature whereas grant of interest is of different nature.

When refund is covered by section 9(2) of CST Act, the incidental provisions in relation to same are automatically covered. Interest on refund is addition to refund and hence it partakes the character of refund which is covered by section 9(2). It was argued that liberal interpretation to machinery provisions is required and that the benefit of doubt to be given to assessee. Interest on refund is part of assessment and hence it accrues automatically. The principles applicable in respect of referential Legislation also explained.

It was argued that since granting of interest is concession given to dealer, no substantive provision is required. Judgment in case of Orissa Cement Ltd. (29 STC 118)(SC) relied upon.

Department submitted that the judgment of India Carbon is applicable to this case. Without substantive provision if interest is granted it will be loss to revenue, which is not tenable. Rule of interpretation ‘Nocitus-a-Socialis’ pressed in service.

Tribunal on above submissions held that interest, being in nature of concession, it is allowable to dealers and the said provision cannot be said to be substantive. Therefore it can be concluded that even if there is no substantive provision for grant of interest under CST Act, by virtue of fact at it is a concession to dealer the provision for grant of interest on refund under Local Act will automatically apply to CST Act. Therefore, in this case, the dealer will be entitled to interest on refund read with provisions in Local Act.

Q.2 Please explain the nature of works contract transaction along with historical background of the same.

Ans. First it will be useful to refer to Constitutional & Judicial History of Works Contract. Entry 48 in List II of Seventh Schedule to the Government of India Act, 1935 read as “taxes on the sale of goods and on advertisement.” With effect from January 26, 1950 our Constitution came into force. Entry 54 of List II of Seventh Schedule to the Constitution of India, 1950 reads as “taxes on sale or purchase of goods other than newspapers.” In Gannon Dunkerley & Co. (Madras) Ltd. vs. State of Madras (1954) 5 STC 216 (Mad.), certain turnovers (after deducting certain percentage towards labour charges) representing the monies received by the company in respect of certain contracts carried out were subjected to tax under the Madras General Sales Tax Act, 1939. The turnover represented the value of the materials used in building contracts. The assessment was challenged on the ground that there was no element of sale of materials in a building contract and such a contract was an integral one which could not be split-up. The Madras High Court held that the transactions were not contracts for sale of goods as defined under the provisions of the Sale of Goods Act, 1930, which was in force on the date on which the Constitution of India came into force and therefore the company was not liable to pay sales tax on the disputed turnover. On the same question, there was divergence of opinion by different High Courts. Ultimately, the Supreme Court of India in case of State of Madras vs. Gannon Dunkerley & Co. (Madras) Ltd. (1958) 9 STC 353 affirmed the view taken by the Madras High Court overruling the contrary view taken by the High Courts of Nagpur, Rajasthan, Mysore and Kerala. The Supreme Court stated “there having existed at the time of the enactment of the Government of India Act, 1956 a well-defined and well established distinction between a sale and an agreement to sell, it would be proper to interpret the expression “Sale of Goods” in entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935, in the sense in which it was used in legislation both in England and in India and to hold, that it authorize the imposition of tax only when there is a completed sale involving transfer of title”.

The judgment of the apex court in Gannon Dunkerley and other judgments created absolute restrictions on States’ power to levy tax on the contracts, such as works contract, contracts of art work, services, food supplied in hotels and restaurants, compulsory sales, hire purchase transactions, leases etc.

States craving for more and more revenue approached the Centre for getting powers to do what Gannon Dunkerley and other judgments have undone. The Law Commission of India considered all these matters in its 61st Report and recommended certain amendments to the Constitution of India, in consequence of which, Parliament enacted the Constitution (Forty-sixth Amendment) Act, 1982. It received the assent of the President on 2-2-1983. Various Articles of the Constitution were amended, main being introduction of new clause (29A) in the Article 366 which incorporates various definition clauses. The deemed sale transactions, introduced in clause (29A) are as under :

“366. Definitions.– In this Constitution, unless the context otherwise requires, the following expressions have the meanings herein respectively assigned to them, that is to say.......
(29-A) ‘tax on the sale or purchase of goods’ includes—

1. a tax on the transfer, otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration;

2. 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;

3. a tax on the delivery of goods on hire-purchase or any system of payment by installments;

4. a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

5. a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

6. a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

Accordingly the State Government got power to levy tax upon the Works Contracts. Taking clue from the above amendment to the Constitution, State Governments started levying tax on “sale” involved in the execution of Works Contract. Meanwhile a confusion prevailed about the taxable quantum of contracts. The matters relating to this issue and other related issues emerging from various courts were ultimately taken to Supreme Court. The Supreme Court delivered its landmark judgment in case of Builder’s Association of India reported in 73 STC 370. In this case Supreme Court directed that the taxable quantum under Works Contract is not the full contract price but only that amount which pertains to transfer of property in goods. The Supreme Court also ruled that, the principles for determination of sale in course of inter-State trade and in course of import/export and also the restrictions and conditions regarding taxation of declared goods are also applicable to “sale” of goods under Works Contract. Thus it can be said that tax is being levied on works contract transactions due to 46th Amendment to Constitution.

Nature of transaction under Works Contract

The next question is regarding the nature of transaction under Works Contract. In case of Works Contract, the Seller (i.e., Contractor) is required to do something more to the goods, than simple delivery of goods, as in case of normal ‘sale’. Thus, if it is a contract of building construction, the contractor not only delivers various building materials but also performs further work on them by embedding them into earth to construct walls etc. The contractee is also not interested in taking the delivery of various building materials as goods but to get them used in construction of walls etc. Thus in such cases the contract comes to an end, not on supplying the goods as goods, but with some more services coupled with them, like fitting, embedding in earth etc. Various examples can further be stated in this respect, like repairs of cars, where the contractee is not interested in purchasing the spare parts but further interested in getting them fitted in his car. Thus the “sale” does not come to an end by delivery of goods but by putting some labour to it to complete the contract. In fact, this was the reason, why Supreme Court in case of Gannon Dunkerley & Co. Ltd. (9 STC 353) held that construction of building is not sale of building materials simpliciter but a Works Contract as something more is required to be done by applying labour and getting them used in construction of walls etc. So this is the principle to determine the nature of transaction. By 46th amendment, as mentioned above, what the Constitution has done is divided such transaction between sale of goods and other part by deeming provision and this deemed sale of goods is the subject matter of taxation under Sales Tax Laws.

Q.3 Please explain the nature of inter-State works contract and taxation thereof.

Ans. Inter-State Nature of Works Contract & Use of C forms. The law regarding ‘sale in course of inter-State trade or in course of import’ in relation to works contract is rather complex. As stated earlier the Supreme Court has ruled that the principles of sale taking place in course of inter-State trade or import are equally applicable to deemed sales under works contracts. However, as and when such sale will be deemed to have taken place, is difficult task to decide. Still from the discussions in various judgments it can be said that, when the goods are specifically mentioned/required in the contract, which are moved from one state to other state, and if such goods are installed or used in the same form in the execution of contract, it can be said that the sale of such goods is in course of inter-State trade. On the other hand if the goods are required to be manufactured or fabricated on the site, and only raw materials are moved from other state, it can be said that there is no movement of such finished goods from one state to another state pursuant to contract of sale in execution of works contract, and hence deemed sale of fabricated goods used in the Works Contract cannot be said to be in the course of inter-State trade. It will therefore be a local sale within state where the contract is being executed.

It is pertinent to note that if the sale under works contract is proved to be in course of inter-State trade, no tax will be attracted on the same till 11-5-2002. For example, if an assessee had taken a contract in Maharashtra where the specified goods to be used in Works Contract are to be manufactured at its branch in Gujarat, the movement of the manufactured goods from Gujarat will be in course of inter-State trade and hence the value of such goods cannot be taxed in the State of Maharashtra. Prior to 11-5-2002 it will not be taxable in Gujarat as ‘sale’ under C.S.T. Act did not include sale under Works Contract till amendment, which is effective from 11-5-2002. If such sale is after 11-5-2002 it will be taxable under CST Act, 1956.

If instead of moving manufactured goods from Gujarat, only raw materials are moved and finished goods are fabricated or manufactured on the site in Maharashtra, such sale will be considered as local sale and it will be taxable in Maharashtra under Local Act.

In other words, if the movement of goods to other state is proved to be due to sale under Works Contract, the same will be considered as ‘sale’ under Central Sales Tax Act and the said goods will be liable to tax in the state from where they are moved. Of course, no liability on same goods can arise in the state where contract is executed since it will be considered as inter-State purchase under Works Contract. As stated above whether the movement is pursuant to Works Contract will depend upon facts of each case, i.e. whether movement is of finished goods for contract or raw materials. The liability can arise in relation to movement of finished goods and not in relation to raw materials.

Value on which Central Sales Tax payable

The other issue is about the value on which tax is payable under Central Sales Tax Act. Since the tax is payable under Central Sales Tax Act when no specific provision is made for composition scheme, the tax will be payable on the ‘value’ of goods involved in the contract. The composition scheme, operative under various Local Acts will not be applicable to transactions under Central Sales Tax Act. By amendment of 2005 in ‘sale price’ a standard deduction scheme is sought to be provided for arriving at the taxable portion. However in absence of Rule it is still not operative. At present, the value is to be determined in light of judgment of Hon’ble Supreme Court in case of Gannon Dunkerley & Co. (88 STC 204). For ready reference the relevant portion in the above judgments is reproduces below.

“The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover:

1. labour charges for execution of the works;

2. amount paid to a sub-contractor for labour and services;

3. charges for planning, designing and architect’s fees;

4. charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;

5. cost of consumables such as water, electricity, fuel etc., used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and

6. cost of establishment of the contractor to the extent it is relatable to supply of labour and services;

7. other similar expenses relatable to supply of labour and services;

8. profit earned by the contractor to the extent it is relatable to supply of labour and services.

The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor.”

Judgment in case of Mahim Patram Pvt. Ltd. vs. U.O.I. (6 VST 248)(SC)

Reference can also be made to the judgment of Supreme Court in above case, wherein Supreme Court held that local rules about determination of sale price can apply to CST Act also. The judgment is in relation to U.P. (CST Rules). Though the language in other State CST Rules may not be at par with U.P. Rules, still taking clue from the observations of Supreme Court about assessment etc. it can be said that Local Rules can apply to CST Act also. Accordingly while deciding sale price under CST Act for Works Contract help can be taken of Local Rules for standard deduction etc. for deciding taxable amount.

Rate of tax

The other issue is about rate of tax. The rate of tax will be 2% (after 1-6-2008), if supported by C forms. If not so supported, then local rate of tax, as applicable in appropriate state, will apply. It is needless to add that if goods are generally exempt under local Act, the said goods will be exempt under CST Act also. Thus the rates are to be decided along with rates under Local Act.

Requirement of ‘F’ form

As mentioned above, when raw materials are transferred to other state, where after necessary fabrication etc. the goods are used in Works Contract, the transaction will be covered under Local Act. However since there is transfer of goods from one state to other, in light of amended provisions of section 6A of CST Act, the state authorities, from where the raw materials are transferred, may insist for Form F. Though as per plain language of section 6A, F form is required, the issue needs to be clarified by the Central Government, rest it will cause many hardships as also unwarranted litigation.