A company was involved in the works contract of laying down of pipes for water supply schemes under the Rajasthan Government. The company themselves manufacture the pipes, valves and like equipments needed for executing the contract. Thus, the execution of the work involved sale and supply of pipes, and like equipments.
The sales component in the contract was sought to be taxed under the Rajasthan Sales Tax Act. The company challenged it, on the ground that the State Government had granted exemption to works contract from tax. However, the Revenue justified the levy stating that the sales component in the contract was divisible and could be taxed. The levy and assessment were upheld by the High Court.
In appeal before the Supreme Court, the orders of the Revenue and the High Court were upheld. The Court held 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. Relying on the judgments in Kone Elevator India Ltd. v. State of Tamil Nadu (2014) 7 SCC 1 and State of Karnataka and others v. Pro Lab and others (2015) 8 SCC 557, the position of law was reiterated with much clarity as below:
the works contract is an indivisible contract, but, by legal fiction, is divided into two parts, one for the sale of goods and the other for supply of labour and services.
So, transfer of moveable property in execution of works contract is deemed to be sale, and the value of property can be subject to levy of sales tax. It was also clarified that 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
It was found that the contract in question involved two parts, namely, (i) sale and supply of PSC pipes, jointing material specials, valves, anchor blocks, etc. and (ii) the remaining part being supply of labour and services.
Since there was a divisible element of sales in the agreement, the Court held that there can be levy of sales tax to that extent. Therefore, the appeal was dismissed.
Read the Judgment Here