[email protected] om www.consultconstruction.co Key Indirect Tax Court Judgements Indian Construction Sector CA Sandesh Mundra
Key supreme court judgements
Sep 14, 2014
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Key Indirect Tax Court Judgements
Indian Construction Sector
CA Sandesh Mundra
AIR 2006 SUPREME COURT 1383"Bharat Sanchar Nigam Ltd. v. Union of India
• Transactions in relation to telecom products such as SIM cards, recharge vouchers etc. involve goods and service components On the one hand, telecom products are sold as tangible items
• On the other hand, they are valueless in themselves and are purely representative of provision of telecom services
Two alternatives considered :-I. Determining a method to split the transaction into its respective goods and service
component; orII. Determining a method to deem the transaction to be either a goods or service
transaction• Option I rejected on the basis that splitting only allowable for categories of
deemed sales, viz. works contracts and catering • Certain transactions in which goods component is incidental (lawyers, doctors)
do not constitute works contracts
Relevant facts were as under:
Kone Elevators was responsible for bringing the elevators to site in knocked down state and carry out assembly on site.
The customer was contractually bound to prepare the site by performing the civil works for preparing the lift pit, hoist way and arrange for power supply.
Assessee’s contractual obligation vis-à-vis installation involved completion of mechanical erection, electrical wiring testing and commissioning of the lift.
Assessee’s installation obligations started only upon prior intimation from the customer that site was ready.
AIR 2005 SUPREME COURT 1581 "State of Andhra Pradesh v. Kone Elevators (India) Ltd
Kone Elevators...
Issue before the Court was whether the above arrangement would constitute a works contract :-
The Court held that the Contract was for supply of goods as opposed to a works contract and decided to reject the assessee’s claim of deduction on account of labour.
Reasoning adopted were:-
The execution of the contract had two major components – the work of preparation of the site and the supply of the lift.
Skill and labour involved in converting the main components into end product was merely incidental
As a reaction to the Kone Elevators’ judgment, the Maharashtra VAT authority came up with a circular specifying that in the context of elevators, the contracts that have the following elements would be treated as works contracts :-
If the elevator does not have any individual existence before the delivery; and
Assessee is required to carry substantial obligations for installation and commissioning such as civil construction work etc., which are more than mere incidental works
The judgment of the Court appears to negate the fact that in any contract envisaging supply of an elevator, there is bound to be an element of service along with supply of material.
It should be borne in mind that in the celebrated BSNL case the Supreme Court has unequivocally rendered Rainbow Colour labs ineffective and ruled that even if there is incidental transfer of property the arrangement would constitute works contract.
Factors to note are In Kone Elevators, the Court seemed to place significant reliance on the
feature that the contract contemplated an incidental involvement of labour.
Transposed upon the ratio of BSNL case, does this mark a shift in the view of the Supreme Court that as long as the involvement of labour is incidental the contract would not be works contract (as opposed to incidental supply of material).
Kone Elevators was decided in February 2005, BSNL case in March 2006 – Both by full bench of the Supreme Court.
However, a contract of service and supply, where the component of services is incidental would be a “sale” Could be significant in determining service tax liability in such situations as well as the admissibility of deduction towards labour and other charges
Issue : Incidental installation services pursuant to supply of material. Is Kone Elevators still a good law?�
Can we take different interpretation of the same �transaction in two different statutes i.e.
� VAT: A contract amounts to works contract. � Service tax: The services are merely incidental to
supply of goods and hence not chargeable to service tax.
SERVICE TAX - Similar Issue
M/s Allengers Medical Systems Ltd Vs CCE, Chandigarh (Dated: October 29, 2008)
• Appellants manufactured and sold medical equipment - Activity of installation, erection and commissioning were incidental to delivery of goods to the customers and, therefore, there was no reason for levy of service tax on the installation and commissioning of medical equipment - Tribunal.
Apex Court decision in State of Andhra Pradesh Vs Kone Elevators (India) Ltd referred.
Service Tax demand and penalties set aside and appeal allowed with consequential relief. : DELHI CESTAT;
Interstate works contract – Recent development
Depending on the nature of transaction levy of VAT/sales tax may be attracted under the State level VAT statute or the CST Act . Typically, in case of CST (against form C), a rate of 2 percent would apply, while in case of non form C sales, the rate could increase to VAT rate as applicable on the material
State of Karnataka v. ECE [2006] 144 STC 605
• Section 3(a) of the CST Act does not itself provide (for) the movement ofgoods from one State to another where such movement is the result of acovenant in the contract of sale or is an incident of that contract• The test is movement of goods from one State to another in the course ofinter-State trade or commerce
It is not necessary that the contract of sale must itself provide for andcause the movement of goods or that the movement of goods must beoccasioned specifically in accordance with the terms of the contract of saleIn this case
Post manufacture in UP, lifts were dismantled and stock transferred toKarnataka by assessee. The Karnataka branch office carried out installation and commissioning atcustomer’s site.
Judgment appears to suggest that so long as there is actual movement ofgoods, CST would apply.
However, judgments of the Supreme Court have held that the sale must occasion the movement, which should be a condition of the contract and that mere knowledge of such movement would not suffice for a sale to be an interstate sale (Tata Motors case)
State of Orissa v K B Shah and Sons Industries Private Limited (2007 36 MTJ 401) (Supreme Court)
The seller, a Government of Orissa undertaking, accepted tender notices for sale of goods to the taxpayers, who were located outside Orissa. After payment of the sale value, goods were transported to the taxpayer’s places of business (outside Orissa). The authorities, however, demanded VAT on the basis that the transaction did not amount to inter-state sale. The Supreme Court held that a transaction could be considered as an inter-state sale, if the movement of goods was as a result of sale or incidental to such sale. While it was not necessary for a contract to provide for inter-state movement of
goods, sale and the movement of goods should be inseparably connected.
No VAT liability on supplies to a project, where contract envisages interstate procurements/imports
• In a recent ruling in the case of ABB Limited, the Delhi High Court dealt with contracts with Delhi Metro Rail Corporation (“DMRC”) for supply, installation, testing and commissioning of equipments which involved :-
• (i) goods imported in pursuance of the contract • (ii) goods procured from Indian vendors and supplied to the contract; and • (iii) goods manufactured in the taxpayer’s factory outside the State and
supplied to the contract.
The Court held that the sale by the taxpayer to DMRC involving interstate procurements and imports were not liable to tax under the Delhi Value Added Tax (“DVAT”) Act.
Key Observations of the Court General Observations• The contract specifically required approval of DMRC for sub contractors/vendors. DMRC
issued a letter listing out the approved or authorized list of suppliers (which included their location).
• The goods were custom made.
Interstate Sales • Interstate movement of goods was within the knowledge of DMRC. As there is a total ban
of setting up/operation of heavy industry in Delhi, the goods can only be manufactured outside Delhi.
• DMRC approved the locations from within the country (including the taxpayer's factories) from where the equipments and goods were to be supplied.
• The contract need not specifically stipulate interstate movement. The fact that, in performance of the contract, the taxpayer would have to move the goods from other States to Delhi is sufficient.
• If the interstate movement of goods was contemplated by the parties and if reasonable presumption can be drawn that such movement was necessary for the fulfillment of the contract, the sale would fall under Section 3(a) of the CST Act.
SICOI • To determine whether a sale is in the course of import, the movement of goods should be
integrally connected with the contract for their supply.
On facts, the sale to DMRC is deemed to have taken place in the course of import in view of the following features of the contract:
o The goods were custom made, for use by DMRC in its project; o Specifications were spelt out by DMRC; o Pre-inspection of goods was mandated; o Packed goods were especially marked as meant for DMRC's use in its
project; o Suppliers of the goods (including foreign suppliers) were approved by
DMRC; o In the Project Authority Certificate issued by DMRC, the name of the
subcontractors as well as the equipment/goods to be supplied were expressly stipulated; and
To avoid/reduce disputes, it is advisable to take cognizance of the following aspects:-
• Clear demarcation of value of goods and services ( as much as possible)• The Contract should clearly envisage the specific goods that are
proposed to be purchased by the Contractor from out of State Vendors• Where the contract does not provide so, specific approval from the
Owner may be taken before placing the purchase orders on such out of State vendors
• While issuing the purchase order (PO) on out of State vendor, name and reference of the Owner and the contract should be indicated
• The PO should direct that the goods be dispatched to the Owner’s site• Transport documents ( prepared by the out of state vendor) must be
prepared in the name of the contractor A/c of Owner• The invoice raised by the vendor should also provide corresponding
cross reference to the Contract between the Purchaser and the Owner
• IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.1123 OF 2003
The Indure Ltd. and Another ....Appellants Versus Commercial Tax Officer and Ors. ....Respondents Justice DALVEER BHANDARI and Justice DEEPAK VERMA Date of Judgment: September 20, 201
• Whether import of MS Pipes by Appellants was pursuant to a term of contracts between Appellant No.1 and NTPC.
• Whether import of said MS Pipes and supply thereof by the Appellant No. 1 to N.T.P.C. Constitutes an integral and inseparable part of the Contracts between them.
• Appellant is held entitled to claim benefit of Section 5(2) of the Central Sales Tax Act -
• Test of integral connection or inextricable link
Nagarjuna Constn. Company Limited vs Government of India and another
Appellant-construction company had executed various contracts which were in nature of composite construction contracts and had paid Sales Tax/ VAT on those contract under 1957, Act and 2005, Act
• Appellant wanted to opt for scheme but department issued circular clarifying that Classification of a taxable service was determined based on nature of service provided whereas liability to pay service tax was related to receipt of consideration –
• Those who had paid tax as per provisions and classification existing prior to 1-7-2007 and those who opted for payment of tax under provisions of r. 3 of 2007 Rules and paid tax before exercising option belong to different classes and, therefore, it could not be said that Impugned Circular or provisions of r. 3(3) of 2007 Rules were discriminatory - Appeal dismissed.
Rashtriya Ispat Nigam Limited vs Dewan Chand Ram Saran [SUPREME COURT OF INDIA, 25 Apr 2012]
• Respondent as contractor had to bear service tax u/cl. 9.3, liability in connection with discharge of his obligations under contract - Appellant could not be faulted for deducting service tax from bills of respondent u/cl. 9.3, and there was no reason for HC to interfere in view taken by arbitrator which was based, in any case on a possible interpretation of cl. 9.3 - HC, as well as DB clearly erred in interfering with award rendered by arbitrator and hence, set-aside - Appeal allowed.
Mahim Patram Private Ltd. Through ... vs Union Of India (Uoi) Through ... on 3 May, 2006
Larsen and Toubro Ltd. v State of Andhra Pradesh – Sub-contracting
The assessee had sub contracted some portion of its work. The revenue sought to levy VAT on both the assessee as well as the subcontractor under the category of the works contract
No legal relationship between project owner and the subcontractor In a works contract, the property in goods typically passes directly to the project owner by the
theory of accretion. At no point of time in this case, the property in the goods passed to the assessee where the work was executed by the subcontractor
The sub-contractor was only an agent of the assessee and the property in goods passed directly from the sub-contractor to the project owner
Only one transfer of property and thus only one taxable event
Subcontracted goods scopes to be taxed only once.
However, it is not clear from the judgment which leg of the transaction should be subjected to VAT. Important to note that the Court held that collection of tax from both the subcontractor and the Contractor would be violative of Article 14 of the Constitution.
However, the above principle laid down in the Apex Court decision has not been followed consistently by the Courts and Adjudicating authorities resulting in implementation issues at a practical level as to whether the main contractor is required to pay VAT on the construction turnover, if the entire construction activity is subcontracted.
Recent decisions on this subject matter:-
i. Skyline Constructions & Housing (P) Limited v Authority for Clarification and Advance Rulings, Bangalore (2010 1 GST 173)(Karnataka HC) (“Skyline case”)ii. Larsen & Toubro Limited v Union of India and Others (Writ Petition (C) 1907
of 2012)(Delhi HC) (“L&T Delhi case”)iii. Advance Ruling of Assetz Infrahomes LLP (Order no AR CLR CR 51/2011-
2012) (“Assetz case”)
Karnataka Advance Ruling in Assetz case following the decisions in L&T SC case and Skyline case:-
The Authority for Clarification and Advance Rulings (“ACAR”) in Karnataka, in the case of Assetz Infrahomes LLP (“Assetz”), has clarified that Assetz need not pay VAT if the construction of a project has been completely outsourced and the same would be executed by a Contractor in toto, relying on principles laid down by the L&T SC case and the Skyline Case.
AIR 2005 SUPREME COURT 3336 "Xerox Modicorp Ltd., M/s. v. State of Karnataka
• Full Service Maintenance Agreement (FSMA) and Spares and Service Maintenance Agreement (SSMA) - Assessee thereunder taking responsibility of fully ‐maintaining machine, servicing it and if necessary replacing parts.
Agreements not just service contracts. Replacement of parts ‐after sale of machine amounts to sale as the supply is for price
There is transfer of title in movables for price - Fact ‐ ‐that price was not separately charged or it was not known in beginning as to whether any part was to be replaced, is irrelevant
Levy of sales tax on parts supplied, proper‐
Term 'consumables' used in Exlanation I to R. 6
Read as such term 'consumables' refers to items ‐ used in execution of works contract so that nothing tangible is left - However, property ‐in toners and developers passes moment they are put in machines before they are consumed - Amounting to sale of goods - Levy of ‐ ‐sales tax on toners and developers supplied by assessee, thus proper.
AIR 2000 SUPREME COURT 946 "Steel Authority of India Ltd. v. State of Orissa
• TAX - Deduction at source from payment to works contractor -‐ Section does not take into account fact that sale of goods involved in works ‐
contract may not be exigible to State sales tax - Section is, therefore, beyond ‐ competence of State.
Constitution of India, Art.286, Art.246, Sch.7, List 2, Entry 54 :-
• Art. 286 (1) of the Constitution states that no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place outside the State or in the course of the import of goods into, or export of goods out of the territory of India.
AIR 2000 SUPREME COURT 2436 "Twentieth Century Finance Corp. Ltd. v. State of Mah”
The States in exercise of power under Entry54 of List II read with Art. 366(29A)(d) are not competent to levy sales tax on transfer of right to use goods, which is a deemed sale, if such sale takes place outside the State or is a sale in the course of inter-State trade or commerce or is a sale in the course of import or export.
The appropriate legislature by creating legal fiction can fix situs of sale. In the absence of any such legal fiction the situs of sale in case of the transaction of transfer of right to use any goods would be the place where the property in goods passes, i.e. where the written agreement transferring the right to use is executed.
Where there is an oral or implied transfer of the right to use goods, such transactions effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods.
• The right to use goods accrues only on account of the transfer of right. If the goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed. As soon as the contract is executed, the right is vested in the lessee.
AIR 1999 SUPREME COURT 2868 "Aggarwal Brothers v. State of Haryana"
= 1999 AIR SCW 2423 (From : Punjab and Haryana)
• Haryana General Sales Tax Act (20 of 1973), S.2(1) - SALES ‐TAX - WORDS AND PHRASES - "Sale" - Transfer of right ‐ ‐ ‐to use goods for consideration is "deemed" to be a sale - There need not be legal transfer of goods nor ‐transaction should be like a lease - Assessee owned ‐shuttering - Transfer of shuttering for consideration to ‐ builders and building contractors for use in construction of building - Requirements of "deemed sale" are satisfied. ‐
Supreme Court of India Record of Proceedings Petition(s) for Special Leave to Appeal (Civil) No(s).17741/2007 (From the judgement and order dated 06/08/2007 in WA No.1409/2007 of the High
Court of Karnataka at Bangalore) M/s. Larsen & Toubro Limited & Anr. Petitioner(s) State of Karnataka & Anr.
We have prima facie some difficulty in accepting the proposition laid down in Para 20 quoted above. Firstly, in our view, prima facie, M/s. Larsen & Toubro petitioner herein, being a developer had undertaken the contract to develop the property of Dinesh Ranka. Secondly, the Show Cause Notice proceeds only on the basis that Tripartite Agreement is the works contract. Thirdly, in the Show Cause Notice there is no allegation made by the Department that there is monetary consideration involved in the first contract which is the Development Agreement.
If the ratio of Raheja Development case is to be accepted then there would be no difference between works contract and a contract for sale of chattel as a chattel.
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