By TIOL News Service

NEW DELHI, AUG 29, 2017: The issue Before the Bench is - Whether the sale of PSC pipes, jointing material specials, valves, anchor blocks, etc. by the assessee along with the supply of labour & services, for the purpose of laying pipelines, would constitute a contract containing two separate agreements, rather than one indivisible works contract. YES is the verdict of the Apex Court.

The assessee company manufactures and lays pipelines for water supply schemes. In pursuance of an agreement with the Public Health and Engineering Department of the State Govt., the assessee supplied pipes, along with labor and services for laying down pipelines. Meanwhile the State Govt. released two Notifications granting exemption to Works contract, with retrospective effect, and also exempting tax all Works contract relating to dams and canals. In pursuance of another agreement, the assessee laid down pipelines in a dam. When the assessee firm sought exemption from payment of tax, the exemption was denied by the CTO on grounds that the pipes manufactured and supplied by the assessee, fell within the definition of ‘sale of goods', and that the contract was divisible in nature. Thereby, 75% value of the contract was treated as consideration for sale of goods.

The appellate authority, Single Judge as well as the Division Bench of the High Court, upheld such findings of the CTO, holding that the assessee was not entitled to claim exemption for supply of pipelines as such supply was termed as ‘sale'.

After considering the elaborate submissions made by both sides and the case laws cited, the Supreme Court observed –

++ by virtue of the Forty Sixth Amendment to the Constitution, a single and indivisible contract is now brought on par with a contract containing two separate agreements. It has also now become a settled position in law that the State Governments have power to levy sales tax on value of material in execution of the works contract. This position is brought about by creating friction whereby the transfer of moveable property in a works contract is deemed to be sale, even though it may not be well within the meaning of Sale of Goods Act. Taxing the sale of goods element in a works contract is permissible even after incorporation of goods, 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.

++ …after scrutinizing the agreement between the assessee and the State Government, the authorities returned a finding of fact that manufacture and supply of PSC pipes, jointing material specials, valves, anchor blocks, etc. do not fall within the scopes of buildings, bridges, dams, roads and canals. It was also held that the agreement was clearly in 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. It may also be mentioned at this stage that the assessee has, in fact, admitted that it had no grievance against the finding that supply of pipes was nothing but the sale of pipes involved in the execution of the contracts and, therefore, it was excisable to sales tax. In view of the findings recorded by the authorities below, this element of sale of goods shall apply to jointing material specials, valves, anchor blocks, etc. as well. Thus, we are unable to find any fault with the impugned judgment of the High Court.

Thus, the Supreme Court upheld the findings of the High Court in levying sales tax on supply of pipes, deemed to be a sale.

(See 2017-TIOL-310-SC-CT)