By TIOL News Service

NEW DELHI, APRIL 11, 2015: THE issue before the Bench is - Whether design parameters of a device stipulated by a customer can override the decisive characterstics of the works contract otherwise unequivocally spelt out in the work order. NO is the answer.

Facts of the case

The assessee company is engaged in the business of execution of jobs design, supply and installation of air-conditioning plants construed to be indivisible works contracts. During the relevent year under consideration, M/s. Anupam Colours and Chemicals Industries, Bombay, by a communication had placed an order with the assessee for water chilling plant at its factory at Vapi. The work order insisted on the requirement of chilled water to be used directly for its process of manufacturing pigments with the assertion that sufficient precautions be taken to ensure that chilled water at 5 to 6 degree centigrade would be available for such process. The works contract also emphasized as well that the assessee would provide the customer with the lay-out details, foundation drawing and other necessary information required for the erection of the plant. The assessee being under the impression that the works contract ordered by Anupam Colour and Chemicals would attract the rate of composition prescribed against Entry No.5 notified by the State government, which was for the fabrication and installation of plant and machinery, filed an application before the DCST u/s 62 and insisted that the works contract involved came within the purview of Entry No.5 attracting the composition rate of tax at 5% only. The Deputy Commissioner of Sales tax (DCST) however, rejected the plea of assessee and instead held that the works contract was covered by Entry No.2 at 15%, as the assessee had to air-condition the plant to be erected by it. Accordingly, the concerned Sales Tax Officer (STO) pursuant to the decision rendered by the DCST, assessed the assessee by applying the composite rate of 15% for the works contract involved.

On appeal, both the Assistant Commissioner of Sales Tax (ACST) as well as the Tribunal, dismissed the assessee's appeal. On further appeal, the High Court sustained the determination made by the revenue authorities declaring that the assessee's works contract for fabrication and for installation of air-conditioning plant did fall under Entry 2 of the Notification and was taxable at the composition rate of 15%.

Having heard the parties, the Supreme Court held that,

++ the competing entries requiring scrutiny to ascertain the correct composition rate of tax payable vis-a-vis the works contract involved are engrafted admittedly in the Notification issued by the Government of Gujarat in exercise of powers conferred u/s 55A. Logically thus, the interpretation necessitated by the rival orientations ought to be in furtherance of the underlying objective of the said provision. A plain perusal thereof would attest that thereby, in the circumstances to be prescribed, a dealer can be left at his option to pay in lieu of the amount of tax payable, a lump sum by way of composition, at the rate or rates as may be fixed by the State Government having regard to the incidence of tax on the nature of the goods involved in the execution of total value of the works contract. Unmistakably, therefore, the State Government while fixing the composition rate of tax has to be mindful of the nature of the works contract executed and by no means can be oblivious thereof. Further, a composition rate of tax is in lieu of the amount of levy otherwise payable by the dealer under the Act. The scheme of composition as envisaged by Section 55A therefore in the comprehension of this Court, does not admit of any synonymity with that of exemption as contemplated in law. This pre-supposition of the High Court as one of the contributing factors in concluding that the works contract in question did fall within the framework of Entry No.2 of the Notification is apparently erroneous;

++ it is seen that the work order in clear terms did enjoin that the design parameters pertaining to tonnage of refrigeration, final temperature of the water to be made available for the process of manufacturing pigments and the quantity of the chilled water essential therefor were indispensable and were in addition to the other specifications as offered by the assessee. The rigour of the insistence for the adherence to the design parameters is patent also from the request of the customer requiring the assessee to provide it with the lay out detail, foundation drawing and other necessary information essential for the erection of the water chilling plant. The exercise as a whole as contemplated by the work order thus was neither intended nor can be reduced to mere installation of the finally emerging apparatus. The work order noticeably did not refer to any readymade or instantly available devices, meeting the requirements of the customer so much so to be only installed at its factory. Instead, the work order had been apparently tailor-made to the requirements from which no departure was intended or comprehended. It is in this perspective that the word "fabrication" appearing in Entry No.5 of the Notification assumes a decisive significance. The legislative intendment entrenched u/s 55A to maintain a direct correlation between the composition rates of tax as the Notification would reveal that the description of the corresponding works contract is patent. Understandably, the word "fabrication" had not been applied in the works contract for installation of air-conditioners and A.C. coolers contained in Entry No.2 of the Notification. The author of the said Notification, however, did consciously include the expression "fabrication" while describing the works contract enumerated in Entry 5 thereof. Having regard to the inseparable interdependence between the description of a works contract and the corresponding composition rate of tax, none of the inherent components of the works to be executed can either be ignored or disregarded for identifying the correct composition rate of the levy under the Act. Any other approach could tantamount to doing violence not only to the legislative purpose conveyed by Section 55A but also the language of its yield i.e. the Notification seeking to promote the statutory end. Viewed in that context, mere omission of the expressions "air-conditioners" and "A.C. coolers" in Entry No.5 would not be of any definitive consequence. The words plant and machinery applied in Entry 5 are otherwise compendious enough to include air-conditioners and A.C. coolers, if the works contract involved require fabrication as well as installation thereof. Therefore, since fabrication in terms of the work order in the instant case is a distinctly independent yet integral segment of the works contract contributing to the final physical form of the water chilling plant with the characteristics intended, it cannot be construed to be, synonymous to the installation thereof;

++ it is seen that the High Court had confined itself wholly to the components of various air-conditioning devices available and the range of the use thereof and had missed the significant aspect of "fabrication" integrally involved in the works contract to supply the water chilling plant with the design parameters stipulated by the customer. The High Court did adopt a general approach vis-a-vis the air-conditioning devices commercially available in different forms dehors the singular factual aspects of the work order constituting the works contract. The High Court, thus, by overlooking the component of fabrication in the works contract opined that the same was within the purview of Entry No.2 and not Entry No.5. The description of the works contract, to reiterate, being of determinative bearing for ascertaining the composition rate of tax, this court is of the unhesitant opinion, in the face of the design parameters insisted upon in the work order and consequential process of fabrication involved to cater thereto, that the works contract involved squarely falls within the ambit of Entry No.5 of the Notification. The margin of difference in rates of tax as prescribed by the Act compared to those mentioned in the Notification ipso facto does not detract from this conclusion. This consideration per se cannot override the decisive characteristics of the works contract otherwise unequivocally spelt out by the work order. Therefore, in the overall legal and factual perspectives, any endeavour to drag the works contract involved within the framework of Entry No.2 would be repugnant to the basic principles of interpretation of statutes and subordinate legislations like the statutory Notification u/s 55A. To exclude the work of fabrication from the works contract as per the work order would render it truncated to a form not intended by the customer. This would strike as well at the root of the mandate of correlation of a works contract and the corresponding composition rate of tax as envisaged by Section 55A and the Notification issued thereunder. In the face of the determinations made herein, the inescapable conclusion is that the assessee's works contract for fabrication and installation of water chilling plant at the factory of Anupam Colours and Chemicals at Vapi would fall under Entry 5 of the Schedule to the Notification issued u/s 55A and would be taxable at the rate of 5% as prescribed thereby.

(See 2015-TIOL-58-SC-CT)