By TIOL News Service

AHMEDABAD, MAY 14, 2018: THE issue at hand before the bench was whether a contractor using self-manufactured inputs in execution of works contract is ineligible to seek composition of tax. NO is the answer. The Court also held that where a dealer executing in works contract is not debarred from using self-manufactured inputs, a declaration for such inputs need not be filed.

Facts of the case

The assessee company, engaged in execution of works contracts, is also a registered dealer under the Act. The assessee was awarded the contract for 4-laning of some sections of a national highway. To this end, the assessee used steel, cement, grit and sand. The assessee also has its own mines taken on lease, from where it procures black trap which is then converted into grit for final use in construction. It may be noted that the assessee had applied for composition of tax on works contract u/s 14A of the Act, wherein it could pay a lump sum tax on total turnover. The assessee's application opting for composition of tax, was accepted. However, in such application, the assessee did not mention that it was itself mining black trap which was later converted into grit for use in construction.

When the Department found out about it later, it noted that the assessee did not pay tax on the grit used in construction, and so had contravened the conditions for composition of tax. Hence the Department issued SCN proposing that the assessee's permission for composition of tax be cancelled. The Department also alleged contravention of Rule 28(6) of the GVAT Rules, on grounds that the assessee had withheld such information from the Department, and based on such limited information available permission for composition had been granted. Hence the present writ by the assessee.

In writ, the High Court held that,

++ the issue can be looked from a different angle. It may be recorded that the Department has raised an erroneous objection that the assessee had failed to disclose its modus of obtaining black-trap or grit, while applying for composition. Neither the Act nor the Rules require any such declaration. The assessee cannot be expected to make declaration which was not called for. In this context, the question arises what would have happened had the assessee made such a declaration while applying for composition or the Department was aware of the assessee's modus, while dealing with such an application. Would the authority be justified in rejecting such an application ? The answer has to be in the negative since there is no provision under the Act or the Rules which debars a dealer from using self-manufactured inputs in execution of the works contract;

++ even if the assessee wanted to pay tax on such goods, there is no provision under the Act under which the assessee could do so. Since the assessee had not purchased the goods from market but had self-manufactured it from the mines taken on lease, there was no occasion to pay the tax. The Department obviously cannot argue that in such a situation, the assessee cannot avail of composition facility at all. This would indirectly disqualify a contractor who uses self-manufactured products for home consumption in the course of execution of works contracts from claiming composition of tax. There is no condition which will render any such contractor ineligible for composition scheme. Interpretation of the said rule, as advanced by the Department would bring about a situation where such a contractor would be rendered totally ineligible to apply for composition. Such an interpretation cannot be accepted. This would amount to Rule 28(8) virtually governing the eligibility conditions for composition of tax which conditions are prescribed in Section 14A of the Act. Rule 28[8] of the VAT Rules being a piece of subordinate legislation must yield to the provisions contained in the Act.

(See 2018-TIOL-908-HC-AHM-VAT)