July 31, 2018

By K Srinivasan, IRS

THE big question that legal Experts keep asking is why is works contract chargeable to tax in the hands of the Contractor?

The Central Excise Law fortunately modeled on the lines of the English Contract Laws, was obviously working like a well-oiled machinery.

It regarded the Principal/Owner as the person responsible for tax liability eventually factoring in all the additions in the value chain that took place in the hands of the Jobber/Contractor, right until it reached the hands of the Principal/Owner.

The point in question is, Works Contract though a different genre of Job work, it essentially still remains as Job Work only.

Therefore, one would strongly think that insofar as the final tax liability is concerned, it must be greatly likened to the tax liability as in the case of Job work under the Central Excise Law.

It only points strongly at the final tax liability with all the downstream value additions, still having to be that of the Principal/Owner only.

If one looks closely at the Contract Act, which is supposed to be the backbone of all indirect tax Laws, one would have no great difficulty in seeing clearly the final tax liability in transactions of the above nature of Job work/Works Contract, naturally leading up to the Principal/Owner.

The Contract Law clearly defines the ownership and the claim of ownership in the event of repudiation of such a contract to vest indisputably with the Principal/Owner.

It will be regardless of the extent of processing or jobbing done by the jobber/Contractor on the goods whose ownership lies tenuously with him and it is after all only to enable him just about enough to be in its possession, to prosecute his work.

That is how in the event of repudiation of a contract, the restitution of right of ownership of the Principal/Owner takes precedence over the Job worker/Contractor, instantly without having to recourse to even a legal proceeding.

In such an event, all the other aspects of value addition done by the Jobber/Contractor will be immaterial and should any tax liability be grafted artificially to the Jobber/Contractor by operation of any law much less a tax law, it is bound to fail in the end.

In view of the above, the Central Excise Law treated the Job work as exempted in the hands of the Job worker. But, the GST law took a departure from the above position without any provocation, which needs to be taken note of carefully here.

The above principle was not without its legal sanction. If you have carefully followed the 46th Constitutional Amendment Act, passed in 1982, inserting in Article 366 Clause 29A sub-clauses (a) & (b), you will appreciate that vide clause (a) tax on transfer of property in goods, otherwise than in pursuance of a contract (whether as goods or in some other form) involved in the execution of a works contract, alone was sought to be named a deemed sale.

Ironically, the above clause will fail to override a non-contractual obligation created by way of a statutory order or obligation i.e. created other than by a contract, notwithstanding the deemed sale scenario described therein.

Also, it is noteworthy that clause (b), not only speaks about movable property but by mentioning 'whether as goods or in some other form' and even Immovable property stands covered under its ambit.

In view of the above, it would be quite well within the sanction of the Constitution to conclude that works contract whether carried out on movable or immovable goods, would still be within the ambit of a deemed sale under Article 366(29A)(b) ibid.

It would only go to imply further in terms of the aforementioned clause (b) of Article 366(29A) that tax on the said deemed sale would, even with the value additions be only on the Principal/Owner, to the extent of the property in goods whether movable or immovable stands transferred to him in the execution of the works contract.

In an indivisible contract, based on the extent of annexation made of the property in goods transferred for the said purpose, whether permanent or temporary, would still not be required to be distinguished as movable or immovable, no matter whether such a supply requires to be regarded as a composite supply or not. Please also refer to my earlier article.

When that being the case, how does the GST Law manage an exception to bring the Job worker under the ambit of tax is an enigma, especially when the value addition should rightfully accrue finally to the goods on its completion, and be taxed in the hands of the Principal/owner.

In the same manner, one would think it logical to regard all indivisible contracts of Labor, whether of Job work or works contract, carried out on goods, movable or not, whether a composite supply or not, the final liability after all to the value additions would be that of the Principal/Owner only.

To the Exchequer, the means of tax is immaterial but the end tax is important, no matter who pays it. The Job worker or the works-contractor, both can afford to stand outside the purview of the above tax, in the stated circumstances explained above in detail.

The predominant nature test will time and again stand up to proof even as transfer of property in goods whether in movable or immovable form, always outweighs the job-work/works-contract carried out on such goods transferred.

As long as ownership of the property in the goods transferred (involved in the execution of the work) is temporary, it vests always with the Principal/Owner and the Job-worker or the Contractor has no more interest in the property in the said goods than a miniscule extent of work carried out on it.

Hence, it would not be worth the Government's while to sweat the small stuff of Job work and Works Contract which, after all, are matters of sweat and Labor already.

In the humble view of the Author, the Government will do well not to labor to establish the above tax base on these shifting sands of Job work/Works Contract and better it had looked out for its annexation on the Chattel instead of Labor, whose definition amply fits all laws of even the yonder.

(The author is Assistant Commissioner, GST, Chennai & Master Trainer, GST. The views expressed are strictly personal.)