06 December 2007
We have given a contract for printing of stationery as per the specification given by us to the contractor. The contractor is charging VAT. Whether contractor is right in doing so or not? Further contract for printing of stationery is a works contrac of purchase contract for us.
06 December 2007
The entire case will depend upon the nature of your contract. At the very outset, it is to be determined that what is the nature of your contract. Whether the contract is a contract of sales or a contract of services or a composite contract? Whether the composite contract is divisible in to Contract of sales and Contract of service or the same is indivisible one. I assume that in your case you are providing stationery to the printer and the printer does the printing work only. Now, the question arises, whether printing work it self falls under the category of sales? Answer is- It is a sale, if it is a works contract in excution of which, transfer of property in goods have been passed.
A transaction of works contract will come under the net of taxation (VAT/CST), if following conditions are satisfied:- 1) There must be a works contract. 2) There must be transfer of property in goods in some form (either goods or in other form) 3) The goods must be involved in or used in during the course of execution of works contract.
The point of dispute in you case is whether there is any transfer of property in goods in some form (either goods or in other form)in execution of contract. Answer may be, yes the transfer of property of ink passes.
I would like to quote few decision of apex court in order to help you in getting the reply of your question:- Hindustan Aeronautics Ltd. v. State of Karnataka [1984] 55 STC 314 at page 322 where it was held thus: “......Mere passing of property in an article or commodity during the course of performance of the transaction in question does not render the transaction to be transaction of sale. Even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work, and property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials. In every case, the court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it...”. The Apex court further held that:- “unless there is sale and purchase of goods, either in fact or deemed, and which sale is primarily intended and not incidental to the contract, the State cannot impose sales tax on a works contract simpliciter in the guise of the expanded definition found in article 366(29A)(b) read with section 2(n) of the State Act.”
This above decision was found disapproved by the Supreme Court in the case [2001] 124 STC 0059- - Associated Cement Companies Ltd. Vs. Commissioner of Customs (and other appeals) (SC-3 Judges). The Apex Court held that “the decision in Rainbow Colour Lab case [2000] 118 STC 9 (SC); (2000) 2 SCC 385 requires consideration.” The Court further observed that:- “The Forty-sixth Amendment was made precisely with a view to empower the State to bifurcate the contract and to levy sales tax on the value of the material involved in the execution of the works contract, notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract. Even if the dominant intention of the contract is the rendering of a service, which will amount to a works contract, after the Forty-sixth Amendment the State would now be empowered to levy sales tax on the material used in such contract. The conclusion arrived at in Rainbow Colour Lab case [2000] 118 STC 9 (SC); (2000) 2 SCC 385, in our opinion, runs counter to the express provision contained in article 366(29A) as also of the Constitution Bench decision of this Court in Builders' Association of India v. Union of India [1989] 73 STC 370; (1989) 2 SCC 645.”
Associated Cement’s case does not overrule the ratio of “Rainbow Colour Lab” :- [2006] 144 STC 0322- - C.K. Jidheesh Vs. Union of India and others (SC-2 Judges) It was observed that:- “In Associated Cement Companies' case (2001) 4 SCC 593 the question was whether or not customs duty could be levied on drawings, designs, diskettes, manuals, etc. The argument there was that these were intangible properties and not goods as defined in section 2(22) of the Customs Act. The question of levy of service tax did not arise in that case. The observations relied upon are mere passing observations and do not overrule Rainbow Colour Lab's case (2000) 2 SCC 385..” It is wrong that Rainbow’s case is still a good Law :-
[2006] 145 STC 0091- - Bharat Sanchar Nigam Ltd. and another Vs. Union of India and others (and other appeal and writ petitions) (SC-3 Judges); It was observed that- “We agree. After the 46th Amendment, the sale elements of those contracts which are covered by the six sub-clauses of clause (29A) of article 366 are separable and may be subjected to sales tax by the States under entry 54 of List II and there is no question of the dominant nature test applying. Therefore when in 2005, C.K. Jidheesh v. Union of India (2005) 8 SCALE 784 held that the aforesaid observations in Associated Cement were merely obiter and that Rainbow Colour Lab (2000) 2 SCC 385 was still good law, it was not correct. It is necessary to note that Associated Cement (2001) 4 SCC 593 did not say that in all cases of composite transactions the 46th Amendment would apply.” The Apex Court in the case- [2006] 145 STC 0091- - Bharat Sanchar Nigam Ltd. and another Vs. Union of India and others (and other appeal and writ petitions) (SC-3 Judges) observed; “Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in clauses (b) and (f) of clause (29A) of article 366, there is no other service which has been permitted to be so split. For example the clauses of article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases. The reason why these services do not involve a sale for the purposes of entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley's case [1958] 9 STC 353 (SC), namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in article 366(29A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in article 366(29A) continues to be—did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is as to what is "the substance of the contract”. We will, for the want of a better phrase, call this the dominant nature test.”
The Apex Court in this case has laid down the following principles:- 01. No dominant nature test will apply to contracts, which are covered by clauses 29A(b) & 29A(f) of the Article 366. 02. Dominant nature test will apply to contracts, which are not covered by clauses 29A(b) & 29A(f) of the Article 366.
Confusion in this field of state taxation is being mounting, despite of several judgments of the highest Judiciary Authority of the Country. None of the post amendment case laws except the case law relating to Rainbow Colours, which we have discussed herein, are directly relating to taxation on transfer of property. With due respect, the author would beg to submit that in none of the post amendment cases sited above, the thorough discussion has been made on the totality of this field of taxation. In none of the cases sited above, emphasis was laid on the fact that whether the contract was a works contract or not. The difference in ‘Contract of works’ and ‘Contract of sales’ were also not discussed. In following paras, we will discuss differences between these two contracts. Contract of works vs. contract of sale:- The distinction between contract of sale and contract for work and labour has been so stated in Halsbury's Laws of England (Fourth Edition, Vol. 41, para 603): “Contract of sale distinguished from contract for work and labour.- A contract of sale of goods must be distinguished from a contract for work and labour. The distinction is often a fine one. A contract of sale is a contract the main object of which is the transfer of the property in, and the delivery of the possession of, a chattel as such to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel as such, the contract is one for work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale. Neither the ownership of the materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining in the circumstances of a particular case whether the contract is in substance one for work and labour or one for the sale of a chattel."
Pollock & Mulla on Sale of Goods Act (1990, Fifth Edition, at page 53) lay down the test for distinction as under: "Generally a contract to make a chattel and deliver it, when made, is a contract of sale, but not always. The test would seem to be whether the thing to be delivered has any individual existence before delivery as the sole property of the party who is to deliver it."
In Benjamin's Sale of Goods (Fourth Edition) following types of Contracts are discussed:-
1. Chattel to be affixed to land or another chattel.-Where work is to be done on the land of the employer or on a chattel belonging to him, which involves the use or affixing of materials belonging to the person employed, the contract will ordinarily be one for work and materials, the property in the latter passing to the employer by accession and not under any contract of sale. 2. Materials supplied wholly or principally by employer.-Where an article is to be manufactured, and all the materials are supplied by the person for whom the work is to be done, it is obvious that there can be no sale unless there is a specific transfer of the materials followed by a repurchase of the product. Where each party provides some of the materials or components, the task of the court is to determine which of them has supplied the 'principal materials'; it then follows that the materials supplied by the other vest by accession in the owner of the principal materials. 3. Services independent of creation or furnishing of product.-Where work or skill is involved over and above what goes into the making of the goods delivered, it is possible and often correct to view the contract as 'substantially' one for work or services. A doctor or veterinary surgeon who supplies medicines does so as an incident to a contract for professional services, which include diagnosis and advice over and above any work in the making up of the medicine. In contrast, a chemist who makes up a prescription sells it, since his work and skill goes entirely into the product-it is simply a component reflected in the price of the goods. 4. Work wholly a component of article produced.-The most difficult type of contract remains to be discussed. In this case the whole of the work of skill involved goes into the creation of the product which is ultimately delivered in performance of the contract; for example, a contract to make a suit of clothing or to build a ship. The work or skill is here a component perhaps the most important-of the thing produced, but is a component and nothing more. It is not logical to ask whether in such a case the parties contracted primarily or substantially for the performance of work or for the transfer of a chattel; they contracted for both. In Clay v. Yates 156 ER 1123, Pollock C.B. suggested that the court should ask whether it was the work or the materials supplied that was of the essence of the contract, a question to be determined by comparing the importance, though not perhaps necessarily the value, of the two items."
The Apex Court in [2000] 119 STC 0533- - Hindustan Shipyard Ltd. Vs. State of Andhra Pradesh (2 Judges) after considering few case laws including case laws of Patnaik and Company v. State of Orissa [1965] 16 STC 364 (SC), State of Gujarat v. Kailash Engineering Co. (Pvt.) Ltd. [1967] 19 STC 13 (SC), State of Gujarat [Commissioner of Sales Tax, Ahmedabad] v. Variety Body Builders [1976] 38 STC 176 (SC), Union of India v. Central India Machinery Manufacturing Co. Ltd. [1977] 40 STC 246 (SC), Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax [1978] 42 STC 409 (SC), Hindustan Aeronautics Limited v. State of Orissa [1984] 55 STC 327 (SC) summed up the principles as under:-
(1) It is difficult to lay down any rule or inflexible rule applicable alike to all transactions so as to distinguish between a contract for sale and a contract for work and labour. (2) Transfer of property of goods for a price is the linchpin of the definition of "sale". Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. It is the substance of the contract document/s and not merely the form, which has to be looked into. The court may form an opinion that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour. (3) If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. If A may transfer property for a price in a thing in which B had no previous property then the contract is a contract for sale. On the other hand where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour. (4) The bulk of material used in construction belongs to the manufacturer who sells the end-product for a price, then it is a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not one for work and labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee which have to be weighed. If the major component of the end-product is the material consumed in producing the chattel to be delivered and the skill and labour are employed for converting the main components into the end-products, the skill and labour are only incidentally used and hence the delivery of the end-product by the seller to the buyer would constitute a sale. On the other hand if the main object of the contract is to avail the skill and labour of the seller though some material or components may be incidentally used during the process of the end-product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour. The Court further said that-. “There may be three categories of contracts : (i) The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (ii) It may be a contract for work in which the use of the materials is ancillary or incidental to the execution of the work; and (iii) It may be a contract for supply of goods where some work is required to be done as incidental to the sale. The first contract is a composite contract consisting of two contracts one of which is for the sale of goods and the other is for work and labour. The second is clearly a contract for work and labour not involving sale of goods. The third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale.”
The Court further given few examples to clarify its observations:- “Two simple illustrations may be given to demonstrate applicability of the above said principles. A customer goes to a tailoring shop accompanied by a suit length in his hands and entrusts the same to the tailor for stitching a suit for him as per his measurements. The tailor by devoting his skill and labour stitches the suit and delivers the same to the customer. In this process the tailor utilises lining, buttons and threads of his own. The transaction would remain a contract for work and labour. The stitched suit delivered by the tailor to the customer is not a sale. It would not make any difference if the customer would have selected a piece of cloth of his own choice for a price to be paid or paid and having purchased the suit length left it with the tailor for being stitched into a suit. The property in the suit length had passed to the customer and physical possession over the suit length by the tailor thereafter was merely that of a bailee entrusted with the suit length. However, if the tailor promises to stitch and deliver the suit for a price agreed upon, investing his own cloth and stitching materials such as lining, buttons and threads, and utilising his own skill and labour then though the customer might have chosen the piece of cloth as per his own liking as to the texture, colour and quality and given his own instructions in the matter of style, the transaction would remain a contract for sale of goods, that is, a stitched suit piece inasmuch as the object of the contract was to transfer property in the stitched suit piece along with delivery of the suit by the tailor to the customer, all investments, whether of material or of skill and labour having been made by the tailor incidental to the fulfilment of the contract.”
Now, at the end of this discussion, we should also consider the latest decision of the Supreme Court (3 Judges) in the case [2005] 140 STC 0022- - State of Andhra Pradesh Vs. Kone Elevators (India) Ltd. Wherein it was held that :-
“If the intention is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a "contract of sale", the main object is the transfer of property and delivery of possession of the property, whereas the main object in a "contract for work" is not the transfer of the property but it is one for work and labour.
Another test often to be applied to is: when and how the property of the dealer in such a transaction passes to the customer: is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a "sale"; if it is the latter, it is a "works contract". Therefore, in judging whether the contract is for a "sale" or for "work and labour", the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provides a guide in deciding whether transaction is a "sale" or a "works contract". Essentially, the question is of interpretation of the "contract". It is settled law that the substance and not the form of the contract is material in determining the nature of transaction. No definite rule can be formulated to determine the question as to whether a particular given contract is a contract for sale of goods or is a works contract. Ultimately, the terms of a given contract would be determinative of the nature of the transaction, whether it is a "sale" or a "works contract". Therefore, this question has to be ascertained on facts of each case, on proper construction of terms and conditions of the contract between the parties.”
From the discussion, above we can safely conclude the position of tax in works contract will be applicable, if:-
a) There must be a works-contract (which should not be contract of sale); b) There must be transfer of property in goods; (in goods involved in WC) c) The transfer should be in some form, and d) The dominant nature of the works contract should be relating to ‘transfer of property in goods’ (Pl. refer Bharat Sanchar’s case).
There may be different opinions regarding different theories and principles in context of taxing the transfer of property in goods in Works Contract, but one thing is beyond any dispute that the determination of character of a contract in context of works contract will rarely be dispute free.
06 December 2007
I would like to give two cases: 1) Contract for printing files / envelop / writing pad etc on which logo as well as name of my company is appearing. 2) A book which contains financial performance of the company.
In both the cases we do not supply any material to the printer like paper/ink etc. My question is: 1)whether above two cases are works contract or contract for purchase of goods. 2)whether contractor can charge VAT for doing above job.
07 December 2007
In your cases, only two probabilities are there:-
a) This is a 'contract of Sales' and services are incidental to the contract of sales.
b)This is a indivisible contract of sales & services.
For Income Tax purpose (Sec 194C), picture is ulmosty clear. As per judgemnents given in BDA Ltd.'s Case and Dabur India Ltd.'s case- these are contract of sales.
Whereas for VAT or Sales Tax purposes, the matter is still disputed. You are advised to go through the latest judgemnt of apex Court (3 Judges)in the case of Kone Elevators.
I am quoting few paras from the said judgment for your ready reference:- [2005] 140 STC 0022- - State of Andhra Pradesh Vs. Kone Elevators (India) Ltd. "5. It can be treated as well-settled that there is no standard formula by which one can distinguish a "contract for sale" from a "works contract". The question is largely one of fact depending upon the terms of the contract including the nature of the obligations to be discharged thereunder and the surrounding circumstances. If the intention is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the inten- tion of the parties to the contract. In a "contract of sale", the main
Page No: 0027 object is the transfer of property and delivery of possession of the property, whereas the main object in a "contract for work" is not the transfer of the property but it is one for work and labour. Another test often to be applied to is: when and how the property of the dealer in such a transaction passes to the customer: is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a "sale"; if it is the latter, it is a "works contract". Therefore, in judging whether the contract is for a "sale" or for "work and labour", the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provides a guide in deciding whether transaction is a "sale" or a "works contract". Essentially, the question is of interpretation of the "contract". It is settled law that the substance and not the form of the contract is material in determining the nature of transaction. No definite rule can be formulated to determine the question as to whether a particular given contract is a contract for sale of goods or is a works contract. Ultimately, the terms of a given contract would be determinative of the nature of the transaction, whether it is a "sale" or a "works contract". Therefore, this question has to be ascertained on facts of each case, on proper construction of terms and conditions of the contract between the parties.
6. Before proceeding further, an insight into the relevant provisions more especially the definitions of "sale" and "works contract" have to be noticed. Section 2(1)(n) which defines "sale" and sec- tion 2(1)(t) which defines the "works contract" are extracted hereunder:
"2(1)(n). 'Sale' with all its grammatical variations and cognate expressions means every transfer of the property in goods (whether as such goods or in any other form in pursuance of a contract or otherwise) by one person to another in the course of trade or busi- ness, for cash, or for deferred payment, or for any other valuable consideration or in the supply or distribution of goods by a society (including a co-operative society), club, firm or association to its members, but does not include a mortgage, hypothecation or pledge of, or a charge on goods.
Explanation VI.—Whenever any goods are supplied or used in the execution of a works contract, there shall be deemed to be a transfer of property in such goods, whether or not the value of the goods so supplied or used in the course of execution of such works
Page No: 0028 contract is shown separately and whether or not the value of such goods or material can be separated from the contract for the service and the work done.
2(1)(t). 'Works contract' includes any agreement for carrying out for cash or for deferred payment or for any other valuable consider- ation, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property."
7. We also quote hereinbelow entry 82 of the First Schedule to the 1957 Act:
Sl. No. Description of goods Point of levy Rate of tax Effective from 82. Lifts, electrical or hydraulic (1082) At the point of first sale in the State. 10 paise in the rupee 16 paise in the rupee 1-8-1986 1-4-1995
8. The bracketed words and the transactions brought within the purview of sale by the aforestated Explanation VI appended to section 2(1)(n) are meant to cover non-conventional sale transactions which are now specified in clause (29A) of article 366 introduced by the Constitution 46th Amendment Act. Before the inclusive defini- tion of the "tax on sale or purchase of goods" was introduced by the 46th Amendment, the expression "sale of goods" occurring in entry 48 of List II of the Government of India Act was interpreted by this Court in the classical case of State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.* reported in AIR 1958 SC 560 as a term of well- recognized legal import in the general law and as mentioned in the Sale of Goods Act. The expression "sale of goods" in entry 48 was described as "nomen juris", its essential ingredients being an agree- ment to sell movables for a price and property passing therein pur- suant to that agreement. It was held that in a building contract which is composite and indivisible, there is no sale of goods as there could be no agreement to sell materials as such and moreover, the property does not pass as movables. In order to enlarge the concept of sale and to arm the State Legislatures with power to tax the transactions simulating sales but not conforming to the concept of sale under the Sale of Goods Act, clause (29A) was inserted in article 366 by the 46th Constitutional Amendment. The Andhra
*See [1958] 9 STC 353.
Page No: 0029 Pradesh State Legislature fell in line with this amendment and changed the definition of "sale" so as to bring within the tax net the transactions which are not stricto sensu sales as per the law laid down in Gannon Dunkerley's case* AIR 1958 SC 560. It is important to note that the 1957 Act ordains that transfer of property in goods for valuable consideration must be "in the course of trade or busi- ness" [vide section 2(1)(n)]. This is because the incidence of tax falls on a dealer who "carries on the business of buying, selling, supplying or distributing goods" [vide section 2(1)(e)]. A sale by a person who carries on the business of buying, selling, etc., and a sale in the course of business are the twin requirements to attract the charge of tax under the said 1957 Act. The crucial question is whether these two requirements are satisfied. Is there an element of business present in the disputed transactions? Assuming there was a sale of goods, did such sale take place in the course of business and by a person who carries on the business of buying and selling goods?
9. In the case of Hindustan Shipyard Ltd. v. State of Andhra Pradesh reported in [2000] 119 STC 533, this Court held that if the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. If the bulk of material used in construction belongs to the manufacturer who sells the end-product for a price, then it is a strong pointer to the conclusion that the contract is in substance one for the sale of goods and not one for labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee which also has to be seen. If the major component of the end- product is the material consumed in producing the chattel to be delivered and skill and labour are employed for converting the main components into the end-products, the skill and labour are only incidentally used, the delivery of the end-product by the seller to the buyer would constitute a sale. On the other hand, if the main object of the contract is to avail the skill and labour of the seller though some material or components may be incidentally used during the process of the end-product being brought into existence by the invest- ment of skill and labour of the supplier, the transaction would be a contract for work and labour."
In my personal opinion, your case is a case of indivisible works contract. My opinion is based on following grounds:-
01. Sale of Papers and Ink are not the basic intention of the contract. 02. What has been transfered are printed documents, which were never a property of the printer. Even in case of rejection of the same by you, printer will not be authorised to use the same as per his own choice.
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