Interstate transaction under Works Contract

CA. O.P. Agarwalla (C.A.) (2916 Points)
Replied 18 November 2007

As per section 8 of the CST Act, transactions of Inter State Sales are liable for taxation under CST Act. State Government has no right to levy any tax on inter state sales. After insertion of works contract in the definition of sales under CST Act, inter state works contract (which were out of taxation purview due to legal fiction) has come under the purview of CST Act. As per section 4 of the CST Act:- (1) Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance with sub-section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States. (2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State- a) in the case of specific or ascertained goods, at the time the contract of sale is made; and b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation. Explanation.-Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of this sub-section shall apply as if there were separate contracts in respect of the goods at each of such places. Further assistance in determining the situs of sales may be taken from the local VAT Act. For example- as per clause (a) of section 18(2) of Assam VAT Act, 2003:- For the purpose of the clause (43) of section 2 *(definition of Sales), a sale or purchase shall be deemed to have taken place in the State,— (a) in a case falling under sub-clause (ii) *(transfer of property in goods) of the said clause, if the goods are in the State at the time of transfer of property in such goods (whether as goods or in some other form) involved in the execution of the works contract, notwithstanding that the agreement for the works contract has been wholly or in part entered into outside the State; I hope you have got the hints.

(Guest)

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(Guest)

Interstate works contract tax rate on IGCAR KALPAKKAM

Adv. S Sharma (Lawyer) (574 Points)
Replied 28 December 2007

hi sir there is not any Works Cntract under Inter State Trade which is liable to WCT in State in which WC executed NO STATE CAN LEVY TAX OR CUT TDS ON THE GOODS WHICH ARE IMPORTED (PURCHASED FRM OTHER STATE) AND WHICH ARE USED IN EXCUTION OF WORKS CONTRACT IN THAT STATE. The same issue was considered by the Gujarat High Court in Larsen & Toubro Ltd. Vs. Commissioner of Sales Tax, Gujarat, [2001] 124 STC 162. In this case, Larsen & Toubro undertook to execute a works contract for the installation of a dairy plant in Gujarat, for which it imported goods and machinery from abroad, procured large number of materials from other states, and purchased a very small percentage of the materials in Gujarat. Section 57B of the Gujarat Sales Tax Act, 1969 authorized the employer to collect 2% advance tax at source on the value of the entire bill. The High Court held: “The provisions of section 57-B of the Gujarat Sales Tax Act, 1969 impose an obligation on the employer to deduct 2 per cent of the amount of the bill of the works contractor as sales tax treating the whole of it as sale price and regardless of the nature of the sales and transactions. Such obligation the employer has to discharge in all cases where no certificate of non-deduction from the Commissioner in terms of sub-section (4) to that section is produced. At the time of collection of advance tax on bills, neither employer as payer nor the contractor as payee has any right to make tentative self-assessment of his tax liability. Although, by its definitions of "sale" in section 2(28) and its definition of "sale price" in section 2(29), the Act clearly intends to exclude inter-State sales or outside sales and price representing labour charges in the course of works contracts, these definitions and the provisions of section 87 do not confer legislative competence on the State Legislature to levy and collect sales tax in advance on inter-State sales or outside sales or sales in the course of import only because the contractor fails to produce a certificate from the Commissioner of no deduction of tax at source in accordance with section 57-B(4) of the Act. Section 57-B(4)(a) which imposes an obligation on the employer to deduct 2 per cent of the amount of the bill as tax assuming the works contract to have involved all supplies of material and goods within the State and taxable as such, is an encroachment on the legislative field exclusively assigned to the Union Legislature under entry 92-A of List I of the Seventh Schedule to the Constitution. If the State Legislature has no power to impose tax on inter-State sales or sales in the course of import or outside sales through the amount of bill for works contracts, even machinery provisions cannot be made to collect such tax in advance by assuming all the transactions of sales or supplies to be inter-State sales and taxable in the State. The provisions of section 57-B of the Gujarat Sales Tax Act, 1969 are invalid.” The above judgment of the High Court is in accordance with the law laid down by the Supreme Court in Nathpa Jhakri Jt. Venture v. State of H.P., (2000) 3 SCC 319 wherein the Court had held as follows: “A bare perusal of the two provisions will make it clear that in either provision there is an obligation to deduct from transactions relating to works contract on bills or invoices raised by the works contractor an amount not exceeding 4 per cent or 2 per cent, as the case may be. Though the object of the provision is to meet the tax in respect of the transactions on all works contracts on the valuable consideration payable for the transfer of property in goods involved in the execution of the works contract, the effect of the provision is that irrespective of whether the sales are inter-State sales or outside sales or export sales which are outside the purview of the State Act and those transactions in respect of which no tax can be levied even in terms of the enactment itself such deductions have to be made in the bills or invoices of the contractors. To say that if a person is not liable for payment of tax inasmuch as on completion of the assessment refund can be obtained at a later stage is no solace, as noticed in Bhawani Cotton Mills Ltd. v. State of Punjab. Further, there is no provision for certification of the extent of the deduction that can be made by the authority. Therefore, we must hold that arbitrary and uncanalised powers have been conferred on the person concerned to deduct up to 4 per cent from the sum payable to the works contractor irrespective of whether ultimately the transaction is liable for payment to any sales tax at all. In that view of the matter, we have no hesitation in rejecting the contention advanced on behalf of the State. The above cases reiterate the point that a state is only allowed to tax local sales by way of works contract; inter-State sales by way of works contract or otherwise cannot be the subject matter of a State’s taxing statute. I HOPE NOW ISSUE IS CRYSTAL CLAR

CA. O.P. Agarwalla (C.A.) (2916 Points)
Replied 02 January 2008

Mr. Sharma had given his remarks that:-
"NO STATE CAN LEVY TAX OR CUT TDS ON THE GOODS WHICH ARE IMPORTED (PURCHASED FRM OTHER STATE) AND WHICH ARE USED IN EXCUTION OF WORKS CONTRACT IN THAT STATE."
I will be enlightened to know the source of such finding. In the light of the above observation- I have one more query-which may also kindly be replied.
Query:- I am a dealer in Assam. I brought few goods from W. Bengal. Lateron I got few works contract order and in execution of works contract, I have used such imported goods. Whether, I will be exempted from WC tax on such goods?

Adv. S Sharma (Lawyer) (574 Points)
Replied 02 January 2008

hello Agarwalla Sir well sir it is depend on which method u r adopting for works contract. there are three methods for works contract (I) Itemized basis: This method maybe used only where proper accounts are there for all items used in the execution of the works contract. Tax is payable at the rate of ____ (as applicable rate) on the value of the works contract, less the cost of services and labour . You should also deduct the value attributable to materials imported from abroad, and materials purchased in other states. The tax will therefore be payable only on the remaining amount. Since a bulk of materials are imported, this method of valuation may be preferable. OR (II) Standard deductions: Pay tax at the rate of ________ on the balance of the value of the works contracts less the cost of the services and labour. This method is used when there are no proper accounts are maintained. (III) Compounding scheme: Pay at the rate of ____ on the entire value of the works contract. Sir in our case querry was asked by Mr. Rao nd he is working in Reliance. Most of the goods are imported or purchsaed from other states as Reliance deal or i knw. Query asked by Mr. Rao was regarding WCT (TDS) nt applicability of VAT. see, u have to pay the tax either in the form of VAT or TDS. since my focus was on only TDS not on either VAT is payable or not. Sir Ans. of urs query :- well, again it is based on which method u r adopting. but YES u r exempt from works contract tax (bt there is a sale therefor liable to VAT) if the imported goods were imported for the purpose of that works contract. Sir u used the word "LATERON" well, it can raise the litigation issue.

CA. O.P. Agarwalla (C.A.) (2916 Points)
Replied 03 January 2008

Sachin Sir,
I must appreciate your knowledge in this line. I am happy that, with the continuing debate with you I will be able to enrich my knowledge base.
Sir, I believe there is no any difference between WCT and VAT. WCT is a part of VAT, which is imposed on deemed sales on transfer of property of goods in execution of works contract. VAT (excluding WCT) will be applicable where the contract is either Contract of sale or a divisible contract. In case of indivisible contract, WCT will be applicable.

In 1993, the constitution bench of Apex Court in the case of Gannon Dunkerley had laid down the principals for finding out the taxable value of indivisible works contract. All the three methods quoted by you are duly prescribed by the Apex Court in the said Judgement.
The query, what I understood is was relating to Inter State Works Contract. It is a settled law, that what ever may be contained in the State Act, in case of conflict CST Act will prevail (In case of sales/ purchases in cousre of inter State trade & commerce).
As per CST Act, sales (including works contract) in course of inter state trade & commerce or in course of import/export will be governed by the CST Act and the state in which sales is made will be elkligible for collecting taxes.
Now, in this case- the dispute is in which State the sale is takjen place?
As per CST Act, a sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State-
a) in the case of specific or ascertained goods, at the time the contract of sale is made; and
b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.

As normally in works contract, such goods are not ascertained and the goods are normally unascertained or future goods, the acid test which is suppossed to be done is to determine the point of time of appropration of such goods to the Contract.
If the goods are appropriated to the Contract, before it enter in the State, certainly the State will not collect any VAT/WCT on it. Further, in a case where say 98% goods involved in the execution of WC are imported and had been attributed to the Contract before enetering in to the State, what will be the tax implication in the State?
In my opinion, the contract will be taxable one (subject to exclusion of the value of such imported goods and subject to charges towards labour and other charges).
Sir, I admit that the issue is very complicated and a week planning may cost the dealers a lot. Your expert opinion on my above submission will certainly enlghten me.

I woul also like to quote the following para from the above said judgment of Apex Court:-
Since the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works.

1 Like

Adv. S Sharma (Lawyer) (574 Points)
Replied 07 January 2008

hello Agarwal sir plz send me here Gannon Dunkerlay 1993 judgement. actly my manupatra is nt working thx nd warm regards Adv. Sachin Sharma

Adv. S Sharma (Lawyer) (574 Points)
Replied 07 January 2008

ahhhh its working i gt it

(Guest)

Hi,

I appreciate your knoledge and interest about inter-state works contract. Every thing is ok in your view. procurement of materials in the course of inter-state trade is taxable at alower rate against form C / D. Whether in case of material used in execution of works contract should be supported by form C / D from the contractee. for example "A" places order on "B" for supply and commissioning of material in U.P. "B" Procures materials from "C" at A.P. "B" issued form C for getting material at concessional rate. my question is whether "A" required to give form C to "B" for availing the concessional rate.

Originally posted by :Adv. Sachin Sharma

"

hi
sir there is not any Works Cntract under Inter State Trade which is liable to WCT in State in which WC executed

NO STATE CAN LEVY TAX OR CUT TDS ON THE GOODS WHICH ARE IMPORTED (PURCHASED FRM OTHER STATE) AND WHICH ARE USED IN EXCUTION OF WORKS CONTRACT IN THAT STATE.

The same issue was considered by the Gujarat High Court in Larsen & Toubro Ltd. Vs. Commissioner of Sales Tax, Gujarat, [2001] 124 STC 162.

In this case, Larsen & Toubro undertook to execute a works contract for the installation of a dairy plant in Gujarat, for which it imported goods and machinery from abroad, procured large number of materials from other states, and purchased a very small percentage of the materials in Gujarat. Section 57B of the Gujarat Sales Tax Act, 1969 authorized the employer to collect 2% advance tax at source on the value of the entire bill.

The High Court held:
“The provisions of section 57-B of the Gujarat Sales Tax Act, 1969 impose an obligation on the employer to deduct 2 per cent of the amount of the bill of the works contractor as sales tax treating the whole of it as sale price and regardless of the nature of the sales and transactions. Such obligation the employer has to discharge in all cases where no certificate of non-deduction from the Commissioner in terms of sub-section (4) to that section is produced. At the time of collection of advance tax on bills, neither employer as payer nor the contractor as payee has any right to make tentative self-assessment of his tax liability. Although, by its definitions of "sale" in section 2(28) and its definition of "sale price" in section 2(29), the Act clearly intends to exclude inter-State sales or outside sales and price representing labour charges in the course of works contracts, these definitions and the provisions of section 87 do not confer legislative competence on the State Legislature to levy and collect sales tax in advance on inter-State sales or outside sales or sales in the course of import only because the contractor fails to produce a certificate from the Commissioner of no deduction of tax at source in accordance with section 57-B(4) of the Act.

Section 57-B(4)(a) which imposes an obligation on the employer to deduct 2 per cent of the amount of the bill as tax assuming the works contract to have involved all supplies of material and goods within the State and taxable as such, is an encroachment on the legislative field exclusively assigned to the Union Legislature under entry 92-A of List I of the Seventh Schedule to the Constitution. If the State Legislature has no power to impose tax on inter-State sales or sales in the course of import or outside sales through the amount of bill for works contracts, even machinery provisions cannot be made to collect such tax in advance by assuming all the transactions of sales or supplies to be inter-State sales and taxable in the State. The provisions of section 57-B of the Gujarat Sales Tax Act, 1969 are invalid.”

The above judgment of the High Court is in accordance with the law laid down by the Supreme Court in Nathpa Jhakri Jt. Venture v. State of H.P., (2000) 3 SCC 319 wherein the Court had held as follows:
“A bare perusal of the two provisions will make it clear that in either provision there is an obligation to deduct from transactions relating to works contract on bills or invoices raised by the works contractor an amount not exceeding 4 per cent or 2 per cent, as the case may be. Though the object of the provision is to meet the tax in respect of the transactions on all works contracts on the valuable consideration payable for the transfer of property in goods involved in the execution of the works contract, the effect of the provision is that irrespective of whether the sales are inter-State sales or outside sales or export sales which are outside the purview of the State Act and those transactions in respect of which no tax can be levied even in terms of the enactment itself such deductions have to be made in the bills or invoices of the contractors. To say that if a person is not liable for payment of tax inasmuch as on completion of the assessment refund can be obtained at a later stage is no solace, as noticed in Bhawani Cotton Mills Ltd. v. State of Punjab. Further, there is no provision for certification of the extent of the deduction that can be made by the authority. Therefore, we must hold that arbitrary and uncanalised powers have been conferred on the person concerned to deduct up to 4 per cent from the sum payable to the works contractor irrespective of whether ultimately the transaction is liable for payment to any sales tax at all. In that view of the matter, we have no hesitation in rejecting the contention advanced on behalf of the State.

The above cases reiterate the point that a state is only allowed to tax local sales by way of works contract; inter-State sales by way of works contract or otherwise cannot be the subject matter of a State’s taxing statute.

I HOPE NOW ISSUE IS CRYSTAL CLAR

"

(Guest)

we are in business of job work of textiles processing i.e dyeing and printing schedule B of goods of special importance we want to know when the excise duty (AED&BED) is paid on the total job work charges which includes cost of dyes and chemical , fuel, power, cartages , labour, and all other charges and also on the profits the cst on the transfer of property in the work contract will be leived or not

(Guest)

Can you guide me on:-

XYZ based in New Delhi got an order from a PSU YYY in assam for repair of equipment. Repair is to be done by ABC in Uttar Pradesh and ABC will use material for coating etc. (in such case usually value of material is less then 20% of contract price). YYY will send equipment directly to ABC in UP and ABC will send the goods back directly to YYY in Assam. XYZ will only supervise the job as technology belong to them and XYZ does not have any facility in India.

In such a case what will be treatment of Works contract tax and service tax.

CA. O.P. Agarwalla (C.A.) (2916 Points)
Replied 16 September 2008

Originally posted by :Guest

"

we are in business of job work of textiles processing i.e dyeing and printing schedule B of goods of special importance we want to know when the excise duty (AED&BED) is paid on the total job work charges which includes cost of dyes and chemical , fuel, power, cartages , labour, and all other charges and also on the profits the cst on the transfer of property in the work contract will be leived or not

Levying of or payment of Excise does not have any connection with levying of CST. Only criteria for levying of CST are:-

01. There must be a inter-state sale and goods must be moved to some other state.

02. There must be a sale (may be a deemed one, i.e. transfer of property in goods).

Regarding first criteria you are clear that the transaction is a inter state one. Regarding second that, whether transfer of property has been made or not in course of dying and printing. Though there is a conflict about the concept of materiality test, there are few high court decisions in which it was held that in yours type of cases poperty of ink etc. are being transferred.Hence these are works contract and CST seems to be leviable on the taxable value of the contract.

"

CA. O.P. Agarwalla (C.A.) (2916 Points)
Replied 16 September 2008

Originally posted by :Guest

"

we are in business of job work of textiles processing i.e dyeing and printing schedule B of goods of special importance we want to know when the excise duty (AED&BED) is paid on the total job work charges which includes cost of dyes and chemical , fuel, power, cartages , labour, and all other charges and also on the profits the cst on the transfer of property in the work contract will be leived or not

Levying of or payment of Excise does not have any connection with levying of CST. Only criteria for levying of CST are:-

01. There must be a inter-state sale and goods must be moved to some other state.

02. There must be a sale (may be a deemed one, i.e. transfer of property in goods).

Regarding first criteria you are clear that the transaction is a inter state one. Regarding second that, whether transfer of property has been made or not in course of dying and printing. Though there is a conflict about the concept of materiality test, there are few high court decisions in which it was held that in yours type of cases poperty of ink etc. are being transferred.Hence these are works contract and CST seems to be leviable on the taxable value of the contract.