Confusion persists over taxing of works contracts

The distribution of powers between the centre and the states has created complexities around taxing of works contracts involving both goods and services. The recent decision of the larger bench of the Customs Excise and Service Tax Appellate Tribunal (CESTAT) in CCE v BSBK Private Limited [2010-TIOL-646-CESTAT-DEL-LB] has added to the complexity.

The question whether states could levy sales tax in case of a works contract was dealt with for the first time in a landmark decision in State of Madras v Gannon Dunkerly & Company [1959 SCR 379]. In that case the Supreme Court held that a state could not levy tax on the supply of goods involved in the execution of a works contract. It triggered a constitutional amendment and by the 46th Amendment Act, 1982, the definition of “tax on the sale or purchase of goods” in article 366(29A) was amended to introduce the concept of a “deemed sale”. This gave the states the power to levy sales tax in composite contracts (e.g. works contract) on the basis of a legal fiction that said there had been a transfer of title in the goods.

After the 46th amendment, the Supreme Court in a series of cases that included Gannon Dunkerly & Company v State of Rajasthan [AIR 1993 SC 2627] held that the taxable event is the transfer of property in the goods involved in the execution of a works contract. Hence, the value of the goods at the time of incorporation in the works can constitute a measure for levy of tax. Consequently, valuation principles were formulated under the sales tax laws.

Ritesh Kanodia is a senior associate and Kamlesh Balani is an associate at Economic Laws Practice. They can be contacted at riteshkanodia@elp-in.com and kamleshbalani@elp-in.com.