Key supreme court judgements

Key Indirect Tax Court
Judgements
Indian Construction Sector

CA Sandesh Mundra

info@consultconstruction.com
www.consultconstruction.com

AIR 2006 SUPREME COURT 1383
"Bharat Sanchar Nigam Ltd. v. Union of India
• Transactions in relation to telecom products such as SIM cards, recharge
vouchers etc. involve goods and service components On the one
hand, telecom products are sold as tangible items
• On the other hand, they are valueless in themselves and are purely
representative of provision of telecom services

Two alternatives considered :-
I. Determining a method to split the transaction into its respective goods and
service component; or
II. Determining a method to deem the transaction to be either a goods or
service transaction
• Option I rejected on the basis that splitting only allowable for categories
of deemed sales, viz. works contracts and catering
• Certain transactions in which goods component is incidental
(lawyers, doctors) do not constitute works contracts


AIR 2005 SUPREME COURT 1581 "State of Andhra
Pradesh v. Kone Elevators (India) Ltd

Relevant facts were as under:

Kone Elevators was responsible for bringing the elevators to site in knocked
down state and carry out assembly on site.

 customer was contractually bound to prepare the site by performing the
The
civil works for preparing the lift pit, hoist way and arrange for power supply.

Assessee’s contractual obligation vis-à-vis installation involved completion of
mechanical erection, electrical wiring testing and commissioning of the lift.

Assessee’s installation obligations started only upon prior intimation from
the customer that site was ready.

Kone Elevators...
Issue before the Court was whether the above arrangement would
constitute a works contract :-

The Court held that the Contract was for supply of goods as
opposed to a works contract and decided to reject the assessee’s
claim of deduction on account of labour.

Reasoning adopted were:-

 execution of the contract had two major components – the work
The
of preparation of the site and the supply of the lift.
Skill and labour involved in converting the main components into end
product was merely incidental


As a reaction to the Kone Elevators’ judgment, the
Maharashtra VAT authority came up with a circular specifying
that in the context of elevators, the contracts that have the
following elements would be treated as works contracts :-

 the elevator does not have any individual existence before
If
the delivery; and
Assessee is required to carry substantial obligations for
installation and commissioning such as civil construction work
etc., which are more than mere incidental works


The judgment of the Court appears to negate the fact
that in any contract envisaging supply of an elevator,
there is bound to be an element of service along with
supply of material.

It should be borne in mind that in the celebrated BSNL
case the Supreme Court has unequivocally rendered
Rainbow Colour labs ineffective and ruled that even if
there is incidental transfer of property the
arrangement would constitute works contract.


Factors to note are
 Kone Elevators, the Court seemed to place significant reliance on the
In
feature that the contract contemplated an incidental involvement of labour.

Transposed upon the ratio of BSNL case, does this mark a shift in the view of
the Supreme Court that as long as the involvement of labour is incidental the
contract would not be works contract (as opposed to incidental supply of
material).

Kone Elevators was decided in February 2005, BSNL case in March 2006 – Both
by full bench of the Supreme Court.

However, a contract of service and supply, where the component of services is
incidental would be a “sale” Could be significant in determining service tax
liability in such situations as well as the admissibility of deduction towards
labour and other charges

Issue : Incidental installation services pursuant to
supply of material. „ Is Kone Elevators still a good
law?
„ Can we take different interpretation of the same
transaction in two different statutes i.e.

‰VAT: A contract amounts to works contract.
‰Service tax: The services are merely incidental to
supply of goods and hence not chargeable to service
tax.

SERVICE TAX - Similar Issue

M/s Allengers Medical Systems Ltd Vs CCE, Chandigarh (Dated:
October 29, 2008)

• Appellants manufactured and sold medical equipment - Activity of
installation, erection and commissioning were incidental to delivery
of goods to the customers and, therefore, there was no reason for
levy of service tax on the installation and commissioning of medical
equipment - Tribunal.
Apex Court decision in State of Andhra Pradesh Vs Kone Elevators
(India) Ltd referred.
Service Tax demand and penalties set aside and appeal allowed
with consequential relief. : DELHI CESTAT;


Interstate works contract –
Recent development

Depending on the nature of transaction levy of VAT/sales tax may be
attracted under the State level VAT statute or the CST Act . Typically, in
case of CST (against form C), a rate of 2 percent would apply, while in case
of non form C sales, the rate could increase to VAT rate as applicable on
the material

State of Karnataka v. ECE [2006] 144 STC 605

• Section 3(a) of the CST Act does not itself provide (for) the movement of
goods from one State to another where such movement is the result of a
covenant in the contract of sale or is an incident of that contract
• The test is movement of goods from one State to another in the course of
inter-State trade or commerce


It is not necessary that the contract of sale must itself provide for and
cause the movement of goods or that the movement of goods must be
occasioned specifically in accordance with the terms of the contract of sale
In this case

 Post manufacture in UP, lifts were dismantled and stock transferred to
Karnataka by assessee.
 Karnataka branch office carried out installation and commissioning at
The
customer’s site.

Judgment appears to suggest that so long as there is actual movement of
goods, CST would apply.


However, judgments of the Supreme Court have
held that the sale must occasion the
movement, which should be a condition of the
contract and that mere knowledge of such
movement would not suffice for a sale to be
an interstate sale (Tata Motors case)


State of Orissa v K B Shah and Sons Industries Private Limited
(2007 36 MTJ 401) (Supreme Court)

The seller, a Government of Orissa undertaking, accepted tender notices for sale
of goods to the taxpayers, who were located outside Orissa. After payment of the
sale value, goods were transported to the taxpayer’s places of business (outside
Orissa). The authorities, however, demanded VAT on the basis that the
transaction did not amount to inter-state sale.

The Supreme Court held that a transaction could be considered as an inter-state
sale, if the movement of goods was as a result of sale or incidental to such
sale. While it was not necessary for a contract to provide for inter-state
movement of goods, sale and the movement of goods should be inseparably
connected.


No VAT liability on supplies to a project, where contract
envisages interstate procurements/imports

• In a recent ruling in the case of ABB Limited, the Delhi High Court dealt
with contracts with Delhi Metro Rail Corporation (“DMRC”) for supply,
installation, testing and commissioning of equipments which involved :-

• (i) goods imported in pursuance of the contract
• (ii) goods procured from Indian vendors and supplied to the contract; and
• (iii) goods manufactured in the taxpayer’s factory outside the State and
supplied to the contract.

The Court held that the sale by the taxpayer to DMRC involving interstate
procurements and imports were not liable to tax under the Delhi Value
Added Tax (“DVAT”) Act.


Key Observations of the Court
General Observations
•  contract specifically required approval of DMRC for sub contractors/vendors. DMRC
The
issued a letter listing out the approved or authorized list of suppliers (which included their
location).
•  goods were custom made.
The
Interstate Sales
•  Interstate movement of goods was within the knowledge of DMRC. As there is a total ban
of setting up/operation of heavy industry in Delhi, the goods can only be manufactured
outside Delhi.
•  DMRC approved the locations from within the country (including the taxpayer's factories)
from where the equipments and goods were to be supplied.
•  contract need not specifically stipulate interstate movement. The fact that, in
The
performance of the contract, the taxpayer would have to move the goods from other States
to Delhi is sufficient.
•  the interstate movement of goods was contemplated by the parties and if reasonable
If
presumption can be drawn that such movement was necessary for the fulfillment of the
contract, the sale would fall under Section 3(a) of the CST Act.
SICOI
•  determine whether a sale is in the course of import, the movement of goods should be
To
integrally connected with the contract for their supply.

On facts, the sale to DMRC is deemed to have taken place in the course of
import in view of the following features of the contract:

o The goods were custom made, for use by DMRC in its project;
o Specifications were spelt out by DMRC;
o Pre-inspection of goods was mandated;
o Packed goods were especially marked as meant for DMRC's use in its
project;
o Suppliers of the goods (including foreign suppliers) were approved by
DMRC;
o In the Project Authority Certificate issued by DMRC, the name of the
subcontractors as well as the equipment/goods to be supplied were
expressly stipulated; and


To avoid/reduce disputes, it is advisable to take
cognizance of the following aspects:-

• Clear demarcation of value of goods and services ( as much as possible)
• The Contract should clearly envisage the specific goods that are proposed
to be purchased by the Contractor from out of State Vendors
• Where the contract does not provide so, specific approval from the Owner
may be taken before placing the purchase orders on such out of State
vendors
• While issuing the purchase order (PO) on out of State vendor, name and
reference of the Owner and the contract should be indicated
• The PO should direct that the goods be dispatched to the Owner’s site
• Transport documents ( prepared by the out of state vendor) must be
prepared in the name of the contractor A/c of Owner
• The invoice raised by the vendor should also provide corresponding cross
reference to the Contract between the Purchaser and the Owner


• IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL A
PPEAL NO.1123 OF 2003

The Indure Ltd. and Another ....Appellants Versus Commercial Tax Offi
cer and Ors. ....Respondents Justice DALVEER BHANDARI and Justice DEE
PAK VERMA Date of Judgment: September 20, 201

• Whether import of MS Pipes by Appellants was pursuant to a term of contr
acts between Appellant No.1 and NTPC.
• Whether import of said MS Pipes and supply thereof by the Appellant No. 1
to N.T.P.C. Constitutes an integral and inseparable part of the Contracts bet
ween them.

• Appellant is held entitled to claim benefit of Section 5(2) of the Central Sal
es Tax Act -
• Test of integral connection or inextricable link


Sec 6(2) Transactions


Nagarjuna Constn. Company Limited vs
Government of India and another
Appellant-construction company had executed various contracts which were in nature of
composite construction contracts and had paid Sales Tax/ VAT on those contract under
1957, Act and 2005, Act

• Appellant wanted to opt for scheme but department issued circular clarifying that
Classification of a taxable service was determined based on nature of service provided
whereas liability to pay service tax was related to receipt of consideration –

• Those who had paid tax as per provisions and classification existing prior to 1-7-2007 and
those who opted for payment of tax under provisions of r. 3 of 2007 Rules and paid tax
before exercising option belong to different classes and, therefore, it could not be said that
Impugned Circular or provisions of r. 3(3) of 2007 Rules were discriminatory - Appeal
dismissed.


Rashtriya Ispat Nigam Limited vs Dewan Chand Ram Saran
[SUPREME COURT OF INDIA, 25 Apr 2012]

• Respondent as contractor had to bear service tax u/cl. 9.3, liability in
connection with discharge of his obligations under contract - Appellant
could not be faulted for deducting service tax from bills of respondent
u/cl. 9.3, and there was no reason for HC to interfere in view taken by
arbitrator which was based, in any case on a possible interpretation of cl.
9.3 - HC, as well as DB clearly erred in interfering with award rendered by
arbitrator and hence, set-aside - Appeal allowed.


Mahim Patram Private Ltd. Through ...
vs Union Of India (Uoi) Through ... on 3 May, 2006


Larsen and Toubro Ltd. v State of Andhra Pradesh
– Sub-contracting
The assessee had sub contracted some portion of its work. The revenue sought to levy VAT on
both the assessee as well as the subcontractor under the category of the works contract

 legal relationship between project owner and the subcontractor
No
 a works contract, the property in goods typically passes directly to the project owner by the
In
theory of accretion. At no point of time in this case, the property in the goods passed to the
assessee where the work was executed by the subcontractor
 sub-contractor was only an agent of the assessee and the property in goods passed directly
The
from the sub-contractor to the project owner
Only one transfer of property and thus only one taxable event

Subcontracted goods scopes to be taxed only once.

However, it is not clear from the judgment which leg of the transaction should be subjected to
VAT. Important to note that the Court held that collection of tax from both the subcontractor
and the Contractor would be violative of Article 14 of the Constitution.


However, the above principle laid down in the Apex Court decision has not
been followed consistently by the Courts and Adjudicating authorities
resulting in implementation issues at a practical level as to whether the
main contractor is required to pay VAT on the construction turnover, if the
entire construction activity is subcontracted.

Recent decisions on this subject matter:-

i. Skyline Constructions & Housing (P) Limited v Authority for Clarification and
Advance Rulings, Bangalore (2010 1 GST 173)(Karnataka HC) (“Skyline case”)
ii. Larsen & Toubro Limited v Union of India and Others (Writ Petition (C) 1907
of 2012)(Delhi HC) (“L&T Delhi case”)
iii. Advance Ruling of Assetz Infrahomes LLP (Order no AR CLR CR 51/2011-
2012) (“Assetz case”)


Karnataka Advance Ruling in Assetz case following the
decisions in L&T SC case and Skyline case:-

The Authority for Clarification and Advance Rulings (“ACAR”)
in Karnataka, in the case of Assetz Infrahomes LLP (“Assetz”),
has clarified that Assetz need not pay VAT if the construction
of a project has been completely outsourced and the same
would be executed by a Contractor in toto, relying on
principles laid down by the L&T SC case and the Skyline Case.


AIR 2005 SUPREME COURT 3336 "Xerox
Modicorp Ltd., M/s. v. State of Karnataka

• Full Service Maintenance Agreement (FSMA) and Spares
and Service Maintenance Agreement (SSMA) -
Assessee thereunder taking responsibility of fully
maintaining machine, servicing it and if necessary replacing
parts.
Agreements not just service contracts.
Replacement of parts after sale of machine amounts to
sale as the supply is for price
There is transfer of title in movables for price -
Fact that price was not separately charged or it was
not known in beginning as to whether any part was to
be replaced, is irrelevant
Levy of sales tax on parts supplied, proper


Term 'consumables' used in Exlanation I to R. 6

Read as such term 'consumables' refers to items
used in execution of works contract so that
nothing tangible is left -
However, property in toners and developers
passes moment they are put in machines before
they are consumed -
Amounting to sale of goods -
Levy of sales tax on toners and developers
supplied by assessee, thus proper.


AIR 2000 SUPREME COURT 946 "Steel Authority of
India Ltd. v. State of Orissa

• TAX - Deduction at source from payment to works contractor -

Section does not take into account fact that sale of goods involved in works
contract may not be exigible to State sales tax -
Section is, therefore, beyond competence of State.

Constitution of India, Art.286, Art.246, Sch.7, List 2, Entry 54 :-

• Art. 286 (1) of the Constitution states that no law of a State shall

impose, or authorise the imposition of, a tax on the sale or
purchase of goods where such sale or purchase takes place outside
the State or in the course of the import of goods into, or export of
goods out of the territory of India.


AIR 2000 SUPREME COURT 2436 "Twentieth
Century Finance Corp. Ltd. v. State of Mah”
The States in exercise of power under Entry54 of List II read
with Art. 366(29A)(d) are not competent to levy sales tax
on transfer of right to use goods, which is a deemed sale, if
such sale takes place outside the State or is a
sale in the course of inter-
State trade or commerce or is a sale in the
course of import or export.
The appropriate legislature by creating legal fiction can fix situs of
sale. In the absence of any such legal fiction the situs of
sale in case of the transaction of transfer of right to use any goods
would be the place where the property in goods passes, i.e.
where the written agreement transferring the right to use
is executed.
Where there is an oral or implied transfer of the right to use goods,
such transactions effected by the delivery of the goods. In
such cases the taxable event would be on the delivery of goods
.

• The right to use goods accrues only on
account of the transfer of right. If the

goods are available, the transfer of the
right to use takes place when the contract in
respect thereof is executed. As soon as the
contract is executed, the right is vested in the
lessee.


AIR 1999 SUPREME COURT 2868 "Aggarwal Brothers v. State of
Haryana"
= 1999 AIR SCW 2423 (From : Punjab and Haryana)

• Haryana General Sales Tax Act (20 of 1973), S.2(1) -
SALES TAX - WORDS AND PHRASES - "Sale" -
Transfer of right to use goods for consideration is
"deemed" to be a sale -
There need not be legal transfer of goods nor transaction
should be like a lease - Assessee owned shuttering -
Transfer of shuttering for consideration to builders and buil
ding contractors for use in construction of building -
Requirements of "deemed sale" are satisfied.


Supreme Court of India Record of Proceedings
Petition(s) for Special Leave to Appeal (Civil) No(s).17741/2007 (From the
judgement and order dated 06/08/2007 in WA No.1409/2007 of the High
Court of Karnataka at Bangalore)
M/s. Larsen & Toubro Limited & Anr. Petitioner(s) State of Karnataka & Anr.

We have prima facie some difficulty in accepting the proposition laid
down in Para 20 quoted above. Firstly, in our view, prima facie,
M/s. Larsen & Toubro petitioner herein, being a developer had
undertaken the contract to develop the property of Dinesh
Ranka. Secondly, the Show Cause Notice proceeds only on the
basis that Tripartite Agreement is the works contract. Thirdly, in
the Show Cause Notice there is no allegation made by the
Department that there is monetary consideration involved in the
first contract which is the Development Agreement.

If the ratio of Raheja Development case is to be accepted then
there would be no difference between works contract and a
contract for sale of chattel as a chattel.

Any Questions ?


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