works contract tax – resales-yet other side of confusion

 Works contract tax – resales-yet other side of confusion

The Ordinance

After the nuclear blasts at Pokhran, the other blast was in Maharashtra by way of Ordinance No. VI of 1998, which was promulgated on 1-5-98. By this Ordinance the effect to the Budget Proposals was given. In the budget speech dated 23-3-98 [in para 126] the Finance Minister had hinted about the removal of amendments which have lessened the burden of tax on contractors but have not simplified the procedure. Accordingly, the charging section; viz., section 6 of the ‘Maharashtra Sales Tax on the transfer of Property in Goods Involved in the Execution of Works Contract [Re-enacted] Act, 1989, is amended substantially. [The name of the Act is longer than the Konkan Railway hence for the sake of brevity hereinafter it is referred to as the Works Contract Tax Act].

Section 6 (1)(A)

The newly amended section 6 (1) (A) says that there shall be levied a tax on the turnover of sales in respect of goods at the rates specified in clause (B), after deducting from such turnover, the turnover of sales of declared goods purchased from a dealer registered under the B.S.T. Act and sold in the same form in which they were purchased.

Apparent Meaning

According to many commentators, now the entire turnover of sales [that is, the purchases related to works contract] will be liable to works contract tax and the only deduction allowed will be for resale of declared goods sold without changing the form. Many commentators have given this interpretation and according to them the effect of the amendment to section 6 will result in levy of tax on the purchase value of all local purchases used in works contract, even if such goods are purchased from registered dealers. The resales allowable under Works Contract Tax Act will now be of declared goods only and not of other goods.

The Confusion

There appears to be some confusion about resales claim under Works Contract Tax Act. This is because the Act is the piece of legislation which in fact should be the part of Bombay Sales Tax Act. But Maharashtra is proud of having a separate statute for the same. The drafting appears to be dominated by few self-righteous bureaucrats and patched up from time to time to plug the loop- holes confirmed by the Courts.

Section 6(1)(A)

To understand the correct interpretation of section 6(1)(A) let us analyse the amended section by dissecting it: —

• There shall be levied a tax

• on the turnover of sales

• in respect of goods

• at the rates specified in clause (B)

• after deducting from such turnover

• the turnover of sales of declared goods, purchased from registered dealer under the B.S.T. Act, 1959

• and sold in the same form in which they were purchased, or without doing anything to them, which amounts to manufacture.

The tax is to be levied on the turnover of sales. The words “turnover of sales” are defined by section 2 (1) (p) as ” ……. the aggregate of the amount of sale price received or receivable by a dealer in respect of any transfer of property in goods involved in the execution of works contract”.

Inverted Meaning

The words, “sale price”, will give a general impression that the tax is to be paid on the sale price, which will mean the contract value to be received for the work done. But that is not so. Under the Works Contract Tax Act you are not allowed to use your common sense. The `sale price’ is defined under the Act and, therefore, the legal meaning alone has to be given to the words `sale price’.

The words ‘Sale price’ are defined by section 2 (1) (m) as under :

‘(m) “Sale price”, in relation to a transfer of property in goods [whether as goods or in some other form] involved in the execution of a works contract, means the amount of purchase price paid or payable by a dealer in respect of the purchases of such goods effected in the State, or in the course of inter-State trade or commerce or in the course of import and includes the value of such goods brought or transferred from places outside the State, used, applied or, as the case may be, appropriated [whether in the same form in which they were purchased or in other form] in the execution of the works contract in the State.’

In short, this definition of ‘sales price’ means the purchase price of the goods purchased from whatever sources and used in the works contract will be the “sale price”. This will also mean that the works contract tax will be levied on the purchase price of the goods used in the works contract. Since the purchases from all sources are to be considered, the local as well as OMS purchases will be liable to works contract tax.

So far this meaning of the words ‘sale price’ was true, the commentators are justified in saying that the works contract tax is payable on the purchases made from all sources unless the deduction is provided for in section 6. The deduction was available till 1-5-1998 for goods which were free from all taxes under the B.S.T. Act and also for declared goods or other goods purchased from registered dealer and sold in the same form in which they were purchased.

Change in the Definition

BUT, the above definition was up to 7-6-95 only. It was substituted on 8-6-1995 by Ordinance No. VIII of 1995, which was converted into Act by Mah. Act No. 12 of 1995. The section 13 (b) of the Ordinance No. VIII of 1995 which amended the definition of ‘sale price’ is as under :

(b) for clause (m), the following clause shall be substituted and shall be deemed always to have been substituted, namely :—

“(m) `sale price’ means, —

1. the amount of purchase price of the goods or, as the case may be, the value of the goods, brought or transferred from a place outside the State where such goods are sold in the same form in which they were purchased, brought or transferred; and

2. where the goods have been sold in the form other than the form in which they were purchased or, as the case may be, brought or transferred from a place outside the State, then the purchase price of the goods or, as the case may be, the value of the goods brought or transferred from a place outside the State, and so sold.”

Restricted Meaning

As per the definition of ‘Sale price’, the sale price is to be read as ‘purchase price’ of goods purchased from places outside the State only.

The “purchase price” is defined in section 2(1)((i) as `valuable consideration paid or payable by a person for the purchase of any goods in relation to execution of works contract, effected within the State or in the course of inter-State trade or commerce or in the course of import ….. Thus, the purchase price is the valuable consideration paid or payable for the purchases. In this definition the purchases from all sources are included.

But in the definition of the ‘sale price’ restricted meaning is given. It is restricted to OMS purchases and its price/value only. It is not the purchase price/value of all goods irrespective of places from which the purchase or transfer of goods is effected. The purchase price is restricted only to purchases made from OMS and transfers from OMS. Purchase price does not cover the purchases made inside the State.

This sounds illogical and irrational. But as pointed out earlier, the Works Contract Tax Act does not want the common sense to be used by the reader. Law has to be read strictly in legal language. The point will be more clear if we analyse the new definition of ‘sale price’.

Analysis of the definition

The new definition envisages two types of situations. Firstly, where the goods are sold in the same form in which they were purchased, and secondly where the goods are sold after changing the form.

In the first case, where the goods are sold in the same form, “the sale price is the purchase price of goods or, as the case may be, the value of the goods”. Here the words “or as the case may be” refer to the words `purchase price’ and `value’. The price will be relevant to purchase only and the value will be relevant to transfer where the price is not declared.

The words, “brought or transferred from a place outside the State” qualify the word `goods’ appearing at both places. If written in a simple way it will read as “the amount of purchase price of the goods or the value of the goods brought or transferred from a place outside the State”. Thus, the goods bought will have a price and the goods transferred will have a value. In both cases the place of dispatch has to be outside the State.

Take an example of a case where we are not concerned with the transfers and the value, and we have a case of simple purchase, then ‘the sale price has to be the purchase price of the goods brought from a place outside the State because there is a comma after the word ‘goods’ coming immediately before the words ‘brought or transferred from a place outside the State’.

In the second case, the goods are not sold in the same form. Here the price is not taken into consideration. Since in the case of M/s Fine Rolling Shutters [APP No. 69/92 dt. 30-7-94] the Tribunal had observed that ‘if the goods are manufactured by a contractor, and then used in the works contract, so as to amount to passing of property in such manufactured goods, there will be no purchase price of such goods, whether paid or payable. Therefore, in all such cases there will be no tax leviable under the Re-enacted Act.’ To overcome this decision, in case of goods not sold in the same form, the words, ‘purchase price’, were replaced by the word, ‘value’.

Here too if we read ‘or as the case may be’ in proper context the words ‘from a place outside the State’ qualify the word ‘goods’.

Comparison

Above mentioned interpretation will appear more logical if we compare the old and the new definitions. In old definition of sale price it was specifically mentioned that the purchase price will be in respect of the purchases of goods effected in the State or in the course of inter-State trade or in the course of import. But in the new definition there is no such provision for the purchase price of the goods purchased inside the State. On the contrary it says ‘places outside the State’ which will include the inter-State purchases as well as imports. Thus, the new definition is restricted to OMS purchases only; and excludes the local purchases from 8-6-1995.

Logical interpretation

When the tax is to be levied as per section 6, on the turnover of sales, it is to be levied on the aggregate of sale price of goods involved in execution of works contract. The aggregate of sale price will be the aggregate of purchase price of goods brought from OMS and used in execution of works contract. The purchase price of all the goods used in the works contract is not to be considered for section 6, BUT only the purchase price of OMS purchases is to be considered.

When it is evident that the works contract tax is to be levied on the purchase price of only OMS goods, the question of deduction for goods purchased locally from RD does not arise. Then the question arises as to why the deduction for declared goods purchased from the registered dealers and sold in the same form is provided in section 6 (1) (A). Much can be said about the quality of drafting of the Works Contract Tax Act. In fact the present deduction for declared goods purchased from registered dealers is superfluous. To put in the bureaucratic language, it can be said that it is provided by way of abundant precaution to comply with the restrictions put by section 15 of the Central Sales Tax Act.

Illustration

Take a simple illustration to clear the confusion. A contractor takes a contract to complete a job for Rs. 10 lacs and his cost-sheet is as under —

Local purchase
[R D & URD] — Rs. 5,00,000

OMS purchase — Rs. 1,00,000

Labour & Technical
Expenses — Rs. 3,00,000

Profit element — Rs. 1,00,000

Total — Rs. 10,00,000

In the above case for taxing the job of Rs. 10 lacs, the sale price on which the works contract tax u/s 6(1)(A) will be payable will be the purchase price of OMS purchases; i.e., Rs. 1,00,000. Hence the works contract tax will be charged on Rs. 1,00,000 only and not on Rs. 6,00,000. [The effect of sub-section (B) which deals with the rates of tax is not considered in this illustration because that will be another story.]

If above interpretation is correct then the apprehension that the works contract tax will be levied on the local purchases after 1-5-1995 which are used in execution of works contract appears to be unfounded.

Overheard on the 8th Floor :

“If this is so, it is very likely that another ordinance may be promulgated to overcome this situation and that too with retrospective effect from 1-10-1986 without any saving clause for the benefit of Honest Dealers.”

Written by ntnirale on September 20th, 2009 with comments disabled.
Read more articles on General.

« Older articles

No newer articles