The Hon’ble Supreme Court delivering very important judgment with regard to taxability of inter-state works contract. In the case of Commissioner, Delhi VAT vs ABB Ltd., it has been held that in case the goods are purchased from other States or are imported from outside the country for the purpose of only using in the works contract, then the transaction would be covered under the Central Sales Tax Act and not liable to tax under local VAT act.
This judgment goes a long way in determining everyday disputes with regard to taxability of goods where the movement has started from other State for the purpose of using in a specified works contract.
The Apex court relying upon the judgements in Oil India Ltd v. The Superintendent of Taxes (1975) 35 STC 445 (SC) = (1975) 1 SCC 733 (2) English Electric Company of India Ltd. v. The Deputy Commercial Tax Officer (1976) 38 STC 475 (SC) = (1976) 4 SCC 460 (3), settled the issue with regard to taxability of deemed sales in the cource of inter-state sales and held as under:
“In Oil India Ltd. this Court held that the inter-state movement must be the result of a covenant, express or implied in the contract of sale or an incident of the contract. In other words, the covenant regarding inter- state movement need not be specified in the contract, It would be enough if the movement was in pursuance of or incidental to the contract of sale. In English Electric Co. of India Ltd. the law was clarified thus: “if there is a conceivable link between the movement of the goods and the buyer‟s contract, and if in the course of inter-State movement the goods move only to reach the buyer in satisfaction of his contract of purchase and such a nexus is otherwise inexplicable, then the sale or purchase of the specific/ascertained goods ought to be deemed to have taken place in the course of inter-State trade or commerce…………”. In South India Viscose Ltd. it was held that if there is a “conceivable link” between contract of sale and the movement of goods from one state to another to meet the obligation under a contract of sale it would amount to an inter-state sale and such character will not be changed on account of interposition of an agent of the seller who may temporarily intercept the movement.”
With regard to the sale in the cource of import in a works contract the Apex Court relied upon its judgement in M/s. K.G. Khosla & Co. v. Deputy Commissioner of Commercial Taxes, Madras (1966) 3 SCR 352 = AIR 1966 SC 1216 and held that no privity of contract is required between foreign sellers and the contractee to establish the sales in the cource of import in a works contract, rather for establishing the sales in the cource of import the only thing required is the movement of goods from another country to India should be in pursuance of the conditions of the contract.
The court held as under:
“A Constitution Bench of this Court had the occasion to consider in the case of M/s. K.G. Khosla & Co. (supra) whether sales in that case were in the course of imports. The assessee in that case had a contract with the Director General of Supplies, New Delhi for supply of axle bodies manufactured by its principals in Belgium. Although goods were inspected in Belgium also but under the contract they could be rejected on further inspection in India. After supplying the goods the assessee claimed the sales to be in course of import. After losing up to High Court, the assessee succeeded before the Supreme Court. The Constitution Bench held that Section 5(2) of the CST Act does not prescribe any condition that before the sale could be said to have occasioned import, it is necessary that the sale should precede the import. The sale is only required to be incidental to the contract. In other words the movement of goods from another country to India should be in pursuance of the conditions of the contract. The incident was held to be import of goods within Section 5(2) on the reasoning that the entire transaction was an integrated one by which a foreign seller through its Indian agent namely the assessee sold the goods to Indian purchaser namely the Director General of Civil Supplies.”
To sum up after this judgement, in case the goods are purchased from other States or are imported from outside the country for the purpose of only using in the works contract, then the transaction would be covered under the Central Sales Tax Act and not liable to tax under local VAT act.
(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: email@example.com , M +919815243335)