Jyoti Raj Advocate

Initially when section 3-F was introduced transactions covered under section 3,4 and 5 of the Central Sales Tax Act have not been excluded. Thus the provisions has been declared Ultra virus by the Division bench decision of this court in the case of V K Singhal vs. State of UP reported in 1995 NTN (Vol. 6) 17; 1995 UPTC 337. Section 3-F of the U.P Trade Tax Act under which the assessments were made, was amended and a new Section 3-F was substituted by Act 31 of 1995 with retrospective effect from 13th September, 1985. Under the new amended Section 3-F of the Transaction relating to section 3, 4 and 5 of the Central Sales Tax Act have been excluded.. Sub section (2) of Section 3-F provides the manner in which the turnover in respect of transfer of property in goods involved in the execution of a works contract shall be determined . Sub-clause (i) of clause (b) of sub section (2) of Section 3-F provides that the amount representing the sale value of the goods covered by section 3,4 and 5 of the Central Sales Tax Act, 1956 shall be deducted from the total amount .

In case of CTT U.P V/s Indian Railway Construction Co. Ltd Agra, [2007 NTN (Vol. 32) 273] it was held by the Allahabad High Court -Contract-Material imported from outside state for use in execution of works contract- Held deductible in determining net turnover.

In above case during the execution of the above works contract, dealer used various items of Electric goods, Iron & Steel and Hardware etc. purchased from the registered dealer from U.P and also from out side the state .Before the Assessing authorities it was claimed that the goods used in the execution of works contract were imported from outside the state of U.P in the course of import, covered under section 3, 4, and 5 of the Central Sales Tax. Act and therefore the value of such goods were liable to be deductable from the gross turnover in view of section 3-F (2) (b) (i) of the U.P Trade Tax Act. Assessing Authority, however, had not allowed such claim and levied tax on the value of the goods imported from outside the state of U.P by adding 15% profit. First appeals filed by the dealer were dismissed, where as the Tribunal has allowed the claim of dealer in respect of the goods purchased from outside the State of U.P and up held the levy of tax on the goods purchased within U.P from unregistered dealers, used in the works contract.

The Learned High Court held that as the goods purchased from outside the state of U.P and imported in the course of inter­state, used in the execution of work contract, were liable to deducted from gross turnover under Section 3-F(2) (b) (i) of the Act being transactions covered under section 3. 4 and 5 of the Central Sales Tax Act. Hence no tax can be imposed on the goods purchased from Ex-U.P & used in execution of work contract .

One of an Important case in this matter is of M/S SANTOSH AND COMPANY, NEW DELHI, [1999 NTN (Vol. 15)604] where in the Learned High Court held – That Goods brought from outside U.P and consumed in U.P in work contract – Deductable under section 3-F (2) (b) (i) of the Act .

In above case the Garrison Engineer, M.E.S, Dehradun invited tenders for the supply and fixing of Aluminum doors, Windows and ventilators and fixed glazed partition in its building situate at Raipur, Dehradun. M/s Santosh & Company was granted the contract . For using the material in the said contract , the contractor imported the goods from Delhi to the site where the work was to be executed . There was never any dispute that the goods which were brought from the State of Delhi into U.P was in pursuance of the contract for supplying and fixing of Aluminium doors, windows, ventilators and fixed glazed partition etc & for the fabrication of the doors, windows etc.. Sub section (2) of Section 3-F provides that the amount representing the sale value of the goods covered by Section 3, 4 and 5 of the Central Sales Tax Act, 1956 shall be deducted from the total amount received or receivable by a dealer in respect of a works contract . But in case of assessee entire payments received from the Garrison Engineer has been treated as the taxable turnover by the Assessing Officer .

The assessee had already paid the CST on the goods brought in by the dealer from Delhi, the authorities have tried to clinch the issue in favors of the revenue by saying that since the works were executed at Dehradun, the sale was finally completed there and therefore, the value of such things was also taxable.

The Learned High Court held that this contention of the authorities is not correct that the goods imported & used in work contract at Dehradun hence the sale was finally competed at Dehradun and therefore the value of such things was also taxable. The law specifically provides for exclusion of goods which are the subject-matter of inter state trade or the subject of sale outside the state or the sale in the course of export or import and are thus, covered by Sections 3,4 and 5 of the Central Sales Tax Act and the goods were brought from Delhi to the State of UP in pursuance of and for the execution of the works contract and therefore, they were covered by section 3 of the Central Sales Tax Act and the sale value thereof could not have been subjected to Trade Tax Act. The fact that the sale was ultimately completed in UP was of no consequence, as held by the Hon’ble Supreme Court in Oil India Limited v. Superintendent of Taxes, 1975 UPTC 335.

Similarly in case of M/s J.S Fabricators (P) Ltd. Ghaziabad V/s C. T. T (U.P) (2002) 20 NTN 45 it was held by the Learned High Court ,that if the goods are purchased from outside the State and are directly incorporated in works contract, tax can not be imposed under local Act- Decision in Gannon Dunkerley & Co. vs. State of Rajasthan 1993 U.P.T.C 416. was followed.

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CTT vs. Indian Railway Construction Co, Agra [2005 U.P.T.C- 984]- it was held-Transactions-Movements of goods-Contract of sale was in existence, from before the movement of goods- Movements of goods was in pursuance of contract which were used in the works contract-Goods have been imported from outside the state for use in execution of works contract-Transaction was covered by section 3 of Central Sales Tax Act-Liable to be excluded from the Gross turnover.

Matter relating to levy of tax on the value of goods involved in the execution of works contract further came up for consideration before the Constitution Bench of the Apex Court in the case of Gannon Dunkerely and Co. vs. State of Rajasthan, reported in 1992 NTN (Vol. 1) 417J; 1993 U.P.T.C 416. The Apex Court concluded -“On behalf of the State, it has been seriously contended that a deemed sale resulting from transfer of property in goods involved in the execution of a works contract can never be a sale or a sale in the course of import since the transfer of property in the goods take place only at the stage when the goods are incorporated in the works and that can take place only in the state where the work is required to be executed.”

It was held that “the State Legislature cannot so frame its Law as to convert an outside sale or a sale in the course of import and export into a sale outside the State. The question whether a sale is an outside sale or a sale inside the State or whether it is a sale in the course of import or export will have to be determined in accordance with the principles contained in Sections 4 and 5 of the Central Sales Tax Act and the State Legislature while enacting the sales tax legislation for the State cannot make a departure from those principles.”

In the case of Shaney Steel and Press Works Ltd. and Another vs. Commercial Tax Officer and Others [1986 UPTC 105 ] and in the case of Union of India and another vs. M/s K.G Khosla and Company (P) Ltd. and Others [1979 UPTC 751], Apex Court held that it is immaterial whether a complete sale proceeds the movements of goods or for that matter takes place while the goods are in transit. What is important is that the movement of the goods and the sale must be inseparably connected.

Thus it is clear from the above judgments that the goods imported from outside the state for use in execution of works contract cant be taxed by the assessing authorities because they are the transaction which are covered by section 3 of Central Sales Tax Act. Hence liable to be excluded from the Gross turnover.

Position When the Contractor had opted for Compound

If the contractor had opted for compound scheme and the amount of intre-State purchases exceeds 5% of the contract value in such case also the central purchase has to be deducted from the taxable turnover even if the dealer has opted compounding & granted relief of 5%, under Section 2F(2)(b)(1),. This was held by the Noida Tribunal Bench in the case of M/s Nathu Ram Goyal & Company, Noida vs. CTT U.P [(2007) 35 NTN Tribunal 8 ] & in case of M/s Mass Construction vs. CTT U.P- [(2007) 35 NTN Tribunal 77 ] . Hence still the position remains same. The State cannot impose tax on the goods which have been imported from outside the state for use in execution of works contract .The transaction is covered by section 3 of Central Sales Tax Act. Hence liable to be excluded from the Gross turnover.

Position Under Uttarakhand Vat Act

Rule 14 deals with the determination of turnover of goods involved in the execution of Work Contracts

Rule 14(2) clearly says for determining the net turnover of work contract , what are the amount which are to be deducted from the total amount received or receivable by a dealer . It is clearly mentioned under Rule 14(2)(a) , that the sale value of goods covered by Section 3, Section 4 & Section 5 of the Central Sales Tax Act , will be reduced from the total turnover of the work contract .

Thus the position under Vat is same in Uttarakhand as that was under Trade Tax Régime ..

Position Under U.P Vat Act

Section 7 of U.P Vat Act lays down the condition under which tax cannot be levied on certain sales & Purchases . It is clearly mentioned in explanation of Section 7 ” For the purposes of this ordinance Section 3, 4, & 5 of CST Act 1956 , shall apply respectively for determining weather or not a particular sale or purchase of any goods falls under any of the sub-clause (i), (ii) and (iii) of clause (a) . Thus the position is same , that the sale value of goods covered by Section 3, Section 4 & Section 5 of the Central Sales Tax Act , will be reduced from the total turnover of the work contract .

Thus the position under Vat is same in U.P also .

( Author can be reached at jyotirajadvocate@yahoo.com>

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0 responses to “Effect of Section 3, 4 & 5 of CST Act in Determining Net Turnover of Work Contract”

  1. pvramarao says:

    I would like to have latest case laws on sales tax matters

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