Imparting computer education in schools along with providing computers/ accessories is a Works contract and liable to Sales tax

Activity of imparting computer education in schools along with providing computers/ accessories is a Works contract and computers/ accessories so installed are liable to Sales tax

NIIT Limited (the Petitioner) executed a contract dated June 29, 2002 (the Contract) with the Government of Andhra Pradesh for imparting computer education in High Schools in the State of Andhra Pradesh, including leasing of computer hardware, software and connected accessories on Build Own Operate Transfer (BOOT) basis.

The Department contended that the work executed by the Petitioner under the Contract is a ‘Works contract’ and therefore the turnover of property involved in the execution of the said Works contract is liable to be taxed at 8% under Section 5F of the A.P. General Sales Act, 1957 (“A.P. Sales Act”). Accordingly, proceedings were initiated against the Petitioner.

Being aggrieved, the Petitioner filed a writ petition before the Hon’ble High Court of Andhra Pradesh on the basis of following submissions:

• The Contract is a simple contract for imparting computer education in the schools and it does not involve the element of ‘sale’ as defined in Section 2(1)(n) of the A.P. Sales Act;
• Though the Petitioner had provided computers and software for teaching purpose, it is purely incidental to rendering of computer education and involves no sale of goods and there is no sale consideration;
• The contract is purely a service contract;
• Even assuming that the said transfer would amount to sale, the same would come into operation only at the end of the Contract and for the purpose of the Assessment Years 2002-03 to 2004-05, the Petitioner continues to be the owner of all those assets.

The Hon’ble High Court of Andhra Pradesh after detailed discussion on the provisions of the A.P. Sales Act and Article 366(29A)(b) of the Constitution of India held the following:

• On a careful analysis of the recitals and terms and conditions of the Contract, there cannot be any doubt that it involves certain goods in execution of the Contract and that the same would be transferred to the schools in which the equipment is installed for imparting the computer education;
• The mere fact that the ownership of the computers and the accessories passed on to the schools at the end of the Contract does not alter the nature of the Contract. Passing of ownership at a later point of time is permissible as held in Larsen and Toubro Limited’s case [2013 (9) TMI 853 – SUPREME COURT] (“L&T case”);
• On a combined reading of the terms and conditions of the Contact with reference to the object sought to be achieved, it is observed that the Contract involves both a contract of Service and a contract of Sale of Goods. It is a composite contract and by legal fiction provided under Article 366(29A)(b) of the Constitution, it is permissible to separate the transfer of property in goods (as goods or in some other form) from the contract of service;
• As held in L&T case, the traditional decisions which hold that the substance of the contract must be seen, have lost their significance and what was viewed traditionally has to be now understood in the light of the philosophy of Article 366(29A) of the Constitution of India;
• It is also explained in L&T case that the term ‘Works contract’ cannot be confined to a particular form and it encompasses a wide range of many varieties of contract. It is also laid down in the said decision that for sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract three conditions must be fulfilled namely:
• there must be a Works contract,
• the goods should have been involved in the execution of a Works contract;and
• the property in those goods must be transferred to a third party either as goods or in some other form. In the instant case, all the said three conditions are satisfied.
• Hence, the Contract is a Works contract and consequently levy of Sales tax under Section 5F of the A.P. Sales Act on transfer of property in goods/equipment installed in theschools for the purpose of imparting computer education is permissible under law.

Our Comments:The five Judges Constitution Bench of the Hon’ble Supreme Court in the case of Kone Elevator India Private Limited Vs. State of Andhra Pradesh [2014-TIOL-57-SC-CT-CB], while explaining the distinction between ‘Contract for sale of goods’ and ‘Works contract’, overruled the judgment of three Judge Bench and changed the classification of contracts for supply, erection, installation and commissioning of elevators from ‘Contract of sale of goods’ to ‘Works contract’.

It is held by the five Judges Constitution Bench of the Hon’ble Supreme Court of India that four concepts have emerged from various SC judgments, which are:

• The Works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services;
• The concept of ‘Dominant nature test’ or for that matter, the ‘Degree of intention test’ or ‘Overwhelming component test’ for treating a contract as a Works contract is not applicable;
• The term ‘Works contract’ as used in Clause (29A) of Article 366 of the Constitution takes in its sweep all genre of Works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and
• Once the characteristics of Works contract are met within a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract.

‘Dominant nature test’ or ‘overwhelming component test’ or ‘the degrees of labour and service test’ are really not applicable.