Materials purchased from unregistered dealers for works contract is liable to tax u/s 4(4) of APVAT Act, 2005

R.K RENGARAJ

Introduction:

The Andhra Pradesh Sales Tax & VAT Appellate Tribunal, Hyderabad held recently that materials purchased from unregistered dealers and used in the execution of works contract is liable to tax u/s 4(4) of the APVAT Act (Ramky Environ Engineers Ltd., Hyderabad Vs State of Andhra Pradesh  2013 57 APSTJ 1).  The A.P State VAT Act, 2005 states that in order to attract liability to tax u/s 4(4) on the purchase of goods from unregistered dealers, the revenue has to establish that the tax liability arises in the course of business of taxable goods, if such purchases are used as inputs which are exempt from the tax or used as inputs for goods which are disposed of otherwise than by way of sale in the state or outside the State or disposed of otherwise than by way of consumption.

Background of the case:

The Appellant is a registered dealer in APVAT Act, 2005 dealing in works contract as well as waste management. During the year 2005-06 to 2007-08, the Appellant purchased goods (Cement bricks, CRS Stones, Dust Hardware materials, RCC pipes, Sand etc) from unregistered dealers for construction of buildings, roads, landfill etc and consumed in disposal of waste.

According to the Assessing Officer, such purchases attract purchase tax @4% u/s 4(4) of APVAT Act and hence he levied tax.

The issue was categorized in two types: a) Rs.1,69,34,235/-. Value of Materials purchased from unregistered dealer for capping work and used as consumables in cinerator including operating expenditure.

                                                                                           b) Rs.15,35,171/-. Value of Materials viz., metal, bricks, sand etc., purchased from unregistered dealer for own construction.

On Appeal, the ADC (CT) dismissed it.  Against this order, the appellant filed the appeal before the Tribunal.

Relevant PROVISONS:

APVAT Act Section 2(6) ‘Business’ includes:

(a)    Any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture, adventure or concern is carried on or undertaken with a motive to make gain or profit and whether or not any gain or profit accrues there from;

(b)   Any transaction in connection with, or incidental or ancillary to such trade, commerce, manufacture, adventure or concern; and

(c)    Any transaction in connection with commencement or incidental or ancillary to the commencement or closure of such trade, commerce, manufacture, adventure or concern.

Section (4): Every VAT dealer, who in the course of his business purchases any taxable goods from a person or a dealer not registered as a VAT dealer or from a VAT dealer in circumstances in which no tax is payable by the selling VAT dealer, shall be liable to pay tax at the rate of four (4%) on the purchase price of such goods, if after such purchase, the goods are:

(i)      Used as inputs for goods which are exempt from tax under the Act, or

(ii)    Used as inputs for goods, which are disposed of otherwise than by way of sale in the State or dispatched outside the State otherwise than by way of sale in the course of inter-state trade and commerce or export out of the territory of India; or

(iii)   Disposed of otherwise than by way of consumption or by way of sale either within the State in the course of interstate trade or commerce or export out of the territory of India;

[provided that wherever a common input is used  to produce goods, the turnover, taxable under this sub-section, shall be the value of the inputs, proportionate to the value of the goods, used or disposed of in the manner as prescribed under this section:

Provided further that in respect of purchase of goods specified in Schedules and IV, the VAT dealer shall be liable to pay tax at the rates specified for such goods in the respective schedules.]

Judicial guide lines : Case laws favouring the revenue:

Assistant Commissioner (intelligence) No.IV, Enforcement Wing, Hyderabad Vs  Nandanam Construction Company (1999 29 APST 221) SC

Deputy Commissioner of Sales Tax, Board of Revenue, Ernakulam Vs Thomas Stephen and Co., Ltd., (1988 6 APSTJ 200)SC

State of A.P Vs Dairy Development Corporation Limited, Hyderabad (1997 24 APST 113) HC

The State of AP Vs H.Abdul Bakshi & Bros (1964 15 STC 644) HC

Decision:  For the first issue, the Tribunal remitted back to the assessing authority with a direction to verify the records and to pass speaking order clearly mentioning the reasons of the applicability of clause (iii) of Section 4(4) of the APVAT Act. For the Second issue, the Tribunal disallowed by quoting reference to the Supreme Court of India overruling the A.P High Court judgment in Assistant Commissioner (intelligence) No.IV, Enforcement Wing, Hyderabad Vs  Nandanam Construction Company (1999 29 APST 221), wherein it was held that “where a registered dealer purchases goods from a person other than a registered for consumption or disposal of dispatch of goods outside the state, the said purchases become exigible to tax under clause 9ii) of Section 6 A of the APGST Act as the said goods cease to exist in the original form or cease to be available in the State for purchase or sale.  Therefore, sand, bricks and granite purchased from unregistered dealers used in construction of buildings would be liable to tax under Section 6A of the APGST A ct”.

Conclusion:

This judgment will create more ripples in the minds of construction industries not only in the State Andhra Pradesh but also in many states, where the impact of VAT liability will be more on account of purchases from unregistered dealers. The definition ‘business’ clearly indicate any trade, commerce or manufacture is carried on with a profit motive or profit accrued there from, any transaction in connection with the incidental or ancillary. In respect of levy of tax under Sec 4(4) of the APVAT Act,, 2004, the liability to tax arise in the course of his business who purchases any taxable goods and if such purchases are used as inputs which are exempt from tax under the Act or used as inputs for goods which are disposed for otherwise than by way of sale or by way of consumption.  Though the charging section for Works Contract is separate in every State VAT Act, the Purchase tax liability created on account of purchases from unregistered dealers for construction industries will be huge while opting for a compounded rate of tax in the works contract, in view of the provisions laid down in the Acts.  There are decided case laws for levying purchase tax for the purchases made from unregistered dealers for “consumed otherwise”, even in the General Sales Tax period (Kandaswamy VS State of Tamilnadu 1975 36 STC 191 SC, Ruchi Soya Industries Ltd., Vs CTO 2008 12  VST 546 (MAD) and Decan Lime Shell & Co Vs. State of Tamilnadu 1992 87 STC 29 Mad).

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