1.1 Articles on VAT:1.

2 INTRODUCTION OF WORKS CONTRACT: The taxation of Works Contract had never been clear and simple. It was always sur rounded by uncertainty.Whenever the States tried to levy tax on a transaction wh ich did not involve Transfer of Property in a chattel-qua-chattel it was objecte d to by the tax-payer, as the term sale as understood under the Sale of Goods Act, 1930 did not include composite transactions of supply of goods and labour. Furth er, there was no precisedefinition of the term Works Contract and therefore one ha d to look to the interpretation of the term WorksContract made by the various cour ts in their judicial pronouncement.Since in every sale and purchase there is tra nsfer of property backed up by an agreement to transfer property.The intention o f the parties is to be gathered from the terms and conditions of the agreement o r the contracts.Therefore from the analysis of the contract the intention of the parties is to be gathered and the contract isrequired to be classified accordin gly. There can be various contracts in which there can be a transfer of property in goods but each one of them cannot be a contract of sale as understood under the Sale of Goods Act, 1930.There can be various contracts in which there is a Tran sfer of Property in goods yet these may not amount to acontract of sale. 1. TYPES OF CONTRACTS INVOLVING TRANSFER OF PROPERTY IN GOODS The first important judicial pronouncement is in the form of Supreme Court decision in the case of Government of Andhra Pradesh vs. Guntur T obacco Ltd. (16 STC 240) . In this decision the Supreme Courthas explained the types of contract in which there is a transfer of property.According to the Supreme Court there are 3 type s of Contract where material is used: (i) The contact may be for work to be done for remuneration and for supply of materi al used in theexecution of a work for a price.(ii) It may be a contract for work in which use of material is incidental or accessor y.(iii) The last in which use of material is voluntary or freely given.In the last type of contract there is no difficulty to say that there is no sale because even if property passes it iswithout any price. In the first case there is a composite c ontract for work and sale of goods and in the secondtype of work it is a contrac t for execution of works not involving sale of goods.Thus where there is a contr act in which there is transfer of title to the goods expressly or impliedly and not asincidental to the contract it is a Works Contract. However, where the cont ract is for work in which there istransfer of property in material but it is jus t incidental or accessory to the main contract then such transfer of property c annot be taxed under the Works Contact Act as the predominant object of the part ies was to get theservices and not to buy or sale any goods. Such contract was r eferred to as Service Contracts. There can bemany examples of Service Contracts wherein there is a transfer of property in goods involved in the executionof a w ork where in such transfer of property was not intended by the parties to the co ntract. The property passesin such contract only as incidental to the contract f or the simple reason that the primary object of the party wasto give and take se rvices. An example can be that of a photographer. A person going to the photogra pher is notinterested in purchase of the paper on which photograph is printed bu t is interested in the skill of the photographer though in such case there is a transfer of property, the property passes only as incidental transfer.A useful r eference can be made in this regard to the case of M/

s. B. C. Kame (39 STC 237) . Another example of Service Contract could be that of a radiologist giving writ ten opinion. The same will be a case with the paintersand consultants. 2. POSITION AFTER 46th CONSTITUTIONAL AMENDMENT To overcome the effect of certain judgements the Constitution was amended. The a mendment is known as the46th Amendment which took place in the year 1983. After 46th amendment, in Article 366, Clause (29A) wasinserted; which reads as under:

(29A) tax on the sale or purchase of goods include (a)...., (b) a tax on the tran sfer of property in goods(Whether as goods or in some other form) involved in th e execution of a Works Contract, (c)..., (d)..., (e)...,(f)...,The objective behi nd introducing sub-clause (b) was to enable the States to levy tax on sale or pu rchase of goods where such sale/purchase of goods is by way of transfer of prope rty in goods involved in the executionsof Works Contract. Now a question arises as to whether after this amendment can the Service Contract; i.e.,where the Transf er of Property in Goods involved in the Execution of a Contract is only incident al or ancillaryand was not intended to be purchased and sold by the parties can be taxed? In my humble opinion, ServiceContract cannot be taxed even after the 46t h amendment in the Constitution because the predominant objecttheory still holds goods. A contract of sale or purchase of goods has to be with knowledge of the parties andwith a clear objective in mind for transfer of property in goods invo lved in the execution of a particular contractwhere the parties to a contract di d not intend the transfer of property in goods in the execution thereof there ca n be no sale or purchase of goods. SARVODAYA PRINTNG PRESS CASE (114 STC 240): In this case the Supreme Court was dealing with a printing contract. It was held to be a Works Contract. Whileholding so the court has noted the observations ma de by it in the case of State of Tamilnadu vs. AnandanVishwanathans case in following words: In our opinion the contract in this case is one, having regard to thenature of the job to be done and the confidence reposed for work to be done for remuneration and supply of paper is just incidental. Thus the Supr eme Court did not describe the transaction before it as a Works Contractto be ex ecuted for a payment of contract price. The Supreme Court held that the case bef ore it having regard tothe nature of the job to be done and the confidence repos ed was for work to be done for remuneration andsupply of paper was just incident al. Thus in the view of the Supreme Court also service contract do exist evenafte r the 46 th Constitution Amendment and such Service Contract cannot be subjected to tax unde r the WorksContract Tax Act. RAINBOW COLOUR LABs CASE (118 STC 9): The Supreme Court in the case of Rainbow Colour Lab vs. State of M adhya Pradesh (118 STC 9) hasobserved that all that has happened in law after the 46th amendment following the judgement of this court in builders case is that it is now open to the State to divide the Works Contract into two separate contracts by alegal fiction.(i) Contract for sale of goods involved in the said Works Contract.(ii) For supply o f labour and service.This division of Works under the amended law can be made on ly if the Works Contract involved dominantintention to transfer the property in goods and not any contract where the transfer of property is as an incidenceof c ontract of service. The amendment referred to above has not empowered the State to indulge in microscopicdivision of contract involving the value of material us

ed incidentally in such contract. What is pertaining toascertain in this connect ion is what was the dominant intention of the contract, every contract, be a Ser viceContract or otherwise, may involve the use of some material or the other in execution of the said contract. TheState is not empowered by the amended law to impose Sales Tax on such incidental material used in suchcontract.From the above observations of the Supreme Court the jobs like Xeroxing, cyclostyling, pest con trol etc. willnot be covered by Article 366 (29A) sub-clause (b). 3 . DETERMINATION OF PREDOMINANT INTENTION To judge the predominant intention of the parties to a contract also poses diffi culty. Where the contract is in black and white then the terms of the contract m ay throw light on the dominant intention of the parties. Butwere there is no cle ar contract then the nature of work to be done, the monetary value of the goods in whichthere is a transfer of property, the common parlance will help in knowin g the intention. All these tests cannot beapplied independently and their applic ation will depend upon the facts and circumstances of each case. In thecase of p urely artistic work such as photography, painting etc. it is easy to understand the predominant intentionof the parties and there is no difficulty in saying tha t predominant intention of the party is to have the service of the photographer. Nobody is interested in buying the paper on which the photograph is printed. Ho wever, incase of a printing contract if the contractee has given the specificati on regards the paper on which the matter given by him should be printed and the paper is of such a type that it is not used ordinarily by printers in general

then definitely it can be inferred that the parties intended to buy and sell pap er on which the matter is printed. Insuch case the printer also fixes his charge s accordingly by taking into consideration the cost of paper involved.The third case can be that of the monetary value of the goods in which there is a transfer of property. In themonetary value of the goods in which there is a transfer of property is of considerable high value it can beinferred that there is a transfe r of property in goods involved in the execution of a works contract. Indetermin ing whether there is a transfer of property in goods involved in the execution o f a works contract or notone may adopt the reasoning given by the Courts and the Tribunal while inferring deemed sale of packingmaterial under the Sales Tax Law . For example in the case of Dhariwal Bottles Ltd., vs. The State of M aharashtra (99 STC 326) it was held by the Court that no deemed sales of empty gunny bags would beinferr ed which were used to pack empty bottles for transportation as such packing mate rial was commonly usedas a cheap and convenient mode of transportation. Therefor e here the practices followed in common parlancewere taken into consideration. S imilar, in the case of Vidarbha Bottlers Ltd. the Tribunal had held that a deeme dsale of packing material (glass bottles) in which the liquor was packed would b e inferred as the value of glass bottles was significantly high or form an subst antial component of cost of liquor.However, the Rainbow Colour Labs case strengt hened the concept of Service Contract. Supreme Court decision in case of Associated Cement Ltd. (124 STC 59) (ACC) unsettled the already settled position. In thiscase the division bench of 3 judg es was examining the levy of custom duty on imported diskettes/paper/floppyetc. under the Custom Act. M/s. ACC and others had obtained technical knowhow from fo reign experts. Theforeign experts sent their opinion/advice on media like floppy /drawing paper/diskettes. The assessee declarednominal value of 1 dollar for the purpose of custom duty. Though they had paid a huge amount towardsconsultation

fees. The Custom Authority however, imposed the custom duty on full amount paid by theimporters. The Supreme Court held that the foreign experts sent the floppy /papers only on getting their fees andhence the entire fee is liable to custom d uty. For the above purpose the Supreme Court took into considerationthe definiti on of goods defined under the Customs Act, 1962 which is totally different from th e definition of goods under the Sales Tax Laws so also the definition of custom val ue is different from the sale price andthe turnover of sales under the Sales Tax Laws . The Supreme Court resolving the above controversy observedthat the case under the Sales Tax Legislation is not of any relevance to the controversy under the C ustom Act.However, observed as follows: Even though in our opinion the decisions relating to levy of Sales Tax would have, for reasons to which weshall presently mention, no application to the case of levy of customs duty, the decision in Rainbow Colour Lab(118 STC 9) (SC) requires reconsideration.The Supreme Court then further observed that The conclusi on arrived in Rainbow Colour Lab (2000) (118 STC 9) (SC) in our opinion runs counter to theexpress provisions contained in Article 366(29 A) as also of constitution bench decision of this Court in Builders Association of India vs. Union of India (73 STC 370) .Also Supreme Court observed that Apart from the decision in Rainbow Colour Labs case (118 STC 9) (SC) which does not appear to be correct,the other decisions cited relating to pre 46 th amendment period. Thus, except observation that the judgementruns counter to the constitution or appears to be not correct, Supreme Court has not held furthe r so as to declareit invalid or they have stated clearly that the judgement in R ainbow is overruled. Therefore, it can be said thatSupreme Court in the above ca se has expressed doubts but certainly not overruled the judgement, as it has not examined the judgement of Rainbow Colour Lab on merits. The observations made by the Supreme Court in the judgement is said to be only an obiter dicta (passing remarks). 4. HAS THE ACC CASE CLOSED ALL THE DOORS? A question may arise whether the judgement of the ACC has put a last cap on the entire issue or there is still aray of hope in the matter. In my humble opinion since the decision of ACC has not overruled expressly thedecision of Rainbow Col our Lab there is still a chance of review of ACCs decision by the Supreme Court. Onemay see that something comes out of the decision of larger bench in the case of M/ s. Tata Consultancy vs. The State of Andhra Pradesh (122 STC 198) which was referred to the larger bench of the Supreme Court bydivision bench. In this case also before the division bench the decision of ACC was cited. Had the SupremeCourt considered that ACCs case has taken the matter to the finalising th en that would have definitely followed