TAX LIABILITY ON INTER-STATE SALES OF GOODS IN WORKS CONTRACTS KESHAV DAYAL
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A contractor, who claims that he has made inter-state sale of certain goods involved in the execution of a works contract, is liable for payment of tax on such sales in the State from which movement of such goods has commenced. He is also liable for obtaining registration under sub-section (1) of section 7 of the Central sales Tax act, 1956, in each such State from which such goods have been purchased. A contractor who fails to pay tax within prescribed time is liable to pay interest in addition to tax payable by him. Penalty may also be imposed on him. A dealer who fails to obtain registration may be punished with imprisonment or fine or both. |
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An inter-state sale is a sale which either occasions the movement of goods from one State to another State or is effected by transfer of documents of title to goods during their movement from one State to another State. |
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| (i) | If goods are available in the stock of the supplier, it may supply goods out of such stocks;
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| (ii) | It may purchase goods from the local market and after taking delivery of such goods, supply such goods to the purchaser;
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| (iii) | It may place an order for inter-state purchase of such goods with a vendor of other State. In such a case, it may direct the vendor to-
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| (a) | dispatch the goods through common carrier for a given destination; and | |
| (b) | send the goods receipt (GR) or railway receipt (RR) other such document to it. | |
Thereafter, it can supply the goods to the purchaser in any of the following ways: |
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| (1) | It may take delivery of goods from the common carrier and thereafter may supply such goods to the purchaser; or | |
| (2) | It may, without taking delivery of goods from the common carrier, effect the sale to local purchaser by transfer of documents of title to goods (here GR or RR).
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Out of the aforementioned cases, sales mentioned in clauses (i), clause (ii) and sale in which supplier, after taking delivery from the common carrier at the destination, supplies such goods to the local purchaser, fall under the category of local sales. All such transactions sale will be liable to tax under local VAT law. But in a case in which supplier makes inter-state purchase of goods and without taking delivery of such goods, endorses document of title to goods in favour of purchaser and purchaser takes delivery of goods from the common carrier, it is case of inter-state sale effected by transfer of document of title to goods. Liability of tax on such sale will be governed by the provisions of the Central Sales Tax Act, 1956 (hereinafter referred to as the Act). |
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Let us consider another example. A manufacturer, for purchase of certain machinery, places purchase order with a local supplier with a condition that machinery to be supplied will be manufactured by a particular manufacturer of other State at his factory outside the State and before machinery is dispatched by the Ex-State manufacturer, the purchaser will inspect and approve the machinery and supplier will supply only such inspected and approved machinery. Now local supplier places purchase order with manufacturer of machinery outside the State in similar terms. After manufacture of machinery, the local purchaser inspects machinery and gives its approval. Thereafter, Ex-State manufacturer dispatches such machinery to local supplier and sends goods receipt or railway receipt, as the case may be to the local supplier. Local supplier takes delivery of machinery from common carrier and thereafter delivers such machinery to the local purchaser. Here following two things are to be noted. |
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| (i) | If local supplier, after taking delivery of goods from the common carrier, diverts such machinery for any other purpose or towards any other contract of sale, it will breach the contract with local purchaser; and
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| (ii) | The machinery, when it had been at the factory of the manufacturer outside the State, had been appropriated with the assent of the local purchaser towards contract of sale in between local supplier and local purchaser.
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In a case in which local supplier, due to conditions of the its contract with the local purchaser, is not free to divert goods for any other purpose or towards any other contract of sale, sale falls in the category of inter-state sale even if goods are supplied to local buyer after taking delivery of such goods by it from the common carrier. In this example, there will be two sales and both sales, sale by Ex-State manufacturer to local supplier and sale by local supplier to local purchaser, will be inter-state sales. |
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For the purpose of determining turnover of goods for the purpose of levy of tax on State sale of goods involved in the execution of works contracts, VAT laws all States provide for exclusion of sale prices (values) of goods falling under sections 3, 4 and 5 of the Act. Inter-state sales fall under section 3 of the said Act. Before April 01, 2002 (the date with effect from which definition of word “sale” given in section 2 of the Act was amended), the tax could not be levied on inter-state sale involved in the execution of works contracts. Therefore, contractors were benefited where they had entered into contracts involving inter-state sales. Tax under the Act is levied on inter-state sale. Since sale did not include transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract, therefore tax had not been leviable. But with effect from the said date, circumstances have changed. Now if such sale is not exempt in view of any provision of the Act, then the contractor will have pay tax on such sale. |
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Where a contractor has claimed sale of certain goods in execution of a works contract after 01-04-2002 as inter-state sale (sale falling under section 3 of the Act) then he has been liable for payment of tax. An inter-state sale can be a sale which has occasioned the movement of goods from one State to another or a sale which has been effected by transfer of documents of title to the goods during their movement from one State to another. In cases of works contracts property in goods cannot be transferred by transfer of documents of title to the goods during their movement from one State to another. In a works contract, property in goods passes at the time of incorporation of the goods in the works. |
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Appellant was a company incorporated under the Companies Act and was engaged in execution of electrical works contracts. Appellant had a registered of capacitor banks at various sub-stations of the Karnataka Power Transmissions Corporation Limited ("KPTCL", for short) in the State of Karnataka. Pursuant to the contracts, appellant appointed M/s. Bay West Power and Energy Pvt dealer both under the Karnataka Sales Tax Act, 1957 and the Act ("CST ACT 1956", for short). Appellant was awarded three independent contracts towards - (i) supply of capacitor banks, (ii) execution of civil works and (iii) erection and commissioning. Ltd. ("M/s. Bay West", for short) as EPC contractor located outside the State of Karnataka for procuring the capacitor banks ("equipment", for short) because the said EPC contractor had a prior arrangement with the manufacturers of the said equipment. In that transaction four parties were involved, namely, the appellant, M/s. Bay West, the manufacturers of the equipment and KPTCL being the ultimate consumer. Although four parties had intervened, in substance, there were three independent contracts involved in the transaction. The first contract was between the appellant and KPTCL for supply of the equipment. The second was between the appellant and M/s. Bay West. It was a procurement contract. The third contract was between M/s. Bay West and the manufacturers. |
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The assessing authority has found that sales by all three dealers had fallen under clause (a) of section 3 of the Act. The Hon’ble Supreme Court has held that where it was found that sale had occasioned the movement of goods, then such sale had been liable to tax in the State from where movement of goods had commenced.
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Liabilities of a contractor in respect of inter-state sale declared by it. |
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In sub-section (1) of section 6 of the Act, it has been provided that subject to other provisions of the Act, every dealer shall be liable to pay tax on all sales of goods other than electrical energy effected by him in the course of inter-state trade or commerce. Dealer liable for payment of tax has to- |
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| (i) | submit returns of turnover and tax in the State in which tax is leviable; | |
| (ii) | obtain registration under the Act in the State in which he is liable for payment of tax.
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Sub-section (1) of section 7 of the Act makes it mandatory for every dealer, who effects an inter-state sale, to obtain registration within 30 days from the date of first inter-state sale in the appropriate State. Therefore, where a dealer claims that he had made inter-state sale of certain goods in execution of a works contract, he will have to get himself registered in every State from which he has purchased such goods. Punishment for not obtaining registration has been prescribed in clause (aa) of section 10 of the Act. Person committing offence can be punished with simple imprisonment which may extend to six months or fine or both.
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