[Opinion] Whether GST can be levied on Works Contracts?

Vikas Chandra Guru – [2022] 141 taxmann.com 498 (Article)

1. It is clear that no tax can be levied or collected except by authority of law, as per Article 265 to the Constitution. A question arises that if there is no insertion of “Works Contract” in the definition of supply U/s. 7(1), can still GST be levied? A related question is whether GST can be levied on works contract with the aid of sec,7( 1A ) read with Schedule – II of the CGST Act. This is because it is clear that Works Contract is a separate specie which is a deemed sale Under article 366 (29A) of the Constitution and which survives even after the Constitution 101 Amendment bringing GST. Hence, another way of putting the question is whether it can be read into ” all forms of supply” or expression “sale” by implication when such expression has no place in section 7(1). In other words, Whether a supply can be presumed in the absence of expression “Works Contract” in section 7(1)? Whether Works Contract can be ascribed into the definition of Goods or service or both when the law separately define ” Works Contract” under 2(119) of CGST? Can the expansion of definition of supply should be carried so as to read what is not there? The present article brings to the learned readers a view point as author strongly believe that it is by discussion and deliberations only we can demolish our disbelief or confirm or refine our understanding of law. If we do not express, we are missing a journey which can only be enjoyed through competent and authentic companions.

2. The GST is a tax on supply of (i) Goods or (ii) Service or (iii) Both and is levied on the value determined U/s. 15 [ Sec. 9 – Levy and Collection refers ]. The word ” Supply” is defined in Section 7, which has been amended in 2018 with retrospective effect from 1/7/2017. The supply word is defined in interesting way and by example as the use of word “such as” in Section 7 (1) suggest. In earlier tax regime, the tax on sale or purchase was under exclusive domain of the state [ Article 246 , VII Schedule]. With 101 amendment the Union and State both have concurrent power to levy tax on goods or service or both.

The works contract is a composite contract which involve Goods and Service both. The parties under works contract intend to pay consideration not for goods involve in execution say Cement Gitti etc but a house . A works contract is a contract wherein sale purchase of goods are not intended by parties but by necessary implication once a house or flat is built and it is transferred to buyer. Therefore it is not a sale of goods or service or both as when a house is built, immovable property is supplied and not the goods or service or both. Constitution enables such taxing but it has to be by clear words in section 7(1). Works contract can be traced to category (iii) i.e. (iii) both however it is not supply of goods or service or both as once a immovable property is built under the contract, what is transferred ceased to be goods. Article 366 (29A) introduced by 46th amendment to the Constitution specify 6 instances which per se cannot be regarded as sale or purchase of goods, which run from Clause (a) to (f) . Clause (b) of 366 ( 29-A) of constitution enable to tax on transfer of property in goods ( whether in goods or in some other form) involved in the execution of a works contract from the total value of Contract. Article 366(12) has defined the word “goods” for the purpose of the Constitution as including “all materials, commodities, and articles”.

3. The history of taxing works contract as sale by deeming fiction has its origin to The State of Madras v. Gannon Dunkerlay & Co AIR 1958 SC 560. It was held in this landmark judgment that State has no competence to tax the goods portion involved in execution of a works contract ( which involve goods and service both and parties have intended for a work and not intend to buy the material say Cement, Brick involved in building of a house). The States were deprived to tax the goods portion involved in execution of a Works Contract. The relevant para of the landmark Judgment is re produced below

The contention that a building contract contains within it all the elements constituting a sale of’ the materials was sought to be established by reference to the form of the action, when the claim is in quantum meruit. It was argued that if a contractor is prevented by the other party to the contract from completing the construction he has, as observed by Lord Blackburn in Appleby v. Myres (1), a claim against that party, that the form of action in such a case is for work done and materials supplied, as appears from Bullen & Leake’s Precedents of Pleadings, 10th Ed., at pp. 285-286, and that showed that the concept of sale of goods was latent in a building contract. The answer to this contention is that a claim for quantum, meruit is a claim for damages for breach of contract, and that the value of the materials is a factor relevant only as furnishing a basis for assessing the amount of compensation. That is to say, the claim is not for price of goods sold and delivered but for damages. That is also the position under s. 65 of’ the Indian Contract Act.

“Another difficulty in the way of accepting the contention of the appellant as to splitting up a building contract is that the property in materials used therein does not pass to the other party to the contract as movable property. It would so pass if that was the agreement between the parties. But if there was no such agreement and the contract was only to construct a building, then the materials used therein would be come the property of the other party to the contract only on the theory of accretion. The position is thus stated by Blackburn J. at pp. 659-660 in Appleby v. Myres (1): ” It is quite true that materials worked by one into the property of another become part of that property. This is equally true, whether it be fixed or movable property. Bricks built into a wall become part of the house; thread stitched into a coat which is under repair, or planks and nails and pitch worked into a ship under repair, become a part of the coat or the ship. When the work to be executed is, as in the present case, a house, the construction imbedded on the land becomes an accretion to it on the principle quicquid plantatur solo, solo cedit and it vests in the other party not as a result of the contract but as the owner of the land. Vide Hudson on Building Contracts, 7th Edn. p. 386. It is argued that the maxim, what is annexed to the soil goes with the soil, has not been accepted as a correct statement of the law of this country, and reliance is placed on the following observations in the Full Bench decision of the Calcutta High Court in Thakoor Chunder Poramanick v. Ramdhone Bhuttacharjee (2) : We think it should be laid down is a general rule that, if he who makes the improvement is not a mere trespasser, but is in possession under any bona fide title or claim of title, he is entitled either to remove the materials, restoring the land to the state in which it was before the improvement was made, or to obtain compensation for the value of the building if it is allowed to remain for the benefit of the owner of the soil,-the option of taking the building, or allowing the removal of the material, remaining with the owner of the land in those cases in which the building, is not taken down by the builder during the continued ance of any estate he may possess.” The statement of the law was quoted with approval by the Privy Council in Beni Ram v. Kundan Lall (1) and in Narayan Das Khettry v. Jatindranath (2). But these decisions are concerned with rights of persons who, not being trespassers, bona fide put up constructions on lands belonging to others, and as to such persons the authorities lay down that the maxim recognised in English law, quicquid plantatur solo, solo cedit has no application, and that they have the right to remove the superstructures, and that the owner of the land should pay compensation if he elects to retain them. That exception does not apply to buildings which are constructed in execution of a works contract, and the law with reference to them is that the title to the same passes to the owner of the land as an accretion thereto. Accordingly, there can be no question of title to the materials passing as movables in favour of the other party to the contract. It may be, as was suggested by Mr. Sastri for the respondents, that when the thing to be produced under the contract is moveable property, then any material incorporated into it might pass as a movable, and in such a case the conclusion that no taxable sale will result from the disintegration of the contract can be rested only on the ground that there was no agreement to sell the materials as such. But we are concerned here with a building contract, and in the case of such a contract, the theory that it can be broken up into its component parts and as regards one of them it can be said that there is a sale must fail both on the grounds that there is no agreement to sell materials as such, and that property in them does not pass as movables. To sum up, the expression ” sale of goods ” in Entry 48 is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. In a building contract which is, as in the present case, one, entire and indivisible and that is its norm, there is no sale of goods, and it is not within the competence of the Provincial Legislature under Entry 48 to , impose a tax on the supply of the materials used in such a contract treating it as a sale.

To avoid misconception, it must be stated that the above conclusion has reference to works contracts, which are entire and indivisible, as the contracts of the respondents have been held by the learned Judges of the Court below to be. The several forms which such kinds of contracts can assume are set out in Hudson on Building Contracts, at p.165. It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such a case, there are really two agreements, though there is a single instrument embodying them, and the power of the State to separate the agreement to sell, from the agreement to do work and render service and to impose a tax thereon cannot be questioned, and will stand untouched by the present judgment.

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