Levy of tax on materials used in the execution of indivisible Works Contract have often been discussed at various levels, right from the first Supreme Court judgment in the case of M/s Gannon Dunkerley (9 STC 353). The controversy continued till the Constitution was amended in 1982 by Fortysixth Amendment, inserting definition in Article 366(29A), whereby the expression "tax on the sale or purchase of goods" was expanded to include therein as many as six categories, till then known as ‘non sale transactions’. Such a Constitutional amendment led to the State governments amending the local laws. As far as levy of tax was concerned, initially the views of the Department was that the expanded definition gave them an additional power to levy tax on the entire value of the indivisible Works Contract. This controversy again reached the Supreme Court in the case of M/s Builders Association of India (73 STC 370). The Constitution Bench of the Apex Court held such a view to be incorrect. While considering the scope of Constitutional amendment, the Supreme Court held that the amendment did not confer any additional power to the one provided in entry 54 of the State List. It was held in clear terms that the Constitutional amendment empowered the State legislature to levy tax only on the value of the materials utilised in the execution of the contract, by which it could be inferred that the property therein or the title over the goods was transferred from the contractor to the contractee. The Supreme Court also observed that the transfer of property should be in goods and such transfer may be in the same form or in some different form. Considering the background of the law adopted by India from the law that prevailed in Australia and after considering the precedence in that country, the Supreme Court held that the transfer of property contemplated in the Constitutional amendment would be by way of accession or accretion. Any transfer before and after execution of the contract was not taxable.

Without realising the impact of the said judgment, the Karnataka law defined the term ‘Works Contract’ in a very peculiar manner. That definition came up before the Supreme Court in the case of M/s K. Raheja Development Corporation (141 STC 298). The Supreme Court was concerned with the interpretation of the definition of the term ‘Works Contract’, with a limited scope in that the constitutional validity was neither challenged nor dealt with in that case. The State of Maharashtra, without considering its perspective in a right manner, followed Karnataka by amending the definition through Ordinance No. 6 of 2006 on 20th June, 2006 (later converted as Act 32 of 2006). Thereafter, the Commissioner of Sales Tax issued a Circular under No. 12T of 2007 dated 7th February, 2007.

With due respect, the interpretation so circulated is not correct, because the whole base and bottom of the amendment is misplaced. The taxable event under Article 366(29A) is only the levy of tax on the value of goods which are transferred during the execution of the contract. It nowhere enables the levy of tax on an agreement involving the sale of duly constructed premises. Therefore, the Builders Association are justified in their request to the State of Maharashtra for reconsidering the whole levy. We support their efforts in that regard and hope that the State will take corrective steps in the direction of helping the building industry which of late have started blossoming in the city of Mumbai and other important places of the State. The State should also realise that with the larger activities of construction, larger number of citizens will get employment, revenue would also increase through the payments of stamp duty on all agreements involving immovable property. That aspect of the matter have been commented upon by Mr. Patkar in his Editorial for the Issue for the month of February, 2007.

Last but not the least, I would like to thank all the delegates for their overwhelming response for the 7th International RRC at Nepal.

Though the International RRC is fully booked. We are planning to have 2nd batch. For further information please contact our STPAM's office.