1. Article 366 of the Constitution of India or any other article of the Constitution does not contain the definition of either ‘Supply’ or ‘Works Contract’. However, by virtue of the powers granted by Article 246-A, the Parliament and the State Legislatures, both, have defined ‘Supply’ and ‘Works Contract’ in their respective enactments.
2. We should first understand the development of the concepts of ‘Sale’ and ‘Works Contract’ under the erstwhile repealed laws of Sales Tax and VAT, if we wish to properly understand the concept of Works Contract under the GST Law.
3. The concept of Works Contract was first explained by the Five Judges Bench of the Supreme Court of India in the case of The State of Madras v. The Gannon Dunkerley & Company (Madras) Limited (1958) 9 STC 353. In that case the Court had to deal with an amendment introduced in the Madras General Sales Tax Act (Madras IX of 1939) by the Amendment Act No. XXV of 1947. The Amending Act amended the definition of ‘Goods’ under Section 2(c) of the Act to include therein the material used in the construction, fitting out, improvement or repair of the immovable/ movable property. The definition of Sale under Section 2(h) was also enlarged so as to include the transfer of property in goods involved in the execution of ‘Works Contract.’ A new Clause No. 2 (i) was inserted and it defined the ‘Works Contract’ to mean any agreement for carrying out for cash, deferred payment or other valuable consideration the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property or the fitting out, improvement or repair of any movable property.
4. The assessing officer in view of this amendment levied tax on the material used by the assessee in the building construction. The assessee challenged the amendments so introduced as ultra vires the constitutional mandate. It was their contention that Entry 48 in list II of the Seventh Schedule of the Government of India Act, 1935 which read as ‘Taxes on the Sale of Goods’ should be interpreted as it meant in the Sale of Goods Act, 1930. The Court considered the concept of Sale as the same had developed under the general law and held that the expression ‘Sale of Goods’ in Entry 48 is a nomen juris, it’s 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, one and indivisible and that is it’s norm, there is no sale of goods and it is not within the competence of the Provincial Legislature under Entry 48 to impose tax on the supply of materials used in such a contract treating it as a sale.
5. This judgment related to the works contract in immovable property. Thereafter, the concept of works contract qua the movable property was explained in many judgments of the apex court, the main being The State of Andhra Pradesh v. The Guntur Tobacco Limited (1965) 16 STC 240. The concept was explained in the following words:
‘The fact that in the execution of a contract for work some materials are used and property in the goods so used passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that account to sell the materials. A contract for work in the execution of which goods are used may take one of the three forms. The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for the price; it may be a contract for work in which the use of materials is accessory or incidental to the execution of work or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances: if it is of the first, it is a composite contract for work and sale of goods; where it is of the second category, it is a contract for execution of work not involving sale of goods. —– The question in each case is one about the true agreement between the parties and the terms of the agreement must be deduced from a review of all the attendant circumstances. But one fundamental fact has to be borne in mind that from the mere passing of title to goods either as integral part of or independent of goods it cannot be inferred that the goods were agreed to be sold, and the price was liable to sales tax.’ (Underling supplied).
6. Thus, the Courts thereafter, till Forty Sixth amendment to the Constitution of India, evolved the tests known as ‘dominant nature test’ or ‘degree of intention’ or ‘overwhelming component test’ or ‘degree of labor and service test’ to find out the true agreement between the parties.
7. However, after the introduction of Clause (29A) in Article 366 which is the definition clause in the Constitution of India the above referred tests have become inapplicable. See Larsen & Toubro Limited v. The State of Karnataka (2014) 1 SCC 708. Every composite contract became divisible by the operation of law. See Kone Elevator (India)(P) Ltd; v. State of Tamil Nadu (2014) 7 SCC 1. Entire position has been summarized by the Supreme Court in the case of State of Karnataka v. Pro Lab (2015) 8 SCC 557 in the following words:
‘20. To sum up, it follows from the reading of the aforesaid judgement in Larsen and Toubro case that after insertion of clause (29 – A) in article 366, the works contract which was indivisible one by legal fiction, altered into a contract, which is permitted to be bifurcated into two: one for sale of goods and the other for services, thereby making goods component of the contract exigible to sales tax. Further, while going into this exercise of divisibility, dominant intention behind such a contract, namely, whether it was for ‘sale of goods’ or for services, is rendered otiose or immaterial. It follows, as a sequitur, that by virtue of clause (29 – A) of Article 366, the State Legislature is now empowered to segregate the goods part of the works contract and impose sales tax thereupon. It may be noted that Schedule VII List II Entry 54 to the Constitution of India empowers the State Legislature to enact a law taxing sale of goods. Sales Tax, being subject matter of the State List, the State Legislature has the competency to legislate over the subject.’
8. We have seen hereinabove how the concept of Works Contract got developed in the erstwhile Sales Tax/ VAT laws. Let us now see to what extent the same applies to the GST laws.
9. The definition of Works Contract under Section 2 (119) of the GST laws is substantially the same as it existed in the amended Madras General Sales Tax Act (and later on imported in the Central Sales Tax Act, 1956) which was considered by the Supreme Court of India in the case of Gannon Dunkerley & Company cited supra. However, while construing this definition two riders have to be born in mind :
• Firstly, it operates in the narrow field in the sense that it is restricted to immovable property. Clause (119) of Section 2 defines “works contract’ to mean a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair , maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract. Thus, the definition covers only the contracts pertaining to immovable property. For example, it applies to the repairs of building but does not apply to the repairs of Motor Car.
• Secondly, Clause (29A) of Article 366 of the Constitution of India has no application to the GST laws.
10. In Gannon Dunkerley, the State had derived the power to levy tax form Entry 48 in list II of Seventh Schedule to the Government of India Act,1985 which read as ‘Taxes on sale of goods’. Therefore, the Court held that those words sale of goods should be interpreted to mean sale of movables. As aforesaid, under the GST laws the power to enact laws is not derived under Entry No. 54 of list II of Schedule VII of the Constitution of India. It is derived from Article 246 A. Therefore, the observations of the Court qua sale of goods would not apply.
11. The Court in that case had observed that there can’t be an agreement for one kind of property and sale as regards another. These observations of the Court regarding the transfer of property in very goods will also not apply since the definition of Works Contract under the GST laws incorporates therein the transfer of property in goods whether in the form of goods or in some other form.
12. The Sale of Goods Act, 1930 does not apply to the goods supplied (in any form) under the Works Contract. However, the Indian Contract Act, 1872 does apply to such supply. There can be two different contracts for supply of goods and services, respectively. These two contracts can also be embodied in one document. There can be two separate obligations. For example, there can be an obligation for supply of Equipment or Machinery and in the same document there can be an obligation for commissioning of such Equipment or Machinery. However, if there exist cross fall breach clauses or the clauses such as handing over such Equipment or Machinery after successful commissioning, then the contracts even if those are separate, may turn out to be one turkey contract. In short, whether the contract is the Works Contract or not would depend how the contract is drafted.
13. For the application of the definition of Works Contract, it is necessary that the contracts enumerated therein should relate to immovable property. If the contract is otherwise or if the same results in movables, then it may be a composite supply but not the works contract. The Supreme Court of India in the case of Commissioner of Central Excise, Ahmedabad Vs. Solid and Engineering Works, (2010) 5 SCC 122 has explained in detail the law relating to Immovable property. In that case the asphalt drum/ hot mix plants were claimed to be immovable property. The observations of the Court in that case as regards immovable property are reproduced below for the benefit of the readers:
Page 129-
‘Para 21- the expression ‘movable property’ has been defined in Section 3 (36) of the General Clauses Act, 1897 as under:
“3. (36) ‘movable property’, shall mean property of every description, except immovable property.”
From the above it is manifest that the answer to the question whether the plants in question are movable property, would depend upon whether the same are immovable property. That is because anything that is not immovable property is by this very definition extracted above movable in nature.
Para 22-Section 3 of the Transfer of Property Act, 1882 does not spell out an exhaustive definition of the expression immovable property. It simply provides that unless there is something repugnant in the subject or context, immovable property under the Transfer of Property Act, 1882 does not include standing timber, growing crops or grass. Section 3 (26) of the General Clauses Act, 1897 similarly, does not provide an exhaustive definition of the said expression.
It reads :
“3. (26) immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;”
Para 24-Section 3 (26) of the General Clauses Act includes within the definition of the term” immovable property” things attached to the earth or permanently fastened to anything attached to the earth. The term attached to the earth has not been defined in the General Clauses Act, 1897. Section 3 of the Transfer of Property Act, however gives the following meaning to the expression “attached to the earth”
(a) rooted in the earth, as in the case of trees and shrubs;
(b) imbedded in the earth, as in the case of walls or building; or
(c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.
Para 25-it is evident from the above that the expression ‘attached to the earth’ has three distinct dimensions.… Attachment of the plant in question with the help of nuts and bolts to a foundation not more than one and half feet deep intended to provide stability to the working of the plant and preventing vibration/wobble free operation does not qualify for being described as attached to the earth under any one of the three clauses extracted above. That is because attachment of the plant to the foundation is not comparable or synonymous to trees and shrubs rooted in the earth. It is also not synonymous to imbedding in the earth of the plant as in the case of walls and buildings, for the obvious reason that a building imbedded in the earth is permanent and cannot be detached without demolition. Imbedding of a wall in the earth is also in no way comparable to attachment of a plant to a foundation meant only to provide stability to the plant especially because the attachment is not permanent and what is attached can easily be detached from the foundation. So also the attachment of the plant to the foundation at which it rests does not fall in the third category, for an attachment to fall in that category it must be for permanent beneficial enjoyment of that to which the plant is attached. It is nobody’s case that the attachment of the plant to the foundation is made for permanent beneficial enjoyment of either the foundation or the land in which the same is embedded.’
14. Further, the transfer of property should be involved in the execution of works contract. The author is of the view that if the transfer of property in goods is after the completion of works contract of immovable property then the definition of works contract is not applicable.
15. Section 9 is the charging Section. It empowers the levy and collection of tax on goods or services or both. The parliament was aware of the difficulties it would face in determining the nature of composite supply qua immovable property and prescribing the rates applicable thereto. Therefore, conveniently the same has been classified as Service in Schedule II.
16. The concept of works contracts qua movables which was enunciated by the apex court in Guntur Tobacco cited supra has been attempted to be given a go by in the GST laws. The works contract relating to movables would now either fall under the ‘Composite Supply’ or fall outside it.
17. However, definition of Composite Supply may not cover the work contracts in the following circumstances:
• Supplies of goods and services may not have been rendered by the single taxable person. For example, the goods are supplied by the Delhi Branch, however, the services relating thereto are supplied by the Gurgaon Branch;
• The bunch of goods and/or services are offered but those are unnaturally bundled. The Advance Ruling Authorities have interpreted the meaning of the term ‘naturally bundled’ to mean dependent on each other. The author is of the view that such restrictive meaning can’t be given to this term. It should be interpreted relevant to the facts of each case;
• The goods and services so offered may not be supplied in conjunction with each other. Conjunction means in combination. An act of con joining;
• All the different kinds of supplies in such Composite Supply may be equal and there may not be a Principal Supply.
18. I am aware that the discussion made hereinabove regarding the concept of works contract in GST laws is not exhaustive. It is a vast subject. The law is still developing. I have intentionally not discussed any particular Advance Ruling. Those Rulings are based on the facts involved in those cases and the law as is understood by the bureaucrats.