VIP Road Chartered Accountants Association

The question whether a contract would qualify as a contract of sale or of works has always been a contentious issue. The courts in India have not been able to arrive at a style criterion to answer the above issue. In various judicial pronouncements it has been held that the dividing line between a contract of sale and a contract of works was always very thin and the issue has to be determined based on examination of the facts of each case and manner of execution of such contract.

A works contract is generally a contract where in transfer of property takes place along with labour i.e. transactions involving both transfer of property in goods and labour together are works contract.

Before we technically analyse the definition of works contract it is important to understand the nature of works contract in the light of Judicial pronouncement.

There could be yet another category of transactions that may involve both transfer of property in goods as well as labour or services. Hybrid transactions involving transfer of goods along with labour or services or skill is known as works contract.

Sub clause (a) to (d) of clause (57) specify the following transactions treated as works contract under West Bengal VAT ACT.

Construction, fitting out, improvement or repairs of building road, bridge or other immovable property.
Installation or repair of any Machinery affixed to building or immovable property.

Over hauling or repairs of;

Any Motor vehicles.
Any sea going vessels, river crafts or steamer, other vessels.
Railway Engine.
Aircraft.
Any components or accessory part of any goods mentioned in item I to IV.

Fitting out or assembly or altering, ornamenting, finishing improving, processing, treating or adapting any goods.

Goods must be involved in the execution of the works transfer of property in goods does qualify as works contract when it is incorporated in the works.
Transfer of property in goods must pas as goods or in some other firm. Form of goods has no relevance.
Property in goods must pass during the execution of works not before or after the execution of works.
in the works contract transfer of property must be an integral part of its executions.
Pure labour contracts or services contract are outside the purview of the works contract.
If during the execution of works contract goods are consumed and their identity is lost then no transfer of property occurs in those goods.

Composite contract or individual contract :- A contract that cannot be split in to two parts i.e. Sale and Labour or Services, is known as composite contract. In such type of contract whole contract amount will be considered for works contract.
Divisible Contract :- If a contract in which two agreement has been made i.e. one for sale and other for work or labour is called divisible contract. If a contract comprises separate agreements one for supply of materials and other for works and labour there supply of materials contract will be treated as sale.

As per Clause (55) of Section 2 and Section 14, the turnover in relation to work contract is the aggregate of contractile transfer price paid or payable to a dealer for executions of works contract.

Taxable turnover of work contract as per section 18 can be arrived by deducting the following amount from the value of contractile transfer price.

Contractile transfer of tax free goods.
Charges for labour service and other like charges.
All amount paid to sub contractor for execution of the works contract whether wholly or in part subject to condition that the sub contractor is registered under VAT and such amount is included in his return.

i) As per Section 14(2), every dealer, who is liable on the day immediately before the appointed day to pay tax Under Section 15 of the W.B.S.T. Act 1994 shall be liable to pay VAT on all works contract affected by then on or after 1 st April 2005.

ii) A dealer not covered by above clause but whose contractual transfer price in the VAT exceeds Rs.5,00,000/- on any day, shall be liable to tax with effect from the day when its C.P.T exceeds Rs.500,000/- U/s-14(4).

Any registered dealer who is liable to pay tax for execution of works contract may at his option pay tax at a compounded rats of two per cent of the agreement of the amount received or receivable by such dealer of the year in lieu of the amount of tax payable.

The dealer engaged in execution of works contract shall be en tiled to the composition scheme provided he is not engaged in the following ;

Making sale as referred to in sub Clause (ii) of Clause (g) of Section 2 of C.S.T. Act 1956.
Making sale in the course of import of the goods in to, or export of the goods out of, the territory of India.
Transferring goods otherwise than by way of sale for execution of works contract outside the State.