Government of Jammu and Kashmir

Department of Commercial Taxes

Excise & Taxation complex

Rail Head Complex, Jammu

The clarification no. 01 of 2014 dated 15-01-2014 issued by this office on an application filed by Garrison Engineer, Leh has been quashed by the Hon'ble High Court of Jammu and Kashmir vide judgment dated 29.05.2015 passed in batch of two writ petitions viz.; (1) OWP No. 419/2014 titled Pardeep Electricals and Builders Pvt. Ltd. and another Vs. State of J&K and others & (2) OWP No.525/2014 titled Pardeep Electricals and Builders Pvt. Ltd. and another Vs. State of J&K and others, and the said judgment dated 29.05.2015 has attained finality after dismissal of SLP filed by the Department before the Hon'ble Supreme Court of India.

So as to effectively comply the judgment dated 29.05.2015 supra and to rationalize the levy and collection of sales tax on services rendered in the shape of works contract more particularly with respect to those contracts which are inclusive of sales tax and which are exclusive of sales tax, there exists an emergent need to issue instructions so that confusion looming large with Assessing Authorities as well as Drawing and Disbursing Officers is set at rest once for all.

Accordingly in exercise of powers vested in me under section 25-A of the J&K General Sales Tax Act, 1962, following instructions are issued for information and further necessary action at the end of Assessing Authorities as well as Drawing & Disbursing officers responsible for deduction of sales tax at source under section 16-C of the J&KGST Act, 1962:-

(a] With regard to the deduction of sales tax at source where contract agreements are inclusive of tax, the same shall be governed strictly as per the provisions of Rule 19(d) of the J&K GST Rules, 1962 and formula provided in the said rule;

[b) Where sales tax component is not included in the contract agreements, sales tax shall be deducted on the gross value of the contract.

The concerned Assessing Authorities as well as Drawing and Disbursing Officers responsible for deduction of sales tax at source are also advised to minutely scrutinize and consider each and every contract/contract agreement so as to ensure that no loss to the State exchequer is caused under any circumstances merely because of language employed/being employed in such contracts/contract agreements.

It shall further be incumbent upon concerned Assessing Authorities to reproduce and indicate the relevant clauses of contract agreements in the assessment orders, determine the same specifically and categorically and return necessary findings while dealing with these two issues so that chances of any wrong interpretation/misinterpretation are obviated.

Further vide clarification no.1 of 2014 dated 15.01.2014, which has been quashed by the Hon'ble High Court, harmonization of clarification no. 06 of 2008 dated 11.02.2008 and clarification no. 16 of 2010 dated 26.03.2010 pertaining to taxability on the indivisible contract of supply installation and commissioning, repairing, fitting out, improvement, was also carried out by placing reliance upon the judgment of Hon'ble Supreme Court of India in case titled State of A.P. Vs. Kone Elevators (India) Ltd. (2005) PHA(SC)(FB). In the clarification no. 01 of 2014 dated 15.1.2014 it was also clarified that contract for supply and installation shall amount to works contract irrespective of the fact whether predominant part is supply or installation in terms of J&K GST Act, 1962 and the whole indivisible transaction/contract has to be subjected to service tax and surcharge if the contract envisages independence of supply and installation for fulfilment of the contractual obligations. After issuance of this clarification no. 01 of 2014 dated 15.1.2014, the Hon'ble Supreme Court of India (Constitutional Bench of 5 Judges) overruled the law laid down in judgement passed in case State of A.P. Vs. Kone Elevators (India) Ltd. (2005), vide judgment dated 06.05.2014 passed in case titled M/s Kone Elevator India Pvt. Ltd. vs. State of Tamil Nadu and others as a result of which the instructions contained in the aforesaid clarification have also become redundant.

The Hon'ble High Court of J&K while quashing the clarification no. 01 of 2014 has also taken into consideration this latest judgment of the Hon'ble Supreme Court of India and returned necessary findings on this count also. The Hon'ble Supreme Court of India (Constitutional Bench of 5 Judges) in judgement dated 06.05.2014 has, inter-alia has held:

"...However, if there are two contracts, namely, purchase of the components of lifts from a dealer, it would be a contract for sale and similarly if separate contract is entered into for installation, that would be a contract for labour and services. But a pregnant one, which is composite contract for supply and installation, has to be treated as a works contract, for it is not a sale of goods/chattel simpliciter. It is not chattel sold as chattel or for the matter, a chattel being attached to another chattel."

In view of aforesaid legal position, the Assessing Authorities concerned are also advised to minutely scrutinize each and every contract to find out the essence of such contracts and decide the cases on merits accordingly.

The instant circular be given wide publicity for information of all the dealers involved in the execution of works contract and the Drawing and Disbursing officers responsible for deduction of sales tax at source from the contractors.

(Hilal Ahmed), IAS

Commissioner Commercial Taxes,

Jammu &Kashmir Government