Works Contractors Liable To Pay Purchase Tax On Unregistered Dealer Purchases: Madras High Court

The Madras High Court on 9 July held that works contractors are liable to pay purchase tax on materials purchased from unregistered dealers, even when such materials are used in the execution of works contracts involving deemed sales.

A Division Bench of Justices N. Anand Venkatesh and K.K. Ramakrishnan allowed the revision petitions filed by the State of Tamil Nadu, set aside the orders passed by the appellate authority and the Tamil Nadu Sales Tax Appellate Tribunal, and restored the assessment orders imposing purchase tax and penalty on I. Vetrivel. It held:

“....Section 3-B operates in a different field concerning the taxable turnover arising out of transfer of property involved in execution of works contracts namely construction contract where the purchase of materials like sand etc. was made through “the registered dealer”. On the other hand, Section 7-A specifically deals with purchases effected “from unregistered dealers” who had not suffered tax. Both provisions operate independently in their respective spheres.”

The dispute arose after the assessing authority levied purchase tax under Section 7-A of the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act) and the corresponding provisions of the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act) on I. Vetrivel, a works contractor who had purchased construction materials from unregistered dealers.

The High Court reversed these findings and held that the purpose of purchase tax remained unchanged under both the TNGST Act and the TNVAT Act. It observed that purchase tax is attracted when taxable goods are purchased in circumstances where no tax has been paid and are subsequently consumed in manufacturing, disposed of otherwise than by sale, dispatched outside the State, or used in manufacturing activities.

It rejected the argument raised by the taxpayers that the deemed sale provisions relating to works contracts covered the transactions, and held that Section 3-B and Section 7-A of the TNGST Act operate in different fields.

The Court also held that Section 3-B deals with taxable turnover arising from the transfer of property involved in the execution of works contracts, while Section 7-A specifically applies to purchases made from unregistered dealers where the goods have not suffered tax. It clarified that liability to pay purchase tax under Section 7-A cannot be avoided merely because the transaction also involves a deemed sale under a works contract.

Further, the Bench held that once it is established that construction materials such as sand and bricks were purchased from unregistered dealers, purchase tax becomes payable under Section 7-A. It observed that “purchases made by a works contractor from unregistered dealers are exigible to purchase tax under Section 7-A of the Act.”

It also upheld the levy of penalty, observing that the taxpayers had filed incorrect and incomplete returns, attracting penalty under Section 12(5) of the TNGST Act. It held that the same reasoning would apply to assessments under the TNVAT Act as the relevant provisions are substantially similar.

Accordingly, the High Court allowed the Revenue's revisions, quashed the orders passed by the appellate authority and the Tribunal, and directed the assessing authority to proceed with recovery of tax and penalty in accordance with law.

For Appellant: Mr.R.Suresh Kumar, Additional Government Pleader

For Respondent: Mr.Rajakarthikeyan, Advocate