The State of Tamil Nadu v. I.Vetrivel

What happened

The respondent assessee, a civil contractor registered as a dealer under the Tamil Nadu General Sales Tax Act, 1959 and the Tamil Nadu Value Added Tax Act, 2006, purchased sand, jelly and similar materials from unregistered dealers and used them in works contracts. The assessing authority levied purchase tax and penalty under section 7-A of the 1959 Act with section 12(5) and under section 12 of the 2006 Act with section 27(3)(c), and the Appellate Deputy Commissioner and the Tribunal, relying on East Coast Constructions and Industries, a Division Bench decision in (1986) 61 STC 337, held the provision did not apply to goods used in constructing buildings since 'otherwise' qualified sale only. Seven tax revisions were filed by the Government, TCR(MD) Nos. 23 to 28 and 30 of 2024, on the questions whether the contractor was liable and whether Rajapalayam Cotton Pressing Factory applied. The assessee argued before the High Court that, after the 46th Amendment, tax had been paid on the deemed sale under section 3-B so section 7-A was excluded, and that this meant double taxation.

Questions before the court

• Are works contractors liable to purchase tax on sand, bricks and similar material bought from unregistered dealers and used in construction?

Why the court ruled this way

The assessee did not dispute the finding that the goods came from unregistered dealers, and the Court found no perversity in it (paragraph 10). After the Forty-sixth Amendment, works contracts became divisible and Tamil Nadu enacted section 7-A to levy purchase tax; State of Tamil Nadu v. M.K. Kandaswami held section 7-A an independent charging and remedial provision (paragraphs 11.5 to 11.7). The Constitution Bench in Assistant Commissioner (Intelligence) v. Nandanam Construction Co. overruled the view that 'otherwise' qualifies only 'sale', holding that goods used in building construction cease to exist as goods and are taxed on consumption, and the Division Bench in East Coast Constructions could not stand (paragraphs 11.8 to 11.13). Section 3-B operates where the materials are bought through registered dealers and gives a deduction under clause (2)(b) for goods bought from registered dealers, while section 7-A deals with unregistered purchases, so there is no double taxation and no deemed sale arises on such purchases (paragraphs 11.16 to 11.19). The TNVAT provision is similar, and penalty for incorrect returns is justified (paragraphs 11.20 and 11.21).

Controlling point

Purchases by a works contractor from unregistered dealers are liable to purchase tax, and the Tribunal erred in holding otherwise.

Order and next steps

The revisions were allowed, the impugned orders were quashed, the questions of law were answered in favour of the Revenue and the assessing authority was directed to proceed to recover the amounts, with no order as to costs.

Practical implications

Works contractors in Tamil Nadu who source sand, bricks or similar materials from unregistered dealers should expect purchase tax and penalty unless the seller was registered and paid tax.

Limits of this ruling

• The Court decided on the finding that the purchases were from unregistered dealers and the Tamil Nadu provisions; it did not hold that purchases from registered dealers who charged tax attract the levy, and it left quantification to the assessing authority.