What is ‘works contract’:
Works contract is essentially and inherently a contract of service, irrespective of legal fiction created by Article 366(29A) of Constitution of India – Larsen and Toubro Ltd. v. CST (2015) 318 ELT 633 (CESTAT LB 3 v. 2 decision)
Basically, works contract is a contract for work, where supply of material is incidental to the contract for work.
When you purchase a flat for residential purpose, you proudly inform your relatives and friends that you have purchased a flat. You never say that you have purchased steel, cement, bricks, tiles or bathroom fitting sb(though you become owner of all those goods). This is because your intention was never to purchase those goods as ‘goods’ [‘chattel’ as ‘chattel’].
When you take Xerox copy of your document from the vendor, you do not ‘purchase’ paper. When you take your photograph from photographer, you do not purchase the photographic paper, as that was not intention at all. If you give cloth to the tailor for stitching shirt or pant for you, the tailor uses some of his own material (like buttons, some inner cloth for pockets, thread etc.) while stitching your shirt or pant. Ownership of that material
passes on to you though it cannot be said that your intention was to purchase those buttons, cloth or thread. While repairing a machine, the mechanic may use some parts.
These are examples of ‘works contract’.
Contract of building is one, entire and indivisible. There is no sale of movables (building materials) and hence in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. 9 STC 353 = AIR 1958 SC 560 = 1959 SCR 379, it was held that the contract for building is not a contract for ‘sale of goods’.
In Gannon Dunkerley and Co. v. State of Rajasthan 66 Taxman 229 = 1993 AIR SCW 2621 = (1993) 1 SCC 364 = 88 STC 204 (SC – 5 member Constitution bench), it was held that taxable event in works contract is the transfer of property in goods involved in execution of a works contract.
In works contract, property in goods should pass on the principle of accretion, accession or blending when the works contract is getting executed. If property in goods pass after execution of works contract, it is ‘sale’ and not ‘transfer of property in goods involved in execution of works contract’.
Accretion – movable goods are imbedded in immovable property (e.g. construction contract)
Accession – Movable goods attached to movable property (e.g. spare parts fixed in car or machinery)
Blending – Movable goods mixing with goods of contractee (e.g. printing, dyeing work).
If property in goods pass after execution of works contract, or as ‘goods’ as ‘goods’ (chattel as chattel), it is ‘supply of goods’ and not ‘transfer of property in goods involved in execution of works contract’.