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The Indian Hume Pipe Co. Ltd. v. The State of Rajasthan & Ors.

Civil Appeal · 2017 INSC 817Decided 28 Aug 2017
Civil Appeal No. 9879 of 2017
Justice A.K. Sikri · Justice Ashok Bhushan

Background

Indian Hume Pipe Co. Ltd. manufactured and laid pipelines for water-supply schemes for Rajasthan's Public Health and Engineering Department under contracts from 1988-92. Tax authorities treated the contract as a "divisible" works contract and taxed 75% of its value as a sale of goods (the manufactured pipes) under the Rajasthan Sales Tax Act, 1954, denying the company's claim for tax exemption. The company's appeals against this were rejected by the appellate authority, a Single Judge, and a Division Bench of the Rajasthan High Court, prompting several appeals to the Supreme Court across different assessment years.

Decision Breakdown

The Supreme Court held that the works contract in this case was factually divisible: the High Court had found that a substantial, separable part of the contract's value related to the manufactured PSC pipes and fittings, distinct from the labour/service component of laying them. Relying on this factual finding, the Court distinguished the company's reliance on the Constitution Bench ruling in Kone Elevator (which deals with whether a contract is a single composite works contract at all), holding that once a contract is factually shown to be divisible into separate goods and services components, the sale-of-goods portion remains taxable regardless of Kone Elevator's "no weighing of proportions" principle, which applies only to genuinely indivisible composite contracts. Since the company itself had not disputed that the pipe supply constituted a sale, the Court found no fault with the High Court's judgment and dismissed all the appeals with costs.

Lesson Learnt

Whether a works contract is taxed as a single indivisible contract or split into separately taxable "goods" and "services" components turns on the factual terms of the specific contract: a business cannot invoke a general legal principle (like the one in Kone Elevator) to escape tax if the contract's own terms show it was, in substance, divisible into a distinct supply-of-goods part.

Official source (sci.gov.in)View Judgment (PDF)

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