M/S.Harish Chandra Majhi vs State Of Odisha & Others ....... ... on 7 June, 2021

1. Outcome

The writ petition was dismissed, with the Court finding no merit in the petitioner's challenges. The Court upheld the legality of the Office Memorandum dated 10.12.2018 and the Revised Schedule of Rates (SoR)-2014, which govern the transition of works contracts from the VAT to the GST regime.

2. Core Issue

The central issue before the Court was the legality and constitutionality of the methodology adopted by the State of Odisha for calculating payments for works contracts that were tendered in the pre-GST (VAT) era but were executed, wholly or partly, after the implementation of GST on July 1, 2017. The petitioner challenged the transitional mechanism, arguing that it imposed an unfair financial burden.

3. Key Facts

• Petitioner: A registered works contractor who executed contracts for the Odisha government that straddled the pre-GST and post-GST periods.
• Contract Basis: The tenders were invited and estimates prepared based on the Schedule of Rates-2014 (SoR-2014), where rates for materials and labour were inclusive of pre-GST taxes like VAT, Entry Tax, etc.
• GST Transition: Following the implementation of GST, the State government issued a Revised SoR-2014, which made the rates tax-exclusive.
• Impugned Guidelines: The Finance Department issued an Office Memorandum (OM) dated 10.12.2018 detailing the procedure to recalculate the value of the remaining work for transitional contracts. This involved:
  1. Determining the value of the work done post-GST based on the tax-exclusive Revised SoR-2014.
  2. Adjusting this value with the original tender premium/discount.
  3. Adding the applicable GST (e.g., 12%) to arrive at the final payable amount.
• Grievance: This recalculation led to a reduction in the base contract value. In the petitioner's case, it resulted in a determination of excess payment, leading to a demand notice under Section 61 of the OGST Act for recovery.

4. Arguments

• Petitioner's Arguments:

  • The OM and the Revised SoR-2014 are illegal, arbitrary, and unconstitutional as they unilaterally alter contract terms and place an undue financial burden on the contractor.
  • The Revised SoR-2014 was not prepared based on actual market rates prevailing in different areas, contrary to the OPWD Code.
  • The State's OM is inconsistent with the guidelines issued by the central agency (NRIDA).
  • Relying on Gannon Dunkerley, the petitioner argued that tax should only be on the material component, after deducting labour and service charges.

• State's (Respondents') Arguments:

  • Under GST, a 'works contract' is treated as a composite supply of service, taxable at a single rate on the entire value.
  • The revision of SoR-2014 was a necessary step to create a tax-exclusive base value to which GST could be applied, thereby preventing the cascading effect of tax-on-tax.
  • The OM provides a fair and transparent transitional mechanism. It allows for reimbursement to the contractor if the final GST-inclusive value is higher than the original agreement value and provides for recovery if it is lower.
  • The demand notice is not for the GST amount itself but for the recovery of excess payment made to the petitioner based on the original contract value.
  • The legal principles of Gannon Dunkerley have been superseded by subsequent constitutional amendments and Supreme Court judgments like Larsen and Toubro, which have held that the 'dominant nature test' is no longer applicable to composite works contracts.

5. Court’s Reasoning

• Legality of Revised SoR and OM: The Court found the revision of SoR to be a logical and necessary step to migrate from an old tax-inclusive rate structure to a new tax-exclusive one. The OM merely prescribes a procedural calculation for this transition and is not arbitrary.
• Fairness of the Mechanism: The Court noted that the OM provides a balanced approach, allowing for reimbursement to the contractor where the tax burden increases and recovery where it decreases. The recovery sought from the petitioner was for excess payment received, not for the GST liability itself, which the Court found to be legitimate.
• Consistency with Central Guidelines: The Court compared the State's OM with the NRIDA notification and found no significant discrepancies, concluding they operated on a similar rationale.
• Evolution of Law on Works Contract: The Court held that the petitioner's reliance on Gannon Dunkerley was misplaced. Post the 46th Constitutional Amendment and landmark rulings in Larsen and Toubro and Kone Elevator, a works contract is legally treated as a composite supply. The artificial vivisection of the contract into goods and services is no longer the governing principle for taxability.
• Notice under Section 61: The Court refrained from ruling on the merits of the specific demand notice, noting that it was issued under Section 61 of the OGST Act and an appellate remedy is available to the petitioner under the statute.

6. Statutory References

• Constitution of India: Articles 226, 227, 366(29-A)(b).
• CGST Act, 2017: Section 2(119) (Definition of 'Works Contract'), Section 7 (Scope of Supply), Section 17(5)(c) (Blocked ITC), Schedule II (Activities treated as Supply of Goods or Services).
• OGST Act, 2017: Section 61 (Scrutiny of returns).
• Other Acts: Odisha Value Added Tax (OVAT) Act, Finance Act, 1994.

7. Precedents Cited

• M/s. Gannon Dunkerley and Co. v. State of Rajasthan (1993): Distinguished by the Court as the legal position has evolved significantly since this judgment.
• Larsen and Toubro Limited v. State of Karnataka (2014): Relied upon to establish that under the amended constitutional framework, a works contract is a deemed sale, and the 'dominant nature test' is no longer applicable.
• Kone Elevator India Private Limited v. State of Tamil Nadu (2014): Cited to reinforce that for composite works contracts, the service and labour components do not alter the fundamental nature of the contract for taxation purposes.
• Mathuram Agrawal v. State of M.P. (1999): Referenced to affirm that the tax law and the related OM clearly defined the subject of the tax, the person liable, and the rate, thereby satisfying the requirements of a valid tax imposition.