How to Evaluate Corporate Finance Project

Before Investing in the Company or before evaluating a Financial Project one must do his home Work

Here are the certain questions for which answer must be sought before putting your valuable asset i.e money into any New/ existing brown field project.

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Techniques of Financial Statement Analysis

Business

It is an interrelated system of financial resources movement that is activated by the management decisions.

Management                                                          

It is the art of asking significance questions. The process management is a series of economic choices that activates movement of financial resources connected with business.

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Franchising

Franchising

 A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor 

 Franchisee

   An entrepreneur whose power is limited by a contractual agreement with a franchisor

Franchisor

The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party 

The 20 Fastest-Growing Franchises in 2003

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Measuring Investments (Part-2)

The Working Capital Effect

Ø  Intuitively, money invested in inventory or in accounts receivable cannot be used elsewhere. It, thus, represents a drain on cash flows. To the degree that some of these investments can be financed using suppliers credit (accounts payable) the cash flow drain is reduced. . Investments in working capital are thus cash outflows

1.      Any increase in working capital reduces cash flows in that year

2.      Any decrease in working capital increases cash flows in that year

3.      To provide closure, working capital investments need to be salvaged at the end of the project life

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How can I do business on the web?

How can I do business on the web?

Essentially, doing business on the Web can be broken down into five main requirements.

• On-Line Store

The obvious requirement is an on-line store, or commerce-enabled Web site where goods or services can be described and selected.

• Payment Processing

While it is possible to run an on-line store without accepting on-line payments, this is cumbersome and rarely successful. Accepting on-line payments is therefore essential - and at the moment this means credit cards.

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E-Commerce

What do you mean by E-commerce? E-commerce simply means buying and selling of goods and services across the Internet

Advantages and Disadvantages of E-Commerce 

The major advantage to a customer using this mode of shopping

are:

1.   One can buy/sell items from anywhere using one’s computer provided an internet connection is available.

 2.   The shopping can be done 24 hours a day, 365 days in a year

- an internet based shop never closes!

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Measuring Investments

Measuring Investment – (Returns Measurement)

First Principles

Ø  Invest in projects that yield a return greater than the minimum acceptable hurdle rate.

Ø  The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds (equity) or borrowed money (debt)

Ø  Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects.

Ø  Choose a financing mix that minimizes the hurdle rate and matches the assets being financed.

Ø  If there are not enough investments that earn the hurdle rate, return the cash to stockholders.

Ø  The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics.

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Intellectual Properties

CS S. Dhanapal

Intellectual property(IP) has taken a very important role in the economic world today.  Long gone are the times when brick and mortar were treated as assets of a company. Today, it is the grey matter inside a human brain that is the asset.  Companies are gearing up fast to accommodate the rage that is IP now. 

Every new thing created fell into the public realm without any restriction on its usage. But, with the dawn of new technology and political barriers and competition, inhabitants have started to value their individual creation; such intellectual asset is termed an intellectual property right. Universally known as IPR, the intellectual property rights bear a great impact on the corporate sector and individuals who creates it. Each and every idea or object made is anintellectual property created by an individual for the usage of the people at large. From an interior design of a house, an article written by a scholar or the design of a logo of a company can all come under the purview of intellectual property among other like items.

A company has its task cut out as a commercial enterprise, i.e., to make profits.  Its endeavor is therefore to utilize to the maximum the available resources.  The development of technology especially in media and computers during the second half of the last century has given the impetus for centuries old concept of IP.  A company is no longer looked at as a mere employment tool for its neighborhood, it has acquired global proportions.  Understanding and utilizing IP, as an asset, is critical to a company not only to grow but also to survive.  The truth is evident in even the traditional companies now becoming IP savvy.

Such creations, when they are created into a tangible form and are registered, give them a protection from usurpers. The owner acquires a right to sue such user in the court of law and seek justice. The Intellectual Property Rights Law has also been enacted for better understanding and streamlining the usage of Intellectual Property Rights.

The business environment of today has become very concise and dynamic with the access of Internet. It enables the users to access any information throughout the globe. This has become a serious threat to the valuable asset of intellectual property. The article endeavors to identify these areas and explore further into the changing scene of the intellectual property rights.

A company has to look at the following as their important IP assets:

a. trademark;

b. copyright;

c. patent;

d. industrial designs; and

e. trade secrets.

A glance at each of the following is important as follows:

Of these, trademarks are perhaps the utilized more than the other areas by every company.  A trademark is a perpetual monopolistic right given to a person who uses it with respect to goods or services he provides.  In essence, a trademark identifies the product manufactured by one trader or service provided by one and that of another, thus identifies the source of the product or service to one manufacturer or service provider.  In India, a trademark can be a word, letter, numeral, name, symbol, label, brand, device, signature, shape of goods, packaging, and colour combination.  From a customer point of view, he buys a particular product by a trademark because he is then clear of what he gets.  From a trader’s point of view, it helps him make the promise to the consumer about the quality of his product and build a customer base.  In due course a trademark may become well known.   

Copyright.  A person who owns the copyright has the exclusive right to copy.  In other words, if any other person copies the work, he would be violating the copyright.  Thus, it is a negative right as it does not expect you to use it but protects your right if others mis-use it. In this way, it is different from a trademark which you must use to maintain the monopoly.   A copyright can be available in a literary work like this book, a sound recording, dramatic work, cinematograph film, musical work, artistic work like a painting, computer programme etc., 

Design. A product is sold not only because of its quality but often because of its appearance also.  Such appearance, shape and configuration of a product when it is novel and new is protected as a design.  A design must be exclusively identified by the eye.  It should not be dictated by any convenience in use or based on utility.  For e.g., a mobile phone may have a distinct shape that is new and novel that can be protected.   But if the features are designed to better grip, easy handling of keys etc., it cannot qualify for a design.  Without registration, which is valid for 15 years, a person cannot take any action against the infringement of design.   

A patent is an exclusive right granted for using an invention which is new, novel and is useful. Just like a design, a patent application must be filed before the same is commercially used.  Any patentwhich is a mere improvement or modification of an existing invention will not be granted a patent.  Here again no person can initiate an action for infringement of patent unless he has a registeredpatent. 

Trade secrets are essentially confidential information that are vital for a part of the company’s manufacturing or trading activities. It is by its very nature not registered and kept alive for as long as a company manages to keep it secret. However, presently this area of law is falling out of fashion as companies as content with getting their ideas properly registered and obtain a limited right rather than manage to keep it a secret at a considerable risk.

Though the four branches excluding trade secrets have fundamental differences, the principles underlying all of them are the same. The legislations regarding Intellectual property is ultimately for the benefit for the people, contrary to popular belief.  A person must be rewarded for using his intellectual skill and the society should derive the benefit ultimately.  The protection given also depends on a number of factors, viz., level of skill, use for the public, time for the proprietor to reap his benefits etc., For e.g.,  a patent requires a level of skill and expertise that only a person highly skilled in his job can achieve.  But at the same time, the invention ought to be beneficial to the society also and the owner should not be allowed to monopolise the invention forever. Thus a patentis granted protection for 20 years and thereafter any person is free to use the invention.  In the process, a person’s effort, his INTELLECTUAL PROPERTY, is protected and the society is also benefited.  It thus creates a right environment where a person knows that his invention will be rewarded and encourages him to use his intellectual skills.  Creation of a trademark involves lesser skill than one required for a patentable invention.  But the monopoly granted to a trademark owner is virtually forever subject to the owner renewing his registration every 10 years by paying a required fee.  Though the creation of trademark is not as difficult, the public stands to gain by the continued availability of a product with a brand.  The older the trademark, the more confident the people are when buying the product.  Thus, no useful purpose would be served by curtailing the trademark rights for a limited period.  Therefore, each of the area in the field is given a time limit for its validity.  The ultimate gain must go to the general public for whose benefits these laws – indeed any law is – created.

To use anything one requires knowledge of the same.  An intellectual property is just like any other asset capable of being bought, sold, licensed, leased, mortgaged etc.,  A company has to have a clear and defined IP policy that must be scrupulously adhered to attain maximum utility.

Generally, an IP policy should include identification, registration, utilization or exploitation and protection from misuse.  Some companies by its very nature create rights like a software developing company.  Otherwise, educating the personnel about the importance of IP as an asset and its value to the company is very important in identifying an IP.  Registration requires professional advice.  A lawyer or a company secretary’s advice can be obtained on the registrability of the IP.  Their expertise is also necessary in obtaining search reports, prosecution and renewal of the IP asset.

An intellectual property can be effectively utilized by a company by itself or through others.  There are innumerous examples where a company has licensed its products and earned lakhs.  One can look in the market the products available to see there are number of products that are manufactured/marketed by a licensee using another trademark.  A book or other literary work is usually sold or licensed to the publisher by the author.  A patent can be well utilized by the patentee company itself.  If the patentee is an individual, it can be licensed to a few other companies and royalty obtained which can utilize the short term of the patent to the maximum.  An IP review and audit can be conducted by a company at regular intervals to govern as to how to exploit each IP a company possesses to the best.

Protecting IP is a very important factor in maximizing the returns from the IP portfolio.  Policing misuse of your IP is as important as protecting your house from trespass.  A successful prosecution or litigation is also indicative of the fact that the owner of the IP is serious about it and infringers would be hesitant to venture near it.

There are two types of legal protection available for trademarks. Under the Trade and Merchandise Marks Act, 1999, In case of registered mark, infringement can easily be established. In case of unregistered marks, the only protection is the passing off. Trademark law protects the right of the owner of a mark to use marks that distinguish his goods from others and to prevent others from using marks that are likely to cause confusion.

In order to establish infringement with regard to a registered trademark, it is necessary only to establish that the infringing mark is identical or deceptively similar to the registered mark and no other proof is required. Whereas if passing off action is taken, proving that the marks are identical or deceptively similar alone is not sufficient. The use of the mark should be likely to deceive or cause confusion. For passing off action it is necessary to prove that the use of the trademark by the defendant is likely to cause injury or damage to the plaintiff’s goodwill, whereas in an infringement case, the use of the mark by the defendant need not cause any injury to the plaintiff. However, when a trademark is registered, registration is given only with regard to a particular category of goods. Protection is, therefore, afforded only to these goods. In a passing off action, the defendant’s goods need not be the same; it may be allied or different.

A regular and concentrated effort will be certainly beneficial in keeping your IP portfolio productive.

Identifying a trademark is the first and the foremost task of any company.  While identifying the trademark what one has to keep in mind is that the trademark acts as a source to identify your product.  It would be there as long as you care for it.  So choose it with the same care as is shown to identify a spouse.  The basic principle that is required to be kept in mind is to choose a trademark that is not likely to be utilized by another. This is the fundamental principle of trademark law, NEVER HAVE A DESCRIPTIVE TRADEMARK.  A descriptive trademark for e.g., likeWRITEWELL for pens, pencils cannot be monopolized because they can be legitimately used by others.  What can be used by others cannot become distinctive of your product or service.

A trademark MUST BE DISTINCTIVE.  A product or a service can be described only in a few ways.  So the entire gamut of the language or better still an incomprehensible word can be chosen as a trademark.  By choosing a trademark that is not descriptive you can straightaway eliminate the possibility of infringement to a large extent.  When your trademark is descriptive and the product that bears it is famous, it is inviting trouble.  An infringer will be emboldened to use it because he knows he has a defence and he may even succeed in them.

The only difficulty in having a distinctive trademark is that it becomes difficult to create a brand out of that.  It may take a long time for people to accustomed to the word as a trademark meaning a particular product or that it belongs to a particular source.  But weighing the balances, in the longer run, it is not only sensible but also advantageous to have a distinctive trademark.  IT PAYS TO BE DIFFERENT.

Once the trademark is chosen, it must be used and registered.  The Trademarks Act,1999 does not prohibit from applying for a trademark that is yet to be used, i.e., the trademark can be proposed to be used.  However, if the trademark is not distinctive it may run into problems.  Thus, it is a descriptive trademark, the applicant would be well advised to use the trademark widely and extensively before an application is filed.  In doing so, the applicant would be able to establish that though the trademark is descriptive, it has acquired a “secondary meaning”.  A secondary meaning is that which is acquired by a descriptive trademark by virtue of its long and wide user.  This may give a better chance for the mark to be registered.

Once a trademark is chosen, you have to file a trademark application for registration in the relevant “class”. The trademark registry will scrutinize the application both procedurally and substantially.  The Registrar also searches the Trademarks Registry for previously registered or applied trademark for conflicts.  An “examination report” is issued to the applicant with these conflicting marks and procedural problems which should be replied. A “show cause hearing” can also be sought for by the applicant to overcome the objections by filing relevant evidence.

The trademark will then be “advertised” in the Trademarks Journal, a Govt. of India gazette publication.  A maximum period of 4 months is prescribed for any person seeking to oppose the trademark.  Once opposed, the procedure involves filing of opposition, counter statement, evidences and a personal hearing at the registry.  There is also a provision for Appeal to the IPAB (intellectual property Appellate Board).  Orders of the IPAB can be further contested before the High Court and the Supreme Court.

If there is no opposition or if the opposition is successfully completed in favour of the applicant, the trademark certificate would be issued to the applicant.  A trademark once registered will last forever subject to renewal every 10 years on payment of fees.  A trademark can also be rectified on an application by any “person aggrieved” on the ground of non-use or fraud or lack of bonafide intent to use.  The procedure for rectification before the IPAB is almost the same as that of an opposition.

The registration process consists of the scrutiny of the application by the trademark registry for conflicting marks whether registered or pending.  The applicant is given a chance by a show cause hearing to answer the registry’s objections. The successful application will then proceed to be advertised in the Gazette.  Any person may oppose the trademark within 4 months (three months + one month extension) on the grounds mentioned in the act.  Only if the opposition is successful for the applicant, the trademark will be registered.

A registered trademark must be used; otherwise it runs the risk of being expunged from the register.  If a registered trademark is not used for a period of 5 years from the date of registration, any person interested can file a rectification of the register by expunging the trademark.  The use cannot be sporadic or few and far between.  The use should not be sham use to avoid non-use.  It must be commercial use.

It is well said by experts that, If you have a trademark, use it; if you use a trademark, register it. 

Maintaining records of use of a trademark is of vital importance in protecting the trademark.  Use of a trademark is often sought to be proved by evidence in a proceedings for infringement.  Though this is not required, this would give evidence of the trademark being not only registered but also has commercial goodwill in the market.  That goodwill is often proved by invoices using the trademark, advertising and promotional activities, caution notices etc., by the entity owning the trademark. Other evidence like newspaper /magazine reports, awards and accolades by others are useful evidence in proving reputation to succeed in an action.  Many a case has been lost because the proprietor of the trademark could not give sufficient evidence of use of the trademark.

Prompt and timely action against infringers, opposition in the trademark registry when an identical or similar mark is sought to be registered and regular vigil in the market is a serious deterrent against infringers.

Renewing a trademark once in 10 years is statutory.  However, the entity must review the working of a trademark at least every 3 years to have a clear idea as to its trademark portfolio.  A trademark that is useful must be renewed and that which the entity feels is a liability (a rectification for non-use can be bad publicity for a company) ought to be abandoned.

Valuation of a trademark is a recent phenomenon. Every organisation is keen to know the value of its trademark, as it is part of its goodwill.  It also helps a company know its brand value.  It must be reminded that a trademark is only part of the ‘brand’ which has many other attributes to it.  Valuation is a multi-disciplinary task involving lawyers, accountants, marketing personnel etc.  A properly valued trademark is an important tool especially during mergers or acquisitions.

By identifying, registering, using, maintaining and renewing a trademark portfolio well, an entity will be sure caring for its intellectual property well.

Though registration of a trademark is not mandatory, but it bestows very substantial commercial benefits as follows:

• A trademark registration bestows rights countrywide.
•   A registered trademark will cause an impediment to any subsequent application by any other person to register the same or a similar trademark.
•  The Trade Marks Act bestows legally enforceable powers upon a registered trade mark that provide less expensive protection to enforce rights in a registered trade mark than in one that is not registered.  Privileges in an unregistered trademark only arise where a substantial standing /usage has been developed in the relevant trademark. To enforce these privileges, you must substantiate one’s standing /usage towards trademark, a very time-consuming and expensive task.
•   It is easier to prove infringement which is also very wide compared to proof of ownership and reputation in an unregistered trademark.
•   A registered proprietor of the trademark can file a suit for infringement at the place where he resides whereas a suit for unregistered trademark can be filed only where the infringer resides.

CONCLUSION

Therefore, it can be concluded that registering INTELLECTUAL PROPERTIES will be a strong protection and a value addition to the corporate sector.  It is as much an asset as any other property.  Always we have to remember as said earlier, IF YOU HAVE A TRADEMARK, REGISTER IT and IF YOU HAVE REGISTERED A TRADEMARK then USE IT.

Written by S.Dhanapal, Senior Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries, Chennai.

Summary of Copyright Act, 1957

Copyright deals with the rights of intellectual creators in their creation. The copyright law deals with the particular forms of creativity, concerned primarily with mass communication.

The Copyright Act, 1957 protects original literary, dramatic, musical and artistic works and cinematograph films and sound recordings from unauthorized uses. There is no copyright protection for ideas, procedures, methods of operation or mathematical concepts as such.

Why Copyright??

Copyright ensures certain minimum safeguards of the rights of authors over their creations, thereby protecting and rewarding creativity. Creativity being the keystone of progress, no civilized society can afford to ignore the basic requirements of encouraging the same.

Meaning of Copyright:

Section 14 of the act defines copyright as:

1. In case of literary, dramatic or musical work:

a)       Reproducing the work in any material form which includes storing of it in any medium byelectronic means,

b)       Issuing copies of the work to the public which are not already in circulation,

c)       Performing the work in public or communicating it to the public,

d)       Making any cinematograph film or sound recording in the respect of work,

e)       Making any translation or adaptation of the work.

2. In case of a computer programme:

a)       To do any of the acts specified in respect of a literary, dramatic or musical works,

b)       To sell or give on commercial rental or offer for sale or for commercial rental any copy of thecomputer programme.

3. In the case of artistic works:

a)       To reproduce the work in any material from including storing of it in any medium by electronicor other means, depiction in three dimensions of a two dimensional work and depiction in two dimensions of a three dimensional work,

b)       Communicating the work to the public,

c)       Issuing copies of work to the public which are not already in existence,

d)       Including work in any cinematograph films,

e)       Making adaptation of the work, and to do any of the above acts in relation to an adaptation of the work.

4. In the case of cinematograph film:

a)       To make a copy of the film, including photograph of any image forming part thereof or storing of it in any medium by electronic means or otherwise.

b)       To sell or give on commercial rental or offer for sale or for such rental, any copy of the film,

c)       To communicate the film to the public.

5. In the case of sound recording:

a)       To make any other sound recording embodying it “including storing of it in any medium byelectronic or other means,

b)       To sell or give on commercial rental or offer for sale or for such rental, any copy of the sound recording,

c)       To communicate the sound recording to the public.

Who is a Author:

Works	Author
Literary or dramatic work	Creator of work
Musical Work	Composer
Cinematograph Film	Producer
Sound Recording	Producer
Photograph	Photographer
Computer Generated Work	Person who causes the work to be created

 Term of Copyright:

Literary, dramatic, musical or artistic works enjoy protection for the life time of the author plus 60 years beyond i.e. 60 years after his death. In case of joint authorship which implies collaboration of two or more authors in the production of work, the term of copyright is to be construed as a reference to the author who dies at last.

In case of copyright of posthumous, anonymous and pseudonymous works, cinematograph films,sound recordings, works of Government, public undertakings and international organization, the term of protection is 60 years from the beginning of the calendar year next following the year in the work has been first published.

The act has given broadcasting reproduction right to every broadcaster which is valid for 25 years from the beginning of the calendar year next following the year in the broadcast has been done.

Copyright Board:

Section 11 of the act provides for the establishment of the Copyright Board and empowers Central Government to constitute the same consisting of Chairman and 2 other members. It has many important functions, such as:

1. Settlement of disputes,
2. Grating of licenses, etc

Copyright Licenses:

Chapter VI containing Sections 30-32B deals with Licenses.

I. Licenses by Owners of Copyright: Section 30 of the act empowers the owner of the copyright in any existing work or the prospective owner of the copyright in any future work to grant any interest in the right by license in writing by him or by his duly authorized agent. However, in the case of a license relating to copyright in any future work, the license shall take effect only when the work comes into existence.

II. Compulsory License withheld from public: Section 31 provides that of at any time during the term of copyright in any Indian work which has been published or performed in public, a complaint is made top the Copyright Board that the owner of copyright in the work has refused to republish or allow the reproduction of the work or has refused to allow the performance in public of the work and by reason of such refusal the work is withheld from the public or has refused to allow communication to the public by broadcast of such work or recording, on terms which the complainant considers reasonable, the Copyright Board, after giving to the owner of the copyright in the work a reasonable opportunity of being heard and after holding such inquiry as it may deem necessary, may, if it is satisfied that the grounds for such refusal are not reasonable, direct the Registrar of Copyright to grant to the complainant the license to republish the work.

III. Statutory License for broadcasting of literary and musical work and sound recording: Section 31D provides that any broadcasting organization desirous of communicating to the public by way of a broadcast or by way of performance of a literary or musical work and sound recordingwhich has already been published may do so subject to the fulfillment of prescribed conditions.

IV. Termination of License: Section 32B of the act deals with termination of licenses and provides that if any time after the granting of a license, the owner of the copyright in the work or any person authorized by him publishes a translation of such work in the same language and which is substantially the same in content at a price reasonably related to the price normally charged in India for the translation of works of the same standard on the same or similar subject, the license so granted shall be terminated.

V. Other Licenses can be by way of License in unpublished or published works, benefit of disabled, etc

Author: Sagar Gupta, Email: casgrgupta@gmail.com

RBI allows FDI in LLPs

RBI allows FDI in LLPs via capital contribution or transfer of share of profit; notifies form to report FDI

VIDE NOTIFICATION [NO.FEMA.298/2014-RB]/GSR 190(E), DATED 13-3-2014

Source: Taxmann

Work contract tax

Work contract tax

Goods involved in works contract’ have been included in definition of ‘sale’ w.e.f. 11-5-2002. Note that the CST is on ‘goods involved in works contract’ and not on ‘works contract’ as such. This distinction is vital in deciding aspects of valuation and also whether a particular transaction is inter state sale.What is works contract - Some contracts are for contracts for labour, work or service and not for sale of goods, though goods are used in executing the contract for labour, work or service e.g. when a contractor constructs a building, the buyer pays for cost of building which includes cost of building material, labour and other services offered by the Contractor. Property in building is passed on to buyer and there is no contract for supply of building material as such. An air conditioner manufacturer may undertake a ‘works contract’ for designing, fitting and commissioning of air conditioning equipment. This is contract for sale of labour and material and not contract of sale. Property in air conditioning equipment passes as an incidental to the works contract. Here, there is no sale of ‘goods’. It is a ‘works contract’ and not liable to CST. – State of Madras v. Voltas Ltd. (1963) 14 STC 446 and 861 (Mad HC) – also indirectly approved in Batliboi v. STO (2000) 119 STC 583 (Guj HC DB).Laying of pipe line is yet another example of works contract, where passing of property in the pipe is incidental to works contract.It is difficult to establish whether a particular contract is ‘contract for work’ or ‘contract of sale’ and rigid and inflexible fast tests cannot be laid down. It depends on main object of the parties, circumstances and custom of trade. Generally, a contract of sale is a contract whose main object is the transfer of the property in, and delivery and possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for labour and work. The aspects like ownership of material, value of skill and labour compared to value of material can be considered, but these are not conclusive. - Halsbury’s Laws of England - quoted with approval in State of Gujarat v. Variety Body Builders - AIR 1976 SC 2108 = (1976) 38 STC 176 (SC). – same view in State of Himachal Pradesh v. Associated Hotels - (1972) 29 STC 474 (SC) = AIR 1972 SC 1131 = 1972(2) SCR 937 = (1972) 1 SCC 472In Vanguard Rolling Shutters v. CST - (1977) 39 STC 372 (SC) = AIR 1977 SC 1505, it was observed that it is difficult to lay down any rule of universal application to decide whether a contract is a works contract or contract for sale of goods. If the contract is primarily for supply of materials at prices agreed and the work or service is incidental to the execution of contract, it will be contract for sale. On the other hand, where contract is primarily a contract of work and labour and materials are supplied in execution of such contract, it is a works contract.In Hindustan Aeronautics Ltd. v. State of Orissa (1984) 55 STC 327 (SC) = (1984) 1 SCC 706 = 1983(2) SCALE 1090 = AIR 1984 SC 744 (SC 3 members), HAL imported materials and components on behalf of Government of India and manufactured aircrafts on behalf of Government of India. The goods belonged to Government of India but were entrusted to HAL for manufacture of aircraft to be delivered to Air Force. It was held that it is a works contract. It was observed that in contract for work, person producing has no 'property' in the thing produced as a whole, even if part or even whole of material used by him may have been his property. In contract of sale, the thing produced as a whole has individual existence as sole property of the party who produces it some time before delivery and the property therein passes only under the contract relating thereto to the other party for a price. In State of Gujarat v. Kailash Engineering Co. (1967) 19 STC 13 (SC) = AIR 1976 SC 2108, it was held that if unfinished goods are held as property of buyer, it is a works contract. In UOI v. Central India Machinery Mfg Co. Ltd. (CIMMCO) AIR 1977 SC 1537 = (1977) 40 STC 246 (SC), it was held that if property in final article passes only after it is completed, the contract will be of sale, even if raw material is purchased on behalf of buyer.In State of Tamilnadu v. Anandam Viswanathan – (1989) 1 SCC 613 = (1989) 73 STC 1 (SC), it was observed that nature of contract can be found out only when intentions of parties are found out. The fact that in the execution of works contract some materials are used, and the property in the goods so used, passes to other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the materials. - - Primary difference between a contract of work or service and a contract for sale is that in the former, there is in the person performing or rendering service, no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. Where the finished product supplied to a particular customer is not a commercial commodity in the sense that it cannot be sold in the market to any other person, the transaction is only a works contract.In Hindustan Shipyard Ltd. v. State of Andhra Pradesh 2000 AIR SCW 2582 =(2000) 6 SCC 579 = 119 STC 533 = 2000(5) SCALE 216, after reviewing entire case law, following principles were evolved - (1) It is difficult to lay down any inflexible rule (2) Transfer of property of goods for a price is the linchpin of definition of sale. Main object of parties has to be found out. Substance of the contract and not form is to be looked into. (3) If the thing to be delivered has individual existence before the delivery as sole property of the party who is to deliver it, it is a sale. (4) If bulk of material used belongs to the manufacturer who sells the end product, it is strong pointer that the contract is for sale of goods and not of work and labour. However, the test is not decisive. Relative importance of material qua work is important. Supreme Court in a very old case - State of Madras v. Gannon Dunkerley & Co. - AIR 1958 SC 560 = 1959 SCR 379 = (1958) 9 STC 353 (SC), had held that no tax can be levied on works contract, as tax can be levied only on ‘sale of goods’ as defined in Sale of Goods Act. In an indivisible works contract, there is no sale of goods as there could be no agreement to sell materials as such and moreover, the property does not pass as movables. The material used therein becomes property of the other party on the theory of accretion and, as such, no sales tax can be levied on such material.‘Works Contract’ was one of the ways of avoiding sales tax. Hence, Constitution was amended on 2nd February, 1983 (46th amendment). Clause 29A was added to Article 366 to cover ‘transfer of property in goods involved in execution of works contract’. Subsequently, most of States have amended their sales tax laws to cover ‘works contract’, but Central Sales Tax Act was not amended till May 2002. Thus, till 11-5-2002, CST was not leviable on indivisible works contracts.In Builders' Association of India v. UOI - (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = (1989) 1 SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 (SC 5 member constitution bench), it has been observed : ‘After the 46th amendment, the works contract which was indivisible one, is by a legal fiction altered into one for sale of goods and the other for supply of labour and services. After 46th amendment, it has become possible for States to levy tax on value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of goods and materials supplied in a building contract which had been entered into two distinct and separate parts.’In Associated Cement Companies Ltd. v. CC 2001(1) SCALE 436 = (2001) 4 SCC 593 = 124 STC 59 = AIR 2001 SC 862 = 2001 AIR SCW 559 (SC 3 member bench), it was held that even if the dominant intention of the contract is rendering of service which will amount to a works contract, after forty-sixth amendment to Constitution, the State would now be empowered to levy sales tax on material used in such contract.Contract of skill & labour - Some contracts are essentially contracts of skill & labour e.g. tailoring work, printing or cyclostyling etc. These jobs are not covered under 'works contract'. - - A contract to paint a portrait is a contract for skill and labour and not a contract for sale of goods, as substance of contract is for artist’s skill and it is only ancillary to that there would pass to the customer some materials like paint and canvas. – Robinson v. Graves (1935) 1 KB 579. However, in Lee v. Griffn (1861) 30 LJ QB 252, when a dentist agreed to make set of false teeth for a lady and to fit them into mouth, it was held a contract for sale of goods [There can be two views on the issue].Mere supply of labour not covered – Taxable event is transfer of property in goods. In case of contract for supply of labour, there is no transfer of property in goods and hence there is no tax liability. – Ashok Kumar Garg v. UOI (2002) 128 STC 442 (P&H HC DB) * Rajiv Gumber v. S. (2002) 128 STC 494 (P&H HC DB). Contractor need not be owner if he sales flat before construction – The contractor need not be owner of property. He will be liable even if he never had absolute ownership of the flat. – Mittal Investment Corporation v. ACCT (2001) 121 STC 3 (Karn HC DB). The judgment was modified in Mittal Investment Corporation v. ACCT (2001) 121 STC 14 (Karn HC DB) to the extent that it was held that the contractor is not liable if he enters into agreement with buyer after construction of flat, but will be liable if he enters into contract before construction of flat. [Decision as per Karnataka Sales Tax Act, but principle may apply in other cases also.]Value liable for Works Contract Tax – Some important case law is discussed here.Builders Association of India v. UOI - This is a landmark judgment of Supreme Court on ‘works contract’. (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = 1989(1) SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 ( 5 member Constitution bench). The background of this case is that after amendment to Constitution in 1983, various State Governments imposed levy on works contract. The tax was levied by some State Governments on full value of contract which included the material cost and other costs like labour, supply of services etc. However, in the judgment, Hon. Supreme Court held that the power of States to levy tax on works contract is subject to limitation of Article 286 i.e. tax cannot be levied by State on (a) Outside the State (b) during import/export. (c) Restrictions placed on ‘declared goods’ are applicable even while levying tax on works contract. Further, tax cannot be imposed on full value of contract. The tax is on ‘transfer of property in goods involved in execution of works contract.’ Thus, tax on works contract can be levied only on ‘value of goods involved’ and not on whole value of works contract.Gannon Dunkerley and Co. v. State of Rajasthan - This is also an important judgment on ‘Works Contract' (1993) 66 Taxman 229 = (1993) 10 CLA 56 (SC) = 1992 (3) SCALE 173 = 1993 AIR SCW 2621 = (1993) 1 SCC 364 = (1993) 88 STC 204 (SC - 5 member bench judgment)]. Here, it was held that taxable event is the transfer of property in the goods involved in the execution of a works contract. The said transfer of property takes place when goods are incorporated in the works. Hence, value of goods at the time of incorporation in the works can constitute measure for levy of tax. However, cost of incorporation of the goods in works contract cannot be made part of measure for the levy of tax. It was held that value of goods involved in works contract would have to be considered for taxation on works contract. Charges for labour and services have to be deducted from total value of works contract. Moreover, tax cannot be levied on goods which are not taxable under sections 3, 4 and 5 of CST and goods covered under sections 14 and 15 of CST. If contractor is not able to give detailed break up, legislature can prescribe scales for deductions permissible on account of cost of labour and services for various types of works contract. It is permissible to have a uniform rate for works contract. This rate may be different from the rates applicable to individual goods. The judgment in this case was subsequently followed in Builders’ Association of India v. State of Karnataka - (1993) 88 STC 248 = AIR 1993 SC 991 = (1993) 1 SCC 409 = 1993 AIR SCW 152 (SC - 5 member bench).In Daelim Industrial Co. v. State of Assam (2003) 130) STC 53 (Gau HC), it was held that in case of works contract, tax is payable only of value of goods and not on cost of design and engineering.State of Kerala v. Builders Association - In State of Kerala v. Builders Association of India - 1996 (8) SCALE 730 = (1997) 104 STC 134 = (1997) 2 SCC 183 = AIR 1997 SC 3640 = 1997 AIR SCW 977 (SC), the position was that a convenient, hassle-free and simple method, which was 'rough and ready method' was evolved by State Government for collection of sales tax on Works Contract. This was optional to assessee. It was held that legislature can evolve such alternate, simplified and hassle-free methods of assessment, making it optional to assessee. - . - In the field of taxation, legislation must be allowed greater 'play in joints'. Allowance must be made for 'trial and error' by the legislature. - - In Mycon Construction v. State of Karnataka 2002 AIR SCW 2156 = 127 STC 105 (SC), it was held that a simplified composition scheme instead of regular assessment, can be evolved, if it is on optional basis. Validity of such provision has been upheld.Other judgments - In Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC), it was observed that State Legislature can tax all the goods involved in works contract at a uniform rate which may be different from the rates applicable to individual goods which are involved in execution of works contract.Government can make a provision allowing contractors option to opt for composition by paying a sum based on total consideration of contract. - Mytcon Construction v. State of Karnataka (1998) 111 STC 322 (Karn HC).Royalty payable can be included for purpose of works contract tax – If contractor has to pay royalty and property gets transferred to him, it can be included for purpose of works contract tax. – Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC) – followed in B Seenaiah v. CTO (2001) 124 STC 248 (AP HC DB). However, in ACTO v. R K Constructions (2001) 124 STC 701 (Raj HC), it was held that if material is supplied by Government to contractor for use in Government contract, there is no ‘transfer of property in goods’ to contractor and no sales tax is leviable, even if Government had collected royalty. Sale price for purpose of CST – So far, no specific provision has been made in CST and hence ‘sale price’ will have to be determined on basis of definition of ‘sale price’ as contained in section 2(h) of CST Act. As per this definition, freight or delivery or the cost of installation is not includible when separately charged. Thus, value of goods involved will have to be calculated excluding these charges.‘C’ form can be supplied/ received for purchases / sales for works contract - Many High Courts have held that ‘C’ form can be issued for purchase of goods which are used in works contract. The dealer is entitled to registration and he can receive sales tax forms in respect of his sales. See the discussions under ‘C Form’ in a later chapter. These judgments pertain to period prior to 11-5-2002.After amendment of definition of ‘sale’ w.e.f. 11-5-2002, now C form can certainly be issued as ‘works contract’ has been specifically included in definition of ‘sale’.CST on works contract - Central Sales Tax will be payable on goods involved in works contract, if goods move from one State to another on account of such works contract from 11th May 2002 onwards. Works contract of movable property - There can certainly be inter State works contract in case of movable property e.g. printing contracts. In fact, Central sales tax can be levied on any goods involved in works contract in case of movable property.Works contract in case of immovable property - One interesting question that is likely to arise is whether there can be ‘goods involved in works contract’ if finally the article becomes immovable property in other State. For example, if a dealer undertakes supply and erection of machinery in other State, whether it will be a ‘inter State works contract’. In the opinion of author, it will be held so, as the movement of goods from one State to another certainly occasions on account of the works contract. - - It must be remembered that in case of works contract, the sales tax is on ‘goods involved in the execution of contract’ whether the property passes as goods or in some other form. There is no CST on ‘works contract’ as such. Thus, CST on works contract is really only on goods involved, which certainly move from one State to another.It may be noted that a ‘sale’ can be inter-State even if property in goods is transferred in other State.