1958 (7) TMI 42 - HC - VAT and Sales Tax

Issues Involved:
1. Legislative competence of the Hyderabad State Legislature.
2. Constitutionality of Rule 5, Sub-rule (3) of the Hyderabad General Sales Tax Rules.
3. Applicability of Clause (iv) of Explanation 1 to Section 2, Clause (m) of the Act.
4. Nature of transactions as sales or works contracts.

Detailed Analysis:

1. Legislative Competence of the Hyderabad State Legislature:
The petitioner challenged Section 2, Clause (m), Explanation 1, Clause (i) of the Hyderabad General Sales Tax Act, 1950, and Rule 5, Sub-rule (3) of the Hyderabad General Sales Tax Rules, 1950, arguing they were ultra vires the legislative competence of the Hyderabad State Legislature. The contention was based on Item No. 54 of List II in the Seventh Schedule to the Constitution, which pertains to "taxes on the sale or purchase of goods other than newspapers." The petitioner argued that its transactions were works contracts, not sales, and thus fell outside the ambit of Item No. 54. The Court rejected this argument, stating, "the essential character of the work done by the petitioner press is the supply of stationery," and concluded that the transactions were sales of goods, not works contracts.

2. Constitutionality of Rule 5, Sub-rule (3) of the Hyderabad General Sales Tax Rules:
The petitioner argued that Rule 5, Sub-rule (3) was ultra vires the Constitution as it was arbitrary and lacked a rational basis. The rule provided for a deduction of 30% towards the cost of labor in contracts other than electrical, structural, or sanitary contracts. The Court found merit in this argument, noting that the percentages were fixed without any rational basis or evidence. The Court stated, "The learned counsel Mr. Joshi appearing for the respondents in this case has not been able to point out to us any rational basis upon which the above-mentioned percentages were fixed." Consequently, the Court held that the rule was arbitrary and unconstitutional.

3. Applicability of Clause (iv) of Explanation 1 to Section 2, Clause (m) of the Act:
The petitioner contended that its case fell within the ambit of Clause (iv) of Explanation 1 to Section 2, Clause (m) of the Act, which pertains to dealers obtaining goods from another dealer and immediately disposing of them to a customer. The Court disagreed, emphasizing the importance of the word "immediately." The Court stated, "Here the press does not immediately dispose of the stationery purchased by it in favour of its constituents. It keeps it in the press. It prints letter-heads etc., upon the stationery and then supplies the finished product to the constituents." Therefore, the Court concluded that Clause (iv) was not applicable.

4. Nature of Transactions as Sales or Works Contracts:
The petitioner argued that the supply of printed material to customers did not amount to a sale of goods but was a works contract. The Court referred to the substance of the contracts, stating, "the substance of the transactions which the petitioner press enters into with its constituents is the production of something to be sold to the constituents." The Court found that the petitioner press purchased stationery, printed on it, and then sold the finished product to its customers. Thus, the transactions were sales of goods, not works contracts.

Conclusion:
The Court concluded that the transactions of the petitioner press were sales of goods and not works contracts. Consequently, Rule 5, Sub-rule (3) of the Hyderabad General Sales Tax Rules was not applicable. Additionally, the rule was found to be arbitrary and unconstitutional. The Court reversed the order of the Sales Tax Tribunal dated 7th September 1956 and restrained the respondents from recovering sales tax from the petitioner press for the year 1951-52. The application was allowed, and the respondents were ordered to bear their own costs and pay the costs of the petitioner.

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