1994 (2) TMI 281 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Imposition of tax on the transfer of property in goods involved in the execution of a works contract.
2. Validity of Section 5(3) of the Rajasthan Sales Tax Act, 1954, and Rule 29(2)(i) of the Rajasthan Sales Tax Rules, 1955.
3. Applicability of other provisions of the Rajasthan Sales Tax Act and Rules after the Supreme Court's decision in Gannon Dunkerley & Co. v. State of Rajasthan.
4. The effect of the Forty-sixth Amendment to the Constitution on sales tax legislation.
5. The role of administrative circulars in the imposition of tax.

Detailed Analysis:

1. Imposition of Tax on Transfer of Property in Goods in Works Contract:
The primary issue was whether the State of Rajasthan could levy sales tax on goods and materials used in the execution of works contracts. The petitioners argued that after the Supreme Court declared Section 5(3) of the RST Act and Rule 29(2)(i) unconstitutional, no tax could be levied. The Revenue contended that other provisions of the Act and Rules still provided a basis for taxation.

2. Validity of Section 5(3) of the RST Act and Rule 29(2)(i) of the Rules:
The Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan declared Section 5(3) of the RST Act and Rule 29(2)(i) of the Rules unconstitutional. The court noted that these provisions allowed for the imposition of tax on the turnover of works contracts, which included sales in the course of inter-State trade, sales outside the State, and sales in the course of import/export, thereby exceeding the legislative competence of the State Legislature.

3. Applicability of Other Provisions of the RST Act and Rules:
The petitioners argued that no tax could be levied after the invalidation of Section 5(3). The Revenue countered that other provisions could still impose tax on the value of goods used in works contracts. The court, however, held that the invalidity of Section 5(3) went to the root of the tax imposition, and in the absence of this provision, tax could not be levied under the existing legal framework. The court emphasized that a charging provision requires strict interpretation and cannot be inferred or expanded beyond its clear terms.

4. Effect of the Forty-sixth Amendment:
The Forty-sixth Amendment to the Constitution allowed States to levy sales tax on the value of goods involved in works contracts by considering such contracts as divisible into one for the sale of goods and another for labor and services. The court acknowledged this amendment but clarified that the State's power to levy tax was still subject to other constitutional provisions and restrictions, including those laid out in the Central Sales Tax Act.

5. Role of Administrative Circulars:
The Commissioner of Commercial Taxes issued a circular directing the levy of tax on "taxable turnover" instead of "turnover." The court held that administrative circulars could not create a charging provision or override the Supreme Court's decision. The court emphasized that tax could not be levied based on an administrative circular in the absence of a statutory provision.

Conclusion:
The Rajasthan High Court concluded that, following the Supreme Court's decision in Gannon Dunkerley & Co., sales tax could not be levied on goods involved in works contracts under the existing provisions of the RST Act and Rules. The court highlighted the need for legislative amendments to align with the Supreme Court's judgment. Consequently, all petitions were allowed, and the parties were left to bear their own costs.