1994 (5) TMI 247 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutionality of the amendments to the Kerala General Sales Tax Act, 1963 and the Kerala General Sales Tax Rules, 1963.
2. Validity of section 5(1)(iv), sub-sections (7), (7A), (7B), (8), (10), (11), and (12) of section 7, and the Fourth Schedule to the Act.
3. Validity of rules 8(4), 22A, and 30A of the Rules.
4. Compliance with Article 366(29A)(b) of the Constitution.
5. Deduction of tax by the awarder under section 7B.
6. Determination of taxable turnover and deductions for labor and service charges.

Issue-wise Detailed Analysis:

1. Constitutionality of the Amendments:
The amendments to the Kerala General Sales Tax Act, 1963 and the Kerala General Sales Tax Rules, 1963, were challenged on the grounds that they were not in accord with Article 366(29A)(b) of the Constitution. The amendments were made to levy tax on works contracts, which were not taxable in the state until April 1, 1984, following the introduction of clause (29A) in Article 366 of the Constitution.

2. Validity of Section 5(1)(iv) and Sub-sections of Section 7:
Sub-sections (7) and (7A) of section 7 provide for payment of tax at compounded rates, with sub-section (7) relating to civil construction works and sub-section (7A) to other types of works contracts. The option to pay tax at compounded rates is voluntary and not mandatory for contractors. Sub-sections (8), (10), (11), and (12) are machinery provisions for implementing sub-sections (7) and (7A). The court upheld the validity of these provisions, stating that the option to pay tax at compounded rates is not unconstitutional since it is exercised voluntarily by the contractors.

3. Validity of Rules 8(4), 22A, and 30A:
Rules 22A and 30A are intended to implement the provisions of section 7. Rule 8(4) prescribes the manner in which the total turnover of a dealer in relation to works contracts is to be determined. The court found that these rules are valid and do not suffer from any constitutional infirmity.

4. Compliance with Article 366(29A)(b) of the Constitution:
The court referred to the decisions of the Supreme Court in Builders Association of India v. Union of India, Gannon Dunkerley & Co. v. State of Rajasthan, and Builders' Association of India v. State of Karnataka to elucidate the principles governing the levy of tax on works contracts. The court held that the provisions of the Kerala Act are in conformity with Article 366(29A)(b) and do not suffer from the same infirmities as the Rajasthan Act.

5. Deduction of Tax by the Awarder under Section 7B:
Section 7B requires the awarder to deduct the tax due from payments made to the contractor and remit it to the government. This provision was challenged as being beyond the competence of the State Legislature. The court upheld the validity of section 7B, stating that it is a machinery provision for the effective enforcement of the levy of tax and does not violate entry 54 of the State List.

6. Determination of Taxable Turnover and Deductions for Labor and Service Charges:
The court held that the taxable turnover for works contracts should be determined by deducting labor and service charges from the value of the contract. The court found that the expression "labor charges" in rule 8(4)(b) is wide enough to include all the items enumerated by the Supreme Court in Gannon Dunkerley. However, the court found that the exclusion of labor charges incurred in relation to the goods involved in the execution of the works contract from deduction is unconstitutional and void. The rule will be read without this exclusion.

Summary of Conclusions:
(a) Section 5(1)(iv)(a), sub-sections (7), (7A), (7B), (8), (10), (11), and (12) of section 7 of the Kerala General Sales Tax Act, 1963, and rules 9, 22A, and 30A of the Kerala General Sales Tax Rules, 1963, are not unconstitutional or void.
(b) The provision in the two provisos to sub-clause (b) of section 5(1)(iv) limiting the applicability to cases where the transfer of goods is effected without any processing or manufacture is unconstitutional and void. The expression "the transfer of which was effected without any processing or manufacture" will be eschewed from the provisos.
(c) The expression "labor charges" in rule 8(4)(b) is wide enough to include all the eight heads of labor and service charges enumerated by the Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan. The limitation in the expression "not incurred in relation to the goods involved in the execution of the works contract" is unconstitutional and void. The rule will be read without this expression.

The original petitions were disposed of in accordance with these principles, and the assessing authorities were directed to complete the assessments in accordance with this judgment.