2001 (1) TMI 951 - HC - VAT and Sales Tax

Issues Involved:
1. The vires of item (c) of Explanation 4 of clause (xxi) of section 2 of the Kerala General Sales Tax Act, 1963.
2. The applicability of Article 286 of the Constitution of India and the Central Sales Tax Act to works contracts.
3. The validity of retrospective amendments introduced by Act 11 of 1995.
4. The interpretation and application of Supreme Court decisions on works contracts and inter-State sales.

Summary:

1. Vires of Item (c) of Explanation 4 of Clause (xxi) of Section 2 of the Kerala General Sales Tax Act, 1963:
The original petition challenges the constitutionality of item (c) of Explanation 4 of clause (xxi) of section 2 of the Kerala General Sales Tax Act, 1963. This provision deems the transfer of property in goods involved in the execution of a works contract to have taken place in the State if the goods are within the State at the time of such transfer, irrespective of the place where the agreement of works contract is made.

2. Applicability of Article 286 and Central Sales Tax Act:
The petitioner argues that the goods sold are inter-State sales and hence not liable to be taxed by the State Legislature. The Supreme Court in Builders Association of India v. Union of India [1989] 73 STC 370 held that sales tax laws passed by State Legislatures levying taxes on the transfer of property in goods involved in the execution of a works contract are subject to the restrictions and conditions mentioned in Article 286 of the Constitution and the Central Sales Tax Act.

3. Validity of Retrospective Amendments by Act 11 of 1995:
The amendment introduced by Act 11 of 1995 with retrospective effect from April 1, 1984, defines "sale" to include the transfer of property in goods involved in the execution of a works contract if the goods are within the State at the time of such transfer. The petitioner contends that this explanation is very wide and can rope in any transfer which takes place u/s 3 of the Central Sales Tax Act.

4. Interpretation and Application of Supreme Court Decisions:
The Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204 held that the State Legislature is not competent to impose a tax on deemed sales which constitute a sale in the course of inter-State trade or commerce, or a sale outside the State, or a sale in the course of import or export. The court also held that the provisions of sections 3, 4, 5, and sections 14 and 15 of the Central Sales Tax Act are applicable to a transfer of property in goods involved in the execution of a works contract.

Judgment:
The court held that the definition in Explanation 4(c) takes in even inter-State trade or commerce in the course of export or outside sale and hence, it goes against the decision of the Supreme Court. The court declared that Explanation 4(c) to section 2(xxi) of the Act will not take in sales u/s 3, 4, and 5 of the Central Sales Tax Act. If the assessee can prove on the basis of materials that the property in the goods transferred in accordance with the principles u/s 3, 4, and 5, then the explanation will not apply.

The assessment orders were quashed and the assessing officer was directed to pass fresh assessment orders in accordance with law and the principles stated in this judgment and the Supreme Court's judgment in Gannon Dunkerley & Co. v. State of Rajasthan. Any tax deposited on the basis of the assessment order and interim orders need not be refunded immediately but will be reconsidered after fresh assessment orders are passed. The original petition and the writ appeal were disposed of accordingly.

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