2003 (3) TMI 694 - HC - VAT and Sales Tax

Issues Involved:
1. Constitutional validity of Explanation II to Section 2(14) and Section 2(38)(ii) of the Rajasthan Sales Tax Act, 1994.
2. Whether the Union of India can be subjected to sales tax under the Rajasthan Sales Tax Act, 1994.
3. Interpretation of Article 285 of the Constitution of India concerning the immunity of Union property from State taxation.
4. Legislative competence of the State Government to expand the definition of "sale" in the context of works contracts.

Detailed Analysis:

Issue 1: Constitutional Validity of Explanation II to Section 2(14) and Section 2(38)(ii) of the Rajasthan Sales Tax Act, 1994
The Union of India, through its departments, challenged the constitutional validity of Explanation II added to Section 2(14) and Section 2(38)(ii) of the Rajasthan Sales Tax Act, 1994, arguing that they were hit by Article 285 of the Constitution of India. Explanation II to Section 2(14) deems the Central Government and its departments as "dealers" for the purposes of the Act, while Section 2(38)(ii) expands the definition of "sale" to include the transfer of property in goods involved in the execution of works contracts. The Court upheld the constitutional validity of these provisions, stating that they were not hit by Article 285, as the immunity from State tax does not extend to indirect taxes like sales tax.

Issue 2: Whether the Union of India can be Subjected to Sales Tax under the Rajasthan Sales Tax Act, 1994
The Court examined whether the Union of India could be subjected to sales tax under the Act of 1994. It was argued that the ownership of goods supplied by the Central Government departments for their own work was not transferred to the contractors, and thus, no sale occurred. The Court, however, found that the transactions where the price of goods supplied was deducted from the final bills of contractors amounted to sales, making the departments "dealers" under the Act. The Court relied on precedents, including the Supreme Court's decision in N.M. Goel & Co. v. Sales Tax Officer, which held that such transactions constituted sales.

Issue 3: Interpretation of Article 285 of the Constitution of India
Article 285 exempts Union property from State taxation. The Court analyzed whether this exemption applied to indirect taxes like sales tax. The Court referred to the Supreme Court's decisions in In re Sea Customs Act, 1878, and New Delhi Municipal Committee v. State of Punjab, which clarified that Article 285 provides immunity from direct taxes on property but not from indirect taxes such as sales tax. The Court concluded that the State Legislature could impose sales tax on transactions involving Union property, as the immunity under Article 285 did not extend to such indirect taxes.

Issue 4: Legislative Competence of the State Government to Expand the Definition of "Sale"
The petitioners challenged the expansion of the definition of "sale" under Section 2(38)(ii) of the Act, arguing that it was beyond the State Legislature's competence. The Court rejected this contention, citing the amendment to Article 366 of the Constitution, which includes the transfer of property in goods involved in works contracts within the definition of "sale." The Court held that the State Legislature was competent to levy tax on such transfers under the expanded definition.

Conclusion:
The Court dismissed the petitions, upholding the constitutional validity of Explanation II to Section 2(14) and Section 2(38)(ii) of the Rajasthan Sales Tax Act, 1994. It ruled that the Union of India could be subjected to sales tax under the Act, as the immunity under Article 285 did not extend to indirect taxes like sales tax. The Court also affirmed the State Legislature's competence to expand the definition of "sale" to include transfers of property in goods involved in works contracts. The interim orders were vacated, and the petitions were dismissed.

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