2007 (8) TMI 656 - HC - VAT and Sales Tax

Whether the State has the power to levy taxes on declared goods at a rate higher than three per cent, when there is deemed sale of such goods in the course of execution of works contract? Whether the goods, which are declared to be goods of special importance in inter-State trade or commerce and known as declared goods are, even if used in the execution of works contract, subject to the restrictions or limitations imposed on the legislative power of the State by section 15 of the Act of 1956, so far as, at least, the rate of tax is concerned? Held that - While the State, under the Scheme of the Assam VAT Act, 2003, is competent to levy sales tax on transfer of property in goods involved in the execution of works contract at 12.5 per cent, such transfer of property in goods involved in the execution of works contract will not exceed three per cent if the goods involved in the execution of works contract are declared goods. Thus, the impugned order, dated April 10, 2007 which holds that the tax is imposable at 12.5 per cent on both declared as well as undeclared goods is wholly without jurisdiction and not supported even by the scheme of the Act under consideration. In the result and for the reasons discussed above, these two writ petitions succeed. The impugned order, dated April 10, 2007, is hereby set aside and quashed and it is held that the Assam VAT Act, 2003, does not permit the respondents/authorities concerned to impose tax at 12.5 per cent on transfer of such goods, which have been declared as goods of special importance under section 14 of the Act of 1956, and that on such declared goods, rate of tax cannot exceed three per cent (as amended); whereas transfer of property in goods, which are not declared goods involved in the execution of works contract, would be subject to usual rate of tax of 12.5 per cent.

Issues Involved:

1. Power of the State to levy taxes on declared goods at a rate higher than three percent.
2. Applicability of restrictions under Section 15 of the Central Sales Tax Act, 1956, to declared goods used in works contracts.
3. Historical context and legal interpretations of works contracts pre and post the 46th Amendment of the Constitution.
4. The impact of Article 366(29A) and Article 286 on the State's power to levy taxes.
5. Legislative competence of the State under Entry 54 of the State List.

Issue-wise Detailed Analysis:

1. Power of the State to levy taxes on declared goods at a rate higher than three percent:

The petitioners, engaged in civil construction works, contested the imposition of VAT at 12.5% on declared goods used in works contracts, arguing that the tax rate should not exceed three percent. The court examined whether the State has the power to levy taxes on declared goods at a rate higher than three percent when there is a deemed sale of such goods in the execution of works contracts.

2. Applicability of restrictions under Section 15 of the Central Sales Tax Act, 1956, to declared goods used in works contracts:

The court discussed the historical background of the 46th Amendment, which allowed the imposition of sales tax on works contracts. The court referred to the case law, including the landmark judgment in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., which held that works contracts could not be taxed as sales unless there were separate agreements for materials and services. The 46th Amendment, through Article 366(29A), deemed the transfer of property in goods involved in works contracts as sales, thus enabling taxation.

3. Historical context and legal interpretations of works contracts pre and post the 46th Amendment of the Constitution:

The court traced the legal evolution from the pre-46th Amendment era, where works contracts were considered indivisible and not subject to sales tax, to the post-46th Amendment era, where such contracts were deemed divisible for taxation purposes. The court emphasized that the 46th Amendment aimed to bring previously non-taxable transactions within the State's tax net.

4. The impact of Article 366(29A) and Article 286 on the State's power to levy taxes:

The court highlighted that Article 286 imposes restrictions on the State's power to tax sales or purchases outside the State or in the course of import/export. Article 366(29A) expanded the definition of "tax on the sale or purchase of goods" to include transfers involved in works contracts. The court noted that these provisions, along with Sections 14 and 15 of the Central Sales Tax Act, 1956, restrict the State's power to levy taxes on declared goods.

5. Legislative competence of the State under Entry 54 of the State List:

The court clarified that the State's legislative power under Entry 54 of the State List is subject to limitations imposed by Entry 92A of List I and Article 286. The court reiterated that the State cannot impose taxes on declared goods at rates exceeding those specified in Section 15 of the Central Sales Tax Act, 1956.

Conclusion:

The court concluded that the Assam VAT Act, 2003, does not permit the imposition of a 12.5% tax on declared goods used in works contracts. The impugned order dated April 10, 2007, was set aside and quashed. The court held that the tax rate on declared goods cannot exceed three percent, while undeclared goods involved in works contracts would be subject to the usual rate of 12.5%. The writ petitions were disposed of with no order as to costs.

← Previous Next →