2006 (9) TMI 518 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutional validity of Section 35 and Section 35-A of the Madhya Pradesh Commercial Tax Act, 1994.
2. Interpretation of Section 35 and Section 35-A in light of Supreme Court judgments.
3. Exclusion of sales outside the state, inter-state trade, and export/import from the value of the works contract.

Summary:

1. Constitutional Validity of Section 35 and Section 35-A:
The petitioner challenged the constitutional validity of Sections 35 and 35-A of the Madhya Pradesh Commercial Tax Act, 1994, and Rule 42-A of the M.P. Commercial Tax Rules, 1995. The court referred to the previous judgment in *Punj Lloyd Ltd. v. State of M.P.* [1996] 102 STC 299 (MP), where it was held that Section 35 was a machinery provision and not a substantive provision for the impost. However, subsequent Supreme Court judgments in *Steel Authority of India Ltd. v. State of Orissa* [2000] 118 STC 297 and *Nathpa Jhakri Jt. Venture v. State of Himachal Pradesh* [2000] 118 STC 306 struck down similar provisions in other states' sales tax acts.

2. Interpretation of Section 35 and Section 35-A:
The petitioner argued that Section 35 did not exclude sales outside the state, inter-state trade, and export/import from the value of the works contract, which the state legislature had no power to tax under entry 54 of List II of the Seventh Schedule to the Constitution. The respondent contended that Section 35-A allowed for a certificate to be issued to exclude such sales from the value of the contract for tax deduction purposes. The court noted that Section 35(1) did not provide for such exclusions and mandated a 2% deduction on the value of the works contract, irrespective of the nature of the sales.

3. Exclusion of Sales Outside the State, Inter-State Trade, and Export/Import:
The court observed that Section 35(1) did not exclude sales outside Madhya Pradesh, inter-state trade, or export/import sales from the value of the works contract. This was contrary to Section 79 of the Act, which exempted such sales from taxation. The court cited Supreme Court judgments, including *A. V. Fernandez v. State of Kerala* [1957] 8 STC 561 and *Rapti Commission Agency v. State of U.P.* [2006] 147 STC 566, which emphasized that tax collection on exempt sales with a possible refund later was invalid.

Conclusion:
The court declared that Section 35 of the Act was beyond the competence of the State Legislature and ultra vires the Constitution. Consequently, it was unnecessary to consider the petitioner's other contention regarding the exclusion of labor and other components from the value of the works contract for tax deduction purposes. The matter was directed to be placed before the division bench.