2011 (3) TMI 1505 - HC - VAT and Sales Tax

Whether the definition of dealer as given in section 2(b) of the TST Act 1976 is unconstitutional? whether the definition of sale as appearing in section 2(g) of the TST Act 1976 does not include thereunder a deemed sale within the meaning of section 3A of the TST Act 1976? Whether that part of the contract which amounts to transfer of property in goods involved in the execution of the works contract is taxable under the relevant statute? Whether definition of sale as contained in section 2(b) of the TST Act 1976 is intra vires? Held that - The definition of dealer as given in section 2(b) of the TST Act 1976 is not unconstitutional. Section 3A cannot be said to be bad in law because of the fact that rate of tax has not been specified in column 3 of the Schedule to the TST Act 1976 in respect of transfer of property in goods involved in the execution of works contract inasmuch as separate entries in the Schedule fixing rates of tax in respect of various goods involved in the execution of works contract is not as a matter of law necessary or imperative and cannot be said to be invalid because it does not specifically allow deductions in respect of labour and other charges which have been held allowable in Gannon Dunkerley s case 1992 (11) TMI 254 - SUPREME COURT OF INDIA . No tax can be assessed and recovered in respect of sale arising out of a works contract by taking recourse to section 3A inasmuch as tax is leviable on turnover but the manner of computation of turnover has not been provided for in the TST Act 1976 in respect of works contract making thereby assessment and computation of tax inapplicable in respect of works contract. The State does not have power to impose tax on deemed sales in respect of sales which take place in the course of inter-State trade or commerce or if the transactions constitutes a sale outside the State or if it is a sale in the course of import of goods into or export of the goods out of the Territory of India. The State Legislature is however not prevented from imposing tax on the goods which are declared to be of special importance in terms of section 14 of the Central Sales Tax Act 1956 and the State s limitation in this regard is only with regard to the rate of tax inasmuch as rate of tax cannot exceed four per cent inasmuch as section 15 of the Central Sales Tax Act 1956 imposes restrictions on the State as regards rate of tax and not in respect of goods which are declared to be of special importance by Central Government by section 14 thereof. The definition of sale as contained in section 2(b) of the TST Act 1976 is intra vires inasmuch as tax is imposed only on a sale which takes place within the State of Tripura. Section 3AA of the TST Act 1976 and rule 3A(1) of the TST Rules are bad in law inasmuch as section 3AA and rule 3A(1) permit deduction at source at a flat rate. Thus the respondents are hereby directed to refund the amounts deducted at source as sales tax from the bills of the petitioner with interest at the rate of six per cent per annum from the date(s) of the deduction(s) made until payment thereof to the petitioner.

Issues Involved:
1. Constitutional validity of section 3A of the Tripura Sales Tax Act, 1976 (TST Act, 1976) and Rule 3A(1) of the Tripura Sales Tax Rules, 1976 (TST Rules).
2. Constitutional validity of the definitions of "dealer," "sale," "sale price," and "turnover" in the TST Act, 1976.
3. Imposition of tax on transfer of property in goods involved in the execution of "works contract."
4. Deduction of tax at source under section 3AA of the TST Act, 1976 and Rule 3A(1) of the TST Rules.
5. Whether the work of digging and development of tube wells is a "works contract" or a service contract.

Detailed Analysis:

1. Constitutional Validity of Section 3A and Rule 3A(1)
The court examined the constitutional validity of section 3A of the TST Act, 1976, which provides for the imposition of tax on the transfer of property in goods involved in the execution of "works contract." The court emphasized that the Constitution is the highest law of the land, and any legislation contrary to it cannot survive. The court noted that invalidating a statute is a serious matter and must be done with great circumspection. The court held that section 3A, which deems the transfer of property in goods involved in the execution of "works contract" as a sale, is not unconstitutional. However, the court found that the TST Act, 1976, does not provide a clear method for computing the "turnover" for "works contracts," making section 3A unworkable for assessing and recovering taxes.

2. Constitutional Validity of Definitions
The petitioner challenged the definitions of "dealer," "sale," "sale price," and "turnover" in the TST Act, 1976. The court held that the definition of "dealer" in section 2(b), which includes persons executing "works contracts," is not unconstitutional. The court also found that the definitions of "sale," "sale price," and "turnover" are intra vires (within the powers) of the Constitution, as they impose tax only on sales that take place within the State of Tripura.

3. Imposition of Tax on "Works Contract"
The court examined whether the imposition of tax under section 3A on the transfer of property in goods involved in the execution of "works contracts" is valid. The court noted that the 46th Amendment to the Constitution allows states to impose tax on the transfer of property in goods involved in the execution of "works contracts." However, the court found that the TST Act, 1976, does not provide a clear method for computing the "turnover" for "works contracts," making it unworkable for assessing and recovering taxes.

4. Deduction of Tax at Source
The petitioner challenged the validity of section 3AA of the TST Act, 1976, and Rule 3A(1) of the TST Rules, which provide for the deduction of tax at source on payments made for the transfer of property in goods involved in the execution of "works contracts." The court held that these provisions are beyond the legislative competence of the State Legislature as they mandate deduction at a flat rate without considering whether the entire "turnover" is exigible to tax. The court found that these provisions do not provide a mechanism for excluding non-taxable transactions from the purview of taxation, making them unconstitutional.

5. Nature of the Contract for Digging and Development of Tube Wells
The court examined whether the contract for digging and development of tube wells is a "works contract" or a service contract. The court found that the contract involved a transfer of property in goods, making it a "works contract" under section 3A of the TST Act, 1976. However, since the court had already held that no tax can be assessed and recovered under section 3A due to the lack of a clear method for computing "turnover," the deduction of tax at source from the payments made to the petitioner was held to be without jurisdiction and illegal.

Conclusion:
1. The definition of "dealer" in section 2(b) of the TST Act, 1976, is not unconstitutional.
2. Section 3A of the TST Act, 1976, is unworkable for assessing and recovering taxes due to the lack of a clear method for computing "turnover."
3. The definitions of "sale," "sale price," and "turnover" in the TST Act, 1976, are intra vires the Constitution.
4. Section 3AA of the TST Act, 1976, and Rule 3A(1) of the TST Rules, providing for the deduction of tax at source, are unconstitutional.
5. The contract for digging and development of tube wells is a "works contract," but no tax can be assessed and recovered under the TST Act, 1976, due to the lack of a clear method for computing "turnover."

The court directed the respondents to refund the amounts deducted at source as sales tax from the bills of the petitioner, with interest, at the rate of six per cent per annum from the date(s) of the deduction(s) made until payment thereof to the petitioner. No order as to costs.

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