2012 (11) TMI 978 - HC - VAT and Sales Tax

Deemed sale Writ Petition - constitutional validity of section 2(24) of the Maharashtra Value Added Tax Act - challenge of the petitioners is that by Amending the provisions of section 2(24) the State Legislature has brought within the ambit and purview of the expression sale , an agreement for the building and construction of immovable property which is not a works contract Held that - The effect of the amendment to section 2(24) is to clarify the legislative intent that a transfer of property in goods involved in the execution of works contract including agreement for building and construction of immovable property would fall within the description of a sale of goods within the meaning of the provision. - In order to meet the description contained in clause (b), State legislation must provide for a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Such a transfer shall be deemed to be a sale by a person making the transfer and a purchase of those goods by the person to whom the transfer is made. The amendment made by the State Legislature does not transgress the limitations which have been imposed by article 366(29A)(b) of the Constitution. The amended definition of the expression sale in clause (b)(ii) of the Explanation to section 2(24) brings, within the ambit of that expression transactions of that nature which are referable to article 366(29A)(b). The transactions which the Legislature had in mind involve works contracts. What the State Legislatures can tax under the expanded definition contained in clause (b) of article 366(29A) must meet the governing requirements of that clause. There must be a transfer of property in goods involved in the execution of a works contract. The relevant clause in section 2(24) is valid because it does not transgress the boundaries set out in article 366(29A). Whether there is a works contract in a given case is for assessing authorities to determine. As noted earlier, it is not possible to provide a comprehensive or all-encompassing list of what contracts constitute works contracts. Section 2(24) properly construed, even after its amendment, reaches out to those cases which-fall within the ambit of article 366(29A). Explanation (b)(ii) to section 2(24) in other words covers those transactions where there is a transfer of property in goods, whether as goods or in any other form, involved in the execution of a works contract. Regarding validity of composition scheme - held that - A composition scheme is made available at the option of the registered dealer. There is no compulsion or obligation upon a registered dealer to settle. The court may in an extreme instance interfere in the exercise of its powers of judicial review only where the terms of a composition scheme are ex facie arbitrary and extraneous so as to be violative of article 14. That has not been established before the court in this case. There is no merit in the challenge to the Constitutional validity of the composition scheme. The definition of the expression works contract in section 2(ja) of the Central Sales Tax Act, 1956, which has been introduced by Act 18 of 2005 with effect from May 13, 2005 is only for the purposes of that Act. The State law in the present case does not infringe the provisions of clauses (a) and (b) of article 286(3), for the aforesaid reason. Constitution validity of levy of levy of VAT on transfer of goods involved in execution of building and construction of immovable property upheld.

Issues Involved:
1. Constitutional validity of section 2(24) of the Maharashtra Value Added Tax Act, 2002.
2. Legislative competence of the State Legislature concerning the amendment.
3. Validity of rule 58(1A) of the Maharashtra Value Added Tax Rules, 2005.
4. Validity of the trade circular dated February 7, 2007.
5. Validity of the notification dated July 9, 2010, regarding the composition scheme.
6. Legitimacy of certain notices issued by the State tax authorities.

Detailed Analysis:

1. Constitutional Validity of Section 2(24) of the Maharashtra Value Added Tax Act, 2002:
The petitioners challenged the constitutional validity of section 2(24) as amended by Maharashtra Act 32 of 2006 and Maharashtra Act 25 of 2007. They argued that the amendments transgress the limitations contained in article 366(29A)(b) of the Constitution. The petitioners contended that the State Legislature sought to impose a tax on transactions that do not involve a sale of goods within the meaning of entry 54 of the State List to the Seventh Schedule to the Constitution, thus overstepping its legislative power under article 246(3). The court held that the amendments to section 2(24) were within the legislative competence of the State Legislature and that the definition of "sale" includes transactions that fall within the ambit of article 366(29A)(b).

2. Legislative Competence of the State Legislature:
The petitioners argued that the State Legislature had no competence to amend section 2(24) to include agreements for the building and construction of immovable property, as these do not constitute works contracts. The court found that works contracts have numerous variations and that it is not possible to restrict the definition to contracts involving only the supply of goods and materials and the supply of labor and services. The court held that the State Legislature acted within its powers under article 366(29A) and entry 54 of List II.

3. Validity of Rule 58(1A) of the Maharashtra Value Added Tax Rules, 2005:
The petitioners challenged the validity of rule 58(1A), which was introduced by a State notification dated June 1, 2009. The rule provides for deductions from the value of the entire contract for the purpose of determining the value of goods involved in the execution of a works contract. The court upheld the validity of rule 58(1A), stating that it provides a convenient mode for determining the value of goods in the execution of works contracts, as permitted by the Supreme Court in Gannon Dunkerley II.

4. Validity of the Trade Circular Dated February 7, 2007:
The petitioners challenged a trade circular issued by the Commissioner of Sales Tax, which purported to clarify the scope of the amendment. The court held that the trade circular was only meant for the guidance of the trade and could not override legislative provisions or subordinate legislation. The circular was found to be clarificatory in nature and did not have any bearing on the constitutional validity of the legislative provisions.

5. Validity of the Notification Dated July 9, 2010:
The petitioners challenged the notification which provided for a composition scheme under section 42(3A) of the Act. The court held that the composition scheme was optional and that there was no compulsion on registered dealers to opt for it. The court found no merit in the challenge to the constitutional validity of the composition scheme, stating that it was not arbitrary or extraneous.

6. Legitimacy of Certain Notices Issued by the State Tax Authorities:
The petitioners questioned the legitimacy of certain notices issued by the State tax authorities. The court held that the notices fell within the purview of sections 64 and 66 of the MVAT Act and were legitimate.

Conclusion:
The court dismissed the petitions, upholding the constitutional validity of section 2(24) of the Maharashtra Value Added Tax Act, 2002, as amended, and rule 58(1A) of the Maharashtra Value Added Tax Rules, 2005. The trade circular dated February 7, 2007, and the notification dated July 9, 2010, were also found to be valid. The court found no merit in the challenges and ruled that the State Legislature acted within its legislative competence.

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