2006 (10) TMI 377 - HC - VAT and Sales Tax

Works contract - the contractor promises to carry out some obligations like the construction of building, fabrication of machinery etc in consideration of the employer promising to pay a certain amount in cash or in the form of some other valuable consideration.

Issues Involved:

1. Constitutionality of Section 4(7), Explanation VI to Section 2(28) of the Andhra Pradesh Value Added Tax Act, 2005.
2. Constitutionality of Rules 17(1)(a), 17(1)(c), and 17(1)(e) of the Andhra Pradesh Value Added Tax Rules.
3. Legislative competence of the State Legislature under Serial No. 54 of List II of the Seventh Schedule to the Constitution of India.
4. Violation of Articles 14, 19(1)(g), and 265 of the Constitution of India.

Detailed Analysis:

1. Constitutionality of Section 4(7), Explanation VI to Section 2(28) of the Andhra Pradesh Value Added Tax Act, 2005:

The petitioners argued that the provisions in question are repugnant to Article 366(29A)(b) of the Constitution and beyond the legislative competence of the State Legislature under Entry 54 of List II of the Seventh Schedule. The court examined the historical context and legal principles, particularly focusing on the interpretation of "sale of goods" in the context of works contracts. The court referred to the landmark case of State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., which established that the property in goods used in the execution of a works contract passes to the employer by accretion, not by sale. The 46th Amendment to the Constitution, which included Clause (29A) in Article 366, was intended to enable states to tax the transfer of goods involved in the execution of works contracts as deemed sales.

2. Constitutionality of Rules 17(1)(a), 17(1)(c), and 17(1)(e) of the Andhra Pradesh Value Added Tax Rules:

The court scrutinized Rule 17, which outlines the procedure for assessing the tax liability of dealers executing works contracts. It was noted that Rule 17(1)(c) requires sub-contractors to issue tax invoices to contractors, but the rule is silent on whether tax paid by sub-contractors should be credited to contractors. Rule 17(2)(j) exempts sub-contractors from tax liability, making only the main contractor liable. The court found that these rules do not clearly establish the number of taxable events in cases where a works contract is executed by a sub-contractor.

3. Legislative Competence of the State Legislature:

The court analyzed whether the State Legislature has the competence to create two taxable events in the execution of a works contract involving a sub-contractor. It was concluded that the transfer of property in goods involved in the execution of a works contract passes directly from the sub-contractor to the employer, resulting in only one taxable event as per the legal fiction created under Article 366(29A)(b). The court held that the State's understanding of two taxable events lacks legal basis.

4. Violation of Articles 14, 19(1)(g), and 265 of the Constitution of India:

The court found that taxing the same goods twice-once in the hands of the sub-contractor and once in the hands of the main contractor-would be irrational and violative of Article 14, as it creates an unequal burden on contractors who employ sub-contractors compared to those who do not. This double taxation was also found to be inconsistent with the principles of Article 19(1)(g) and Article 265, which mandate that no tax shall be levied or collected except by the authority of law.

Conclusion:

The court did not declare the impugned provisions unconstitutional but clarified that they must be interpreted in light of the judgment. It emphasized that tax can be collected either from the sub-contractor or the contractor, but not from both. The assessment against the petitioner was set aside due to the erroneous understanding of the law, and the respondents were allowed to pass a fresh assessment order in accordance with the judgment.

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