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TMI Blog1994 (2) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of tax as provided in rule 46(2) of the Rules. As the matter goes to the root of the imposition of tax and is of general importance, notices were given to the respondents. Mr. G.S. Bapna, Advocate, accepted notices on behalf of the Commercial Taxes Department. He argued the matter without filing any return as pure questions of law are involved for decision. 2.. The petitioners are contractors engaged in the work of construction. It was urged on behalf of the petitioners that section 5(3) of the RST Act was the only charging provision for levy of tax on works contracts and once the said provision is declared unconstitutional and void, the basis to levy/charge tax on works contracts in respect of goods and materials used in their execution, no more exists and, as such, no tax can be imposed. Learned counsel contended that no tax can be levied and charged from a dealer or a contractor unless the charging provision clearly imposes an obligation. In other words, the argument is that if the case does not fall within the four corners of the provision of a taxing statute, no tax can be imposed by inference and the operation of the existing provisions cannot be enlarged so as to em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Amendment Act of 1947 were ultra vires the power of the Provincial Legislature. The same view was taken by the Hyderabad High Court in Jubilee Engineering Co. Ltd. v. Sales Tax Officer [1956] 7 STC 423; AIR 1956 Hyd 79. The Kerala High Court in Gannon Dunkerley and Co. Madras (Private) Ltd. v. Sales Tax Officer [1957] 8 STC 347; AIR 1957 Ker 146 and the Mysore High Court in Mohamed Khasim v. State of Mysore [1955] 6 STC 211 took a contrary view and held that the provisions of the Act imposing a tax on construction of work are valid, and further upheld the determination of the value of the materials on a percentage basis under the Rules. In Pandit Banarsi Das v. State of Madhya Pradesh [1955] 6 STC 93, a Bench of the Nagpur High Court held, differing from the view taken by the Madras High Court, that the provisions of the Act imposing a tax on the value of the materials used in a construction on the footing of a sale thereof were valid, but that they were bad insofar as they enacted an artificial rule for determination of that value by deducting out of the total receipts a fixed percentage on account of labour charges, inasmuch as the tax might, according to that computation, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt received under a works contract, even though, the contractor had supplied goods for construction of the buildings. This decision was equally applicable to the provisions found in entry 54, List II of the Seventh Schedule to the Constitution. 6.. After the decision in Gannon Dunkerley's case [1958] 9 STC 353 (SC); AIR 1958 SC 560, the Law Commission examined the matter with regard to taxability of goods involved in the execution of works contracts. In its sixtyfirst report, the Commission considered the legal position and expressed the desirability of inserting in article 366 of the Constitution, a wide definition of "sale" so as to include works contracts. Consequently, the Constitution was amended by Forty-sixth Amendment and clause (29-A) was inserted in article 366 and clause (3) of article 286 was substituted. There were other amendments also, but they are not relevant for the present petitions. Clause (29-A) of article 366 is in the following terms: "(29-A) 'tax on the sale or purchase of goods' includes- (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (b) a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the States to levy sales tax on the materials used in a works contract is subject to other provisions of the Constitution and the Parliamentary legislation made in pursuance of articles 269(3) and 268(2), i.e., the Central Sales Tax Act. In view of these provisions, the State Legislature is not competent to levy the tax on the following sales or purchases: "(i) Where sale or purchase takes place in the course of inter-State trade or commerce, such a sale is beyond the legislative competence of the State Legislature for purposes of levy of sales tax [see article 269(3)]. Entry 54 of List II is subject to entry 92-A of List I. Entry 92-A of List I gives exclusive power to the Parliament to levy tax on the sales taking place in the course of inter-State trade or commerce. (ii) Where the sales take place outside the State vide article 286(1)(a) of the Constitution. (iii) Where sales take place in the course of import into or export from the country [vide article 286(1)(b)]. (iv) Such other limits, if any, as the Parliament may impose in respect of: (a) Sale of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; (b) Sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (iii) to (vi).............. Explanation I.-The transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to take place within the State of Rajasthan if the goods are within the State at the time of their appropriation or application or use for the execution of the works contract irrespective of the place where the agreement for such works is made or from where the goods are transferred or delivered for use in the works contract. Explanation II.-Where the work under a works contract is spread over many States including the State of Rajasthan, the proportionate work done within the State of Rajasthan shall be deemed to be the sale under this clause irrespective of the place of agreement for works or the point of movement of goods involved in the execution of that works contract." "2(p) 'sale price' means the amount payable to a dealer as consideration for the sale less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability." Sub-section (2-C) of section 7 provides as under: "(2-C) Notwithstanding anything contained in this Act, in the case of a works contract, the tax may be deducted in such manner and under such circumstances as may be prescribed, from every bill of payment to a contractor." 12.. Sub-rule (2) of rule 29 of the Rules, as substituted by notification dated June 24, 1989, reads as under: "(2) In case of works contract, tax shall be computed on the turnover of the contractor after deducting- (i) The value of the goods transferred in execution of works contract, whether as goods or in some other form which have already suffered tax at the rate prescribed under section 5 or which are exempted from tax under section 4 of the Act. (ii) All sums towards labour charges, which are directly correlated with the goods, property in which has passed in the execution of works contract, whether as goods or in some other form: Provided that where the labour charges are not determinable from the accounts of the contractors, or are considered unreasonably high considering the nature of the contract, the deductions towards labour charges shall be allowed by the assessing authority ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable turnover which has been defined under clause (s) of section 2 of the Act. 15.. The constitutional validity of the Forty-sixth Amendment as well as the amendments made in the State legislations were considered by the Supreme Court in Builders Association of India's case [1989] 73 STC 370; [1989] 2 SCC 645. The second question, which also came for consideration in the above case was whether the power of the State Legislature to levy tax on the transfer of property in the case of goods in the execution of a works contract referred to in sub-clause (b) of clause (29-A) of article 366 of the Constitution was subject to the restrictions and conditions contained in article 286 of the Constitution. The Supreme Court upheld the validity of the Forty-sixth Amendment. On the second question, it was held that sales tax laws passed by the Legislatures of States to levy taxes on the transfer of property in goods (whether as goods or some other form) involved in the execution of a works contract are subject to the restrictions and conditions mentioned in each clause or sub-clause of article 286 of the Constitution. It was laid down as under: "Sub-clause (b) of clause (29-A) states that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y sales tax, it was observed: "Even after the decision of this Court in State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353; [1959] SCR 379, it was quite possible that where a contract entered into in connection with the construction of a building consisted of two parts, namely, one part relating to the sale of materials used in the construction of the building by the contractor to the person who had assigned the contract and another part dealing with the supply of labour and services, sales tax was leviable on the goods which were agreed to be sold under the first part. But sales tax could not be levied when the contract in question was a single and indivisible works contract. After the 46th Amendment the works contract which was an indivisible one is by a legal fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labour and services. After the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of sections 3, 4, 5 and sections 14 and 15 of the Central Sales Tax Act, 1956, are applicable to a transfer of property in goods involved in the execution of a works contract covered by article 366(29-A)(b). (3) While defining the expression 'sale' in the sales tax legislation it is open to the State Legislature to fix the situs of a deemed sale resulting from a transfer falling within the ambit of article 366(29-A)(b) but it is not permissible for the State Legislature to define the expression 'sale' in a way as to bring within the ambit of the taxing power a sale in the course of inter-State trade or commerce, or a sale outside the State or a sale in the course of import and export. *Reported as Best Crompton Engineering India v. State of Rajasthan in [1993] 88 STC 189 (Raj). (4) The tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract falling within the ambit of article 366(29-A)(b) is leviable on the goods involved in the execution of a works contract and the value of the goods which are involved in the execution of works contract would constitute the measure for imposition of the tax. (5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions made by the learned counsel for the parties may now be considered. The principal contention of the learned counsel for the contractors is that no sales tax is leviable in Rajasthan on a works contract after the decision of the Supreme Court in Gannon Dunkerley Co.'s case [1993] 88 STC 204; [1993] 1 SCC 364 whereby sub-section (3) of section 5 of the RST Act and rule 29(2)(i) of the Rules were declared unconstitutional and void. Learned counsel contended that sub-section (3) of section 5 of the RST Act was the charging provision and the said provision having been struck down, tax cannot be imposed by inference or enlarging the existing provisions of the Act so as to cover the matters which are not specifically mentioned therein. It was also contended that their Lordships of the Supreme Court were aware of other provisions of the RST Act and the Rules but still assessment orders were set aside. The decision of the Supreme Court, according to the learned counsel, is clear and admits no other argument except that sales tax is not leviable on the goods and materials used in a works contract under the existing provisions of the RST Act, till amendments are incorporated in it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance, but on probing no substance is found in them. After the Fortysixth Amendment the State Legislatures have got power to impose tax on the goods and materials used in the execution of a works contract, and in pursuance of that, amendments were made in the Rajasthan Sales Tax Act and Rajasthan Sales Tax Rules to make provision for tax on a works contract. The various provisions of the RST Act and the Rules so amended, as extracted earlier, to provide for imposition of sales tax on the goods and materials involved in a works contract make it clear that the tax on a works contract was leviable on the turnover of such contract and not on the taxable turnover as provided in sub-section (1) of section 5, which applied to other transactions of sale. In other words, in case of a works contract tax was leviable on the turnover, while for other transactions of sale, tax was leviable on the "taxable turnover". Sub-section (3) of section 5 read with clause (t) of section 2 of the RST Act, therefore, provided that in relation to a works contract tax would be leviable on the value of works contract, i.e., turnover, after deducting (i) the cost of labour up to such extent as may be prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under section 14 of the Central Sales Tax Act. The proviso to section 5(3) does not oblige the rule-making authority to frame a rule allowing deductions for the turnover of the amount of proceeds of sale of goods on which no tax is leviable under the Act so as to exclude the abovementioned sales from levy of tax. The rule-making authority would not be contravening the mandate of the statute if it does not allow deduction of the amount of proceeds for sale of goods on which no tax is leviable under the Act from the turnover." 21.. Their Lordships further rejected the argument that clause (i) of subrule (2) of rule 29 should be construed to mean that sales on which no tax is leviable under sub-section (1) of section 5 are to be excluded from the turnover for the purpose of computing tax on such turnover in relation to a works contract. It was observed as under: "The goods on which no tax is leviable under sub-section (1) of section 5 are not subject to any tax under the Act and there is no question of such goods having suffered tax at the rates prescribed under section 5. In this context we may again refer to the definition of 'taxable turnover' contained in section 2(s) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax is not leviable on the goods involved in a works contract unless a charging provision is incorporated under the Act in the light of the said decision. The argument of Mr. Bapna also falls to the ground that tax can be levied on the goods involved in a works contract under section 5(1) of the RST Act. 23.. Apprehending the above situation, Mr. Bapna, learned counsel for the Revenue, had also contended that the apex Court in Gannon Dunkerley's case [1993] 88 STC 204 (SC); [1993] 1 SCC 364 did not consider the remaining provisions of the RST Act and the Rules on the basis of which sales tax was leviable on the goods used in the execution of a works contract. In other words, the argument of Mr. Bapna was that this aspect of the matter was not argued and adequately considered by the Supreme Court in the said judgment, as such, this Court can hold that tax is leviable on the goods used in the execution of a works contract on the basis of taxable turnover as provided under section 5(1) of the RST Act. This argument of Mr. Bapna can be rejected conveniently on two counts; firstly, it is not correct that their Lordships of the Supreme Court, while deciding Gannon Dunkerley's case [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... STC 204; [1993] 1 SCC 364. According to Mr. Bapna, tax can be calculated as per the guidelines issued by the Commissioner and the same is permissible under the existing provisions of the RST Act and the Rules. In my view, the above argument is the same, though in a different form, as argued by Mr. Bapna as principal contention. The circular of the Commissioner has no statutory force and it cannot create a charging provision to levy tax. Once the Supreme Court had held that in the absence of section 5(3) of the RST Act tax cannot be levied under section 5(1) of the RST Act, a charging provision cannot be incorporated in the RST Act or the Rules by mere issuing an administrative circular by the Commissioner, Commercial Taxes Department, Rajasthan. The said circular cannot, therefore, override the decision of the Supreme Court and tax cannot be levied on a works contract in the absence of a charging provision under the RST Act. Law is now well-settled that in the absence of a charging provision tax cannot be levied and a charging provision requires strict interpretation to impose an obligation to pay tax. Article 265 of the Constitution of India clearly lays down that no tax shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract for the purpose of determining the value of the goods involved in the execution of the works contract. It was also held that the expenses for labour and services would depend on the nature of the works contract and would not be the same for all types of works contract and it would be permissible, indeed necessary, to prescribe varying scales for deduction on account of cost of labour and services for various types of works contracts. 26.. In the existing provisions of the RST Act and the Rules the expression "turnover" in the case of a works contract is the amount payable to the dealer for carrying out such contract less the cost of labour up to such extent as may be prescribed. Rule 29(2)(ii) of the Rules provides that in case of a works contract, tax shall be computed on the turnover of the contractor after deducting all sums towards labour charges which are directly correlated with the goods, property in which has passed in the execution of the works contract whether as goods or in some other form. The proviso to this rule then provides that where labour charges are not determinable from the accounts of the contractor or are considered unreasonably high considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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