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TMI Blog1995 (1) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... to them, that is to say- (29A) tax on the sale or purchase of goods' includes- (a)...................... (b) 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; (c) to (f)..................... and such transfer,...................of any goods shall be deemed to be a sale of those goods by the person making the transfer,...............and a purchase of those goods by the person to whom such transfer,..................is made;" Article 286 of the Constitution puts restrictions on the imposition of tax by the States on the sale or purchase of goods, which runs as follows: "286. Restrictions as to imposition of tax on the sale or purchase of goods.-(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place- (a) outside the State; or (b) in the course of the import of the goods into, or export of the goods out of, the territory of India. (2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1). (3) Any law of a S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome other form) involved in the execution of a works contract. In pursuance of this enabling provision, the U.P. Sales Tax Act was amended providing for imposition of sales tax on the transfer of property in goods involved in the execution of a works contract. Section 2(h) defines sale, sub- clause (ii) of which includes transfer of property in goods involved in the execution of a works contract. It runs as follows: "2(h). 'sale' with its grammatical variations and cognate expressions, means any transfer of property in goods (otherwise than by way of a mortgage, hypoth- ecation, charge or pledge) for cash or deferred payment or other valuable con- sideration and includes- (i)................. (ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (iii) to (vi)................." The following two Explanations were inserted by the U.P. Sales Tax (Amendment) (Second) Ordinance, 1994 (21 of 1994): "Explanation I.-A sale or purchase shall be deemed to take place in the State- (i) in a case falling under sub-clause (ii), if the goods are in the State at the time of their use, application or appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commissioning of any movable or immovable property." After the Constitution (Forty-sixth Amendment), section 3-F was introduced which is the charging section for the works contract. It runs as follows: "3-F. Rate of tax on the right to use any goods or goods involved in the execution of a works contract.-Notwithstanding anything contained in section 3-A, or section 3-AAA or section 3-D, the turnover relating to the business of transfer of the right to use any goods for any purpose or of transfer of the property in goods whether as goods or in some other form involved in the execution of a works contract shall be determined in the manner prescribed and shall be liable to tax at such rate not exceeding fifteen per cent, as the State Government may, by notification, declare, and different rates may be declared for different goods or different classes of dealers." Rule 44-B prescribes the manner in which the sales tax relating to works contract shall be levied. It reads as under- "44-B. Determination of turnover of goods involved in the execution of works contracts.-The tax under section 3-F on the turnover relating to the business of transfer of property in goods (whether as goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rupees, shall in respect of such turnover, which shall be determined in the manner specified in rule 44-B of the Uttar Pradesh Sales Tax Rules, 1948, be liable to tax at the rate specified in the relevant notification relating to the said goods issued under section 3-A or section 3-D of the aforesaid Act. SCHEDULE Sl. No. Description of works contract. 1. Fabrication and installation of plant and machinery. 2. Fabrication and erection of structural works including fabrication, supply and erection of iron trusses purlins, etc. 3. Fabrication and installation of cranes and hoists. 4. Fabrication and installation of elevator (lifts) and escalators. 5. Fabrication and installation of rolling shutters and collapsible gates. 6. Civil works like construction of buildings, bridges, roads, dams, barrages, seways, spillways and diversions. 7. Installation of doors, door frames, windows, window frames and rills. 8. Supplying and fixing of tiles, slabs, stones and sheets. 9. Supply and installation of air-conditioning equipments incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent, of such sum towards part or, as the case may be, full satisfaction of the tax payable under this Act on account of such works contract: Provided that the Commissioner may, if satisfied, that it is expedient in the public interest so to do and for reasons to be recorded in writing, order that in any case or class of cases no such deduction shall be made or, as the case may be, such deduction shall be made at a lesser rate. (2) Any contractor responsible for making any payment or discharge of any liability to any sub-contractor, in pursuance of a contract with the sub- contractor, for the transfer of property in goods, whether as goods or in some other form, involved in the execution whether wholly or in part, of the work undertaken by the contractor, shall, at the time of such payment or discharge in cash or by cheque or draft or by any other mode, deduct an amount equal to four per cent of such payment or discharge, purporting to be a part or full amount of the tax payable under this Act on such transfer from the bills or invoices raised by the sub-contractor as payable by the contractor. (3) The amount deducted under sub-section (1) or sub-section (2) shall be dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business or residence of the person is located." It may also be mentioned that in Uttar Pradesh the contractors engaged in executing building contracts and electrification contractors have been given an option to pay tax on compounded basis. The validity of Constitution (Forty-sixth Amendment) which introduced clause (29A) to article 366 enabling the State Governments to impose sales tax on the transfer of property involved in the execution of a works contract, came wto be considered by a Constitution Bench of the honourable Supreme Court in the case of Builders Association of India v. Union of India [1989] 73 STC 370; [1989] 2 SCC 645. The Supreme Court declared as follows: "We, therefore, declare that the sales tax laws passed by the Legislatures of States levying taxes on the transfer of property in goods (whether as goods or in 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 further observed by the Supreme Court as follows: "Having interpreted the relevant provisions of the Constitution, as stated above, we feel that it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rks contract, was challenged before us on two counts. Firstly, it was urged that the State Legislature has no power or competence to make provision for advance payment of tax or deduction of tax at source. The State Legislatures have powers to impose taxes on the sale or purchase of goods under entry 54 of List II-State List contained in the Seventh Schedule of the Constitution which reads as follows: "54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92-A of List I." The Parliament under entry 82 of List I of the Seventh Schedule to the Constitution has the power to impose taxes on income. The said entry reads as follows: "82. Taxes on income other than agricultural income" A perusal of entry 82 of List I and entry 54 of List II would show that the language used in the aforesaid two entries is almost identical. While entry 54 of List II makes a provision for taxes on sale or purchase of goods, entry 82 of List I provides for taxes on income. The Income-tax Act, 1961, contains provisions for deduction of income-tax at source and for advance payment of income-tax. If Parliament has the power, as it has, to provide for deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , reliance was placed on the decision of the honourable Supreme Court in the case of Gannon Dunkerley Co. v. State of Rajasthan [1993] 88 STC 204 in which it has been held that the sales tax on the transfer of property in goods involved in the execution of a works contract can be imposed on the total amount received by a contractor from the contractee but after deduction of labour charges, service charges, charges for planning, designing and architect's fees, etc., and after deducting the sums in respect of the sales covered by sections 3, 4 and 5 of the Central Act and after giving allowance to sales covered by sections 14 and 15 of the said Act. It is no doubt true that section 8-D(1) of the U.P. Act while fixing rate of 4 per cent for deduction of sales tax at source, does not specifically in so many words provide for legal deductions as mentioned above but it does take into account the said deductions. The Notification dated April 27, 1987, contains those 15 items of works contract which have been made taxable in Uttar Pradesh. The average rate of tax on all the 15 items when such items are sold as such in the open market and which is payable under U.P. Sales Tax Act, comes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 8-D of the Act would become unworkable. According to the honourable Supreme Court, as has been held by them in Gannon Dunkerley Co. case [1993] 88 STC 204, eight types of deductions have to be made from a total sum received by a contractor from the contractee, while arriving at the figure of transfer of property in goods involved in the execution of a works contract. Apart from this, the deductions in respect of sales covered by sections 3, 4 and 5 of the Central Act have also to be made. Provisions of sections 14 and 15 of the Central Act have also to be taken into consideration. Apart from this, the deductions in respect of tax-paid goods, those generally exempted, those goods which are produced by the new industrial units enjoying sales tax holiday for a fixed period and value of those goods which are supplied by the contractor to the contractee have also to be deducted. Thus, total number of deductions comes to about 17. Neither the contractor nor the contractee are the assessing authorities. It would be very difficult for a contractee to examine and for the contractor to specify all these deductions at the stage of intermediate bills. In fact, it is the duty of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted by his sub-contractor. Sub-section (1) of sec- tion 8-D provides that this deduction at source shall be towards part or as the case may be, full satisfaction of the tax payable under the U.P. Act on account of such works contract. Sub-section (3) of section 8-D provides that the deductions made by a contractee from the bills of the contractor or the deductions made by a contractor from the payments made to the sub-contractor, have to be deposited by both of them into a Government Treasury and according to sub-section (5) such credit into Government Treasury shall be treated as payment of tax on behalf of the persons from whose bills or invoices the deductions have been made. Sub- section (6) lays down that in case the person deducting the aforesaid amount fails to deposit the same into the Government Treasury, the assessing authority may direct that such person shall pay by way of penalty a sum not exceeding twice of the amount deductible under the said section but not so deducted and if de- ducted, not so deposited into the Government Treasury. Sub-section (7) provides for payment of interest if deducted amount is not deposited in the Government Treasury. Sub-section (8) la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case of a 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 according to the limits prescribed in column 3 for the type of contract specified in column 2 of the table given below." Sub-section (3) of section 5 of the Rajasthan Sales Tax Act contains almost identical provisions and appears to be in pari materia with the provisions of section 3-F of the U.P. Sales Tax Act. Almost similar is the case with rule 44-B of the U.P. Sales Tax Rules and rule 29(2) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor. We may, however, make it clear that apart from the deductions referred to above, it will be necessary to exclude from the value of the works contract the value of the goods which are not taxable in view of sections 3, 4 and 5 of the Central Sales Tax Act and goods covered by sections 14 and 15 of the Central Sales Tax Act as well as goods which are exempt from tax under the sales tax legislation of the State. The value of goods involved in the execution of a works contract will have to be determined after making these deductions and exclusions from the value of the works contract." The Supreme Court declared section 5(3) of the Rajasthan Sales Tax Act and rule 29(2) framed thereunder as ultra vires on the ground that it did not permit deduction of the sales covered by sections 3, 4 and 5 of the Central Act and no allowance was given in respect of those goods sale of which is covered by sections 14 and 15 of the Central Act. It also did not permit other deductions. A bare perusal of section 3-F and rule 44-B of the U.P. Sales Tax Rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty only involved in the execution of a works contract and therefore, all deductions will be made at the time of assessment in order to arrive at the value of transfer of property in goods involved in the execution of a works contract This submission has no substance because section 3-F read with rule 44-B does not lay down any guidelines for all the legal deductions. They also do not specify all the deductions. A tax-payer cannot be permitted to suffer at the hands of a tax-man who is left to permit deductions at his whim and caprice. Both, the tax-payer as well as the tax-man, are left in the lurch. In fact, since rule 44-B provides for only three or four deductions, it follows that other deductions will not be permitted. That is the effect of the conjoint reading of section 3-F and rule 44-B. As has been held by the honourable Supreme Court in the case of Gannon Dunkerley Co. [1993] 88 STC 204, all the deductions (a) to (h) quoted above, deductions in respect of sales covered by sections 3, 4 and 5 of the Central Act, and allowance for the sales covered by sections 14 and 15 of the Central Act have to be provided for in State statute relating to tax on deemed sales, i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X
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