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TMI Blog2001 (1) TMI 951X X X X Extracts X X X X X X X X Extracts X X X X ..... d, according to the petitioner, goods sold are sales of inter-State and hence, not liable to be taxed by the State Legislature. Before we deal with the contentions of both parties, it is necessary to state in brief the law regarding the works contract. 3.. Tax on the sale of goods and purchase is the subject coming under entry 54 of List II of the Constitution of India. But this is subject to entry 92-A of List I of the Seventh Schedule. Under entry 92-A it is within the province of the Central Legislature to legislate with regard to tax on the sale or purchase of goods where such sale or purchase takes place in the course of inter-State trade or commerce. The question arose as to whether a works contract can be taxed under the definition of "sale" comes under the Act. This was resolved by the Supreme Court in the decision reported in State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353. This decision, as already stated, gave difficulty in assessing the works contract under the Act. 4.. Thereafter, Forty-sixth Amendment of the Constitution took place. As per the amendment, article 366(29-A) was introduced which gave a definition of tax on the sale or purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of individual cases, the constitutional limitations on the taxing-power of the State as are applicable to 'works contracts' represented by 'building contracts' in the context of the expanded concept of 'tax on the sale or purchase of goods' as constitutionally defined under article 366(29-A), would equally apply to other species of 'works contracts' with the requisite situational modifications." Thus, in the above decision, the Supreme Court held that just as any other tax on the sales, in a works contract also, it is bound by the restrictions under article 286 of the Constitution of India and the Central Sales Tax Act. 5.. The next case that came before the Supreme Court was Gannon Dunkerley Co. v. State of Rajasthan [1993] 88 STC 204. In the above case, an attempt was made to re-open the decision in Builders Association of India v. Union of India [1989] 73 STC 370 (SC). But that was negatived. Another ground raised was regarding the validity of section 5(3) of the Rajasthan Sales Tax Act. After exhaustively discussing the entire aspect, at page 237 of the above decision, the Supreme Court held as follows: "(1) In exercise of its legislative power to impose tax on sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxability to permit tax being levied on sales in the course of interState trade or commerce, sales outside the State and sales in the course of import and export and to ignore the conditions and restrictions placed by section 15 of the Central Sales Tax Act in relation to imposition of tax on goods which are declared to be of special importance in inter-State trade or commerce 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.....". Further, the court held as follows: "We are, therefore, unable to uphold the decision of the High Court in this regard and it must be held that sub-section (3) of section 5 transgresses the limits of the legislative power conferred on the State Legislative under entry 54 of the State List inasmuch as it enables tax being imposed on deemed sales resulting from transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract which take place in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and can rope in any transfer which takes place under section 3 of the Central Sales Tax Act. According to the counsel, as per the decisions of the Supreme Court, one has to look into section 3 of the Central Sales Tax Act to find out when is a sale or purchase of goods is to take place in the course of inter-State trade or commerce. A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase occasions the movement of goods from one State to another or is effected by a transfer of documents of title to the goods during their movement from one State to another. According to the counsel, the explanation ignores sales mentioned in section 3 of the Central Sales Tax Act and hence, the explanation is invalid. Learned counsel placed reliance on the decisions of the Supreme Court mentioned supra, particularly at page 231 of the decision reported in [1993] 88 STC 204 (Gannon Dunkerley Co. v. State of Rajasthan): "The location of the situs of the sale in sales tax legislation of the State would, therefore, have no bearing on the chargeability of tax on sales in the course of interState trade or commerce since they fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt. 9.. This case was heard along with W.A. No. 944 of 1997. That was an appeal from the judgment rendered by Shanmugam, J. in O.P. No. 4085 of 1997*. In that case also, the validity of the explanation was sought to be challenged. The learned Judge relied on the decisions in Builders Association of India v. State of Karnataka [1990] 79 STC 442 (Kar), and 20th Century Finance Corporation Limited v. State of Maharashtra [1989] 75 STC 217 (Bom) and held that the explanation is valid. The learned Judge held thus: "The Supreme Court also held that the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works and not the cost of acquisition of the goods by the contractor." Thus the learned Judge held that the situs of the sale for the purpose of sales tax is the State. Reported in [1997] 107 STC 420 (Ker) (Hydrotec Engineers India Private Limited v. State of Kerala).-Ed. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was considering the Karnataka Sales Tax Act. Similar provision occurred in explanation (3)(c). The division Bench followed the decision of the Bombay High Court in [1989] 75 STC 217 (20th Century Finance Corporation Limited v. State of Maharashtra) and held that it does not affect any inter-State sale. In [1993] 88 STC 204 (Gannon Dunkerley Co. v. State of Rajasthan) the same contention was raised by the State before the Supreme Court. At page 230 of the above decision, it was observed as follows: "On behalf of the States it has been seriously contended that a deemed sale resulting from transfer of property in goods involved in the execution of a works contract can never be a sale in the course of inter-State trade or commerce and it cannot be an outside sale or a sale in the course of import since the transfer of property in the goods takes place only at the stage when the goods are incorporated in the works and that can take place only in the State where the work is required to be executed. On behalf of the contractors, on the other hand, it has been urged that a works contract can involve transactions constituting a sale in the course of inter-State trade and commerce as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commerce in the course of export or outside sale and hence, it goes against the decision of the Supreme Court. As has been rightly observed by the Supreme Court, the question whether the sale is in the course of inter-State or outside has to be examined with the documents in question and such documents cannot be ignored by means of explanation. Hence, we are of the view that the explanation is very wide. 12.. The next question is whether explanation 4(c) to section 2(xxi) should be declared as unconstitutional. According to us, it is not necessary to strike down the said provision. It is enough, if we read down the provision. We declare that explanation 4(c) to section 2(xxi) of the Act will not take in sales under sections 3, 4 and 5 of the Central Sales Tax Act and if the assessee is able to prove on the basis of the materials that the property in the goods transferred in accordance with the principles under sections 3, 4 and 5, then the explanation will not apply. 13.. In O.P. No. 14939 of 1995, the assessment order is exhibit P8. According to us, the assessment proceedings have to be reconsidered in the light of our observations and in the light of the decisions of the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X
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