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TMI Blog2009 (3) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... pective of the "taxable turnover", are hereby set aside and quashed. - W.P. (C) Nos. 116,118,119,189,395(AP) of 2008 - - - Dated:- 5-3-2009 - ANSARI I.A. AND MUSAHARY P.K. , JJ. The judgment of the court was delivered by I.A. ANSARI J. The petitioner herein, which is a company, incorporated under the Companies Act, 1956, has been executing various works at Kameng Hydro Electric Project, in the district of West Kameng, Arunachal Pradesh. The petitioner is also involved in the business of construction of infrastructure facilities like dams, tunnels, powerhouse, etc., all over the country. Pursuant to the work orders, issued by North East Electric Power Corporation Ltd. (NEEPCO), in favour of the petitioner, the petitioner has been executing various civil works. The petitioner is a registered dealer under the Arunachal Pradesh Goods Tax Act, 2005, and possesses a certificate of registration issued, in this regard, by the appropriate authority. The Arunachal Pradesh Goods Tax Act, 2005 (in short, the Act of 2005 ) has been enacted with the object of levying consumption tax, on goods consumed in the State of Arunachal Pradesh, through a combination of tax on entry of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that appearing on behalf of the petitioner, Dr. Saraf submits that section 47A warrants the authority, who makes payments of bills to the works contractors, such as, the petitioner, to deduct, at source, tax, at a flat rate of 12.5 per cent of the total turnover, as payable under the Act of 2005, though, while executing a works contract, the petitioner's total turnover is not exigible to sales tax or value added tax, as the case may be, inasmuch as the petitioner, in the process of execution of works contract, uses, at times, declared goods (i.e.), goods, which are declared as goods of special importance under section 14 of the Central Sales Tax Act, 1956, and also utilises labour and services and, hence, the expenses, which are so incurred by the petitioner, towards payment of declared goods or towards payment of the labour force and other services are not liable to be subjected to sales tax, yet the impugned provisions, contained in section 47A, not only permit, but oblige the authority concerned to realise tax at a flat rate of 12.5 per cent on the total turnover, meaning thereby that by making deduction, at source, the petitioner is being forced to pay, with the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich included, within the definition of the term sale , a transfer of property in goods involved in the execution of a works contract, was beyond the legislative competence of the Provincial Legislature. This view was followed in judicial pronouncements of some of the High Courts. To the contrary was the view taken by the Mysore High Court, in Mohamed Kashim v. State of Mysore reported in [1955] 6 STC 211, for, this decision upheld the power of the State to impose sales tax on the entire turnover relating to construction work by treating the goods, used in execution of the works contract, as transfer of property in goods involved in the execution of the works contract. The above conflict of judicial opinion was resolved by the apex court in State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353; AIR 1958 SC 560, wherein the decision of the Madras High Court was affirmed holding to the effect, inter alia, that in a building contract, which is entire and indivisible, there is no sale of goods, because, in such a contract, the agreement between the parties is that the contractor should construct the building according to the specifications contained in the agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds used in the execution of the works contract. Following the decision in Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353 (SC); AIR 1958 SC 560, the apex court, in Pandit Banarsi Das Bhanot v. State of Madhya Pradesh reported in [1958] 9 STC 388 (SC), held that in a building construction, which is one, entire and indivisible, there is no sale of materials used and, hence, it is beyond the powers of the State Legislature to impose tax on supply of those materials, which are used in such works contract. Consequent upon the decisions in Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353 (SC); AIR 1958 SC 560, and Pandit Banarsi Das Bhanot [1958] 9 STC 388 (SC), it became impossible for the States to bring works contracts, involving supply of materials, within the State's sales tax enactments. Hence, by the 46th Amendment of the Constitution, powers were given to the State Legislature to impose, inter alia, sales tax on the transfer of property in goods whether as goods or in some other form involved in the execution of works contract. Article 366 of the Constitution, which is the definition clause, stood accordingly amended by insertion of clause (29A). This clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concept, a sale . No distinction has, therefore, remained between a works contract, which is one and indivisible, and a works contract, which consists of two parts, one relating to supply of materials and the other relating to construction. In short, thus, the materials used, in execution of a works contract, is, now, deemed to be a sale of the property in the goods, which passes from the end of the builder to the end of other person to the contract. To put it a little differently, when the provisions of clause (29A) are read, in the light of subclause (b) thereof, it becomes clear that tax on sale or purchase of goods includes, amongst others, 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 and that such transfer of property in goods shall be deemed to be a sale of the goods by the person, who makes transfer, delivery or supply, and a purchase of those goods by the person to whom such transfer, delivery or supply is made. The Constitutional validity of the 46th Amendment as well as the amendments made in the State legislations came to be considered by a Constitution Bench, in Builders Association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 State shall, in so far as it imposes, or authorises the imposition of, (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify. Article 286 of the Constitution imposes fetters on the powers of the State to impose tax on the sale and purchase of goods, where (a) such sale or purchase of goods takes place outside the State or (b) in course of import of the goods into, or export of the goods out of, the territory of India. By clause (2) of article 286, Parliament is authorized to formula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inter-State trade and commerce, embodied in section 3 of the Central Sales Tax Act, 1956, would apply, with equal force, to transfer of property in goods involved in the execution of works contract. It is imperative to note that section 3 of the Central Sales Tax Act explains as to when a sale or purchase of goods takes place in the course of inter-State trade or commerce. Section 4 of the Central Sales Tax Act explains as to when a sale or purchase of goods takes place outside a State and section 5 explains as to when a sale or purchase of goods takes place in course of import or export. Section 14 of the Central Sales Tax Act, as already pointed out above, enumerates the goods, which are considered by the Parliament to be of special importance in inter-State trade or commerce and section 15 thereof sets out restrictions and conditions subject to which tax, on sale and purchase of declared goods , within a State, may be imposed. From what has been pointed out above, it is clear that the legislative power of the State, under entry 54 of State List, to impose tax on sale or purchase of goods is subject to two limitations. One limitation, which flows from the entry itself, is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Central Sales Tax Act, 1956 are involved in such transfer, supply or delivery, which is referred to in clause (29A) of article 366, the sales tax law of a State, which provides for levy of sales tax thereon will have to comply with the restrictions mentioned in section 15 of the Central Sales Tax Act, 1956 ... (emphasis Here italicised. is added). From the observations noted above, it becomes clear that even when declared goods are used in execution of a works contract and though use of such declared goods would amount to sale for the purpose of taxation, yet the tax on sale or purchase of such goods would be subject to the restrictions, which section 15 of the Central Sales Tax Act, 1956, imposes on the sale or purchase of goods in such cases. What surfaces from the above discussion is this: Notwithstanding the fact that by taking recourse to entry 54 of List II a State Legislature has the power to enact law imposing sales tax on the materials used in the execution of works contract, such imposition of sales tax by the State will not authorize the State to impose tax on those sales, which take place outside the State or in the course of import of the goods into, or export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered, in the light of the change in the definition of the term sale , as given in article 366(29A), and the term sale , as defined in section 2(zf)(i), it becomes transparent that when a person executes a work contract and, in the process of such execution, uses materials, which are not supplied by the person, who gets the works contract executed, then, the materials used by the works contractor shall be deemed to be a sale of those materials from the end of the works contractor towards the other person to the contract and the builder would be treated as a dealer in respect of the materials, which he has used in the execution of the works contract , for, his sale price would include the value payable in respect of the materials used in the execution of the works contract provided that the materials are taxable under the Act of 2005. Bearing in mind the definition of dealer , when one turns to section 3(1), which is the charging section and which imposes, on persons, who are dealers , the liability to pay tax, it transpires that every dealer , who is registered under the Act of 2005, or a person, who may not have been registered, but is required to be regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act, the amount of such charges shall be calculated as the sale price stipulated in the contract reduced by the prescribed percentage. From the definition of taxable turnover , as contained in section 5, what becomes clear is that taxable turnover means that part of a dealer's turnover, arising during a given tax period, which remains, after making various permissible deductions, under the Act of 2005, as the amount on which tax is payable. This, in turn, clearly shows that taxable turnover does not mean the entire turnover of the business of a works contractor in a given tax period; rather, what taxable turnover means is only that amount on which tax has to be calculated during a given tax period and while making calculation as to what shall be the amount on which tax shall be payable, all deductions, which are constitutionally or statutorily liable for deductions, must be made and kept excluded, while calculating the taxable turnover . Let me, now, come to section 6 of the Act of 2005, which exempts certain sales from tax. This section reads: Section 6. Sales exempt from tax. (1) The sale or import of goods listed in the First Schedule shall be exempted f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that sale of certain of goods, which are listed in the First Schedule, shall be completely exempted from taxation, under the Act of 2005, what it really means is that if, in the execution of a works contract , the works contractor uses any material, which is listed in the First Schedule, then, the works contractor , as a dealer , shall not be liable to pay tax thereon. This apart, even those works contractors , who stand notified, in the Fifth Schedule to the Act of 2005 as dealers or class of dealers , who would not be liable to pay tax at all for sales of goods effected to by them subject to such conditions as may be prescribed, then, such works contractors will remain exempted from payment of tax under the Act. Apart from these exemptions, section 7 exempts from taxation all those sales, which take place (a) in the course of inter-State trade or commerce, (b) outside Arunachal Pradesh and (c) in the course of import of the goods into, or the export of the goods out of the territory of India. Thus, the scheme of the Act of 2005 shows, broadly speaking, that this Act exempts from sales tax not only certain goods, which are listed in the First Schedule to the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts of the dealer, the amount of such charges shall be calculated at the percentages specified in the annexure 8. Thus, when rule 5(2) is read along with the provisions contained in sections 6 and 7, what emerges is that in the case of a dealer , apart from the sale prices of the goods, which are listed in the First Schedule, the transactions, which are mentioned in section 7, shall remain excluded from the taxable turnover . No wonder, therefore, that taxable turnover , according to section 5, means only that part of a dealer's turnover , arising during a tax period, which remains taxable after allowing such deductions as are permitted by sections 6 and 7. In the case of a works contract , while calculating the taxable turnover , the amounts, which represent the charges towards payment of labour and services and like charges, shall also have to be excluded from the total turnover of the dealer . Let me, now, turn to section 47A, which stands impugned in this writ petition. This section reads as under: Section 47A. (1) (a) Every person other than an individual, a Hindu Undivided Family, a firm or a company not under the control of the Government, responsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecified in the Schedule from such sum towards full satisfaction of the tax payable under this Act on account of total sale price of such sale or supply. (3) Notwithstanding anything contained in any other law for the time being in force, every person mentioned in sub-section (1) and sub-section (2) responsible for paying sale price in respect of any works contract or sale or supply of goods shall not enter into such transaction unless the contractor, or seller or supplier, as the case may be, produces an authenticated copy of the certificate of registration under this Act or furnishes an undertaking for getting himself registered and any such contractor, or seller or supplier who is not so registered under this Act shall not be paid by the said responsible person any amount in respect of the sale or supply, before he gets himself registered under this Act and submits an authenticated copy of certificate of registration. (4) Any tax deducted under this section shall be paid into the Government account within such time and in such manner accompanied with such documents and statements of accounts as may be prescribed. (5) The person making any deduction of tax under this se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axed under the Act of 2005 to the Government or Corporation, Board, Authority, undertaking or any other body by whatever name called, owned, financed or controlled wholly or substantially by the Government, at the time of credit to the account of or payment to the payee of such amount in cash, by cheque, by adjustment or in any other manner, whatsoever, shall deduct an amount calculated at the rate as may be specified in the Schedule from such sum towards full satisfaction of the tax payable under this Act on account of total sale price of such sale or supply. What also follows from the provisions contained in section 47A is that section 47A requires the prescribed authority to make deduction, at source, from the bills of a contractor, who executes a works contract, at a flat rate of 12.5 per cent on the total value of the works contract irrespective of the fact as to what the taxable liability of the contractor is except that section 47A enables the prescribed authority to not deduct, if the contractor satisfies the authority concerned that the works contract involves only charges for labour and services and/or that the components of labour and service charges are separable f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works contractor is, as a dealer , statutorily not liable to pay. Thus, the deduction of tax, under section 47A, exceeds far more the circumscribed limits of section 3. It needs to be borne in mind that the power to make deduction must be within the competence of the State Legislature inasmuch as the ancillary power can be exercised in aid of the main subject of legislation and not in derogation thereof. When the State Legislature does not have the power to collect tax on deemed sale of those goods, which are declared as goods of special importance as discussed above, or those sales , which take place in the course of inter-State trade and commerce or outside the State of Arunachal Pradesh or in the course of import of goods into, or export of goods out of, the territory of India, and when the charging section, i.e., section 3 does not permit imposition of taxes on the goods mentioned in the First Schedule, the ancillary provisions of the enactment, such as, section 47A, which relate to deduction at source, cannot go beyond the legislative powers of the State. Thus, the question as to whether, in a given case, the entire turnover relating to a works contract is taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rks contract the property in which is not transferred in the course of execution of works contract; (f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services; (g) other similar expenses relatable to supply of labour and services; (h) profit earned by the contractor to the extent it is relatable to supply of labour and services. The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the materials produced by the contractor. From the above observations, made in Gannon Dunkerley Co. [1993] 88 STC 204 (SC), what becomes transparent is that the value of the goods, involved in the execution of the works contract, will have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services. Thus, the labour charges, in the execution of works contract, would have to be kept excluded from taxable turnover . This apart, even service charges are not taxable and such service charges would include service charges for planning, designing and architect's fees, charges for obtaining, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of import of goods into, or export of goods out of, the territory of India. The prescribed authority has been empowered to look into only the question as to whether any labour and service is involved in the works contract, though it is trite that if a particular sale or purchase is exempted from tax altogether, they can never be taken into account for the purpose of calculating, or arriving at, the taxable turnover . The apex court, therefore, pointed out, in Bhawani Cotton Mills Ltd. v. State of Punjab reported in [1967] 20 STC 290, that the imposition of liability to pay, at the initial stage itself, will be invalid, even when tax is collected from a person subject to the provisions for possible refund at a later stage, if found not liable to pay tax originally, for, when a particular sale or purchase is not subject to taxation, such a transaction can never be taken into account at any stage, for the purpose of calculating, or arriving at, taxable turnover or for levying tax. The relevant observations, made in this regard, in Bhawani Cotton Mills Ltd. [1967] 20 STC 290 (SC), read as under: (page 330) ... If a person is not liable for payment of tax at all, at any time, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volves transfer of property in goods consequent upon of an inter-State sale, an outside sale or a sale in the course of import. The owner is required by section 13AA(1) to deposit towards the contractors' liability to State sales tax four per cent of such amount as he credits or pays to the contractor, regardless of the fact that the value of the works contract includes the value of interState sales, outside sales or sales in the course of import. There is, in our view, therefore, no doubt that the provisions of section 13AA are beyond the powers of the State Legislature for the State Legislature may make no law levying sales tax on inter-State Sales, outside sales or sales in the course of import. The decision in Steel Authority of India Ltd. [2000] 118 STC 297 (SC) is squarely applicable to the facts of the present case inasmuch as in the present case, same as in the case of Steel Authority of India Ltd. [2000] 118 STC 297 (SC), deduction was to be made regardless of the fact that the value of the works contract, in a case, might have included the value in respect of sales outside the State or sales in the course of import of the goods into, or export of the goods out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 STC 297 (SC), one cannot, but strike down section 47A. In Nathpa Jhakri Jt. Venture v. State of Himachal Pradesh reported in [2000] 118 STC 306 (SC), too, the situation was similar in the sense that the enactment authorized deduction of tax, at source, at a flat rate and that while making such deduction, no provision had been made for exclusion of those transactions, which were not exigible to sales tax by the State. In Nathpa Jhakri [2000] 118 STC 306, the apex court declined to accept the proposition that refund can be obtained at a later stage if a person is found, on completion of assessment, not liable to pay tax. Even in such circumstances, the imposition of tax, at the initial stage, by way of deduction, at source, has been held to be impermissible in law. The apex court, therefore, in Nathpa Jhakri [2000] 118 STC 306, declared section 12A of the Himachal Pradesh General Sales Tax Act to be ultra vires. In its decision, the Supreme Court observed (page 309), A bare perusal of the two provisions will make it clear that in either provision there is an obligation to deduct from transaction relating to works contract on bills or invoices raised by the works contractor an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut providing for exclusion on account of labour charges or without giving those deductions, which are provided for in sections 6 and 7 of the Act of 2005, and/or those deductions, which have been held to be allowable by the Supreme Court, in Gannon Dunkerley Co. [1993] 88 STC 204, is not only violative of article 265 read with article 286 of the Constitution, but also amounts to illegal deprivation of the property, which is violative of article 300A of the Constitution. Viewed thus, it is clear that the impugned provisions of section 47A as well as the impugned notice, dated February 15, 2008, issued by the Superintendent of Tax and Excise, West Kameng, District Bomdila, are liable to be declared ultra vires and illegal. I may, now, pause here to point out that section 4 lays down rates of tax. Section 4 reads: 4. Rates of tax. (1) The rates of tax payable under the Act shall be, (a) in respect of goods specified in the Second Schedule, at the rate of one paisa in the rupee; (b) in respect of goods specified in the Third Schedule, at the rate of four paise in the rupee; (c) in respect of goods specified in the Fourth Schedule, at the rate of twenty paise in the rup ..... X X X X Extracts X X X X X X X X Extracts X X X X
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