Works contract taxation must exclude labour and service elements and cannot extend to inter-State, import, export, or outside-State deemed sales.

A deemed sale in a works contract is subject to the constitutional limits applicable to ordinary sales under entry 54 of List II and article 286, so a State cannot tax transfers falling in inter-State, outside-State, import, or export transactions; the Central Sales Tax Act, 1956 applies to those transfers. The tax base is the value of goods involved in the works contract after permissible deductions for labour and service components, including related planning, design, machinery hire, consumables, and attributable overhead and profit, with case-specific determination of deductions. Section 5(3) of the Rajasthan Sales Tax Act, 1954 and rule 29(2)(i) of the Rajasthan Sales Tax Rules, 1955 were treated as unconstitutional for widening the charge beyond constitutional competence.

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Issues: (i) Whether the State could levy tax on the transfer of property in goods involved in the execution of a works contract when the deemed sale is in the course of inter-State trade or commerce, outside the State, or in the course of import or export, and whether the Central Sales Tax Act, 1956 applies to such transfers; (ii) what is the correct measure of tax on goods involved in the execution of a works contract and what deductions are permissible in arriving at that value; (iii) whether section 5(3) of the Rajasthan Sales Tax Act, 1954 and rule 29(2)(i) of the Rajasthan Sales Tax Rules, 1955 are constitutionally valid.

Issue (i): Whether the State could levy tax on the transfer of property in goods involved in the execution of a works contract when the deemed sale is in the course of inter-State trade or commerce, outside the State, or in the course of import or export, and whether the Central Sales Tax Act, 1956 applies to such transfers.

Analysis: The legal fiction created by article 366(29-A)(b) enlarges the concept of sale, but the levy remains subject to the constitutional discipline of entry 54 of List II and article 286. The State's taxing power does not extend to transactions falling under section 3, section 4, or section 5 of the Central Sales Tax Act, 1956, and the restrictions in section 14 and section 15 of that Act also apply to goods of special importance. The absence of a separate parliamentary law specifically amending the Central Sales Tax Act to refer to works contracts does not prevent those provisions from governing deemed sales under article 366(29-A)(b).

Conclusion: The State cannot levy tax on deemed sales in a works contract where the transfer falls within inter-State, outside-State, import, or export sales, and the relevant provisions of the Central Sales Tax Act, 1956 apply.

Issue (ii): What is the correct measure of tax on goods involved in the execution of a works contract and what deductions are permissible in arriving at that value.

Analysis: The tax is on the transfer of property in goods involved in the works contract, so the measure must be the value of those goods and not the entire contract price as such. The value is to be determined by taking the works contract value as the starting point and deducting charges attributable to labour and services, including labour charges, sub-contractor labour, planning and design, hire of machinery and tools, consumables consumed in execution, and establishment and profit to the extent relatable to labour and services. Transportation to the work site may be included, and the deductions must be determined on the facts of each case. A uniform rate of tax for all goods involved in a works contract is permissible.

Conclusion: The taxable measure is the value of goods involved in the works contract after permissible deductions for labour and service components, and a uniform rate for such deemed sales is valid.

Issue (iii): Whether section 5(3) of the Rajasthan Sales Tax Act, 1954 and rule 29(2)(i) of the Rajasthan Sales Tax Rules, 1955 are constitutionally valid.

Analysis: Section 5(3) uses the expression "turnover" instead of "taxable turnover" for works contracts and, read with rule 29(2)(i), permits taxation without ensuring exclusion of transactions beyond the State's competence and without adequately excluding goods on which no tax is leviable under the Act or goods governed by the Central Sales Tax Act, 1956. This widens the charging field beyond constitutional limits and allows taxation of deemed sales that the State cannot tax under entry 54 and article 286. The defect goes to the root of the levy.

Conclusion: Section 5(3) of the Rajasthan Sales Tax Act, 1954 and rule 29(2)(i) of the Rajasthan Sales Tax Rules, 1955 are unconstitutional and void.

Final Conclusion: The challenge to the Rajasthan levy succeeded because the impugned charging provision and supporting rule could not sustain constitutional scrutiny, and the assessment under that provision could not stand. The writ petition succeeded only to the extent of quashing the Rajasthan assessment order, while other grievances were left open for proceedings before the appropriate forum.

Ratio Decidendi: A deemed sale under article 366(29-A)(b) is subject to the same constitutional and statutory restrictions as an ordinary sale under entry 54 of List II, and the tax on a works contract can be levied only on the value of the goods involved after excluding the labour and service components.

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