Works-contract sales tax cannot rest on artificial sale-price valuation; vires challenge was allowed in writ jurisdiction.

A works-contract sales tax mechanism that fixes turnover by deducting a predetermined labour percentage was treated as an artificial valuation of the sale element and could not be sustained where the levy must attach to the actual sale of goods; rule 4(3) and the supporting part of section 2(k) were therefore held ultra vires. The Court also accepted that a plea of ultra vires could be raised in writ proceedings under Article 226 even though it had not been urged before the sales tax authorities, and rejected the maintainability objection. The assessment orders based on the percentage-deduction formula were quashed on the constitutional challenge.

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Issues: (i) Whether rule 4(3) of the Travancore-Cochin General Sales Tax Rules, 1950, and the supporting part of section 2(k) of the Travancore-Cochin General Sales Tax Act, 1125, were ultra vires in so far as they authorised a pre-determined percentage deduction in works contracts for the purpose of sales tax; (ii) Whether the challenge to validity could be entertained under Article 226 of the Constitution of India though it had not been urged before the sales tax authorities.

Issue (i): Whether rule 4(3) of the Travancore-Cochin General Sales Tax Rules, 1950, and the supporting part of section 2(k) of the Travancore-Cochin General Sales Tax Act, 1125, were ultra vires in so far as they authorised a pre-determined percentage deduction in works contracts for the purpose of sales tax.

Analysis: The definition of "sale" in section 2(j) included transfers of property in goods involved in execution of a works contract, and section 2(k) together with rule 4(3) treated the turnover in such contracts as the contract amount less a prescribed labour component. The rule proceeded on a fixed percentage basis for different kinds of contracts. The Court accepted the view that such an artificial determination of sale price, untethered to the actual value of goods sold, could not be sustained as a levy confined to sale of goods under the State taxing power.

Conclusion: Rule 4(3) and the supporting part of section 2(k) were held ultra vires, in favour of the assessee.

Issue (ii): Whether the challenge to validity could be entertained under Article 226 of the Constitution of India though it had not been urged before the sales tax authorities.

Analysis: The Court held that a plea of ultra vires could be raised in writ proceedings even if it had not been specifically taken at the earlier stages before the departmental authorities.

Conclusion: The objection to maintainability was rejected, in favour of the assessee.

Final Conclusion: The assessment orders founded on the impugned percentage-based deduction mechanism were quashed, and the writ petition succeeded on the constitutional challenge to the taxing rule.

Ratio Decidendi: A sales tax levy on works contracts cannot be sustained on a notional or artificial determination of sale price that is detached from the actual value of goods transferred, and a vires challenge may be raised in writ jurisdiction notwithstanding omission before the assessing authorities.

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