2007 (2) TMI 73 - SC - VAT / Sales Tax

Levy of sales tax on goods in works contracts upheld; assessing authority may use State rules and Rule 9/Rule 44-B

SC upheld levy of sales tax on transfer of property in goods in works contracts, holding that in absence of Central rules the Assessing Authority may ... Levy of tax on transfer of property in goods involved in execution of works contract - Application of State machinery provisions under Section 9(2) of the Central Sales Tax Act, 1956 - Rule 9 of Central Sales Tax (U.P.) Rules, 1957 making State Act and Rules applicable by reference - Enabling rule-making power in Section 13(1) and Section 13(3) of the Central Sales Tax Act, 1956 - Strict construction of taxing statutes and workable construction of machinery provisionsApplication of State machinery provisions under Section 9(2) of the Central Sales Tax Act, 1956 - Rule 9 of Central Sales Tax (U.P.) Rules, 1957 making State Act and Rules applicable by reference - Determination of turnover for works contracts in absence of Central rules - Strict construction of taxing statutes and workable construction of machinery provisions - Whether, in absence of rules made by the Central Government for determination of sale price/turnover of transfer of property in goods involved in execution of works contracts, the State rules and procedures can be applied for assessment under the Central Sales Tax Act, 1956 - HELD THAT: - The Court held that although a taxing statute must be strictly construed, the machinery provisions and procedural rules are to be construed so as to make the statutory scheme workable. Section 9(2) of the 1956 Act authorises State authorities to assess, reassess and collect tax under the Central Act 'as if' it were tax under the State Act and to exercise powers available under the State general sales tax law; the expression 'as if' and the breadth of Section 9(2) encompass application of the State Act's assessment procedure, including computation under State rules. Section 13(1)/(3) is an enabling power for rule-making; it is not obligatory for the Central Government to make rules. In the absence of inconsistent Central rules, Rule 9 of the Central Sales Tax (U.P.) Rules, 1957 validly makes applicable the provisions of the U.P. Sales Tax Act and U.P. Sales Tax Rules (as amended) so far as they are not inconsistent with the Central Act. Consequently, where Central rules are not framed, the Assessing Authority may determine turnover in terms of State rules (including Rule 44B of the Uttar Pradesh Trade Tax Rules, 1948 and Section 3F of the U.P. Act) as incorporated by reference, and such application does not render the levy invalid. The court rejected the contention that absence of Central rules precludes computation or levy of tax and emphasised that an assessee cannot claim benefit from non-framing of rules contemplated under the Act. [Paras 31, 32, 33, 34, 35]State rules and procedures may be applied by the Assessing Authority under Section 9(2) read with Section 13 and Rule 9 to determine the turnover for works contracts in absence of Central rules; absence of Central rules does not preclude levy or computation of tax.Levy of tax on transfer of property in goods involved in execution of works contract - Characterisation of appellant's activities as works contract - Whether the question of whether the appellant's activities fall within the definition of works contract under the Central Sales Tax Act was decided by this Court - HELD THAT: - The Court recorded that the appellant had filed a separate writ petition before the High Court contesting that its activities did not fall within the definition of works contract under Section 2(g) of the Central Sales Tax Act; that writ petition remains pending. The Supreme Court expressly declined to decide that question in these appeals, noting it was not called upon to answer it. [Paras 8]The question whether the appellant's activities constitute a works contract was not decided and remains pending in earlier proceedings.Final Conclusion: Appeals dismissed. The Court held that, for Assessment Years 2002-03 and 2003-04, in the absence of Central rules, the State's assessment machinery and rules (as applied by Rule 9) can be used to compute turnover and levy tax on transfers of property in goods involved in works contracts; the separate issue whether the appellant's activities are works contracts was not decided and remains pending. Issues Involved:1. Levy of Sales Tax on Works Contract2. Absence of Rules for Determination of Sale Price3. Application of State Rules in Absence of Central Rules4. Validity of Assessments Made by the Assessing AuthorityDetailed Analysis:1. Levy of Sales Tax on Works Contract:The appellant is engaged in printing question papers for various boards and universities outside Uttar Pradesh, which is considered a works contract in the course of inter-State trade or commerce. The Central Sales Tax Act, 1956 (1956 Act) did not initially contain provisions to levy tax on works contracts. The Supreme Court in M/s. Gannon Dunkerley and Co. v. State of Rajasthan observed that without amending the definition of 'sale' in Section 2(g) of the 1956 Act to include works contracts, it was not permissible for State Legislatures to impose such a tax. However, the legislative power of the State could still be exercised under Entry 54 in List II of the Constitution. The Parliament later amended Section 2(g) of the 1956 Act by the Finance Act, 2002, to include works contracts within the definition of 'sale'.2. Absence of Rules for Determination of Sale Price:Despite the amendment in 2002, no rules were framed for determining the sale price of goods involved in works contracts. The Assessing Authority applied provisions of the Uttar Pradesh Trade Tax Act, 1948 (1948 Act) and its rules for calculating the sale price. The appellant contended that in the absence of specific rules under the 1956 Act, the taxable turnover could not be determined, and the determination should not be left to the discretion of the Assessing Authority.3. Application of State Rules in Absence of Central Rules:The State of Uttar Pradesh framed rules under the 1956 Act, applying the provisions of the 1948 Act and its rules to the assessment of Central sales tax. The Supreme Court observed that Section 9(2) of the 1956 Act allows State authorities to assess, re-assess, collect, and enforce payment of tax under the 1956 Act as if it were under the State Act. The State rules, therefore, could be applied in the absence of Central rules, provided they were not inconsistent with the Central Act. Rule 44B of the Uttar Pradesh Trade Tax Rules, 1948, which provides for deductions in determining the net turnover, was deemed applicable.4. Validity of Assessments Made by the Assessing Authority:The Supreme Court held that the machinery provisions for calculating tax should be construed to make the statute workable. The absence of Central rules did not mean that no tax was leviable. The State rules provided sufficient guidelines for the determination of turnover. The Court rejected the appellant's argument that the amendments made by the Finance Act, 2005, were applicable, stating that they provided only an enabling provision and were not retrospective. The Court upheld the validity of the assessments made by the Assessing Authority based on the State rules.Conclusion:The appeals were dismissed, affirming the application of the Uttar Pradesh Trade Tax Rules for determining the sale price of goods involved in works contracts in the absence of specific Central rules. The Court emphasized that the machinery provisions must be construed to make the statute workable, and the absence of specific rules did not preclude the levy of tax.