Works contract taxation upheld within constitutional limits, with only a limited rate-based discrimination struck down.

A State levy on the value of goods involved in works contracts was upheld as constitutionally confined to the permitted sales tax field under article 366(29-A)(b), entry 54 of List II, and article 286; section 5B and explanation (3)(c) of the Karnataka Sales Tax Act were found valid and not repugnant to the Central Sales Tax Act. Rule 6 of the Karnataka Sales Tax Rules was treated as a valid machinery provision for determining taxable turnover and deductions. The differential schedule rates were largely sustained under article 14, though one corresponding item-based discrepancy was held discriminatory to that limited extent.

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Issues: (i) Whether section 5B of the Karnataka Sales Tax Act, 1957 and explanation (3)(c) to section 2(1)(t) are unconstitutional or repugnant to the Central Sales Tax Act, 1956 in their application to works contracts; (ii) Whether rule 6 of the Karnataka Sales Tax Rules is ultra vires; (iii) Whether the differential rates of tax prescribed for items in the Second Schedule and the Sixth Schedule offend article 14 of the Constitution of India.

Issue (i): Whether section 5B of the Karnataka Sales Tax Act, 1957 and explanation (3)(c) to section 2(1)(t) are unconstitutional or repugnant to the Central Sales Tax Act, 1956 in their application to works contracts.

Analysis: The constitutional amendment in article 366(29-A)(b) enlarged the expression "tax on the sale or purchase of goods" to include transfer of property in goods involved in the execution of a works contract, but the levy remains subject to the discipline of entry 54 of List II and the restrictions in article 286. The Court applied the principle that the deemed sale created by the Forty-sixth Amendment does not confer a free-standing taxing power outside those constitutional limits. It further held that section 5B is an independent charging provision limited to the value of goods involved in works contracts within the State, and that explanation (3)(c) merely adopts a situs rule consistent with the statutory scheme. No repugnancy with sections 3, 4 and 5 of the Central Sales Tax Act, 1956 was made out, and the contention that parliamentary legislation was a precondition for the State levy was rejected.

Conclusion: Section 5B and explanation (3)(c) were upheld as valid and constitutional.

Issue (ii): Whether rule 6 of the Karnataka Sales Tax Rules is ultra vires.

Analysis: Rule 6 was examined as a machinery provision for determination of taxable turnover. The Court held that clauses (m) and (n) merely provide different methods of deduction depending on the type of works contract and the manner in which labour charges are recorded, and that the rule does not levy tax on labour as such. The deductions are tied to actual labour expenditure or ascertainable charges, leaving factual determination to the assessing authority. The distinction from the Bihar rule struck down in Jamshedpur Contractors' Association was noted, because the Karnataka rule taxes only the value of goods involved in the works contract after permitted deductions.

Conclusion: Rule 6 was held to be intra vires.

Issue (iii): Whether the differential rates of tax prescribed for items in the Second Schedule and the Sixth Schedule offend article 14 of the Constitution of India.

Analysis: The Court reiterated the settled principle that in taxation the Legislature enjoys wide latitude in classification and rate selection, and that the burden to prove hostile discrimination is heavy. Except for one identified discrepancy between item 6 of the Second Schedule and item 20 of the Sixth Schedule, the Court found the rate structure broadly sustainable. The existence of some differential treatment by itself did not invalidate the scheme, since the Legislature may choose different objects and rates of taxation so long as the classification is not hostile or arbitrary.

Conclusion: The rate structure was largely upheld, with only the noted discrimination between the corresponding items requiring invalidation to that limited extent.

Final Conclusion: The works-contract levy under the Karnataka Sales Tax Act was sustained in substance, the machinery rules were upheld, and the writ petitions failed save for the limited discriminatory rate discrepancy identified by the Court.

Ratio Decidendi: A State levy on the value of goods involved in a works contract is valid if it is confined to the constitutional field of taxation, and a machinery rule or schedule rate will be struck down only if it transgresses constitutional limits or creates hostile discrimination.

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