Works contract taxation after the Forty-sixth Amendment remains confined to goods value, with valid assessment and recovery machinery.
After the Forty-sixth Amendment, a State may tax only the value of goods involved in execution of a works contract, not the labour or service component. Section 5(3) of the Rajasthan Sales Tax Act, as construed with the turnover and deduction provisions, was treated as operating only on the taxable value of goods and thus within legislative competence. Rule 29(2) was described as a workable assessment method for determining deductible labour charges and taxable turnover, while rule 46(2) was treated as a recovery mechanism to secure tax collection through deduction at source. The challenged provisions were therefore sustained as valid machinery provisions.
Issues: (i) whether section 5(3) of the Rajasthan Sales Tax Act, 1954, as applied to works contracts, was beyond legislative competence or inconsistent with the constitutional scheme; (ii) whether rule 29(2) of the Rajasthan Sales Tax Rules, 1955, restricting deduction of labour charges in works contracts was valid; and (iii) whether rule 46(2) of the Rajasthan Sales Tax Rules, 1955, requiring deduction from running bills at source was valid.
Issue (i): whether section 5(3) of the Rajasthan Sales Tax Act, 1954, as applied to works contracts, was beyond legislative competence or inconsistent with the constitutional scheme.
Analysis: The constitutional framework after the Forty-sixth Amendment permits taxation only on the value of goods involved in execution of a works contract and not on the labour or service component. The statutory scheme had to be read with the definition of turnover and the prescribed deductions, so section 5(3) could not be treated as authorising tax on the whole contract amount. When so construed, the provision operated only on the taxable value of goods involved in the works contract and remained within the State's competence.
Conclusion: section 5(3) was upheld and the challenge failed.
Issue (ii): whether rule 29(2) of the Rajasthan Sales Tax Rules, 1955, restricting deduction of labour charges in works contracts was valid.
Analysis: The rule allowed deduction of actual labour charges directly correlated to the goods involved in the works contract where such charges were ascertainable from proper accounts, and the prescribed percentages applied only where the charges were not determinable or were unreasonably high. The rule was therefore a method for assessment and not a levy on labour itself. It was treated as a reasonable and workable provision to determine the taxable turnover in works contracts.
Conclusion: rule 29(2) was held valid.
Issue (iii): whether rule 46(2) of the Rajasthan Sales Tax Rules, 1955, requiring deduction from running bills at source was valid.
Analysis: The deduction at source mechanism was treated as a recovery device to secure revenue and prevent evasion, especially in works contracts where tax became payable when goods were used in execution. The existence of refund provisions and related safeguards showed that the provision was not arbitrary. It was a machinery provision and a reasonable mode of collection.
Conclusion: rule 46(2) was upheld.
Final Conclusion: the challenged statutory provisions and rules governing taxation and deduction in works contracts were sustained, and the writ petitions were not maintainable on merits.
Ratio Decidendi: after the Forty-sixth Amendment, a State may tax only the value of goods involved in a works contract, and assessment or collection provisions that are confined to that taxable component and operate as reasonable machinery for determining or recovering tax are valid.