Works-contract taxation: value of goods alone is taxable, while labour-linked profit, overheads and non-transfer consumables are deductible.

Section 3-B of the Tamil Nadu General Sales Tax Act, 1959, was upheld as a valid works-contract charging provision, read harmoniously with article 286 and the Central Sales Tax Act restrictions on declared goods; the challenge based on use of goods in the same form failed. In computing taxable turnover, only the value of goods involved in execution is taxable, so amounts referable to labour and services, reasonable profit attributable to labour and services, establishment costs so attributable, and consumables not involving transfer of property are deductible. Section 7-C's optional compounded levy for civil works contractors was also sustained as a rational classification and not violative of article 14.

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Issues: (i) Whether section 3-B of the Tamil Nadu General Sales Tax Act, 1959, as substituted and read with section 4, was invalid for conflict with article 286(3)(a) of the Constitution of India and sections 14 and 15 of the Central Sales Tax Act, 1956; (ii) whether, in computing taxable turnover under section 3-B, the contractor's reasonable profit margin, cost of establishment relatable to labour and services, and cost of consumables not involving transfer of property in goods were deductible; and whether the requirement that declared goods be used in the same form was valid; (iii) whether section 7-C of the Tamil Nadu General Sales Tax Act, 1959, creating an optional compounded levy for civil works contractors, violated article 14 of the Constitution of India.

Issue (i): Whether section 3-B of the Tamil Nadu General Sales Tax Act, 1959, as substituted and read with section 4, was invalid for conflict with article 286(3)(a) of the Constitution of India and sections 14 and 15 of the Central Sales Tax Act, 1956.

Analysis: The charging provision for works contracts was upheld on the footing that the transfer of property in goods involved in execution of a works contract is taxable, but only within the constitutional discipline imposed by article 286 and the Central Sales Tax Act. The later amendment and the machinery provisions were read harmoniously with section 4 so that declared goods remained subject to the statutory restrictions on single-point levy and rate limits. The challenge based on the use of goods "in the same form" was rejected because commercial identity, not merely physical form, governs the single-point scheme for declared goods.

Conclusion: Section 3-B, read with section 4, was held to be valid and not contrary to article 286(3)(a) or sections 14 and 15 of the Central Sales Tax Act, 1956.

Issue (ii): Whether, in computing taxable turnover under section 3-B, the contractor's reasonable profit margin, cost of establishment relatable to labour and services, and cost of consumables not involving transfer of property in goods were deductible; and whether the requirement that declared goods be used in the same form was valid.

Analysis: The taxable measure under a works contract is confined to the value of goods involved in the execution of the contract, determined at the time of incorporation, and must exclude charges attributable to labour and services. On that principle, the Court treated profit relatable to labour and services, establishment costs relatable to labour and services, and consumables consumed without transfer of property as outside the taxable base. The "same form" requirement for declared goods was sustained because the statutory scheme preserves the commercial identity of goods for the purpose of single-point taxation.

Conclusion: The assessee was entitled to deductions for reasonable profit margin on labour and services, establishment costs relatable to labour and services, and consumables not involving transfer of property in goods, while the challenge to the "same form" requirement failed.

Issue (iii): Whether section 7-C of the Tamil Nadu General Sales Tax Act, 1959, creating an optional compounded levy for civil works contractors, violated article 14 of the Constitution of India.

Analysis: The special treatment for civil works contractors was tested as a taxing classification and found to have a rational basis. The provision applied only to a defined class of works and provided an optional mode of assessment linked to the nature of the activity. The classification was not found to be arbitrary or without nexus to the legislative object.

Conclusion: Section 7-C was held not to violate article 14.

Final Conclusion: The writ petitions failed on the main constitutional challenge to the charging and optional compounding provisions, but succeeded in part on the proper computation of taxable turnover by requiring deductions for profits attributable to labour and services, establishment cost so attributable, and consumables not involving transfer of property in goods.

Ratio Decidendi: In a works-contract levy, the taxable measure is confined to the value of goods actually involved in execution, and must exclude amounts referable to labour, services and other non-transfer components; a taxing classification in such matters will be sustained if it rests on a rational nexus to the statutory object.

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