Inter-State works contract principle bars local sales tax where movement of goods is integral to the bargain.

A retreading contract requiring tyres to be taken from Karnataka to Andhra Pradesh after retreading was treated as an inter-State works contract because the movement of goods formed an integral part of the bargain. Explanation 3(c) to the definition of "sale" could fix the situs of a deemed sale only where the works contract did not involve inter-State movement; it could not, by legal fiction, convert an inter-State transaction into a local sale. Read with section 3 of the Central Sales Tax Act, 1956 and article 366(29-A)(b) of the Constitution, the transaction was outside the Karnataka Sales Tax Act, 1957 and not taxable as an intra-State sale.

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Issues: Whether the retreading contract, which required the tyres to be moved from Karnataka to Andhra Pradesh after retreading, constituted an inter-State works contract outside the taxing power of the State under the Karnataka Sales Tax Act, 1957.

Analysis: The contract contemplated not merely the affixation of rubber in Karnataka but also the return of the retreaded tyres to Andhra Pradesh, and the movement of goods was an integral incident of the bargain. Explanation 3(c) to the definition of "sale" could fix the situs of a deemed sale in the State only where the works contract did not involve movement of goods from one State to another. Read with the exclusionary language in explanation 3(a) and the principles settled under section 3 of the Central Sales Tax Act, 1956 and article 366(29-A)(b) of the Constitution of India, a State cannot convert an inter-State transaction into a local sale by legal fiction. The earlier authorities on works contracts and inter-State movement of goods supported the conclusion that the taxing authority had no jurisdiction to treat the transaction as an intra-State sale.

Conclusion: The contract was an inter-State works contract and was not taxable under the Karnataka Sales Tax Act, 1957.

Ratio Decidendi: Where a works contract itself requires movement of goods from one State to another, the deemed sale remains an inter-State sale and cannot be subjected to State sales tax by merely fixing a local situs.

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