Works-contract tax deduction limits struck down for reaching inter-State, import, declared goods, and labour-service components.

Section 25-A of the Bihar Finance Act, 1981 was unconstitutional to the extent it authorised advance deduction of tax at source from works-contract bills on transfers of property in goods falling within inter-State trade or commerce, outside the State, import transactions, or declared goods. The Court held that, after the Forty-sixth Amendment, such deemed sales remain subject to article 286 and the limits in sections 3, 4, 5, 14 and 15 of the Central Sales Tax Act, so a State cannot collect tax in advance on transactions beyond its competence. The provision was also invalid insofar as it reached labour charges and other service components, because only the value of goods involved in the contract is taxable.

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Issues: (i) whether section 25-A of the Bihar Finance Act, 1981 was ultra vires to the extent it authorised deduction of tax at source from works-contract bills even where the transfer of property in goods was in the course of inter-State trade or commerce, outside the State, or in the course of import, or involved declared goods; (ii) whether the same provision was ultra vires to the extent it authorised deduction from payments relatable to labour charges and other services in a works contract.

Issue (i): whether section 25-A of the Bihar Finance Act, 1981 was ultra vires to the extent it authorised deduction of tax at source from works-contract bills even where the transfer of property in goods was in the course of inter-State trade or commerce, outside the State, or in the course of import, or involved declared goods.

Analysis: The constitutional scheme permits taxation of the value of goods involved in execution of a works contract only within the limits of legislative competence. The Court applied the principle that, after the Forty-sixth Amendment, a deemed sale in a works contract remains subject to the restrictions in article 286 of the Constitution and to sections 3, 4, 5, 14 and 15 of the Central Sales Tax Act, 1956. A State law cannot authorise recovery in advance of tax on transactions which the State is itself incompetent to tax, including inter-State sales, outside sales, import sales, and declared goods. The machinery provision in section 25-A could not survive beyond the competence of the charging field.

Conclusion: Section 25-A was held ultra vires to the extent it applied to transfers of property in goods falling within sections 3, 4 and 5 of the Central Sales Tax Act, 1956, and to declared goods governed by sections 14 and 15 of that Act; the challenge was accepted in favour of the petitioners on this issue.

Issue (ii): whether the same provision was ultra vires to the extent it authorised deduction from payments relatable to labour charges and other services in a works contract.

Analysis: The Court held that the taxable measure under article 366(29A)(b) is confined to the value of goods involved in the works contract after excluding labour and service components. Section 25-A, read with the notification, effectively authorised deduction on the gross value of the contract and thereby reached amounts attributable to labour charges and other services. Such amounts are not goods, and the State cannot levy or collect sales tax on them. The absence of an adequate mechanism to segregate taxable goods from non-taxable labour and service elements made the provision constitutionally unsustainable to that extent.

Conclusion: Section 25-A was held ultra vires to the extent it provided for deduction from payments made on account of labour charges and other services towards sales tax; this issue was decided in favour of the petitioners.

Final Conclusion: The writ petitions succeeded, and the impugned statutory mechanism for advance deduction was struck down to the extent it transgressed constitutional limits on the State's taxing power over works contracts.

Ratio Decidendi: A State may provide a machinery for advance collection only within its legislative competence, and a works-contract deduction provision is invalid to the extent it reaches inter-State, outside-State, import-related, or declared goods transactions, or extends to labour and service components beyond the taxable value of goods.

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