Deeming provisions cannot convert constitutionally works contract sales into intra-State tax liabilities under sales tax law.

A State cannot, by deeming fiction, treat as an intra-State sale a transaction in a works contract that is constitutionally outside its taxing power, including transactions in the course of inter-State trade, import, or export. The Rajasthan Sales Tax Act provisions that sought to fasten tax on appropriation or use of goods on this basis were held ultra vires to that extent, because the character of such transactions is governed by the constitutional scheme and the Central Sales Tax Act, 1956. A notice founded solely on those invalid deeming provisions is unsustainable, although the assessing authority may still determine taxable turnover and the value of goods within lawful constitutional limits.

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Issues: (i) Whether Explanation II and Explanation IV to section 2(38) of the Rajasthan Sales Tax Act, 1994 could validly deem a sale inside the State on the basis of use or appropriation of goods in a works contract, even where the transaction may fall in the course of inter-State trade or commerce or otherwise outside the State; (ii) Whether the impugned notice could validly require inclusion of the value of goods in the taxable turnover solely on the basis of such deeming provisions, leaving the assessing authority to determine only the value of goods lawfully within the State's taxing power.

Issue (i): Whether Explanation II and Explanation IV to section 2(38) of the Rajasthan Sales Tax Act, 1994 could validly deem a sale inside the State on the basis of use or appropriation of goods in a works contract, even where the transaction may fall in the course of inter-State trade or commerce or otherwise outside the State?

Analysis: The statutory scheme was examined against the constitutional limitations flowing from entry 54 of List II, entry 92-A of List I, and article 286 of the Constitution of India. The deeming provisions sought to treat as intra-State sales transactions that, by their nature, could be outside the State, in the course of import or export, or in the course of inter-State trade or commerce. The governing principles under the Central Sales Tax Act, 1956, particularly sections 3, 4 and 5, control the character of such transactions, and the State Legislature cannot enlarge its taxing field by legal fiction so as to override those principles. Explanation IV was found to operate on the same footing as the already invalidated deeming provision and to suffer from the same vice of legislative incompetence.

Conclusion: The deeming provisions in Explanation II and Explanation IV to section 2(38) of the Rajasthan Sales Tax Act, 1994, to the extent they fasten tax on transactions falling outside the State's legislative competence, were held to be ultra vires.

Issue (ii): Whether the impugned notice could validly require inclusion of the value of goods in the taxable turnover solely on the basis of such deeming provisions, leaving the assessing authority to determine only the value of goods lawfully within the State's taxing power?

Analysis: The notice was unsustainable insofar as it proceeded only on the basis of situs of appropriation within the State under the impugned explanations. At the same time, the question of the identity of the goods, the value of goods involved in execution of the works contract, and the extent to which the transaction fell within the State's lawful taxing power involved mixed questions of fact and law and were left to the assessing authority to decide in accordance with the Central Sales Tax Act, 1956. The assessing authority was therefore permitted to determine turnover only within constitutional limits and without reliance on the invalid deeming provisions.

Conclusion: The notice was invalid to the extent it relied on Explanation II and Explanation IV to include goods outside the State's taxing competence, but the assessing authority could independently determine taxable value within lawful limits.

Final Conclusion: The petition succeeded only to the extent of striking down the impugned deeming basis for taxation beyond legislative competence, while preserving the assessing authority's power to assess turnover in accordance with the Central sales tax framework.

Ratio Decidendi: A State Legislature cannot, by deeming provisions, convert into an intra-State sale a transaction that is in substance outside the State, in the course of import or export, or in the course of inter-State trade or commerce; the character of such transactions must be determined by the constitutional scheme and the Central Sales Tax Act.

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