State sales tax deeming fiction cannot convert inter-State or outside works-contract sales into intra-State sales for taxation.

Explanation II to section 2(38) of the Rajasthan Sales Tax Act, 1994 was held ultra vires to the extent it deemed a works-contract sale to occur inside the State merely because the agreement was made outside the State or the goods moved from outside the State. The court held that a State cannot, by deeming fiction, tax an inter-State sale, an outside sale, or a sale in the course of import or export, because such matters fall within Parliament's field under Entry 92A of List I and remain constrained by article 286. Assessment orders based on the provision were set aside and the matters were to be reconsidered de novo without applying Explanation II.

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Issues: Whether Explanation II to section 2(38) of the Rajasthan Sales Tax Act, 1994, which deems a sale inside the State in respect of goods used in execution of a works contract notwithstanding that the agreement was entered into outside the State or the goods moved from outside the State, is constitutionally valid in view of Entry 92A of List I and article 286 of the Constitution of India.

Analysis: The power of the State Legislature under Entry 54 of List II, even after article 366(29A), remains subject to the exclusive field of Parliament under Entry 92A of List I in relation to sales in the course of inter-State trade or commerce, and to the prohibitions in article 286 against taxing sales outside the State or in the course of import or export. A State cannot, by deeming fiction based on situs of sale, convert an inter-State sale or an outside sale into an intra-State sale for taxation purposes. The impugned provision contained no exclusion for inter-State, outside, import or export sales, and therefore enlarged the taxing field beyond constitutional limits. The provision was held to suffer from the same vice identified in the earlier constitutional decisions on works-contract taxation and on deemed sales beyond State competence.

Conclusion: Explanation II to section 2(38) of the Rajasthan Sales Tax Act, 1994 was held to be ultra vires the Constitution insofar as it authorised taxation notwithstanding that the works contract was entered into outside the State or the goods had moved outside the State.

Final Conclusion: The assessment orders founded on the impugned deeming provision could not stand, and the matters were directed to be reconsidered de novo without applying Explanation II.

Ratio Decidendi: A State sales tax law cannot, by a deeming fiction fixing the situs of sale within the State, tax a transaction that is in law an inter-State sale, an outside sale, or a sale in the course of import or export, because such subjects lie beyond State legislative competence and are controlled by Parliament and article 286 of the Constitution of India.

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