State taxing power over works-contract sales is limited by inter-State and import-export sale rules under central sales law.

State power to tax transfers of property in goods involved in works contracts is subject to article 286 and the Central Sales Tax Act, 1956. A State may fix the situs of a deemed sale for its own levy, but a deeming provision cannot extend taxing competence to transactions that, under sections 3, 4 and 5 of the Central Sales Tax Act, are inter-State, outside-State, or import-export sales. Explanation 4(c) to section 2(xxi) of the Kerala General Sales Tax Act was therefore read down so that it would not apply to those categories of sales.

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Issues: Whether Explanation 4(c) to section 2(xxi) of the Kerala General Sales Tax Act, 1963, which deems a transfer of property in goods involved in the execution of a works contract to take place in the State if the goods are within the State at the time of transfer, is valid and whether it can operate so as to include transactions covered by sections 3, 4 and 5 of the Central Sales Tax Act, 1956.

Analysis: The constitutional scheme permits the State to tax the transfer of property in goods involved in a works contract, but that power remains subject to the restrictions imposed by article 286 of the Constitution of India and the principles governing inter-State, outside-State, and import-export sales under the Central Sales Tax Act, 1956. A State law may fix the situs of a deemed sale for its own purposes, but it cannot expand its taxing power so as to capture transactions which, on the statutory tests in sections 3, 4 and 5 of the Central Sales Tax Act, 1956, fall outside State taxing competence. Since the impugned explanation was wide enough to read such transactions into the State levy, it could not be sustained in that form.

Conclusion: Explanation 4(c) to section 2(xxi) is not struck down, but it is read down so that it will not apply to sales falling under sections 3, 4 and 5 of the Central Sales Tax Act, 1956. The assessments based on the broader understanding of the provision were set aside and fresh assessment was directed in accordance with law, in favour of the assessee.

Ratio Decidendi: A State deeming provision fixing the situs of a works-contract sale cannot extend to transactions which, on the tests of the Central Sales Tax Act, 1956, are inter-State, outside-State, or import-export sales, because State taxing power over deemed sales remains subject to constitutional and central statutory limitations.

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