Works-contract taxation upheld: deduction rules, deemed-sale levy, and labour-charge formula all survived constitutional challenge.

Section 3-B(2)(b) of the Tamil Nadu General Sales Tax Act was upheld as valid because deduction from taxable turnover could be confined to goods used in the same commercial identity and not converted into a different commodity. The definition of sale in section 2(n)(ii) and the levy on transfer of property in goods involved in works contracts were held consistent with article 366(29A), so the constitutional challenge failed. The prescribed percentage for labour charges under rule 6-B was treated as a permissible presumptive formula where actual labour expenses were not established, and the challenge to it was rejected.

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Issues: (i) Whether section 3-B(2)(b) of the Tamil Nadu General Sales Tax Act, 1959 was invalid because deduction from taxable turnover was confined to goods purchased and used in the same form in which they were bought. (ii) Whether the definition of sale in section 2(n)(ii) and the levy on transfer of property in goods involved in works contracts were contrary to article 366(29A) of the Constitution of India. (iii) Whether the percentage fixed for labour charges under rule 6-B of the Tamil Nadu General Sales Tax Rules, 1959 was arbitrary and liable to be struck down.

Issue (i): Whether section 3-B(2)(b) of the Tamil Nadu General Sales Tax Act, 1959 was invalid because deduction from taxable turnover was confined to goods purchased and used in the same form in which they were bought.

Analysis: The deduction provision was read as preserving the distinction between goods retained in the same commercial identity and goods that, after use in execution of the contract, became a different commercial commodity. Goods used without change in their essential form could not be subjected to repeated taxation, but where the purchased goods were converted into another distinct commodity, the deduction was not available. The requirement that the goods be used in the same form was therefore treated as consistent with the scheme of the Act and with the prohibition against multiple taxation on declared goods.

Conclusion: The challenge to section 3-B(2)(b) failed and the provision was upheld as valid.

Issue (ii): Whether the definition of sale in section 2(n)(ii) and the levy on transfer of property in goods involved in works contracts were contrary to article 366(29A) of the Constitution of India.

Analysis: The statutory definition was held to be substantially a reproduction of the constitutional concept of deemed sale in works contracts. Since article 366(29A)(b) expressly includes transfer of property in goods involved in the execution of a works contract, the adoption of the same concept in the State enactment did not offend the Constitution. The levy on such deemed sales was therefore treated as constitutionally permissible.

Conclusion: The constitutional challenge to section 2(n)(ii) and the levy on works contract turnover was rejected.

Issue (iii): Whether the percentage fixed for labour charges under rule 6-B of the Tamil Nadu General Sales Tax Rules, 1959 was arbitrary and liable to be struck down.

Analysis: A prescribed percentage for labour and like charges was held permissible where proper accounts were not maintained or the actual figures were not ascertainable. The rule was treated as a workable formula for determining deductible labour expenses in different classes of works contracts, and not as an arbitrary exaction. The challenge also did not survive in view of the amended statutory scheme.

Conclusion: The challenge to the labour-charge formula failed.

Final Conclusion: The provisions assailed in the petitions were sustained, and the petitions were dismissed, with the interim directions modified only as to payment and security in the stay matter.

Ratio Decidendi: In works-contract taxation, deduction may be confined to goods retained in the same commercial identity, deemed-sale taxation of property in goods involved in execution of works contracts is constitutionally valid under article 366(29A), and a presumptive labour-charge formula is permissible where actual labour expenses are not established.

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