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1995 (2) TMI 402
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....itution of India, void and unenforceable. The prayer in Writ Petitions Nos. 16680 and 18350 of 1994 which are heard along with these writ appeals is also the same. As the points involved in the writ appeals and the writ petitions are common, they are disposed of by this common judgment. 2.. The relevant portion of section 3-B of the Tamil Nadu General Sales Tax Act, 1959 (hereinafter referred to as "the Act"), inserted by the provision of Tamil Nadu Act No. 25 of 1993 which is challenged in the writ petitions out of which these writ appeals arise and in the writ petitions is as follows: "3-B. Levy of tax on the transfer of goods involved in works contract.(1) Notwithstanding anything contained in sub-sections (2-A), (2-B), (3), (4), (7) and (8) of section 3, or section 7-A, but subject to the other provisions of this Act including the provisions of sub-section (1) of section 3, every dealer referred to in item (vi) of clause (g) of section 2 shall pay, for each year, a tax on his taxable turnover of transfer of property in goods involved in the execution of works contract at the rates mentioned in sub-section (2) of section 3 or, as the case may be, in section 4. Explanati....
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....3-B (both prior to and after March 12, 1993) is not violative of article 286(3)(a) of the Constitution as well as sections 14 and 15 of the Central Act. (2) Reasonable profit margin of the contractor on declared goods involving in the execution of a works contract should also go in deduction from the 'total turnover' for arriving at 'taxable turnover'. (3) The extent of cost of establishment of the contractor as relatable to the supply of 'labour and services' and 'reasonable profit margin on labour', besides 'cost of consumables in the execution of works contract' should also go in deduction from the 'total turnover' for arriving at the 'taxable turnover'." As already stated these writ appeals are directed against the said common orders of the learned single Judge dated June 13, 1994* and July 27, 1994. Reported as Kamatchi Lamination (P) Ltd. v. State of Tamil Nadu [1994] 95 STC 378 (Mad.). 4.. Mr. C. Natarajan, learned counsel for the appellants in Writ Appeal No. 982 of 1994 contended in the first place that by reason of the restrictions imposed by section 15 of the Central Sales Tax Act, 1956, the conditions imposed by section 3-B(2)(b) of the Act that in or....
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....nection with the execution of works contract". According to the learned counsel the profit margin of the contractor in providing services involving professional skill from the stage of designing, supervising and execution of the project has to be excluded. The further submission of Mr. C. Natarajan, learned counsel for the appellants is that the Legislature cannot tax the professional income of the contractor by allowing only the actually incurred expenses under section 3-B(2)(e) of the Act. Mr. V. Ramachandran, learned Senior Counsel appearing for the appellants in W.A. No. 1093 of 1994 and Mr. K.J. Chandran, learned counsel for the appellant in W.A. No. 1467 of 1994 and petitioner in W.P. No. 16680 of 1994 contended that in the case of works contract relating to dyeing and printing, the dye or ink as the case may be, used in such works contract are consumed in the execution of the works contract and that there is no transfer of property in the goods and therefore, the cost of the consumables are includible in the expression "labour charges and other like charges", as deduction under section 3-B(2)(e) of the Act, in computing the taxable turnover of the contractor. 5.. Mrs. Chi....
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....ether the condition prescribed in sub-section (2)(b) of section 3-B of the Act that in order to claim deduction from the total turnover in respect of the amounts for which the goods specified in the First or Second Schedule are purchased, such goods must be purchased from registered dealers liable to pay tax under the Act, will result in levying tax at more than one stage and on that ground whether section 3-B of the Act is liable to be struck down? (3) Whether section 3-B is invalid because sub-section (2)(b) of sec- tion 3-B provides that only the amount for which the goods specified in the First or Second Schedule are purchased, are to be deducted and does not provide for the deduction of the profit margin as well as the value at the time of transfer of such goods in computing the taxable turnover of the dealer? (4) Whether section 3-B of the Act is invalid because sub-section (2)(e) of section 3-B limits the expenses towards labour charges and other charges, equal to the actual charges incurred in connection with the execution of the works contract, without providing for exclusion of the profit margin of the contractor? (5) Whether the cost of consumables, no....
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....67 and ending with the date of commencement of section 11 of the Central Sales Tax (Amendment) Act, 1972, this clause shall have effect subject to the modification that the words 'but excluding charcoal' shall be omitted; (ii) cotton, that is to say, all kinds of cotton (indigenous or imported) in its unmanufactured state, whether ginned or unginned, baled, pressed or otherwise, but not including cotton waste; (iia) cotton fabrics, as defined in item No. 65 of the First Schedule to the Central Excises and Salt Act, 1944 (Central Act 1 of 1944); (iib) cotton yarn, but not including cotton yarn waste; (iic) crude oil, that is to say, crude petroleum oils and crude oils obtained from bituminous minerals (such as shale, calcareous rock, sand), whatever their composition, whether obtained from normal or condensation oil-deposits or by the destructive distillation of bituminous minerals and whether or not subjected to all or any of the following processes: (1) decantation; (2) de-salting; (3) dehydration; (4) stabilisation in order to normalise the vapour pressure; (5) elimination of very light fractions with a view to returning them to the oil-deposits in orde....
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....the species Crotalaria juncea whether baled or otherwise; (vi) oil-seeds, that is to say,- (i) Groundnut or peanut (Arachis hypogaes); (ii) Sesamum or til (Sesamum orientale); (iii) Cotton seed (Gossypium Spp.); (iv) Soyabean (Glycine seja); (v) Rapeseed and Mustard- (1) Torta (Brassica campestris var toria); (2) Rai (Brassica juncea); (3) Jamba-Taramira (Eruca Satiya); (4) Sarson, yellow and brown (Brassica campestris var sarson); (5) Banarsi Rai or True Mustard (Brassica nigra); (vi) Linseed (Linum usitatissimum); (vii) Castor (Ricinus communis); (viii)Coconut (i.e., Copra excluding tender coconuts) (Cocos nucifera); (ix) Sunflower (Helianthus annus); (x) Nigar seed (Guizotia abyssinica); (xi) Neem, vepa (Azadirachta indica); (xii) Mahua, illupai, ippe (Madhuca Indica M. Latifolia, Bassia, Latifolia and Madhuca longifolia syn. M. Longifolia); (xiii)Karanja, Pongam, Honga (Pongamia pinnata syn P. Glabra); (xiv)Kusum (Schleichera oleosa, syn. S. Trijuga); (xv)Punna, Undi (Calophyllum, inophyllum); (xvi)Kokum (Carcinia indica); (xvii)Sal (Shorea robusta); (xviii)Tung (Aleurites fordii and A. Montana); ....
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....ver of amounts for which any goods specified in the First or Second Schedule are purchased from registered dealers liable to pay tax under the Act and used in the execution of works contract in the same form in which the goods were purchased. As already pointed out, the submission of the learned counsel for the appellants is that the mandate of section 15(a) of the Central Sales Tax Act is that in the case of declared goods there cannot be levy of tax at more than one stage, that if the declared goods purchased by the dealer are used in the execution of the works contract not in the same form in which they are purchased, but used in some other form the dealer, in view of sub-section (2)(b) of section 3-B is not entitled to claim deduction from the total turnover in respect of those goods used in some other form, which will result in levy of tax at more than one stage and therefore, the said condition prescribed in sub-section (2)(b) of section 3-B that the goods must be used in the same form in which they are purchased, violates section 15(a) of the Central Sales Tax Act. However, we are unable to accept the above contention of the learned counsel for the appellant. The settled pos....
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....ore the apex Court that iron scrap from which the goods had been manufactured having suffered sales tax, tax could not be realised once again from the sale of steel rounds, flats, plates, etc. The apex Court did not accept the above contention and held that each sub-item in entry No. (iv) under section 14 of the Central Sales Tax Act is a separate taxable commodity for the purposes of sales tax and each of them form a separate species for each series of sales although they may belong to the same genus that is iron and steel. Therefore, the apex Court held that the manufactured goods consisting of steel rounds, flats, plates, etc., or similar goods in other forms and shapes could be taxed again, even if the material out of which they were made had already been subjected to sales tax once as iron and steel scrap. In the said decision, the apex Court after referring to the various sub-items in item (iv) of section 14 of the Central Sales Tax Act, observed as follows: "It will be seen that 'iron and steel' is now divided into 16 categories which clearly embrace widely different commercial commodities, from mere scrap iron and leftovers of processes of manufacturing to 'wires' and 'w....
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....etains its identity as a commercially separate item for purposes of sales tax so long as it retains the sub-division. The more natural and normal meaning of such a mode of listing special or declared kinds of goods seems to us to be that the object of specification was to enumerate only those categories of items, each of which was to serve as a new starting point for a series of sales, which were to be classed as 'declared' goods. If one were to state the meaning in different words, it would seem to us to be: 'iron and steel goods of various types enumerated below'. What we have inferred above also appears to us to be the significance and effect of the use of the words 'that is to say' in accordance with their normal connotation and effect. Thus, in Stroud's Judicial Dictionary, 4th Edition, Volume 5, at page 2753, we find: 'That is to say.-(1) "That is to say" is the commencement of an ancillary clause which explains the meaning of the principal clause. It has the following properties: (1) it must not be contrary to the principal clause; (2) it must neither increase nor deminish it; (3) but where the principal clause is general in terms it may restrict it: see this explai....
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....point taxation in a series of sales unless the contrary is shown. Some confusion has arisen because the separate items are all listed under one heading: 'iron and steel'. If the object was to make iron and steel taxable as a substance, the entry could have been: 'Goods of iron and steel'. Perhaps even this would not have been clear enough. The entry, to clearly have that meaning, would have to be: 'Iron and steel irrespective of change of form or shape or character of goods made out of them'. This is the very unusual meaning which the respondents would like us to adopt. If that was the meaning, sales tax law itself would undergo a change from being a law which normally taxes sales of 'goods' to a law which taxes sales of substances out of which goods are made. We, however, prefer the more natural and normal interpretation which follows plainly from the fact of separate specification and numbering of each item. This means that each item so specified forms a separate species for each series of sales although they may all belong to the genus: 'iron and steel'. Hence, if iron and steel 'plates' are melted and converted into 'wire' and then sold in the market, such wire would only....
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....dity more clearly now. It follows that when one commercial commodity is transformed into another, it becomes a separate commodity for purposes of sales tax. We think that the Madras High Court had committed an error in applying Hiralal's case [1966] 17 STC 313 (SC) to the decision of cases now before us, which turns really on a correct interpretation of section 14 of the Central Act. On the question now before us, we approve of the reasoning adopted by a Division Bench of the Punjab High Court in Devgun Iron and Steel Rolling Mills v. State of Punjab [1961] 12 STC 590." 8.. In Telangana Steel Industries v. State of Andhra Pradesh [1994] 93 STC 187 (SC), the specific question decided by the apex Court is whether wire rods and wires occurring in section 14(iv)(xv) of the Central Sales Tax Act are different commercial commodities. The appellant in that case relying on Pyare Lal Malhotra's case [1976] 37 STC 319 (SC), contended that inasmuch as wire rod and wire are mentioned in one sub-item of section 14 of the Central Sales Tax Act, they have to be treated as one goods and not two different goods. The apex Court accepted the above contention and held that under sub-item ....
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....unde's submission, we may carefully note as to what was really decided in that case. There, this Court was examining whether steel rounds, flats, plates, etc., were exigible to tax under the provisions of the Tamil Nadu General Sales Tax Act. These products were also declared goods, and so, an argument was advanced that the iron scrap from which the goods had been manufactured having suffered sales tax, tax could not be realised once again from the sale of plates, flats, rounds, etc. This Court did not accept the contention but the reason given for rejecting the contention is what is pressed into service by Shri Tarkunde, according to whom, the reason given therein establishes his contention conclusively. 9.. As we are concerned with the products of iron and steel, as was Pyare Lal's case [1976] 37 STC 319 (SC); [1976] 3 SCR 168, let the relevant part of section 14 of the Act dealing with it be noted: '14. Certain goods to be of special importance in inter-State trade or commerce.-It is hereby declared that the following goods are of special importance in inter-State trade or commerce: (iv) iron and steel, that is to say.......... (xv) wire rods and wires-rolled, drawn,....
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....in, despite wheat having suffered tax, and we should take the same view qua wires. A perusal of this decision shows that the view in question was taken because wheat simpliciter was mentioned as a declared goods in sub-clause (iii) of clause (i) of section 14 of the Act and not wheat products. So this case has not departed from the view taken in Pyare Lal [1976] 37 STC 319 (SC); [1976] 3 SCR 168, which had been duly noted in this decision. 13.. At this stage, we may note the object behind interdicting multiple-point tax on declared goods which follows from the mandate contained in clause (a) of section 15 of the Act. According to us, the purpose behind this provision is to minimise the tax burden on declared goods because of the special importance of these goods in inter-State trade and commerce. 14.. When the attention of the Sales Tax Appellate Tribunal, against whose orders the present appeals have been filed, was drawn to Pyare Lal's case [1976] 37 STC 319 (SC); [1976] 3 SCR 168 and the argument noted above was advanced, it observed that the two goods being distinct, the argument was 'really a camouflaged attempt to by-pass the judgment'. According to us, the Tribunal did....
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....ble commodity. Section 15 of the Central Sales Tax Act interdicts multi-point sales tax on declared goods. However, if the declared goods are different commodities falling under different sub-items of section 14, the single point taxation principle would not debar realisation of sales tax once again, even if the material out of which they are made had already been subjected to sales tax. 11.. Having regard to the legal position stated above, we see no infirmity in sub-section (2)(b) of section 2-B which says that in computing the taxable turnover of a dealer of transfer of property involved in the execution of works contract he is entitled to deduct all the amounts for which any goods specified in the First or Second Schedule are purchased from registered dealers and used in the execution of works contract in the same form in which such goods were purchased. If the goods purchased by a dealer is a distinct commercial commodity falling under a particular sub-item of section 14 such commodity should be used in the execution of the works contract either in the form in which such goods were purchased or in some other form falling under the very same sub-item of section 14 as the goo....
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....er different sub-items of item (iv) of section 14. Therefore, they are different commodities and the dealer cannot claim deduction under sub-section (2)(b) of section 3-B in respect of amounts for which iron scrap is purchased. 12.. The assessing authorities under the Act, while computing the taxable turnover of a dealer under sub-section (2)(b) of section 3-B of the Act in individual cases, are bound to bear in mind the above principles laid down by the Supreme Court in Pyare Lal's case [1976] 37 STC 319 and Telangana Steel Industries' case [1994] 93 STC 187 and what we have said in the preceding paras 10 and 11. For all the reasons stated above, we have no hesitation in holding that the condition prescribed by section 3-B(2)(b), that in order to claim deduction from the total turnover in respect of the amounts for which the goods specified under First or Second Schedule are purchased, such goods must be used in the execution of the works contract in the same form in which they were purchased, will not result in levying sales tax at more than one stage contravening section 15(a) of the Central Sales Tax Act and article 286(3) of the Constitution and on that ground section 3-....
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....ct prior to May 28, 1993, under section 3-B, tax liability arose on reaching a total turnover of Rs. 50,000 and after the Act 25 of 1993 with effect from March 12, 1993, the liability to tax arises only on reaching the total turnover of Rs. 1,00,000 as given under section 3(1). 19.. The submission of Mr. C. Natarajan, learned counsel for the appellants, is that the condition prescribed in sub-section (2)(b) that in order to claim deduction from the total turnover in respect of the amounts for which the goods specified in the First or Second Schedule are purchased, such goods must be purchased from the registered dealers liable to pay tax under the Act, will result in levying tax at more than one stage contravening section 15(a) of the Central Sales Tax Act and therefore section 3-B of the Act is invalid. However, we are unable to accept the above contention of the learned counsel for the appellant. We must point out that section 3-B(1) of the Act contains charging provision and it says every dealer referred to in item (vi) of clause (g) of section 2 shall pay for each year a tax on his taxable turnover of transfer of property in goods involved in the execution of works co....
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....nded to give exemption to a dealer in respect of sales to registered dealers of specified classes of goods, it seeks also to prevent fraud and collusion in an attempt to evade tax. In the nature of things, in view of innumerable transactions that may be entered into between dealers, it will well nigh be impossible for the taxing authorities to ascertain in each case whether a dealer has sold the specified goods to another for the purposes mentioned in the section. Therefore, presumably to achieve the two-fold object, namely, prevention of fraud and facilitating administrative efficiency, the exemption given is made subject to a condition that the person claiming the exemption shall furnish a declaration form in the manner prescribed under the section. The liberal construction suggested will facilitate the commission of fraud and introduce administrative inconveniences, both of which the provisions of the said clause seek to avoid." 20.. Under sub-section (2)(b) of section 3-B, the requirement is that, in order to claim deduction under the said sub-section, the dealer must prove that the purchases made by him in respect of the goods specified in the First or Second Schedule are f....
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....travention of section 15(a) of the Central Sales Tax Act. Relying upon the above decision, it is contended by Shri C. Natarajan that by reason of sub-section (2)(b) of section 3-B of the Act, there is every possibility of the declared goods suffering tax at more than one point. The above decision of the apex Court in Bhawani Cotton Mills case [1967] 20 STC 290 is clearly distinguishable. In Bhawani Cotton Mills case [1967] 20 STC 290, the Supreme Court was concerned with section 5(2)(a)(vi) of the Punjab General Sales Tax Act, which is charging section but not with a machinery provision as in the present case. In Sha Pannalal Pemraj & Co. v. Commercial Tax Officer [1975] 35 STC 109, the Karnataka High Court after pointing out that the decision of the Supreme Court in Bhawani Cotton Mills case [1967] 20 STC 290 will not apply to a case where the court is concerned with a machinery provision, observed as follows: "........... It is no doubt true that ordinarily the burden of establishing the liability under a fiscal statute is on the revenue. It is however open to the Legislature in appropriate cases, in order to avoid evasion of the tax, to place the burden on the assessee himsel....
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....er. Further, in the case of declared goods, wherever the proof was not forthcoming from the assessee to show that the anterior sale was a taxable sale and hence the sale by the assessee was held to be a taxable sale, the courts have taken the view that there was no shift in the point of taxation. [Vide [1982] 49 STC 147 (MP) (Commissioner of Sales Tax v. Bansal Brothers), [1987] 66 STC 358 (Mad.) (Vasu General Traders v. State of Tamil Nadu) and [1995] 96 STC 60 (Mad.) (Heat Transfer Developments v. State of Tamil Nadu). Under these circumstances, we are of the view that there is no shifting of the charge or taxing at more than one stage violating section 15 of the Central Sales Tax Act when sub-section (2)(b) of section 3-B insists proof of purchase of goods from registered dealers liable to pay tax. For all the reasons, stated above, we are of the view that the condition prescribed in sub-section (2)(b) of section 3-B that in order to claim deduction from the total turnover in respect of the amounts for which the goods specified in First or Second Schedule are purchased, such goods must be purchased from registered dealers liable to pay tax, will not result in levying tax at more....
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....ue of the goods and the profits which are relatable to supply of labour and services will have to be excluded. Therefore, the value of the goods involved in the execution of the works contract have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover among other things the profits earned by the contractor to the extent it is relatable to supply of labour and services. The Supreme Court in the decision referred to above, dealing with the above aspect of measure of tax has held as follows: Measure of tax: On behalf of the contractors, it has been urged that under a law imposing a tax on the transfer of property in goods involved in the execution of a works contract under entry 54 of the State List read with article 366(29-A)(b), the tax is imposed on the goods which are involved in the execution of a works contract and the measure for levying such a tax can only be the value of the goods so involved and the value of the works contract cannot be made the measure for levying the tax. The submission is further that the value of such goods would be the cost of acquisition of ....
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....e goods in the works cannot be made a part of the measure for levy of tax contemplated by article 366(29-A)(b). With regard to the determination of the value of the goods which are involved in the execution of a works contract the submission of the learned counsel appearing for the State is that a more convenient mode for such determination is to take the value of the works contract as a whole and deduct therefrom the cost of labour and services rendered by the contractor during the course of execution of the works contract. The submission of the learned counsel is that this mode would prevent evasion of tax. The learned counsel for the contractors have submitted that in that event the following deductions should be made from the value of the entire contract in order to arrive at the value of the goods involved in the execution of a works contract: (i) labour charges for execution of the works; (ii) amounts paid to a sub-contractor for labour and services; (iii) charges for planning, designing and architect's fees; (iv) charges for obtaining on hire the machinery and tools used in the execution of the works contract; (v) cost of consumables such as water, electric....
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.... well as supply of labour and services, the cost of establishment of the contractor would have to be apportioned between the part of the contract involving supply of materials and the part involving supply of labour and services. The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods. Similar apportionment will have to be made in respect of item No. (viii) relating to profits. The profits which are relatable to the supply of materials can be included in the value of the goods and the profits which are relatable to supply of labour and services will have to be excluded. This means that in respect of charges mentioned in items Nos. (vii) and (viii), the cost of establishment of the contractor as well as the profit earned by him to the extent the same are relatable to supply of labour and services will have to be excluded. The amounts so deductible would have to be determined in the light of the....
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....as been urged that it would be permissible for the State to prescribe a formula on the basis of a fixed percentage of the value of the contract as expenses towards labour and services and the same may be deducted from the value of the works contract and that the said formula need not be uniform for all works contracts and may depend on the nature of the works contract. We find merit in this submission. In cases where the contractor does not maintain proper accounts or the accounts maintained by him are not found worthy of credence it would, in our view, be permissible for the State Legislature to prescribe a formula for determining the charges for labour and services by fixing a particular percentage of the value of the works contract and to allow deduction of the amount thus determined from the value of the works contract for the purpose of determining the value of the goods involved in the execution of the works contract. It must, however, be ensured that the amount deductible under the formula that is prescribed for deduction towards charges for labour and services does not differ appreciably from the expenses for labour and services that would be incurred in normal circumstance....
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....but it is in accordance with the principles laid down by the apex Court in Gannon Dunkerley's case [1993] 88 STC 204. Therefore, there is no merit in the contention of the learned counsel for the appellants that subsection (2)(b) of section 3-B provides deduction of only the amounts for which the goods specified in the First or Second Schedule are purchased, that the value of the goods at the time of transfer is ignored resulting in the profit margin and the transfer value of the goods getting added to the taxable turnover and on that ground sub-section (2)(b) is invalid. Accordingly, we reject the said contention of the learned counsel for the appellants. 27.. The next question we have to examine is the question regarding the validity of sub-section (2)(e) of section 3-B of the Act. Sub-section (2)(e) says that in computing the taxable turnover of a dealer for the purpose of levy of tax under section 3-B(1), the dealer is entitled to get deduction in respect of all amounts towards labour charges and other like charges not involving in transfer of property in goods, actually incurred in connection with the execution of works contract. The apex Court in Gannon Dunkerley's case [1....
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....subsection (2) of section 3-B of the Act are more or less similar to the provisions contained in the Karnataka Sales Tax Act, 1957 and that the apex Court has upheld the validity of the similar provisions of the Karnataka Act in Builders' Association of India v. State of Karnataka [1993] 88 STC 248. Further, we are of the view that the provisions contained in section 3-B particularly, the deduction provisions contained in sub-section (2)(b) of section 3-B are quite in accordance with the principles laid down by the Supreme Court in Gannon Dunkerley's case [1993] 88 STC 204 and the Builders' Association case [1993] 88 STC 248. In these circumstances, we are of the view that the sub-sections (2)(b) and (2)(e) of section 3-B of the Act are perfectly valid and we reject the contention of the learned counsel for the appellant that section 3-B is invalid because sub-section (2)(e) limits the expenses towards labour charges and other like charges only to the actual charges incurred in connection with the execution of the works contract without providing for the inclusion of the profit margin of the contractor. Accordingly, the questions raised in points Nos. 3 and 4 are answered in the ne....
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....lved in the execution of a works contract and the value of the goods which are involved in the execution of the works contract would constitute the measure for imposition of the tax. The apex Court further held that the value of the goods involved in the execution of the works contract will have to be determined by taking into account the value of the entire works contract after deducting therefrom the charges towards labour and services which would cover among other things cost of consumables such as water, electricity and fuel, etc., used in the execution of the works contract, the property in which is not transferred in the course of execution of the works contract. In view of the above decision of the apex Court, it has to be held that the cost of the consumables used in the execution of works contract, the property in which is not transferred in the course of the execution of the works contract, will certainly come within the purview of "labour charges and other like charges" contemplated under sub-section (2)(e) of section 3-B of the Act. Therefore, such cost of consumables has to be excluded from the total turnover of a dealer in calculating the taxable turnover for the purp....