AI Drafter 
TaxTMI 
TaxTMI 
1996 (12) TMI 365
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....t is in the course of inter-State trade or commerce. The question arose as to whether works contract could be taxed by the State by enlarging the definition of "sale" in the sales tax legislation. The Supreme Court held in the case of State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353; AIR 1958 SC 560, that a works contract not being a sale within the meaning of the Sale of Goods Act, 1930, there is no sale or transfer of property in the goods as such, and therefore, a works contract is not exigible to sales tax. When the State Legislature expanded the definition of "sales" and declared that works contract shall be deemed to be sales, the Supreme Court held that the State Legislature has no power to tax transactions which are not sales merely by enacting that they shall be deemed sales. Consequently, the Constitution was amended by the 46th Amendment in 1982 by which clause (29A) was inserted in article 366, i.e., "'tax on the sale or purchase of goods includes'- (a).............. (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract." 4.. Reading this definition of....
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....in article 366(29A)(b), it is permissible to take the value of the works contract as the basis and the value of the goods involved in the execution of the works contract can be arrived at by deducting expenses incurred by the contractor for providing labour and other services from the value of the works contract. (6) The charges for labour and services which are required to be deducted from the value of the works contract would cover (i) labour charges for execution of the works, (ii) amount paid to a sub-contractor for labour and services, (iii) charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract, (iv) charges for planning, designing and architect's fees, and (v) cost of consumables used in the execution of the works contract, (vi) cost of establishment of the contractor to the extent it is relatable to supply of labour and services, (vii) other similar expenses relatable to supply of labour and services, and (viii) profit earned by the contractor to the extent it is relatable to supply of labour and services. (7) To deal with cases where the contractor does not maintain proper accounts or the account books produced by him ....
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....s which had already suffered tax. He argued that the same goods which will be exempted in the hands of the second seller, would however, be taxed if it is used in a works contract and this amounted to discrimination because there was no rational basis for selecting works contracts for the additional levy. He submitted that this result could have been avoided if there was no non obstante clause in the section. He relied on the decision of the Supreme Court in the case of Union of India v. Sanyasi Rao [1996] 219 ITR 330 and submitted that the non obstante clause should be struck down as unreasonable. He also pointed out that there was no such non obstante clause in section 5E which provide for tax on transfer of right to use any goods and this Court had held in the case of I.T.C. Classic Finance and Services v. Commissioner of Commercial Taxes [1995] 97 STC 330 that when the basic norm regulating the tax structure under the Act was tax at a single point levy of tax on a second sale in respect of the goods which have already suffered tax is impermissible and therefore, a deemed sale likewise cannot be subjected to tax if the goods relatable to such deemed sale have already suffered....
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....stained. 9.. Sri Dilleswara Rao submitted that the reference to a "registered dealer" in the fourth proviso to section 5F cast an unreasonable burden on the assessee as he was required to purchase only from the registered dealers in order to avoid the tax in respect of sub-contracts. He also submitted that while the goods could be classified there cannot be differential rate according to the dealers and relied on the decision in Jamshedpur Contractors' Association v. State of Bihar [1989] 75 STC 132 (Pat.). 10.. Sri S.R. Ashok submitted that the provisions of section 5F treated the use of the goods in the works contract as a sale whereas under the Rules, the purchase for use was itself taken as a basis for collection of tax at source where the contract extended beyond one year. He submitted that there was no machinery to ascertain the actual turnover that will be liable to tax by excluding the declared goods, inter-State sales and other exempted sales, and therefore, the provisions of section 5H are liable to be struck down as unworkable. Contentions of the Revenue: 11.. The learned Government Pleader for Commercial Taxes submitted that the provisions have been i....
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.... contractee in the same form in which they were purchased by the contractor: Provided further that no tax shall be levied on the turnover of transfer of property in goods, specified in the Fourth Schedule to the Act, involved in the KEC International Limited Company v. State of Karnataka (W.P. Nos. 16470 and 19493 of 1992 decided on 17th December, 1993-Karnataka High Court). execution of works contract, if such goods are transferred from the contractor to the contractee in the same form in which they were purchased by the contractor: Provided also that no such tax shall be leviable on the turnover of transfer of property in goods whether as goods or in some other form involved in the execution of works contract, if such transfer from the contractor to the contractee constitutes a sale in the course of inter-State trade or commerce under section 3 or an outside the State sale under section 4, or a sale in the course of import or export under section 5 of the Central Sales Tax Act, 1956 but does not include the goods either obtained or purchased from other States and used in the execution of works contract: Provided also that no tax shall be payable under this s....
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....only object of this amending Act was to raise revenues. Consequently, we find that section 5F was a conscious attempt to increase the revenue by levying a separate tax on goods involved in works contract. The contention that the levy of such tax is contrary to the single point system of tax cannot be accepted because the Legislature has intentionally departed from a single point system. It must be noted a non obstante clause was added to the beginning of section 5E also by the same amending Act. 15.. It was argued that if the non obstante clause leads to discrimination, the section can be read down to remove such discrimination and reliance was placed on the Supreme Court decision in Sanyasi Rao's case [1996] 219 ITR 330. In that case, the Supreme Court found that, while enacting section 44AC in the Income-tax Act, 1961, to collect the tax at the inception, the facility of determining the tax, available to the other persons carrying on the business in the same commodity, could not be denied. That was the reason why in spite of non obstante clause, the Supreme Court held that the reliefs available under sections 28 to 43C to the particular business should also be extended t....
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....l-settled that a greater latitude is permitted in the matter of classification and the State is allowed to pick and choose objects, persons, methods and even the rates for taxation (see Khyerbari Tea Co. Ltd. v. State of Assam AIR 1964 SC 925). Since in the present case the goods involved in the works contract have been treated as a separate class for additional levy, we find no discrimination or improper classification. 17.. The third line of attack was that all the goods supplied in works contract are taxed at uniform rate whereas in the Schedule given in the Sales Tax Act, all those goods are taxable at a different rate. As already noted, the Supreme Court has held in Gannon Dunkerley & Co. [1993] 88 STC 204, that while fixing the rate of tax it is permissible to fix a uniform rate of tax for the various goods involved in the execution of a works contract which rate may be different from the rates of tax fixed in respect of sales or purchase of those goods as a separate article. We, therefore, hold that the main provisions of section 5F is not discriminatory and is valid. Validity of the first proviso to section 5F: 18.. This proviso stipulates that the rate of tax in r....
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.... from one form to another in the execution of the contract, will not amount to the creation of a different or distinct commercial commodity exigible to tax once again. The learned counsel for the petitioners submitted that there would often be cases where a particular commodity is purchased and fabricated into another commodity by a sub-contractor and then fitted into the property of the customer in execution of the works contract and such transformation may be sought to be taxed on the ground that it was not transferred in the same form. We find that the use of expression "in the same form" was contrary to the intention of section 5F to tax the goods utilised in the works contract in whatever form it may be transformed during the execution of the works contract. We, therefore, hold in the first proviso of section 5F, the words "in the same form" go beyond the charging section in the main part of section 5F and thereby offends the provisions of section 15 of the Central Sales Tax Act also. We, therefore, strike down the words "in the same form in which they were purchased by the contractor" to this proviso as void. Validity of the second proviso to section 5F: 19.. This provi....
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....ence to the deemed sale under section 5F inside the State. Since the second deemed sale in that situation is not in the course of inter-State trade as defined in the Central Sales Tax Act, it will not have the protection of section 38. But it was submitted that if the purchases were made specifically for the execution of the contract, then the intervention of the branch office of a contractor in the movement of the goods from outside the State, for the execution of the contract inside the State should not make it any the less an inter-State sale. Reliance was placed in a Supreme Court case in Sahney Steel and Press Works Ltd. [1985] 60 STC 301. In that case, the company manufactured the goods according to the designs and specifications of the customers at its factory at Hyderabad and despatched them to the respective branches by way of transfer of stocks. The goods were taken delivery by the branches in the other States and ultimately delivered to the customers. The company was assessed in the other State where the goods were delivered as local sales but the State of Andhra Pradesh also claimed that the transfer of stocks from Hyderabad to the branch of the company outside the Stat....
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.... of A.P. [1981] 47 STC 204, that the goods related to levy of tax on the last purchaser and it was observed that in order to prove that the assessee was not the last purchaser all that was necessary to be shown was that he sold the goods to another dealer and it was not necessary for him to show that the purchaser was either a registered dealer or that he suffered tax. That position was not disputed by the learned Government Pleader in that case. In the present case also once it is found that a sub-contractor is compulsorily registrable, we fail to see any further purpose in requiring the contractor to prove that the turnover of the sub-contractor was included in the return of turnover filed by the sub-contractor. That information will be only with the sub-contractor and it could also be easily verified from the records of the taxing authority since the sub-contractor is registered and his registration number will be known. To require that the contractor should also show that the sub-contractor's turnover was returned by the sub-contractor appears to be an unreasonable burden on the contractor. We are, therefore, of the opinion that the words "and that the turnover of such amount i....
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....hich are not liable to tax and hence exceeds the scope of the charging section itself. However, the definition section starts with the words "in this Act, unless the context otherwise requires", the words shall have the meaning given in the sub-sections. It is obvious that the expression "total turnover" in section 5G(1) cannot, in the context of the liability under section 5G, refer to the total turnover as defined in section 2(r). On the contrary, it must relate to section 5F which refers to the payment of tax "on his turnover of transfer of property in goods whether as goods or in some other form involved in the execution of works contract", that is to say it must refer only to the turnover of the works contract itself. The Legislature itself has clarified the issue by substituting the section by the latest Amendment Act 27 of 1996 in the following terms: "5G(1). Subject to such conditions and in such circumstances as may be prescribed if a dealer, who executes any works contract other than the category of contracts notified by the Government under sub-section (2), so opts, the assessing authority of the area may accept, in lieu of the amount of tax payable by him under the A....
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....red dealer has to file a return in form A showing his estimated total net turnover for the first twelve months of his business. This return does not require any details. It is, thereafter, that he is required to produce his accounts and it is only when he fails to submit his accounts that a best judgment assessment follows under rule 11. If the same pattern is to be followed, it is clear that a dealer who opts for compounding the tax, must file a return in form A showing the amount paid or payable to the dealer towards execution of works contract and make an application for composition. Thereafter, permission is granted in form L1 and accordingly, a provisional assessment will have to be made under rule 10 treating the composition fee as the tax provisionally fixed on the basis of the return and allowing the assessee under rule 13 to pay the same in twelve equal monthly instalments. The relevant rules, therefore, do not require the production of accounts where the assessee opts for composition and hence the contention that sub-clause (3), as it presently stands, requires the production of accounts, is not sound. However, form L1 itself states that "the assessee has shown to the sat....
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....n in respect of the divisible contracts, all the more reason that in an indivisible contract the assessee withholds the power of the assessing authority to estimate the value of the goods involved in the works contract for the purpose of restricting the tax to that alone. Naturally, therefore, it is the assessee who has to consider whether it would be worthwhile for him to pay a lesser rate on the total turnover of the works contract without ascertaining the portion that will be taxable under section 5F at a higher rate. It is only in such cases where the composition is of benefit to the assessee that he would opt for the same. In this situation, there is no question of the statute imposing a tax on non-taxable components of the value of the works contract. It is the assessee who prefers to pay a lesser rate of tax on the total value of the contract and as the assessee derives the benefit from that procedure, he will be estopped from questioning the validity of that composition fee which is paid in lieu of the actual tax payable under section 5F. As regards turnover relating to the sub-contract, sub-section (3) itself provides for excluding the same and in the absence anything in t....
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....t of the counsel in this entire batch of cases was only with reference to this section. According to them, this provision for deduction of tax at source is very harsh and unreasonable in view of the practice of the Commercial Tax Department itself. It was submitted that if the tax is deducted, even though there is a provision for adjusting it against the final assessment, such a final assessment takes place almost at the end of the period of limitation prescribed, namely, four years and in the event of the works contract not being taxable at all or being taxable at a very nominal amount, a very large amount will become refundable which also may not be given back to the assessee promptly and in any case the assessee will not be compensated for the delayed payment because there is no provision in the Act for payment of interest as in the case of the Income-tax Act. It was submitted that such a deprivation of the funds of the petitioners was not only arbitrary but almost confiscatory, and therefore, this section was inherently vicious. The sting of this section has been partly removed by the substitution of the first two sub-sections the same by the following sub-sections by the amend....
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....nal assessment of the tax. The Punjab and Haryana High Court had also taken the view that ultimately whatever is found due on the basis of the assessment after the adjustment of the amount collected at source would have to be recovered, and if surplus, refunded. They took note of the argument that undue delay may be prejudicial to the assessee and observed that it will be open to the aggrieved contractor to move the court for speedy disposal. 34.. The focus, therefore, shifts from the section to the mechanism by which the deduction of tax at source could be limited to the actual tax leviable under section 5F. As held by the Patna High Court if no such mechanism is available, perhaps the section itself would be invalid. But then, the Legislature should be presumed to have intended to enact only a constitutionally valid law. It is no doubt true that if a provision in the statute reasonably construed, does not pass the test of the constitutionality, it cannot be taken to be valid merely because it is administered in a manner which might not conflict with the constitutional requirements as held by the Supreme Court in Collector of Customs v. Nathella See [1995] 98 STC 490 at 500. Sa....
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.... such contract in the year. (iv) In case, either the value of goods involved in the execution of a works contract or the cost of labour in such contract is not ascertainable from the accounts of a dealer, the total turnover of the dealer, shall be deemed to be the amount payable to the dealer for carrying out such contract less a sum not exceeding such percentage of it as may be fixed by the Commissioner of Commercial Taxes from time to time for different types of contracts for different areas, representing the usual proportion in such areas of the cost of labour to the value of materials used in executing such contract, subject to the following maximum percentages: Percentages (a) Electrical contracts- (i) H.T. Transmission lines 15 (ii) Sub-station equipment 10 (iii) Power house equipment and extensions 10 (iv) 11 and 22 KV and LT distribution lines 12 (v) All other electrical contracts 20 (b) All structural contracts 30 (c) Sanitary contracts- (i) Construction of fish nurseries and cement ring wells 25 (ii) Supplying and fixing sluices 15 (iii) Concrete broken stone in lime mortar 1:2 22 (iv) Concrete broken stone cement mo....
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....goods are transferred by the dealer as the same goods as they were purchased; (k) All amounts for which the goods specified in the Fourth Schedule are transferred by the dealer in execution of the works contract provided that the goods are transferred as the same goods as they were purchased; (1) Turnover of goods involved in the execution of works contract which are transferred in the course of inter-State trade or commerce under section 3 or transferred outside the State under section 4 or transferred in the course of import or export under section 5 of the Central Sales Tax Act, 1956." 38.. The deductions prescribed under this rule follow the pattern laid down by the Supreme Court in Gannon Dunkerley's case [1993] 88 STC 204 at page 235 and also along with four more items. This is perhaps the reason why the petitioners have not challenged the validity of this sub-rule. 39.. Rule 6(3)(i): In cases where the execution of a works contract extends over a period of more than one year, the total turnover of the purpose for subrule (2) for that year shall be deemed to be the value of goods purchased for being supplied or used in the execution of such contract in that year. ....
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....42.. In W.P. No. 17415 of 1995, the validity of rule 6(3) and (4) questioned. As sub-rule (4) has already been omitted by G.O. Ms. No. 788, Revenue (CT-II), September 21, 1996, the challenge has to be confined to rule 6(3). It was submitted that the first portion of this sub-rule imposes a tax on the value of the goods purchased for being supplied where the contract extends more than a year even though it may not be ultimately used in the contract. There appears to be some force in this contention. The Supreme Court has held in the case of State of Madras v. Narayanaswamy Naidu [1968] 21 STC 1 that the stock in hand may or may not be sold or consumed and could even be destroyed, and therefore, unless the taxable event has occurred, it cannot be taxed. Perhaps, the intention of this sub-rule was only that, but it is not happily worded. If the words "for being" are substituted by the word "and", it would be clear that only the value of the goods purchased and supplied or used in the execution of such contracts in that year would be liable to be taxed. It must be remembered that in respect of the goods used in the execution of contracts, there is no sale price as such, and therefore, ....
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....of India [1990] 76 STC 57 decided by the Patna High Court on the same lines is also prior to the decision of the Supreme Court. It was argued, basing on the observation of the Supreme Court in Builders Association of India v. Union of India [1989] 73 STC 370: "As the Constitution exists today the power of the States to levy taxes on sales and purchases of goods including the 'deemed' sales and purchases of goods under clause (29-A) of article 366 is to be found only in entry 54 and not outside it", that what is admittedly not a sale of goods, cannot be taxed with reference to the definition by a deeming provision. But then, this observation was also made prior to the decision in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204 (SC), where the issue of indivisible contract and the need for estimating the value of the goods supplied was specifically considered. The only caveat recorded was that the rate prescribed should not exceed the rates normally incurred in any such type of works contract. The petitioners have not placed any material to suggest that the rates prescribed are much less than the normal labour component of such works contract. In view of t....
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....a case of an indivisible contract, the total turnover would be much less than the amount payable in respect of the works contract. 45.. The last item in the list of grievances of the assessee was the burdensome proviso to the sub-section (6) of section 5H. This proviso requires that in order to claim adjustment of the tax deducted at source, the assessee has to establish that the tax deducted has been remitted along with the exact quantum of tax so remitted. The assessees appear to imagine that by placing the burden of proving deduction of tax at source, the assessees are required to produce information not in their possession but with the contractee. We are of the opinion that this is an imaginary grievance because once sub-section (3) provides that the authority making the deduction shall furnish to the dealer a certificate containing such particulars as may be prescribed, the burden cast by the proviso in sub-section (6) will be discharged by producing that certificate. The form XX which is prescribed under rule 17-I which provides for deduction at source, gives the form of certificate of deduction of sales tax. This includes complete particulars with reference to the amount ....