1992 (11) TMI 254 - SC - VAT and Sales Tax

Whether in the absence of an amendment in the Central Sales Tax Act specifically applying its provisions to a transfer of property in goods involved in the execution of a works contract the provisions of sections 3 4 and 5 contained in Chapter II can be held applicable to such a transfer? Held that - Appeal allowed. The High Court has upheld the validity of sub-section (3) of section 5 by taking into account the provisions of sub-rule (2) of rule 29 but while considering the said provisions the High Court has failed to notice that under clause (i) of sub-rule (2) of rule 29 transfer of property in goods involved in the execution of a works contract on which no tax is leviable under section 5 are not required to be deducted from the turnover. The High Court also failed to attach importance to the use of the word turnover (instead of word taxable turnover ) in sub-section (3) of section 5 as a result of which the amplitude of the incidence of tax has been widened so as to include transactions which are outside the sphere of taxation available to the State Legislature under entry 54 of the State List. We are therefore unable to uphold the decision of the High Court in this regard. Since the invalidity of section 5(3) goes to the root of the imposition of tax and in the absence of the said provision the tax cannot be levied the appellants in the appeals are entitled to succeed.

Summary

Issues Involved:
1. Legislative power of States to impose tax on transfer of property in goods involved in the execution of works contracts.
2. Applicability of the Central Sales Tax Act to such transfers.
3. Fixation of the situs of such transfers.
4. Measure for levy and fixing the rates for imposition of such tax.
5. Validity of specific provisions of the Rajasthan Sales Tax Act and Rules.

Detailed Analysis:

1. Legislative Power of States:
The Supreme Court addressed the legislative power of States to impose tax on the transfer of property in goods involved in the execution of works contracts. The power to impose this tax became available to State Legislatures through the Constitution (Forty-sixth Amendment) Act, 1982. The Court upheld the validity of this amendment in Builders Association of India v. Union of India, and clarified that the power to tax such transfers is subject to the same restrictions as any other sales tax under entry 54 of the State List. The Court emphasized that the States cannot impose taxes on inter-State sales, sales outside the State, or sales in the course of import/export.

2. Applicability of the Central Sales Tax Act:
The Court held that the provisions of sections 3, 4, and 5 of the Central Sales Tax Act, which determine when a sale takes place in the course of inter-State trade, outside a State, or in the course of import/export, apply to transfers of property in goods involved in the execution of works contracts. The Court also clarified that sections 14 and 15 of the Central Sales Tax Act, which deal with goods of special importance, are applicable to such transfers.

3. Fixation of the Situs of Transfers:
The Court discussed the issue of fixing the situs (location) of the deemed sale in works contracts. It stated that while States can define the situs of a sale, they cannot do so in a way that brings inter-State sales, outside sales, or sales in the course of import/export within their taxing power. The determination of whether a sale is an inter-State sale or an outside sale must be made according to the principles in the Central Sales Tax Act.

4. Measure for Levy and Fixing the Rates:
The Court determined that the measure for the levy of tax on the transfer of property in goods involved in the execution of works contracts should be the value of the goods at the time of their incorporation into the works, not the cost of acquisition by the contractor. The Court allowed for the deduction of expenses related to labor and services from the total contract value to determine the taxable value of the goods. It also upheld the States' ability to prescribe a formula for such deductions when proper accounts are not maintained by the contractor. Furthermore, the Court permitted States to impose a uniform tax rate on all goods involved in works contracts, which may differ from the rates applicable to those goods when sold separately.

5. Validity of Specific Provisions of the Rajasthan Sales Tax Act and Rules:
The Court examined specific provisions of the Rajasthan Sales Tax Act and Rules. It found that section 5(3) of the Act and clause (i) of sub-rule (2) of rule 29 were unconstitutional and void because they allowed for the imposition of tax on transactions beyond the State's legislative competence, including inter-State sales, outside sales, and sales in the course of import/export. The Court set aside the judgment of the Rajasthan High Court and quashed the assessment order dated September 1, 1990, passed by the Commercial Taxes Officer, Kota.

Conclusion:
The Supreme Court's judgment clarified the scope of State legislative power to tax transfers of property in goods involved in the execution of works contracts, ensuring compliance with constitutional limitations and the Central Sales Tax Act. The judgment also provided guidance on the appropriate measure for such taxes and the permissible deductions, while invalidating certain provisions of the Rajasthan Sales Tax Act and Rules that exceeded the State's legislative competence.