TMI Blog1990 (7) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of works contract in the State, has been brought within the scope of the Karnataka Sales Tax Act. The petitioners challenge the constitutionality of the Forty-sixth amendment, as well as the amendments made to the Karnataka Sales Tax Act. The challenge is in three stages: (i) the constitutional amendment of procedural and substantive aspect; (ii) the power of the respective State Legislature to levy and determine tax on works contract without a law made under article 286(3)(b) of the Constitution; and (iii) the Karnataka Amending Act 27 of 1985 on various grounds of illegality. By the Forty-sixth Amendment, the definition of "sale" under article 366(29-A) is not an enabling amendment. The power to levy sales tax can only be traced to entry 54 of List II in the State List of the Seventh Schedule. That entry has not been amended by the Forty-sixth amendment. Therefore, merely because clause (29-A) of article 366 of the Constitution was amended, that will not enable the State Government to levy sales tax on works contract. This is because the said article cannot be taken as a source of power, for the simple reason that the connected definitions of "goods" under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Sales Tax Act as amended by the amending Act No. 27 of 1985, and the Rules made relating to the levy of sales tax on works contract, as illegal, unconstitutional and violative of articles 14, 19(1)(g), 38, 39, 246, 254, 265 and 301 to 304 of the Constitution of India, in so far as the petitioners are concerned. 3.. Mr. K.K. Venugopal, Senior Advocate, learned counsel for the petitioners, submits in support of the above grounds raised in the writ petitions after drawing our attention to the relevant provisions, that the amending Act No. 27 of 1985 was passed at a time when the Supreme Court had not delivered the judgment in Builders Association of India v. Union of India [1989] 73 STC 370; AIR 1989 SC 1371. The Supreme Court evolved the concept of transfer of goods in a works contract similar to transfer of goods by sale to a customer, the result being the constitutional restrictions and provisions of the Central Sales Tax Act were made applicable. The Supreme Court ruled that the transfer of goods in a works contract will be a fictional sale. It had further ruled that those sales are subject to the same constitutional limitations. Therefore, one cannot get away from them. Unfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . If the fictional sales are brought in so as to enable the State Legislature to tax, it would be clearly violative of the said article. Therefore, it is the Parliament which has to determine what is sale or purchase under clause (29-A) of article 366. Though article 286(2) says that Parliament may by law formulate the principle for determining as to when a sale or purchase takes place, "may" in this context must mean "shall". In support of this submission, the learned counsel cites Principles of Statutory Interpretation by Justice G.P. Singh, IV Edition, page 244. Further, explanation (3)(c) to section 2(1)(t) is violative of article 286. Therefore, this explanation has to be struck down as otherwise the State may claim immunity and proceed to levy tax even though such striking down does not advance the case of the petitioners. 4.. Mr. K. Srinivasan, supporting the arguments of Mr. Venugopal, submits that article 286(1)(a) of the Constitution talks of sale outside the State. This is what is contemplated under section 4 of the Central Sales Tax Act. Therefore, explanation (3)(c) to section 2(1)(t) of the Karnataka Sales Tax Act is directly opposed to section 4 of the Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposing the tax on fictional sales must conform to the constitutional provisions and also the limitations contained in the Constitution as well as the Central Sales Tax Act. The same question as is advanced by the petitioners, came up for consideration in Ranjit Kumar v. Commercial Tax Officer [1988] 71 STC 502 (AP). It was rejected as is seen from the passage occurring in pages 504 and 505. It is incorrect to contend that the State has no power in the absence of a law made by the Parliament under article 286(2) of the Constitution. It should be carefully noted that the said article used the word "may" likewise article 286(3). Only when a law is made by the Parliament, should the State law be repugnant to such Parliamentary enactment, it would be, to the extent of repugnancy, bad, but not otherwise. There is no possibility of construing this word "may" as "shall". In other words, clauses (2) and (3) of article 286 of the Constitution are enabling provisions conferring power on the Parliament. The argument of the petitioners that explanation (3)(c) to section 2(1)(t) of the Karnataka Sales Tax Act lays down a different principle and speaks of situs with reference to delivery of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arriving at the taxable turnover, clause (m) of rule 6 speaks of certain categories of works contract mentioned in the Sixth Schedule while clause (n) takes care of other cases of works contract specified in items 18 and 20 of the Sixth Schedule. This is merely a method and the working out as to what should be deducted would depend upon the facts of a particular case. Clause (m) speaks of actual incurring of labour charges. The excess of labour charges is an integral part of the sale price. As to how the reasonableness of classification must be approached can be gathered from Kerala Hotel Restaurant Association v. State of Kerala [1990] 77 STC 253 (SC); AIR 1990 SC 913. Therefore, there is nothing axiomatic about these matters. That case helps the State greatly. 7.. Mr. Srinivasan, in his reply, would submit that the ruling of 20th Century Finance Corporation Limited v. State of Maharashtra [1989] 75 STC 217 (Bom) will have a bearing only on section 5(1) and hence cannot be applied to a case arising under section 5B of the Karnataka Sales Tax Act. With regard to the applicability of section 4 to transfer of goods in a contract of service one must have regard to the principles l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1). (3) Any law of a State shall, in so far as it imposes, or authorises the imposition of,- (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29-A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify." Clause (3) has been substituted by the Forty-sixth amendment of 1982. The object of the amendment is to create a legal fiction to determine the situs of the sale. Since the law remained somewhat confusing that came to be settled by the Parliament enacting the Central Sales Tax Act in 1956. Section 4 of that Act provides a simple test of physical location of the goods by determining the situs of a sale as between more than one State. It should be noticed that clause (2) did not take away the legislative competence of the State to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made." By this clause, the concept of sale had come to be enlarged. It is no longer confined to the sale as understood under the Sale of Goods Act. 11.. The validity of the Forty-sixth amendment of the Constitution came directly before the Supreme Court in Builders Association of India v. Union of India [1989] 73 STC 370; AIR 1989 SC 1371 because, on the passing of the Forty-sixth amendment the State Governments co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to overcome the effect of the said decision Parliament amended article 366 by introducing sub-clause (b) of clause (29-A). Sub-clause (b) of clause (29-A) states that 'tax on the sale or purchase of goods' includes among other things a tax on the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract. It does not say that a tax on the sale or purchase of goods included a tax on the amount paid for the execution of a works contract. It refers to 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. The emphasis is on the transfer of property in goods (whether as goods or in some other form). The latter part of clause (29-A) of article 366 of the Constitution makes the position very clear. While referring to the transfer, delivery or supply of any goods that takes place as per sub-clauses (a) to (f) of clause (29-A), the latter part of clause (29-A) says that 'such transfer, delivery or supply of any goods' shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to a tax on a transfer of property referred to in sub-clause (b) of clause (29-A) of article 366. Clause (3) of article 286 consists of two parts. Sub-clause (a) of clause (3) of article 286 deals with a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce, which is generally applicable to all sales including the transfer, supply or delivery of goods which are deemed to be sales under clause (29-A) of article 366 of the Constitution. If any declared goods which are referred to in section 14 of the Central Sales Tax Act, 1956, are involved in such transfer, supply or delivery, which is referred to in clause (29-A) of article 366, the sales tax law of a State which provides for levy of sales tax thereon will have to comply with the restrictions mentioned in section 15 of the Central Sales Tax Act, 1956. Clause (b) is an additional provision which empowers Parliament to impose any additional restrictions or conditions in regard to the levy of sales tax on transactions which will be deemed to be sales under sub-clause (b) or sub-clause (c) or sub-clause (d) of clause (29-A) of article 366 of the Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to tax a transaction *Here italicised. which is deemed to be a sale under article 366(29-A) of the Constitution should also be subject to the same restrictions and conditions. ....................................We do not accept the argument that subclause (b) of article 366(29-A) should be read as being equivalent to a separate entry in List II of the Seventh Schedule to the Constitution enabling the States to levy tax on sales and purchases independent of entry 54 thereof. 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................. " Thus the resultant position is, the works contract as referred to in subclause (b) of clause (29-A) in article 366 of the Constitution is subject to tax and is subject to the same restrictions had it been a sale in the ordinary sense. Secondly, what were originally considered to be an inseverable contract could now be separated into two-one for sale of goods and the other for supply of labour and services. 12.. With this background, we pass on to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no antithesis between a sale in the course of inter-State trade or commerce and a sale inside the State. Even an inter-State sale must have a situs and the situs may be in one State or another. It does not involve any contradiction in saying that an inter-State sale or purchase is inside a State or outside it. A sale which is in the course of inter-State trade or commerce cannot be taxed by a State Legislature even if its situs is within the State, because the State Legislature has no legislative competence to impose tax on sale in the course of inter-State trade or commerce. In answering the question whether section 4 fixes the situs of sale, the majority held in Tata Iron Steel Co. Ltd. v. S.R. Sarkar [1960] 11 STC 655 (SC) that sub-section (2) defines what sales or purchases shall be deemed to take place inside a State. The terms of sub-section (2) are quite general, and Parliament has thereby attempted to locate the place where a sale takes place. The clause does not deal with the conditions which "effect" a sale: nor is there any warrant for the view that sub-section (2) of section 4 only seeks to locate the place of sales which are not in the course of inter-State tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen appropriation is made in the case of unascertained goods determines both the situs of such a sale as well as its character as an inside sale. Once a sale is fixed as having taken place inside a State with reference to such tests, it should be deemed to have taken place outside all other States. Even an inter-State sale or purchase or a sale in the course of export of goods out of the territory of India must have a situs. To fix the situs of a sale is a wholly different matter from taxing that transaction. The situs of a sale may fall to be determined both from the point of view of its exigibility to tax as also its exemption from tax either under the Constitution or under the taxing statute itself. The bans prescribed by article 286 operate only for the purpose of curtailing the taxing powers of the State and not for any other purpose. They would not alter the situs of a sale or purchase, and its situs would continue to be inside a particular State as determined by the principles formulated by section 4. 13.. With the above legal background, we go on to section 5B of the Karnataka Sales Tax Act which is under challenge in these writ petitions. That section may be quoted in fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works contract; (iii) a delivery of goods on hire-purchase or any system of payment by instalments; (iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; Explanation.-(1) A transfer of property involved in the supply or distribution of goods by a society (including a co-operative society), club, firm, or any association to its members, for cash or for deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act. (2)............(omitted). (3)(a) The sale or purchase of goods other than in the course of interState trade or commerce or in the course of import or export, shall be deemed, for the purposes of this Act, to have taken place in the State wherever the contract of sale or purchase might have been made, if the goods are within the State,- (i) in the case of specific or ascertained goods, at the time the contract of sale or purchase is made; and (ii) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale or purchase by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation because in paragraph 32 of the judgment in AIR 1989 SC 1371 (pages 396 and 397 of [1989] 73 STC 370) (Builders Association case) the Supreme Court held that all transfers, deliveries and supplies of goods referred to in clauses (a) and (b) of clause (29-A) of article 366 of the Constitution are subject to the same restrictions. Therefore, according to him, the situs was fixed under section 4 of the Central Sales Tax Act, and if the existing laws would cover all sales any attempt by Legislature to add something different to its own State contrary to section 4 of the Central Sales Tax Act is unconstitutional. In opposing this stand, Mr. Achar, learned Government Advocate, would say that the State has the power to tax on such transfer of right to use the goods irrespective of where the contract has taken place or not. In support of this submission reliance is placed on 20th Century Finance Corporation Limited v. State of Maharashtra [1989] 75 STC 217 (Bom). In that case, the validity of the Maharashtra Sales Tax on the Transfer of the Right to use any Goods for any purpose Act, 1985, came up for consideration. The object of that Act was to levy and collect sales tax upon the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers for use by the lessees, the transfer becomes taxable. In other words, the impugned Act levies tax only when the lessee is put in possession for using the goods. According to the claim made by the petitioners themselves, therefore, the movement, if any, of goods pursuant to the orders placed by the 1st petitioner upon the manufacturers and suppliers precedes the transfer of the right to use in favour of the lessee. The impugned Act levies tax upon transfer of the right to use goods which are within Maharashtra at the time of their use." Accordingly, should the goods involved in the execution of the works contract be within the State of Karnataka at the time of transfer the value of such goods would become taxable. Certainly should the declared goods go in as declared goods, the limitations contained in the other Acts would apply, but not if they change their character. When section 5B of the Karnataka Sales Tax Act opens with a non obstante clause, the intention of the Legislature is clear that the sales as understood generally are not to be tagged on to these deemed sales. It also requires to be noted here that the language used here is the same as in article 366(29-A), sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable goods are used up and turned into independent goods losing their original identity and thereafter when the manufactured goods are despatched outside the State of Haryana, only then tax is levied and liability to pay tax is created. In contradistinction to this, under section 5B read with section 2(1)(t), explanation (3)(c) of the Karnataka Sales Tax Act, if the goods involved in the execution of the works contract are within the State at the time of such transfer, the State could levy the tax. Therefore, the levy has direct connection with the transaction of transfer of goods involved in the execution of works contract. Hence the decision in [1990] 76 STC 71 (SC) (Goodyear India Ltd. v. State of Haryana) has no application to the facts of this case. It is also incorrect to contend that section 5B proposes to tax the conglomerate. On the contrary it merely seeks to tax the value of the property in goods, either as goods or in some other form, involved in the execution of works contract mentioned in column (2) of the Sixth Schedule. If this test could be adopted for purposes of local taxation, it is not necessary that section 4 of the Central Sales Tax Act must be amende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lauses (a) to (e) of sub-rule (1). Clause (m) of sub-rule (4) reads as follows: "(m) in the case of works contracts specified in serial numbers 1, 2, 3, 4, 5, 7, 8, 9, 10, 11, 12 and 17 of the Sixth Schedule; (i) all amounts for which any goods specified in the said serial numbers and falling under Second Schedule are purchased from registered dealers liable to pay tax under the Act, (ii) all amounts actually expended towards 'labour charges' for erection, installation, fixing, fitting out, or commissioning of the goods specified in the said serial numbers, (iii) all amounts paid to sub-contractors as the consideration for execution of works contract whether wholly or partly: Provided that, no such deduction shall be allowed unless the dealer claiming deduction produces proof that the sub-contractor is a registered dealer liable to tax under the Act and that the turnover of such amounts is included in the monthly statement or return of turnover as the case may be, filed by such sub-contractor;" The complaint before us is that while the second sub-clause of clause (m) would take note of actual amounts expended towards labour charges, in clause (n) sub-clauses (iv) and (v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of deduction. Those are details to be established before the taxing authority and it cannot be argued in an abstract way. Therefore, leaving open that remedy in that this aspect could be decided in individual cases depending upon the nature of the contract and the method of keeping accounts, we hold that rule 6 is not ultra vires. It is the contention of Mr. Srinivasan that a rule similar to subclauses (iv) and (v) of clause (n) of rule 6(4) under the Bihar Sales Tax Rules, 1983, came to be struck down in Jamshedpur Contractors' Association v. State of Bihar [1989] 75 STC 132 (Pat). We are unable to agree. That rule (rule 13-A of Bihar Sales Tax Rules) stated that while providing for deduction in case of works contract, on account of labour charges depending upon different types of contract a percentage would be deducted. Therefore it was held in paragraph 9 as follows: "Thus it will be noticed that the rule provides that for different types of works in works contract, different percentage of labour shall be presumed to have been used and amount spent to that extent shall be deducted from the gross turnover. Tax is payable on labour charges under this rule. Under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in the United States) have always acted, is nowhere better stated than by Willis in his 'Constitutional Law', page 587. This is how he put it: 'A State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably........... The Supreme Court has been practical and has permitted a very wide latitude in classification for taxation.' This principle was approved by this Court in East India Tobacco Co. v. State of Andhra Pradesh [1962] 13 STC 529 (SC) at page 533; [1963] 1 SCR 404 at page 410; AIR 1962 SC 1733 at page 1735. Applying it, the Court observed: 'If a State can validly pick and choose one commodity for taxation and that is not open to attack under article 14, the same result must follow when the State picks out one category of goods and subjects it to taxation.' This indicates a wide range of selection and freedom in appraisal not only in the objects of taxation and the manner of taxation but also in the determination of the rate or rates applicable. If production must always be taken into account there will have to be a settlement for every ..... X X X X Extracts X X X X X X X X Extracts X X X X
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