TMI Blog1992 (12) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... les Tax (Fourth Amendment) Act, 1986 (Tamil Nadu Act 42 of 1986) introducing section 3-B and the Fourth Schedule to the main Act with effect from June 26, 1986 and amendments to rule 6-B, etc., at different stages obtaining interim orders from initiating any action against them and others challenging in addition to the validity of those provisions, the consequential pre-assessment notices or orders of provisional assessment or final assessment passed in individual cases by the respective assessing officers. In October, 1989, some of the writ petitions earlier filed came to be summarily disposed of by a Division Bench of this Court by issuing certain directions to the assessees and assessing officers and without going into the question of ones of the provisions challenged, in the wake of the decision of the Supreme Court of India reported in [1989] 73 STC 370 (Builders Association of India v. Union of India). Even those assessees have failed second round of cases taking advantage of the law declared by the apex Court in the above decision and the petitioner in W.P. No. 8465 of 1986 filed an appeal before the apex Court in C.A. No. 138 of 1990, in which the apex Court while setting a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The plea on behalf of the States that the Constitution Amendment in question had conferred on the States a larger freedom than what they had before in respect of their power to levy sales tax under entry 54 of List II of the Seventh Schedule was rejected and it was held that the amendment did no more than make it possible for the States to levy sales tax on the price of the goods and materials used in works contracts, as if there was a sale of such goods and materials. Liberty was also given to those aggrieved and before them to approach the concerned authorities or before the competent High Court for vindicating the rights of the parties before court and to even challenge the validity of the statutory provisions and the rules made thereunder before High Courts. 3.. While matters stood thus, the issue relating to the constitutional validity of the statutory provisions and rules made thereunder came up before the apex Court. The constitutional validity of the relevant provisions of the Rajasthan Sales Tax Act, 1954 and the Rajasthan Sales Tax Rules, 1955, relating to the imposition of sales tax on transfer of property in goods involved in the execution of a works contract came up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import or export. (2) The provisions of sections 3, 4, 5 and sections 14 and 15 of the Central Sales Tax Act, 1956, are applicable to a transfer of property in goods involved in the execution of a works contract covered by article 366(29-A)(b). (3) While defining the expression 'sale' in the sales tax legislation it is open to the State Legislature to fix the situs of a deemed sale resulting from a transfer falling within the ambit of article 366(29-A)(b) but it is not permissible for the State Legislature to define the expression 'sale' in a way as to bring within the ambit of the taxing power a sale in the course of interState trade or commerce, or a sale outside the State or a sale in the course of import and export. (4) The tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract falling within the ambit of article 366(29-A)(b) is leviable on the goods involved in the execution of a works contract and the value of the goods which are involved in the execution of a works contract would constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents followed up by M/s. K.M. Vijayan, K.J. Chandran, K. Ramagopal, S.V. Subramaniam, T.V. Ramanathan, Venkataraman, Radhakrishnan, Jayakumar and others who while adopting the submissions of Mr. Natarajan, brought to our notice certain facets of the problems encountered by the different assessees. Before adverting to the submissions made for our consideration, it may be stated that the learned counsel appearing on either side realised the position that several of the points raised in the affidavits filed in support of the various writ petitions stood answered and concluded by the declaration of the law in the three decisions of the apex Court rendered after the Constitution (Fortysixth Amendment) Act and that the endeavour of the various counsel who argued was only to highlight the infirmities in the amendments to the Act and the Rules introduced to the Tamil Nadu General Sales Tax Act, 1959, to bring the same within the category of the Rajasthan Sales Tax Act, the amendments to which were held to be vitiated and pleaded that they are not of the pattern of amendments introduced to the Karnataka Sales Tax Act, which came to be upheld by the apex Court. There is no controversy among ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... really is labour and other charges not involving any transfer of property. It is also contended that the fluctuations and variations in the percentage of deduction in the notifications dated October 1, 1984 and December 15, 1986 have no reasonable basis or material whatsoever and has been arbitrarily fixed at random without any rhyme or reason and, therefore, the same is liable to be declared unlawful. In support of the said grievance a plea of under-classification is also raised by adverting to the fact that whereas Schedule IV indicates about 20 items of contracts the rules deal with only about 5 items of contracts in fixing the percentage of deduction for labour and other charges and that too adopting artificial percentage without any appropriate research material therefor. Finally, it is submitted that the absence of any provision to exclude the turnover relating to transfer of property in the goods in the course of inter-State and import/export sales and also to preserve and secure the benefit of single point levy and the benefits of sections 14 and 15 of the Central Sales Tax Act, 1956 and article 286(3) of the Constitution seriously undermine the validity of the impugned pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption or assumption about the levy of tax. Relying upon the decision in [1991] 81 STC 113 (SC); AIR 1989 SC 2227 (Aphali Pharmaceuticals Ltd. v. State of Maharashtra), it is contended that wherever there is inconsistency between the charging section and the Schedule to the Act the Schedule has to yield and give way and the absence of levy on transfer of property in goods in some other form in section 3-B renders the Fourth Schedule to that extent inconsistent and unenforceable in respect of such turnover. Relying upon the ratio of the decisions reported in [1972] 29 STC 474 (SC) (State of H.P. v. Associated Hotels of India Ltd.) and [1965] 16 STC 364 (SC) (Patnaik Co. v. State of Orissa), rule 6-B(a) is said to be obnoxious, since property does not pass earlier in finished goods in certain types of works contracts. 8.. Mr. K.M. Vijayan, while adopting the submissions of Mr. Natarajan, also contended that rules 6-A and 6-B are illegal and invalid in that they are neither reasonable nor in conformity with the 46th Amendment to the Constitution and that Schedule IV is opposed to the dicta of the judgments of the apex Court. It was also contended that the assessees relating to wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ior counsel appearing for some of the petitioners, highlighted the differences in the relevant provisions of the Tamil Nadu General Sales Tax Act and the Rules on a comparative analysis with the provisions contained in the Rajasthan Act and the Karnataka Act and endeavoured to support the line of submissions made by Mr. C. Natarajan. While adverting to the decision of a Division Bench of the Patna High Court reported in [1989] 75 STC 132 (Jamshedpur Contractors' Association v. State of Bihar) it was also contended that the rate of percentage fixed for deduction towards labour and other charges has no basis or nexus to the object of such deduction. 12.. Mr. T.V. Ramanathan, learned counsel appearing for some of the petitioners, stated that his clients carry on the business of re-charging customers' batteries, that no sale or transfer of property is involved in the same and that acid, etc., used has already suffered levy and there was no scope for once again subjecting the same to tax in the hands of those petitioners. It is the plea of the petitioners that even the amendments introduced would not render the said petitioners liable to tax under the Tamil Nadu General Sales Tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Rules is distinct and not similar to the one held bad in the Rajasthan Act. While adverting to sections 4 and 7-A(1)(c) of the Act and rule 6-B of the Rules, the learned counsel contends that what really ultimately taxed is only the taxable turnover as determined and not the whole of the turnover or the value of the contract as a whole. The omission to provide specifically for the exclusion of the turnover taxable under the Central Sales Tax Act does not, according to the learned counsel matters since it can never form part of the turnover, total or taxable as held by the apex Court reported in [1957] 8 STC 561 (Fernandez v. State of Kerala) and a Division Bench of this Court reported in [1969] 23 STC 447 (Kumarasamy Pathar v. State of Madras). It is also contended that notwithstanding the non obstante clause used in section 3-B in respect of certain charging provisions, the levy is made only "subject to the other provisions of this Act" as found specifically stated in the very provision and read in that manner with the other provisions, the so-called omissions complained of for the petitioners would be of no significance whatsoever. Section 2(n) and 2(q) has been also referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tamil Nadu General Sales Tax Act, 1959, in G.O.P. No. 1103, Commercial Taxes and Religious Endowments Department, dated October 1, 1984, published in the Tamil Nadu Government Gazette, Extraordinary dated October 1, 1984; and (d) the constitutional validity and legality of rule 6-B(b) made in substitution of the original clause (b) by G.O.P. No. 1277, C.T. R.E. dated December 15, 1986 and the relief, if any, to be given in the above writ petitions depending upon the decision of ours on the other issues. 18.. So far as "the 1984 Amendment Act" is concerned, which consequent to the Constitution Forty-sixth Amendment Act added by inserting clauses (v) to (ix) to section 2(g) of the main Act, enlarging the scope of definition of "dealer" for the purpose of the Act, amendments to section 2(j) of the main Act which defines "goods", section 2(n) which defines "sale" in the main Act and section 2(r) relating to the definition of "turnover" were also made, in addition to the addition of a new definition clause in section 2(u) defining "works contract". We are not concerned with, in these batch of cases, other amendments introduced except noticing the position that section 7 of the Amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Andhra Pradesh High Court in the decision reported in [1987] 66 STC 26 (Padmaja Commercial Corporation v. Commercial Tax Officer). A similar challenge to the amendments introduced to the Karnataka Sales Tax Act, 1957, was upheld by a Division Bench of the Karnataka High Court in the decision reported in [1990] 79 STC 442 (Builders Association of India v. State of Karnataka). 19.. The challenge to the amendments introduced by the 1984 Amendment Act on the basis of the Constitution (Forty-sixth Amendment) Act, 1982, could no longer survive after the decision of the apex Court in the First Builders Association case [1989] 73 STC 370. The challenge to the said provisions, therefore, fails and shall consequently stand rejected. 20.. The next issue that requires to be considered is regarding the constitutional validity and legality of the 1986 Amendment inserting section 3-B and also adding the Fourth Schedule to the main Act. Section 3-B reads as hereunder: "3-B. Levy of tax on the transfer of goods involved in works contract.Notwithstanding anything contained in sections 3, 4, 5, 7 or 7-A, but subject to the other provisions of this Act, every dealer referred to in item (vi) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax, contemplated by article 366(29-A) of the Constitution of India. 21.. The learned counsel appearing for the petitioners contended in unison, that unless, the manner and method of determination of the turnover that could be taxed is provided for in the very charging provision, the same stood vitiated and suffer the vice pointed out by the Apex Court in the Gannon Dunkerley's Rajasthan case [1993] 88 STC 204 supra; [1992] 2 MTCR 474 and section 3-13 is, therefore, liable to be struck down, applying the ratio of the said decision. It is also contended for the petitioners that unlike section 5-B of the Karnataka Sales Tax Act, 1957 and in the same manner as section 5(3) of the Rajasthan Sales Tax Act, 1954, the levy is imposed on the turnover and not on taxable turnover and on this ground also section 3-B is liable to be struck down. It is further contended that in any event even the provisions contained in rules 6-A and 6-B of the Tamil Nadu General Sales Tax Rules, 1959, which deal with the determination of such turnover for imposing the tax do not provide for deduction of all that should be, to properly arrive at the turnover that alone could be taxed even after the Constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uctions for the turnover of the amount of proceeds of sale of goods on which no tax is leviable under the Act so as to exclude the abovementioned sales from levy of tax. The rule-making authority would not be contravening the mandate of the statute if it does not allow deduction of the amount of proceeds for sale of goods on which no tax is leviable under the Act from the turnover. The constitutional validity of a statute has to be determined on the basis of its provisions and on the ambit of its operation as reasonably construed and if, so judged, it does not pass the test of constitutionality and it cannot be pronounced valid merely because it is administered in a manner which might not conflict with the constitutional requirements. (See: Collector of Customs v. Nathella Sampathu Chetty [1962] 3 SCR 786 at pages 825 and 826). The rules framed under the Rajasthan Sales Tax Act would not, therefore, be of any assistance in resolving the question regarding the validity of section 5(3). We have, however, examined the rules that have been framed and we find that they do not improve the position. The relevant provisions in this regard are contained in sub-rule (2) of rule 29 of the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on goods declared to be of special importance in inter-State trade or commerce under section 14 of the Central Sales Tax Act. Clause (i) of sub-rule (2) of rule 29 of the Rajasthan Sales Tax Rules also suffers from the same infirmity. Section 5(3) of the Rajasthan Sales Tax Act and clause (i) of sub-rule (2) of rule 29 of the Rajasthan Sales Tax Rules must, therefore, be held to be unconstitutional and void. 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." 23.. We shall now advert to the other decision of the apex Court in Builders' Association of India v. State of Karnataka [1993] 88 STC 248 supra relied upon very much for the respondent-State rendered in relation to the Karnataka Sales Tax Act, confirming the Division Bench judgment of the Karnataka High Court reported in [1990] 79 STC 442 (Builders Association of India v. State of Karnataka). That was a case whereunder the constitutional validity of section 5-B of the Karnataka Sales Tax Act, 1957 and allied provisions and rules made relating to the levy of sales tax on the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pex Court in the Rajasthan case, the charge or levy was imposed in the case of a works contract on the "turnover of such contract", without making any proper provisions either in the Act itself or under the rules to properly ensure that the tax is levied and collected only on transfer of property in goods involved in the execution of works contract and not on the cost of incorporation of the goods in the works too, which forms part of the contract relating to work and labour and is also distinct from the contract for transfer of property in goods. 25.. The provisions of section 3-B of the Tamil Nadu Act unlike section 5(3) of the Rajasthan Act imposes the levy on the turnover of transfer of property in goods involved in the execution of works contract. The use of the word "turnover" in contrast to "taxable turnover" is not so much either pernicious or a vitiating factor provided the provisions in the Act or the Rules ensure properly levy of tax on the value of the goods alone as held by the apex Court eliminating and excluding something which is not part of that value. That apart, as rightly contended for the respondents there is scope and need for reading down the provision in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of this Act" makes the mandate clear that it would be subject to the other governing provisions. 26.. That apart, when a question arises whether the power has been properly conferred and even if so the extent of it, a Judge cannot simply fold his hand and blame the draftsmen and look for new enactment. A Judge can articulate what is inarticulate and what can be reasonably and plainly found to be inherent on the presumption that the Legislature or a law making body with limited authority would act only within limitations so as to make the legislation or the law valid and then supplant the written words and add to it and give "force and life" to the intention and purpose of the Legislature or the law making authority. Though a Judge must not alter the material of which a law or an instrument is woven but he can and should iron out the creases by construing it in a limited sense so as to keep it within the power. The technique of construction known as reading down has the practical effect that where an Act is expressed in language of a generality which makes it capable, if read literally, of applying to matters beyond the relevant legislative power, the court can construe it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court struck down the relevant provisions of the Rajasthan Act. Having regard to the scheme underlying the pattern of levy in section 3-B of the Tamil Nadu General Sales Tax Act, the provisions per se cannot be said to suffer the same infirmity. For all the above reasons, we are unable to countenance the challenge to the provisions of section 3-B either on the ground of absence of the word "taxable" prefixed to the word "turnover" or on the omission to formulate in the provision of the Act itself the procedure for determination of the taxable turnover by having an in built and illustrated items of deductions, the charge or levy under section 3-B itself being only on the value of the goods involved in the execution of the works contract as and when the transfer of property takes place and not the cost or value of the incorporation of the goods forming part of work and labour. The provisions of section 3-B, in our view, is constitutionally valid and does not also suffer from any other infirmity in law warranting or necessitating it to be struck down by us. 27.. The contentions of the learned counsel for the petitioners that though in the execution of a works contract, transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsistency raised for the very same reason of the Fourth Schedule with section 3-B of the Act equally deserves to be rejected in view of our conclusions as above. 28.. The next challenge from the petitioners that requires to be considered relates to the legality and constitutional validity of rules 6-A and 6-B of the Tamil Nadu General Sales Tax Rules, 1959. As noticed already, the above rules came to be introduced originally in its unamended form with effect from October 1, 1984. While rule 6-A provided that, notwithstanding anything contained in rule 5, the total turnover in relation to a works contract shall be the total amount payable for the execution of the works contract inclusive of the value of all goods and the labour and other charges involved in the execution of the contract. Rule 6-B provided the manner of determining the taxable turnover of a works contract by indicating the categories of deductions to be made, subject to the conditions specified therein from the total turnover. The items of deduction provided under rule 6-B(a) are as hereunder: "(a) where under the contract, the transfer of property takes place in the form of finished goods or the contractor is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part from rendering them to be discriminatory; (b) the rule 6-B, prior to its amendment in 1986 renders irrelevant the books of account maintained by an assessee as well as the actual expenditure incurred in respect of works-labour and other charges and this has the pernicious consequence of including as part of the taxable turnover amounts on which no tax could be levied even after the Constitution (Forty-sixth Amendment) Act; (c) the Table appended to rule 6-B deprives the assessing authority from exercising quasi-judicial powers by imposing a ceiling or an outer limit in providing for or allowing deductions permissible towards works-labour and other charges and consequently is arbitrary and unreasonable; (d) the absence of the provisions like the proviso introduced to clause (b) of rule 6-B is discriminatory and arbitrary. Clause (b) of rule 6-B suffers the vice of under-classification in that though in the Fourth Schedule, about 20 items of various categories of contracts are illustrated, the Table appended to clause (b) of rule 6-B provides for a different type of classification with only 5 items and the 6th item being the residuary item. That apart, it is contended that the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the notional percentage for deduction towards labour and other like charges, need not necessarily be one and the same since they have distinct and different purposes to be served, and aims and objects to be achieved, and that by itself provides sufficient scope for different kinds and nature of classification for different purposes. Equally without substance is the plea that the fixation of the percentage for deduction with a limit or ceiling has the consequence of interfering with the exercise of quasi-judicial powers by the assessing officers concerned. Whatever may be the position, prior to December 15, 1986, at least after the substitution of clause (b) of rule 6-B of the Rules with the proviso appended thereto, the need for applying the Table appended to clause (b) arose only in cases where the labour and other charges could not be determined from the accounts maintained or where such charges as shown in the accounts are unreasonably high, considering the nature of the contract, and not in every other case. In our view, the provisions made in the rules cannot be said to suffer from any infirmity, merely on account of a notional fixation so long as it is found to be reasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rajasthan Sales Tax Act in Gannon Dunkerley's case [1993] 88 STC 204 supra; [1992] 2 MTCR 474. We have already referred to in detail the principles laid down by the apex Court in the Rajasthan case and it needs no repetition. Once over again the apex Court has declared in unmistakable terms as to how a law enacted by a State Legislature should be even after the Constitution 46th Amendment, in the following terms: "It must, therefore, be held that while enacting a law imposing a tax on sale or purchase of goods under entry 54 of the State List read with sub-clause (b) of clause (29-A) of article 366 of the Constitution, it is not permissible for the State Legislature to make a law imposing tax on such a deemed sale which constitutes a sale in the course of inter-State trade or commerce under section 3 of the Central Sales Tax Act or an outside sale under section 4 of the Central Sales Tax Act or sale in the course of import or export under section 5 of the Central Sales Tax Act. So also it is not permissible for the State Legislature to impose a tax on goods declared to be of special importance in inter-State trade or commerce under section 14 of the Central Sales Tax Act except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 33.. The provisions of section 3-B merely levied the tax on the transfer of property in goods involved in the execution of the works contract. The assessment, determination of liability and recovery had to be under the provisions of the Act read with the relevant rules. In exercise of rule-making power conferred under section 53(1) and (2)(bb), rules 6-A and 6-B came to be made and published. The rules miserably failed to provide the procedure and principles for effectively determining the taxable turnover, after excluding the items of turnover relating to such works contract which could not be subjected to levy of tax by the State in exercise of its power of legislation under entry 54 of the State List. Rule 6 by its own operation had no application in the matter of determination of liability under section 3-B since it has been made applicable only in respect of determining the taxable turnover of a dealer under section 3, 3-A, 4 or 5. Consequently, with our decision above striking down rules 6-A and 6-B of the Rules, there is no proper machinery provisions to determine the taxable turnover for purposes of section 3-B. The provisions of section 3-B, therefore, in the absence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us and further action thereof cannot be pursued. 36.. The above direction shall not preclude the respondents from initiating fresh action or pursuing the action already initiated in the light of the law that may be properly made hereafter in terms of the declaration of law by the apex Court in the Rajasthan and Karnataka cases and by us in this order, enabling the authorities under the Act to proceed further in the matter in accordance with law. 37.. We are not expressing any view on the liability or otherwise of the assessees/dealers under the Act, de hors the impugned rules or under the impugned rules and section 3-B of the Act, since no such issue or point has been raised or argued before us at the time of hearing of these writ petitions. 38.. For all the reasons stated above, we summarise our conclusions and findings as follows: (a) The provisions of the Tamil Nadu General Sales Tax (Fourth Amendment) Act, 1984 (Tamil Nadu Act 28 of 1984) in so far as it amended section 2(g), (j), (n), (r) and (u) pursuant to the Constitution (Forty-sixth Amendment) Act, 1982 are intra vires and valid and quite in accordance with law; (b) The provisions of the Tamil Nadu General Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X
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