TMI Blog1994 (5) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... (Forty-sixth Amendment) Act, 1982 (hereinafter referred to as "the 46th Amendment"), as explained by the decisions of the Supreme Court in Builders Association of India v. Union of India [1989] 73 STC 370, Gannon Dunkerley Co. v. State of Rajasthan [1993] 88 STC 204 and Builders' Association of India v. State of Karnataka [1993] 88 STC 248. 2(a). Works contracts as such were not liable for tax in the State till April 1, 1984, when consequent to the introduction of clause (29A) in article 366 of the Constitution, defining the expression "tax on the sale or purchase of goods", amendments were made to the Act and the Rules to levy tax on the transactions of sale, as enabled by the said Constitution amendment. The definitions of "dealer", "goods" and "sale" were, inter alia, amended to bring to tax the trans- actions which could be brought to tax by virtue of the 46th Amendment. Explanation (3A) to section 2(xxi) containing the definition of "sale" was thus introduced to provide that a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to be a sale. Appropriate amendments were also made to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of transfer of goods involved in the execution of works contract (where the transfer is not in the form of goods but in some other form) specified in the Fourth Schedule, at the rate specified against such contract in the said Schedule: Provided that no tax is payable in respect of the turnover of goods the transfer of which was effected without any processing or manufacture on which tax was levied under clause (i) on any earlier sale in the State or which are exempted from tax and for goods coming under the Fifth Schedule, no tax specified for the first sale is payable, on which tax was levied in any earlier sale in the State: Provided further that tax payable in respect of turnover of goods coming under the Second Schedule the transfer of which was effected without any processing or manufacture shall not exceed the rate and only at the points specified against such goods in the said Schedule. 7. Payment of tax at compounded rates.- .......................... (7) Notwithstanding anything contained in sub-section (1) of section 5 every contractor, in civil works of construction of buildings, bridges, roads, dams and canals including any repair or maintenance of such c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls of tax deducted and remitted to Government and if the particulars are correct and complete, the assessing authority may summarily make an assessment on that basis. (12) After the close of the year or at the completion of the works contract and on receipt of final statement of accounts and return, if the tax on purchases is found to be in excess of the tax payable under the compounded rates, no refund of such excess tax paid shall be made........... Rule 8: Determination of total turnover.- .......................... (4) For the purpose of sub-rule (1), the amount for which goods are sold by a dealer shall, (a) in relation to a works contract in which the transfer of property takes place in the form of goods, the whole amount payable to the dealer for carrying out such contract; (b) in relation to a works contract in which the transfer of property takes place not as goods but in some other form in which the dealer transfers all the goods involved in the execution of such contract, the whole amount payable to the dealer for carrying out such contract less the labour charges not incurred in relation to the goods involved in the execution of the works contract, as establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready referred to in the course of discussion, so that I may just briefly mention the ratio decidendi of each of these cases. 6.. In the first of these cases, the constitutional validity of the 46th Amend- ment itself was challenged, and was overruled. The other challenge which was on the merits was that it was not open to the States to overlook the provisions contained in article 286 of the Constitution and the Central Sales Tax Act, 1956 ("the CST Act, 1956", for short), while legislating for levy of tax on the transactions described in clause (29A) of article 366 of the Constitution. The law was declared in the following terms, in so far as it pertains to works contracts, covered by sub-clause (b) thereof: "(a) After the 46th Amendment, works contract, which was an indivisible one is by a legal fiction altered into a contract which is divisible, into one for sale of goods and the other for supply of labour and services. It has therefore become possible to the States to levy sales tax on the value of goods involved in a works contract in the same way in which sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Rajasthan Sales Tax Rules as unconstitutional and void, the reasons for which I shall mention later. The conclusions in the decision, in so far as they are relevant for the present discussion, may be summarised briefly in my own words, though a summary thereof appears at page 237 of the Report. (a) The court reiterated what they had stated earlier in the first Builders Association of India case [1989] 73 STC 370 (SC) that the power to impose tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, is subject to the prohibitions/limitations contained in article 286 of the Constitution, read with sections 3, 4 and 5 of the CST Act, 1956. It was therefore impermissible for the State Legislature to frame its enactment in such a manner as to transgress these constitutional limitations, and to impose tax on the goods involved in the execution of a works contract, where the transactions take place in the course of inter-State trade or commerce or outside the State or in the course of import or export. Whether such a contingency could arise in the execution of a works contract will have to be decided in the light ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State. (e) In the case of contractors, who do not maintain proper accounts, or the accounts maintained by them are not found worthy of credence, the States are entitled 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 allow deduction of the amount so determined from the value of the works contract to arrive at the value of the goods involved in the execution of the works contract. This formula need not be uniform for all works contracts and may vary depending on the nature of the contract; but it must be ensured that the amount deductible under the formula does not differ appreciably from the expenses for labour and services, that would be incurred in the normal circumstances in respect of that particular type of works contract. (f) It is permissible for the State Legislature to tax all the goods involved in the execution of a works contract at a uniform rate which may be different from the rates applicable to individual goods, because the goods which are involved in the execution of the works contract when incorporated in the works can be classified into a separate category ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enge to these latter sub-sections depends upon the sustainability or otherwise of the challenge to sub-sections (7) and (7A). I shall therefore consider whether sub-sections (7) and (7A) are invalid in any manner. 12.. The option to pay tax at the compounded rates is that of the contractors. There is no compulsion on them to opt for payment at those rates. The exercise of the option exonerates the contractors of the necessity of subjecting themselves to the rigorous assessment procedure under the Act except for the very limited purpose contemplated by sub-section (11) of section 7. The exercise of the option and the permission to pay tax at the compounded rate generates a contractual relationship between the contractor and the Revenue, and if the levy is otherwise within the legislative competence of the State, the option to pay tax at the compounded rate is not liable to be relieved against in a proceeding under article 226 of the Constitution. I have dealt with the matter at length in my judgment in O.P. No. 15953 of 1993 (V.S. Jyothish Kumar v. State of Kerala) and related matters, disposed of on April 8, 1994, where the validity of similar provisions for payment of tax at com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and (7A) from the payments made to the contractor every time, including advance payments, and remit the same to the Government. This is challenged as beyond the competence of the State Legislature, the plea being that tax is payable under entry 54 only as and when a sale takes place and not in anticipation of a sale. But it is well-established that a legislative entry is to be liberally construed as comprehending within it all the powers which are necessary, incidental or ancillary for the effective implementation of the power conferred by the said entry. In the case of a taxing statute, it is open to the Legislature to enact provisions which would check evasion of tax [Sardar Baldev Singh v. Commissioner of Income-tax [1960] 40 ITR 605 (SC); AIR 1961 SC 736 and Commissioner of Commercial Taxes v. Ramkishan Shrikishan Jhaver [1967] 20 STC 453 (SC); AIR 1968 SC 59]. The power to tax includes the power to provide the means to make the realisation of the tax effective (Chaturbhai M. Patel v. Union of India AIR 1960 SC 424 at page 429). What sub-section (7B) seeks to achieve is to facilitate the collection of revenue as also prevent loss to the State by recoveries becoming impossible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions contained in sections 22, 23 and 25. 17.. Another ground of challenge was that the deduction is made in a summary and arbitrary manner without ascertaining the actual liability, and it was stated, without making allowance for sales taking place in the course of inter- State trade, for declared goods and for labour charges. I find no substance at all in this charge. The sub-section comprises of different segments: one dealing with those who have not opted for payment of tax at the compounded rates and therefore making payment of the tax under section 5(1)(iv); and the other dealing with those who have so opted under sub-sections (7) and (7A). So far as the latter are concerned, none of the questions posed arise since it is only a question of arithmetical calculation with reference to the measure for the levy prescribed therein, and in the case of those falling under sub-section (7A) also making deduction of the amount of tax paid by the contractor on the purchases effected by him of goods used in the contract. The question therefore arises, in effect, only in regard to those contractors who have not opted for payment under sub- sections (7) and (7A). 18.. Now, what is dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the compounded rate is subject to adjustment at the final assessment that has to be made on him. In any case, rule 22A(3) affords the contractor an option and an opportunity to avoid the alleged offensive deduction by paying the tax regularly in accordance with the rules. I do not find anything in sub-section (7B) justifying the various apprehensions voiced by the petitioners. 21.. For all these reasons I am unable to uphold the challenge to sub- section (7B). For the very same reasons, I am also unable to agree with the decisions of the High Court of Orissa in Brajendra Mishra v. State of Orissa [1994] 92 STC 17 and of the Full Bench of the Patna High Court in Builders Association of India v. State of Bihar [1992] 85 STC 362 invalidating the deduction. I do not find anything in the observations in the decision of the Supreme Court in the first Builders Association of India case [1989] 73 STC 370, extracted at page 379 of the decision of the Patna High Court which compels a decision that the provision is unconstitutional. I express my dissent from the aforesaid two decisions. 22.. Before leaving these sections, I may mention a point raised by one of the petitioners, that sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what otherwise was an indivisible contract for the execution of a work. The effect of the amendment was thus to fictionally create sales of the goods involved in the execution of the works contract, though they have become part of the conglomerate which eventually passed on to the awarder of the contract. It is therefore that the sales of the goods concerned were held subject to the same restrictions/limitations to which those sales would have been subject had the sales taken place as goods themselves. Sub-clause (a) of section 5(1)(iv) recalls this principle where the transfer is in the form of goods, and the tax is made payable only as per the provisions of the First, Second and Fifth Schedules. The exemptions and exclusions available as on a normal sale of these goods are also attracted as the tax is only on the taxable turnover as defined in section 2(xxv). There cannot therefore be any grievance either about the rate of tax or the base of the levy and therefore sub-clause (a) is beyond challenge and has only to be upheld. 27.. The challenge is mainly levelled against sub-clause (b) which deals with the transfer of goods involved in the execution of a works contract, when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneric term labour and service charges and held that they should be deducted from the value of the works contract to arrive at the value of the goods involved in the work. This is the first step. The next step relates to the fixation of the taxable turnover and how the tax is to be levied. This stems from the fact that the sale of the goods involved in a works contract is deemed to have taken place as goods despite the property therein passing, not as goods, but as a conglomerate, thereby subjecting the sale to the same disciplines, restrictions, conditions and limitations, as in an ordinary sale of those goods qua goods. Thus sales or purchases of the goods involved in the execution of the work, in the course of the inter-State trade or commerce, outside the State and in the course of import and export are liable to be excluded from the levy. Equally the exemptions and exclusions available under the local sales tax enactment, be it total or partial, or re: rate or point of levy as also the in- hibitions contained in section 15 of the CST Act apply with full force to such deemed sales. The taxable turnover has to be ascertained with reference to all this. This is the second ste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. Conformity with section 15 of the CST Act, 1956, is also ensured. The provisions of the Kerala Act do not therefore suffer from the vice which vitiated the provisions of the Rajasthan Act and the Rules. The deemed sales of goods involved in a works contract are treated in the same manner as any other sale of those goods under the Act (except the uniform rate), so that section 5(1)(iv)(b) is not open to challenge on the grounds on which the Rajasthan provisions were struck down. 32.. The attack based on the Rajasthan Act really pertains to the realm of the second step in the determination of the taxable turnover. The two provisos to sub-clause (b) to section 5(1)(iv) also relate to this subsequent process, after the value of the goods involved is determined by deducting the labour and service charges from the value of the contract. Counsel for the petitioners however contend that the language of these provisos leaves no room for doubt that the only deductions permissible to arrive at the taxable turnover are those pertaining to the goods mentioned in the first proviso, and that only the tax payable on these goods is made, by the second proviso, subject to the restriction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contractor is concerned, the transfer is of the basic components or goods involved in the execution of the work. It is on these that article 366(29A)(b) permits levy of tax, which must therefore follow the disciplines prescribed in the Act, the CST Act, 1956 and in the Constitution regarding sale or purchase of those goods. The contractor cannot be denied the benefits of exemption, total or partial, or lower rate of tax, because he embedded the materials in the work after converting them into some other intermediate category of goods. That is what the offending words in the two provisos seek to do. They are therefore bad. 35.. The position as it stands under the provisos is like this. Iron and steel which have been used by the contractor in the making of a window grill, or a trellis work, or a truss; or cement, and iron and steel used for making a pile which is driven into the foundation; or timber made into doors and windows, which are subsequently used in the work, will be liable to be taxed (though otherwise non-liable), merely because they have undergone a process of processing or manufacture before being used in the work. This, in my opinion, is not correct. The transfo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enough to include the charges for labour and services as indicated in Gannon Dunkerley [1993] 88 STC 204 (SC). In view of this exposition by the Supreme Court, neither sub-clause (b) of section 5(1)(iv) nor rule 8(4)(b) can be held void for non-enumeration specifically of the various items deductible from the value of the contract, for arriving at the value of the goods. The generic term "labour charges" embraces all those items (other than the value of the goods) which go to make up the value of the contract and a provision for deduction of the "labour charges" is sufficient to do service for deduction of all those items enumerated by the Supreme Court. Rule 8(4)(b) and rule 9 cannot therefore be invalidated on this ground. 39.. But rule 8(4)(b) is not happily worded and in my opinion, a part of it has to be eschewed for another reason. The rule limits the labour charges to be deducted to those "not incurred in relation to the goods involved in the execution of the works contract". The labour charges envisaged by the Supreme Court are those incurred in relation to the works contract, i.e., those incurred in the execution of the work, in the user of the goods and in embedding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43.. My conclusions may be summarised as follows: (a) Section 5(1)(iv)(a), sub-sections (7), (7A), (7B), (8), (10), (11) and (12) of section 7 of the Kerala General Sales Tax Act, 1963 and rules 9, 22A and 30A of the Kerala General Sales Tax Rules, 1963, are not unconstitutional or void. (b) The provision in the two provisos to sub-clause (b) of section 5(1)(iv) limiting the applicability thereof to cases where the transfer of goods is effected without any processing or manufacture is unconstitutional and void. The expression: "the transfer of which was effected without any processing or manufacture" will be eschewed from the provisos. In all other respects, sub- clause (b) and the provisos are valid. (c) The expression "labour charges" in rule 8(4)(b) is wide enough to include all the eight heads of labour and service charges enumerated by the Supreme Court in Gannon Dunkerley Co. v. State of Rajasthan [1993] 88 STC 204 and all these items are liable to be deducted from the value of the contract in determining the value of the goods involved in the execution of the works contract. The limitation contained in the expression "not incurred in relation to the goods involved ..... X X X X Extracts X X X X X X X X Extracts X X X X
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