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TMI Blog1997 (5) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... of Himachal Pradesh. In C.W.P. No. 1839 of 1993, it is for Pressure Shafts and Power House Complex. In C.W.P. No. 199 of 1994, it is for dam, intake and desilting chambers as well as head race tunnel from station 0.0 m to 16042 m including sholding works. In C.W.P. No. 208 of 1994 it is for head race tunnel from station 16042 m to 27295 m including surge shaft. In C.W.P. No. 152 of 1995 the contract was for construction of main concrete dam and coffer dams at Chamera Hydro-Electric Project. According to the petitioner, the works were executed and handed over to the contractee and claims were also submitted for payment. In C.W.P. No. 63 of 1996, the petitioner was awarded a works contract for the implementation and execution of 300 M.W. Baspa Hydro Electric Project Stage-11 in Kinnaur District by the Government of Himachal Pradesh. 3.. Though there are some differences in the contentions raised in the pleading, the arguments advanced by learned Senior Counsel for the petitioners in all the cases are the same. There is no dispute that the petitioners are dealers as defined by section 2(c) of the Act. It is also not in dispute that by the execution of the works contracts, the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Rules. The said rule 31-A reads as follows: "31-A. Deduction of tax from the bills/invoices of works contractor.-- (1) For the purpose of section 12-A of the Act, every person in a department of any Government, a corporation, Government undertaking, a co-operative society, a local body, a trust or a private or public limited company or any other concern responsible for making any payment or discharge of any liability on account of valuable consideration payable for the transfer of property in goods whether as goods or in some other form, involved in the execution of works contract or for carrying out any works, shall at the time of- (i) payment thereof in cash or by issue of a cheque or bank draft or any other mode; or (ii) credit of such sum to the account of the works contractor; or (iii) discharging liability on account of the said valuable consideration to the works contractor, deduct an amount equal to two per centum of such sum towards the tax under section 12-A of the Act. (2) The deduction under sub-rule (1) shall be made from all payments being made in respect of all works contract executed, whether in part or in full. (3)(i) The person making tax deduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction in the Government treasury under sub-section (3) of the said section shall also send a return in form S.T. XI-C to the Assistant Excise and Taxation Commissioner or Excise and Taxation Officer, Incharge of the district quarterly within 30 days from the expiry of each quarter in respect of the deductions made by him during the quarter immediately preceding along with the certificate and treasury challan as required in clause (iv) of sub-rule (4) and clause (ii) of sub-rule (3). (6) Any deduction made in accordance with the provisions of sub-section (1) of section 12-A of the Act and paid into the Government treasury in accordance with this rule shall be treated as payment of tax on behalf of the works contractor from whom such deduction was made and credit shall be given to him under rule 26 for the amount so deducted or deposited into the Government treasury: Provided that for the purpose of rule 26, if the amount of tax payable as per return in form S.T. VIII or form S.T. IX, as the case may be, exceeds the amount shown in the treasury challan in form S.T. XI-A and in the certificate in form S.T. XI-B, the works contractor shall make the payment of the balance amount of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... installation of air-conditioners and air-coolers 15 11 Supply and fitting of electrical goods, supply and installation of electrical equipments including transformers. 15 12 Supply and fixing of furnitures and fixtures, partitions including contracts for interior decoration and false ceiling. 20 13 Construction of railway coaches and wagons on under carriages supplied by railway. 20 14 Construction or mounting bodies of motor vehicles and constructions of trailers. 20 15 Sanitary fitting for plumbing and drainages or sewerage. 25 16 Laying underground or surface pipe lines, cables or conductors 30 17 Dyeing and printing of textiles 30 18 Supply and erection of weighing machines and weigh bridges 15 19 Painting, polishing and white-washing. 30 20 All other contracts not specified from serial Nos. 1 to 19 above. 25 Provided further that assessing authority shall not allow any deduction towards labour charges unless the works contractor has specifically preferred the claim therefor and unless such claim is found by the assessing authority to be proper and justified in each case." IV. Contentions: 7. The arguments of Sri Gopal Subramaniam are that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from their bills submitted to the contracting party which is an electrical undertaking contemplated in section 6(3)(a)(iii). It is further contended that in any event, rule 31-A should be either struck down as invalid or read down in such a manner that the petitioners and dealers like them are not made to suffer deduction of a percentage from the amount due to them for the work done by them. V. Historical background: 9.. In order to appreciate the contentions of the petitioners and the true scope of the impugned section and the rule, it is necessary to refer to the relevant constitutional provisions and some rulings of the Supreme Court. Entry 54 in List II of the Seventh Schedule to the Constitution empowers the State Legislature to levy taxes on sale or purchase of goods other than newspapers subject to the provisions of entry 92-A of List I which relates to sale or purchase taking place in the course of inter-State trade or commerce. 10.. In several States a controversy arose about the liability of contractors who had undertaken to carry out works contracts to pay sales tax on the transfer of property in the goods involved in such contracts. In State of Madras v. Gannon Dunk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, fresh writ petitions were filed in the High Court of Rajasthan challenging the validity of the provisions of the Rajasthan Sales Tax Act, 1954 and the Rajasthan Sales Tax Rules, 1955 relating to imposition of tax on transfer of property in goods involved in the execution of a works contract. They were dismissed by the High Court and appeals were filed in the Supreme Court. The judgment of the Supreme Court is reported in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204; [1993] 1 SCC 364. After an exhaustive discussion of the law on the subject the court set out the following conclusions: "(1) In exercise of its legislative power to impose tax on sale or purchase of goods under entry 54 of the State List read with article 366(29A)(b), the State Legislature, while imposing 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 is not competent to impose a tax on such a transfer (deemed sale) which constitutes 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 and 5 and sections 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not found worthy of credence by the assessing authority the Legislature may prescribe a formula for deduction of cost of labour and services on the basis of a percentage of the value of the works contract but while doing so it has to be ensured that the amount deductible under such formula does not differ appreciably from the expenses for labour and services that would be incurred in normal circumstances in respect of that particular type of works contract. It would be permissible for the Legislature to prescribe varying scales for deduction on account of cost of labour and services for various types of works contract. (8) 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." 13.. After settling the law thus the court proceeded to consider the provisions of the Rajasthan Sales Tax Act and Rules. Pointing out that the charging section 5(3) made a departure from the other provisions inasmuch as in the case of a works contract the tax was to be levied on the turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f labour and other charges in cases where the amount actually incurred towards such charges were not ascertainable from the books of account maintained and produced by a dealer before the assessing authority. The court also upheld the prescription of different rates of tax for particular types of works contract and rejected the argument that the same violated article 14 of the Constitution of India. 15.. It must be mentioned here that in the Rajasthan case, section 7(2)(c) and rule 46(2) are similar to section 12-A of the Act and rule 31-A of the Rules impugned in this case. The challenge to the validity thereof was not considered by the court as the charging section 5(3) was struck down in that case. In the Karnataka case, the question relating to the validity of section 19-A of the Karnataka Act, which is similar to section 12-A herein was raised for the first time in the course of arguments and the court refused to permit the appellant to raise the question. Thus, in the two cases referred to above, the question similar to the one which we are now considering was not decided. VI. Analysis of the sections and the Rules. 16.. Now, we shall scrutinise the provisions of the Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o any particular class of dealers not falling within clauses (a), (b) and/or (c), such sum as may be prescribed; or (e) in relation to any other dealer, 3,00,000 rupees: Provided that the registration of dealers already registered under this clause shall not be cancelled until their turnover in each of three consecutive years does not entitle them to cancellation under clause (b) of sub-section (6) of section 8." 18.. Section 5 provides that a dealer registered under the Central Sales Tax Act, 1956 who is not liable to pay tax under section 4 shall nevertheless be liable to pay tax under the Act on any sale or purchase made by him inside the State and the proviso declares that nothing therein shall apply to a dealer who deals exclusively in goods declared tax-free under section 7. 19.. Section 6 is the charging section. Sub-section (1) reads thus: "(1) Subject to provisions of this Act, there shall be levied on taxable turnover of a dealer a tax at such rates not exceeding ten paise in a rupee as the Government may, by notification, direct: Provided that a tax at such rate not exceeding 15 paise in a rupee, as may be so notified, may be levied on the sale of goods as specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l words of the sections are "payment or discharge of any liability on account of valuable consideration payable for the transfer of property in goods whether as goods or in some other form involved in the execution of works contract". Thus, the relevant amount is the valuable consideration payable for the transfer of property in goods and not the entire value or consideration for the entire works contract. What is directed to be deducted is only an amount not exceeding four per centum as may be prescribed purporting to be a part or full of the tax payable on such sales (underlining* ours). The word "such" is very significant. It refers to the "transfer of property in goods" mentioned in the earlier part of the section. The expression "tax payable" would necessarily mean tax payable under the charging provisions of the Act. The section uses also the expression "purporting to be". That also shows that what is deducted is not the tax itself, but an amount purporting to be tax. Further, the section refers to bills or invoices raised by the contractor. Hence, the section contemplates the consideration payable for the transfer of property in goods as per the bills and invoices raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -rule (1) expressly refers to payment on account of valuable consideration payable for the transfer of property in goods, sub-rule (2) begins with the words "the deduction under sub-rule (1)". The two sub-rules should be read together in the light of the section. Sub-rules (3) to (6) expressly refer to deduction under sub-section (1) of section 12-A of the Act. Hence, there can be no doubt that the expression "all payments being made in respect of all works contract executed" means and refers only to payments on account of valuable consideration payable for transfer of property in goods and not other payments. Thus, the Rule does not go beyond the section and enable any person to deduct any amount other than that contemplated by the section. The Rule does not suffer from any invalidity. VII. Discussion of case law cited: (a) Validity of the provision for deduction at source: 23.. Even before the Supreme Court decided the Rajasthan and Karnataka cases in November, 1992 referred to earlier, the Patna High Court had an occasion to consider the validity of section 25-A of the Bihar Finance Act and rule 26-A of the Bihar Rules providing for tax deduction from bills of works contracto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to mean payments made for the transfer of property in goods. The Division Bench observed that on such an interpretation, deductions had to be made only out of payments to be made for the transfer of property in goods and no deduction is to be made in respect of the amounts spent over labour charges and other services in which no transfer of any property in goods was involved. The Bench referred to the well-settled principle of interpretation of statute that if without doing violence to the language of any provision of the Act or the Rules, it can be interpreted in a manner which can make it valid and constitutional that interpretation should be given. 25.. While analysing the rule earlier, we have given a similar interpretation to the expression "all payments" found in rule 31-A(2). We are, however, on a stronger ground for giving such an interpretation as sub-rule (1) of rule 31-A is more explicit than sub-rule (1) of rule 26-A of the Bihar Sales Tax Rules, 1983. We have also referred to the language in sub-rules (3), (4), (5) and (6) in support of our interpretation. 26.. A different view was taken by a Full Bench of the Patna High Court in Builders Association of India v. St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities/persons mentioned therein shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft of any other mode, whichever was earlier, deduct an amount towards sales tax equal to two per centum of such sum in respect of the works contract. A bare reading of the section shows that it was not a provision for deduction of an amount payable for the valuable consideration for the transfer of property in goods whether as goods or in some other form involved in the execution of works contracts. On the other hand, the section directed the deduction in respect of the amount payable under the entire works contracts. That was clearly against the provisions of article 366(29A) and the law laid down by the Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204; [1993] 1 SCC 364. In fact, the Division Bench observed as follows: "If section 13AA is examined from the aforesaid standpoint, there cannot be two opinions that it does not provide any mechanism to exclude a transaction from its purview, even if ultimately the transaction is not at all liable to levy of sales tax. In other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act, 1958 providing a machinery for issuing a certificate of exemption from the provision for deduction at source. 30.. In KEC International Limited v. State of Karnataka [1997] 105 STC 192, the Karnataka High Court struck down section 19-A of the Karnataka Sales Tax Act as ultra vires the Constitution. The said section provided for deduction of certain per centum of the total amount payable to the dealers under the works contracts. Thus, the provision in the section was entirely different from the provision in section 12-A of the Himachal Pradesh General Sales Tax Act, 1968. The Division Bench also placed reliance on the following observations of the Supreme Court in Khyerbari Tea Co. Ltd. v. State of Assam AIR 1964 SC 925: "It may be conceded that when the Legislature constructs a machinery for the recovery of the taxes which it is within its competence to impose, the said machinery should have some rational or intelligent connection with the tax. In the absence of a rational nexus between the producer and the tax on goods carried, it may be open to a citizen to contend that the tax is not one justified by entry 56." 31.. The following passage in the judgment of the Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of advance tax, as provided for, under section 194-C(4) of the Income-tax Act, 1961. 33.. As stated earlier, the section in the Karnataka Act was entirely different from section 12-A of the Himachal Pradesh General Sales Tax Act, 1968. We should also point out that the tests prescribed by the Supreme Court in the passage quoted by the Division Bench as above and the Gujarat High Court in the passage quoted as above are satisfied in the present case. (b) Validity of the provision for payment of lump sum in lieu of tax by way of composition: 34.. In Tirath Ram Ahuja Limited v. State of Haryana [1991] 83 STC 523 (P&H), a question arose whether a provision for payment of lump sum in lieu of tax by way of composition instead of deduction of tax at source by the contractees was valid. A Division Bench of the Punjab and Haryana High Court upheld the validity of such a provision. The court said that the option was with the assessee and for those who did not opt to be governed by the provisions of the section, which enabled the assessee to opt for payment in lump sum by way of composition, it was the responsibility of the contractee to deduct the per centum fixed by the Government f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be granted to the petitioners by declaring that they are not liable to pay any tax under the provisions of the Act in view of the provisions contained in section 6(3)(a)(iii). It is to be mentioned here that in C.W.P. No. 152 of 1995 and C.W.P. No. 63 of 1996, there is a specific prayer to prohibit the 3rd respondent therein from deducting the sales tax out of the payments to be made to the petitioner in each case in respect of the bills submitted. 39.. While the contention of the petitioners in C.W.Ps. Nos. 1839 of 1993, 199 of 1994 and 208 of 1994 is that they are governed by section 6(3)(a)(iii) of the Act inasmuch as their sales are to an undertaking which supplies electrical energy to the public under licence or sanction granted or deemed to have been granted under the Indian Electricity Act, 1910 and that the goods sold are for use by the said undertaking in the generation or distribution of such energy in C.W.P. No. 152 of 1995, the contention is that the works contract for construction of main concrete dam and coffer dams at Chamera H.E. project did not involve transfer of property in any goods and, therefore, no deduction of tax at source as envisaged under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent from section 6(3)(a)(i). Hence, a question relating to the dealer getting a benefit under section 6(3)(a)(iii) will have to be decided by the assessing authority on the facts and circumstances of each case. 41.. It is not possible for us in these writ petitions to decide the said question or uphold the claim made by the petitioners that they are entitled to the benefit of section 6(3)(a)(iii) of the Act. In our opinion, the pleadings in these cases and the materials placed before us are hardly sufficient for considering the said question. In any event, it is a matter to be decided only by the assessing authority and not by this Court under article 226 of the Constitution of India. 42.. In C.W.P. No. 1839 of 1993, paragraphs 3 and 7 read as follows: "3. That the petitioner was awarded a 'works contract' for the construction of civil works for Pressure Shafts and Power House Complex by M/s. Nathpa Jhakri Power Corporation Limited, New Delhi to be executed within the State of Himachal Pradesh at Jhakri-Rampur, District Shimla. The said contract is to be executed by the petitioner-company in collaboration with Hyundai Engg. & Construction Company Ltd., Seoul, South Korea. 7.. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted or deemed to have been granted under the Indian Electricity Act, 1910. That the said Corporation floated tenders for the construction of 'civil works for dam, intake and desilting arrangement' for the generation and distribution of electrical energy to be supplied to general public. 9.. That by the aforesaid execution of 'works contract', the petitioner would be transferring the property in goods involved in the execution of the works contract either in full or in the goods as such and the said goods will fall within the ambit of the word 'sale' as defined under the Himachal Pradesh General Sales Tax Act, 1968 (Act No. 24 of 1968)." 46.. In this case also, in the reply filed by the respondents, the contents of paragraphs 5 and 9 are admitted and in the rejoinder filed by the petitioner, an averment is introduced for the first time that the goods transferred are for direct use in the generation and distribution of electrical energy. Our above reasons with reference to C.W.P. No. 1839 of 1993 will hold good in this case also. 47.. Similarly, in C.W.P. No. 208 of 1994, the averments are found in paragraphs 4, 7 and 14. Apart from making an averment that the petitioner has no li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a process or activity was so integrally related to the ultimate manufacture of goods so that without that process or activity the manufacture may, even if theoretically possible, be commercially inexpedient, goods intended for use in the process or activity, as specified in rule 13 would qualify for special treatment. In that case, the court held that drawing and photographic materials falling within the description of goods intended for use as equipment in the process of designing which is directly related to the actual production of goods and without which commercial production would be inexpedient must be regarded as goods intended for use in the manufacture of goods. It was also pointed out that in the case of company manufacturing for sale cotton, textiles, tiles and other commodities, building materials including lime and cement not required in the manufacture of tiles for sale cannot be regarded within the meaning of rule 13, as raw materials in the manufacture or processing of goods or even as plant. 53.. In Spedding Dinga Singh & Co. v. Punjab State [1968] 22 STC 319, the High Court of Punjab and Haryana held that the sale of timber for the construction of a power-house c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act was descriptive of the goods, but it specified the condition under which exemption was granted. The matter is dealt with in the following passages: "15. Section 6 of the State Act does not speak of exemption, but deals with tax-free goods. In other words, section 6 deals with specified goods on which no tax is payable. Section 5 of the State Act deals with what has to be excluded from the taxable turnover of the dealer. Both the sections deal with goods which do not suffer from sales tax. Section 8(2A) of the Central Act exempts goods from inter-State sales tax where a tax law of the State has exempted them from sales tax. The explanation to section 8(2A) of the Central Act takes away the exemption where it is not general and has been granted in specified circumstances or under specified conditions. The provisions contained in section 5(2)(a)(iv) of the State Act exclude sales which are made under specified circumstances or specified conditions. The specified circumstances are that the sale must be to an undertaking engaged in supplying electrical energy to the public under a licence or sanction granted under the Indian Electricity Act, 1910. The specified condition is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the undertaking must be used for the generation or distribution of electrical energy. 57.. In Commercial Taxes Officer, Circle D, Jaipur v. Rajasthan Electricity Board [1997] 104 STC 89, the Supreme Court followed the judgment rendered in J.K. Cotton Spinning & Weaving Mills Co. Ltd. [1965] 16 STC 563 and held that the motor vehicles, soaps, paints, raincoats and battery cells to the extent mentioned in the aforesaid case were integrally related to the distribution of electricity and their non use would make distribution of electricity commercially inexpedient. The court referred to its earlier judgments in Tata Engineering & Locomotive Company Ltd. v. State of Bihar [1995] 96 STC 211 (SC) and distinguished the same. 58.. The relevant principles, which should guide the assessing authority while considering the claim of the petitioners of the benefit under section 6(3)(a)(iii) of the Act have been laid down in the aforesaid judgments and it is for the assessing authority to apply the same and decide in the light of the above principles and on the facts established before it. We leave open the said question for the decision of the assessing authority. We have already given our inte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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