TMI Blog1997 (1) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... Sixth Schedule executed by them. By the above section, it was made obligatory for the Central Government, or any State Government, or an industrial, commercial or trading undertaking of the Central Government or of any State Government, or a local authority or a statutory body, to deduct from the amounts payable to the contractors, an amount at the rate of 2 per cent of the total amount payable to such dealers if the works contract executed is as specified under serial number 6 of the Sixth Schedule; or at the rate of four per cent of the total amount payable to such dealers, in respect of the works executed other than those specified in serial number 6 of the Sixth Schedule. This provision was mainly challenged by the petitioners on the ground that the deduction of tax on the total amount payable under a works contract is beyond the legislative competence of the State under entry 54 of the State List in that, it includes even the turnover or other components of the transaction which are not exigible to tax at all under the Sales Tax Act. It is the case of the petitioners that, even collection of tax or recovery at source even as an incidental or ancillary power for speedy recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even then, it can be operative only in aid of and to advance the main power that is vested in the State and that, even the machinery provision cannot operate beyond the competence of the State Legislature. It is also contended that, even if by section 9 of the Central Sales Tax Act, the machinery of the State sales tax enactment can be made use of for collection of tax under the Central Sales Tax Act. Even then there are other components which are included in the total amount payable under the works contract, which are not exigible to tax either under the State Act or under the Central Act and in that view of the matter, section 19A is beyond the legislative competence of the State Legislature and as such void. It is the correctness of this contention that has to be decided. 5.. Section 19-A of the Karnataka Sales Tax Act, so far as it is relevant, reads as follows: "19A Deduction of tax at source.-(1) Notwithstanding anything contained in this Act, the Central Government, or any State Government, or an industrial, commercial or trading undertaking of the Central Government or of any State Government, or a local authority or a statutory body shall deduct out of the amounts pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. After the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into in two distinct and separate parts." Even in such circumstances, the assessment of sales tax could not be made ignoring the restrictions and conditions incorporated under article 286 of the Constitution of India. It was ultimately held: ".............We are of the view that all transfers, deliveries and supplies of goods referred to in clauses (a) to (f) of clause (29A) of article 366 of the Constitution are subject to the restrictions and conditions mentioned in clause (1), clause (2) and sub-clause (a) of clause (3) of article 286 of the Constitution and the transfers and deliveries that take place under sub-clauses (b), (c) and (d) of clause (29A) of article 366 of the Constitution are subject to an additional restriction mentioned in sub-clause (b) of article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by deducting expenses incurred by the contractor for providing labour and other services from the value of the works contract. (6) The charges for labour and services which are required to be deducted from the value of the works contract would cover (i) labour charges for execution of the works, (ii) amount paid to a sub-contractor for labour and services, (iii) charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract, (iv) charges for planning, designing and architect's fees, and (v) cost of consumables used in the execution of the works contract, (vi) cost of establishment of the contractor to the extent it is relatable to supply of labour and services, (vii) other similar expenses relatable to supply of labour and services, and (viii) profit earned by the contractor to the extent it is relatable to supply of labour and services. (7) To deal with cases where the contractor does not maintain proper accounts or the account books produced by him are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking into account the provisions of sub-rule (2) of rule 29. But, while considering the said provisions the High Court has failed to notice that under clause (i) of sub-rule (2) of rule 29, transfer of property in goods involved in the execution of a works contract, on which no tax is leviable under section 5, are not required to be deducted from the turnover. The High Court also failed to attach importance to the use of the word 'turnover' (instead of word 'taxable turnover') in sub-section (3) of section 5 as a result of which the amplitude of the incidence of tax has been widened so as to include transactions which are outside the sphere of taxation available to the State Legislature under entry 54 of the State List. We are, therefore, unable to uphold the decision of the High Court in this regard and it must be held that sub-section (3) of section 5 transgresses the limits of the legislative power conferred on the State Legislature under entry 54 of the State List inasmuch as it enables tax being imposed on deemed sales resulting from transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract which take place in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llenge the power of State Legislature to make a provision for collection of advance tax in respect of works contracts. But the challenge is that, section 19-A authorises deduction of tax on the total amount of works contract without making any provision for deduction of value of certain components of the works contract amount which are not exigible to tax at all. From the aforesaid decision of the Supreme Court, it is clear that the entire amount payable under the works contract cannot be exigible to Central or State sales tax and the amount exigible to sales tax has to be calculated out of the total amount on the principles stated by their Lordships of the Supreme Court. Section 19-A makes a provision for deduction of tax at certain percentages on the total amount payable to a dealer in respect of a works contract. In other words, the deduction has to be made at certain percentage even on the amount which are not exigible to tax at all which may sometimes form an integral part of the total amount. If such were the provision in the charging section, certainly it would have been constitutionally invalid. But it is held by the learned single Judge and also contended by the learned Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he machinery section cannot be ultra vires is subject to the exception that machinery section does not stretch its long arms to pick-up the forbidden fruit along with others. Parliament having levied a tax is entitled to provide the mode of its assessment and the method of its collection. However, the mode of its assessment and the method of its collection cannot entrench upon the legislative field earmarked exclusively for the States. In the instant case, though section 3 is valid (its constitutionality has not been challenged), section 4 suffers from a vice because it entrenches upon entry 54 in the State List." 15.. In the light of the above decision, it is clear that even an ancillary provision cannot go beyond the legislative power of the State and has to confine itself to the power conferred on it within the entry in one or the other of the List enumerated in the Constitution. 16.. A similar provision under Patna Act was considered by the Patna High Court in the decision in Construction Construction v. Union of India [1990] 77 STC 405. Rule 26A(2) of the Bihar Rules, provided that, deduction shall be made from "all payments being made in respect of all works contracts e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. It is clear from the above decisions of the Supreme Court referred to above that a works contract may take in turnover which is exigible to tax either under the State Act or under the Central Act, there are other components in a works contract, viz., charges for labour and services which are not exigible to tax at all to be deducted from the value of the works contract for the purpose of determining the tax liability. No provision is made in section 19-A even tentatively to give deductions for the aforesaid amounts and the amount is deducted at a flat rate from the total amount payable to the contractor which is not constitutionally permissible. As stated earlier, the power under entry 54 is restricted by various constitutional inhibitions and other provisions which are not reflected at all in section 19-A of the Karnataka Sales Tax Act. Accordingly, we do not find our way to agree with the learned single Judge and in reversal of the same, we hold that section 19-A of the Karnataka Sales Tax Act is constitutionally invalid and liable to be struck down. As stated earlier, the power of the State Legislature for making a provision for collection of tax in advance cannot be doubted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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