TMI Blog1999 (7) TMI 646X X X X Extracts X X X X X X X X Extracts X X X X ..... reement to sell the materials used in the construction nor there is passing of the property in such materials pursuant to any such agreement. The State Legislatures were therefore, not competent to impose tax on the supply of materials used in such a contract treating them as sale under entry 54 of the State List. 3.. In order to overcome the effect of the abovesaid decision and to confer power upon the State Legislatures to make law for imposition of taxes on the sale and purchase of goods involved in the execution of works contract, a new definition clause tax on sale or purchase of goods was inserted in article 366 of the Constitution by the Constitution (Forty-sixth Amendment) Act, 1982 to include amongst others, 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 within the ambit of tax on sale and purchase of goods, wherever the term occurs in the Constitution. Article 286 which contains provisions relating to restrictions on the State s power to impose tax on the sale and purchase of goods was also amended by substituting clause (3). So amended, article 286 runs as follows: 286.. Restrictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s specified in different sub-clauses of clause (29A) of article 366 of the Constitution was subject to the same discipline which any levy under entry 54 of the State List is made subject to under the Constitution, and further subject to the restrictions and conditions mentioned in each clause or sub-clause of article 286 of the Constitution. 7.. The Supreme Court observed that even after the decision in State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353, where a building contract consisted of two parts, one part relating to the sale of materials used in the construction of the building by the contractor to the person who had assigned the contract and the other part relating to supply of labour and services, it was possible to levy sales tax on the sale of goods under the first part. But sales tax could not be levied where the contract was single and indivisible. After the 46th Amendment, the works contract which was indivisible became a divisible one by legal fiction and it became possible for the States to levy sales tax on the value of goods involved in a works contract in the same way as ordinary sales of goods. Naturally, levy of tax on such deemed sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of section 15 of the Central Sales Tax Act, 1956 while passing final order of assessment of the taxable turnover of the contractor. The court further held that no sale or purchase of goods is involved when a works contractor spends any amount on account of labour. Labour is not goods and therefore, the total amount spent by a contractor as labour charges, in the execution of works contract has to be excluded from the gross turnover of the contractor for purposes of assessment to sales tax. Rule 13A of the Bihar Sales Tax Rules, 1983 which provided for deduction of a fixed percentage from gross turnover, on account of labour charges, was held to be ultra vires because contractor might have spent more on account of labour charges. The court observed that deduction of tax on percentage basis in effect amounted to tax on labour which is not permissible. 11.. In Hindustan Dorr-Oliver Ltd. v. Union of India [1989] 75 STC 211 decided on September 7, 1989, the court followed the abovesaid decision in Jamshedpur Contractors Association case [1989] 75 STC 132 (Pat), and further held that a sub-contract, if granted validly and in terms of the provisions of contract entered into betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue and I shall refer to the case later. 15.. In 1990 section 25-A was amended by the Bihar Taxation Laws (Amendment and Validation) Act, 1990. The Builders Association of India and others challenged the amended provisions in different writ petitions which came up for disposal before a Full Bench of which I had the privilege of being a member. By majority section 25-A was held to be ultra vires. While one of the learned Judges (S. Roy, J.) constituting the majority held the provision to be ultra vires section 15 of the Central Sales Tax Act, 1956, the other learned Judge (S.B. Sinha, J.) held that as no guidelines had been laid down and no machinery had been provided to ascertain prima facie as to whether any tax at all was payable, the provision was arbitrary and unreasonable and ultra vires the Constitution. Since conflicting views were expressed in the said judgment, different portions thereof were relied upon by both the learned counsel for the petitioners and the learned AdvocateGeneral in so far as favourable to them. The judgment is reported in [1992] 85 STC 362 (Pat) (Builders Association of India v. State of Bihar) and I shall refer to it again soon hereinafter. 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the works contractor or person from whose bill or invoice such deduction has been made. (5) If any person contravenes any or all of the provisions of sub-sections (1), (2), (3) and (4), the prescribed authority shall after giving a reasonable opportunity of being heard, by order in writing direct, that such person shall pay by way of penalty, a sum not exceeding twice the amount of tax deducted or deductible under sub-section (1). (6) The provisions of section 27 for recovery of any amount of tax due from a dealer shall, mutatis mutandis, apply for recovery of any amount of tax deducted and or any penalty imposed under this section but not deposited into Government treasury. (7) Notwithstanding any judgment, decree or order of any court, Tribunal or authority any deduction made purporting to be part or full amount of tax payable on the sale of goods from any bill or invoice raised by the works contractor by any person on or after 1st April, 1984 shall be adjusted against the amount of tax finally assessed or determined as being payable by the concerned works contractor and any amount deducted in excess to amount so assessed or determined shall be refunded in accordance with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective of whether the transfer of the goods, or portion of it, took place in the course of inter-State trade or commerce or outside the State or in course of import, and whether they are declared goods under sections 14 and 15 of the Central Sales Tax Act. It is submitted that entry 54 of List II authorises the State Legislature to make law subject to restrictions as contained in entry 54 itself read with entry 92-A of List I and article 286 of the Constitution, as clearly laid down by the Supreme Court in Builders Associations case [1989] 73 STC 370 and further explained by it in Gannon Dunkerley Co. v. State of Rajasthan [1993] 88 STC 204. Section 25-A of the Bihar Finance Act, however, makes it obligatory to deduct tax in respect of the sale price of the entire goods-whether as goods or in some other form. It is submitted that such transfer of goods which does not constitute sale exigible to sales tax has to stand out of the purview of the deductions because deduction can be made of something on which sales tax can be imposed by the State. Where in the matter of supply of goods involved for the execution of works contract, transfer has taken place in the course of inter-Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonable and also ultra vires the Constitution. I agreed with S.B. Sinha, J., on the first point. On the second point I agreed with S. Roy, J. Thus, the learned Judges constituting the majority were in fact in minority on both the points. Relevant provisions of section 25-A was nonetheless held to be ultra vires as they came to that conclusion, albeit for different reasons and on different grounds. In this view of the matter, it may plausibly be argued that the opinion of the majority of the Judges on the points at issue was in fact in favour of the Revenue. However, it is not necessary to go into this aspect of the matter as the law has been further explained by the Supreme Court subsequently in Gannon Dunkerley Co. v. State of Rajasthan [1993] 88 STC 204. 19.. On behalf of the Revenue, Mr. Shashi Anugrah Narayan, learned Advocate-General, submitted that section 25-A of the Bihar Finance Act is not the charging provision, which is contained in section 3 of the Act. The provisions as contained in section 25-A being in the nature of ancillary or machinery provisions designed to recover the tax in advance, subject to assessment of the tax liability, the petitioners cannot make an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very of the taxes which it is within its competence to impose, the said machinery should have some rational or intelligent connection with the tax. 21.. Where the Legislature imposes tax, it has inevitably to provide a machinery for its collection. If the levy is valid machinery provided to make it effective cannot be said to be bad. This principle is well-known but is subject to the exception that the machinery section cannot be stretched to forbidden territory. The law on the point now stands well-settled by later decision of the Supreme Court in Gannon Dunkerley Co. v. State of Rajasthan [1993] 88 STC 204 to which I shall presently refer but before that I may deal with the other submissions of the learned AdvocateGeneral based on section 194-C of the Income-tax Act. 22.. Reference to section 194-C of the Income-tax Act appears on first blush to be attractive but has little substance. Section 194-C of the said Act lays down that any person responsible for paying any sum to a contractor or sub-contractor shall at the time of payment in cash or otherwise deduct certain percentage of the amount as income-tax on income comprised therein. The provision thus prima facie, appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid as advance tax is to be refunded, interest accrues and becomes payable from the first day of April of the assessment year till the date when refund is made. 24.. It would thus appear that the provisions of the Income-tax Act are materially different from those of section 25-A of the Bihar Finance Act and reliance placed thereon is completely misconceived. In Geeta Prasad Singh and Co. v. State [1986] 63 STC 337 (Pat), the distinction does not appear to have been pointed out to the court and therefore not discussed in the judgment. If the State is not competent to impose tax on certain sale but is permitted to collect the tax on it and keep the amount so collected for years without any compensation (because the interest is payable only after six months of the date of application for refund after completion of assessment which may take up to four years), the provision is liable to be invalidated as being confiscatory in nature. It is true that in fiscal matters the Legislature has a latitude which should not be interfered with by courts, but not so where it relates to the legislative competence. 25.. At this stage the decision in Gannon Dunkerley Co. v. State of Rajastha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art from the deductions referred to above, it will be necessary to exclude from the value of the works contract the value of the goods which are not taxable in view of sections 3, 4 and 5 of the Central Sales Tax Act and goods covered by sections 14 and 15 of the Central Sales Tax Act as well as goods which are exempt from tax under the sales tax legislation of the State. The value of goods involved in the execution of a works contract will have to be determined after making these deductions and exclusions from the value of the works contract. 26.. Two things broadly emerge from the decision in Gannon Dunkerley case [1993] 88 STC 204 (SC)-first, the provisions of sections 3, 4 and 5 as well as sections 14 and 15 of the Central Sales Tax Act are applicable to transfer of property in goods involved in the execution of works contract falling within the ambit of article 366(29A)(b) of the Constitution, and in exercise of its legislative power to impose tax on sale or purchase of goods in terms of entry 54 of the State List read with article 366(29A)(b), the State Legislature is not competent to impose tax on such a transfer which constitutes sale in course of inter-State trade or co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs bills is wide enough to include whole amount payable as valuable consideration for the sale or supply of all goods. It does not exclude goods supplied in execution of works contract, the transfer of which took place in the course of inter-State trade or commerce or outside the State or in the course of import within the meaning of sections 3, 4 and 5 of the Central Sales Tax Act or are declared goods . As per the law laid down by the Supreme Court, the State Legislature is not competent to impose any tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract, which constitutes a sale in the course of inter-State trade or commerce or sale outside the State or a sale in course of the import or export, nor it is competent to impose tax on declared goods within the meaning of sections 14 and 15 of the Central Sales Tax Act. 31.. It is true that the definition of sale price in section 2(u) is narrower than the definition of the term sale in section 2(t) of the Bihar Finance Act which has been defined to include transfer of property in goods (whether as goods or in some other form) involved in the execution of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des within its ambit not only the goods which stand out of the purview of entry 54 of the State List read with article 286 of the Constitution but also such items which do not involve any transfer of property in goods or some other form in execution of works contract, which is the essential feature of sub-clause (b) of article 366(29A) of the Constitution. It is by virtue of article 366(29A)(b) that the State Legislature is competent to impose tax on goods (whether as goods or in some other form) involved in execution of works contract. 34.. In Symon v. State of Kerala [1995] 97 STC 283 (Ker) and State of Kerala v. Builders Association of India [1997] 104 STC 134 (SC); (1997) 2 SCC 183, relied upon on behalf of the Revenue, law was upheld because the provision was different. It would be useful to quote the provision contained in rule 22A(2) of the Kerala General Sales Tax Rules, 1963 so far as relevant, to bring home the point: Wherever payment is made by the awarder to the contractor either in lump sum for the whole contract or in instalments, the awarder shall withhold an amount equal to the tax due in accordance with the provisions of the Act ................. (emphasis* ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Legislature. Whether it is possible to read down the provisions of section 25-A so as to exclude the transfer of goods taking place in course of inter-State trade or commerce or outside the State or in the course of import or the declared goods, within the meaning of Central Sales Tax Act, or the transfer of goods in some other form such as labour charges, etc.? 38.. In Delhi Transport Corporation v. D.T.C. Mazdoor Congress AIR 1991 SC 101, it has been held that while the courts have no power to mend it by process of interpretation they do have power to mend it so as to be in conformity with the legislative intendment by reading down the offending provisions, but not so when the provision unambiguously violates the provisions of the Constitution. The unconstitutionality may arise from either the incompetence of the Legislature to enact the statute or from violation of any of the provisions of the Constitution. 39.. Besides, a practical difficulty which may arise in giving effect to the provisions of section 25A in the aforesaid manner would be that in the absence of any mechanism or laid down guidelines in the section, the person required to make deduction may not be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to refund of about Rs. 1,94,000 the amount is being neither refunded nor adjusted. It has been contended that in the majority of the works contract the amount of labour charges and other services which have to be excluded for determining the value of the works contract for the purpose of deduction of tax in advance comprises of very large proportion of the total contract and it may not be worthwhile for the contractor to opt for composition. In this view of the matter, the decisions cited in this regard by the learned Advocate-General on the cases of State of Kerala v. Builders Association of India [1997] 104 STC 134 (SC); (1997) 2 SCC 183 (so far as it relates to composition), the National Heavy Engineering Co-operative Limited v. State of Haryana [1994] 93 STC 265 (P H), S.P. Narang v. Union of India [1994] 95 STC 120 (P H), are of hardly any assistance to the Revenue. 42.. It has been pointed out that in terms of Notification S.O. No. 214 dated June 19, 1993 (supra) only in cases covered by clause 2(a) where earthwork accounts for more than 33 per cent of the total value of the contract and is so mentioned in the estimates, that the deduction is to be made at 2 per cent b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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