TMI Blog2007 (8) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax is imposable at 12.5 per cent on both declared as well as undeclared goods is wholly without jurisdiction and not supported even by the scheme of the Act under consideration. In the result and for the reasons discussed above, these two writ petitions succeed. The impugned order, dated April 10, 2007, is hereby set aside and quashed and it is held that the Assam VAT Act, 2003, does not permit the respondents/authorities concerned to impose tax at 12.5 per cent on transfer of such goods, which have been declared as goods of special importance under section 14 of the Act of 1956, and that on such declared goods, rate of tax cannot exceed three per cent (as amended); whereas transfer of property in goods, which are not declared goods involved in the execution of works contract, would be subject to usual rate of tax of 12.5 per cent. - W.P. (C) No. 3097,3582 of 2007 - - - Dated:- 10-8-2007 - ANSARI I.A. , J. I.A. ANSARI J. I have heard Dr. A.K. Saraf, learned Senior Counsel, appearing on behalf of the petitioners, and Mr. R. Dubey, learned counsel for the respondents. The material facts, which have given rise to these two writ petitions, are thus: The writ peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troversy raised in the present writ petitions, the historical background of the 46th Amendment of the Constitution, which made provisions for levy of sales tax on works contract, needs to be recalled. Before the 46th Amendment, there was conflict of judicial opinion as regards the question as to whether the State has legislative power to impose sales tax on goods involved in the execution of works contract, where the contract was single and indivisible. The question, therefore, raised was, if there is at all a sale of those materials, which are used in the execution of a works contract. The Madras High Court, in Gannon Dunkerley Co (Madras) Ltd. v. State of Madras [1954] 5 STC 216; AIR 1954 Mad 1130, took the view that works contract was not a contract for sale of materials used in the execution of the works contract, for, the contract, being entire and indivisible, cannot be broken into two separate segments, one being the contract for sale of materials and the other being the contract for payment of the works done. The court, therefore, concluded that the definition of sale , as contained in the Madras General Sales Tax Act, 1939, which included, within the definition of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, though there may be a single instrument embodying both the agreements; hence, the power of the State to separate the agreement to sell from the agreement to do the work and render service is possible and, consequently, the State may impose tax so far as the agreement relating to transfer of materials for money consideration is concerned. In short, in Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353 (SC); AIR 1958 SC 560, what was held was that in the case of building construction, if the works contract is entire and indivisible, the property in goods does not pass to the other party to the contract, but if a contract consists of two separate parts, one relating to the supply of materials for money consideration and the other for payment of remuneration for services rendered and for the works done, the Legislature is competent to impose tax so far as the supply of materials is concerned and, hence, the State cannot, if the contract is one, which is indivisible, impose sales tax on the goods, used in the execution of the works contract, by treating the use of such goods as transfer of property in the goods used in the execution of the works contract. Following the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a purchase of those goods by the person to whom such transfer, delivery or supply is made; Following insertion of clause (29A) of article 366, article 286 was also amended by bringing in clause (3). With the amendment, so made, article 286 runs as under: Article 286. Restrictions as to imposition of tax on the sale or purchase of goods. (1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place (a) outside the State; or (b) in the course of import of the goods into, or export of the goods out of, the territory of India. (2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1). (3) Any law of a State shall, in so far as it imposes, or authorises the imposition of (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, be subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he restrictions and conditions imposed by the Central Sales Tax Act, 1956. It further follows from the conclusion, so reached, that when the Parliament declares a goods as goods of special importance under section 14 of the Central Sales Tax Act, 1956, the legislative power of the State to impose tax on such goods shall be subject to the restrictions and limitations, which section 15 of the said Act imposes. Situated thus, it is clear that even the declared goods, when used in the execution of works contract, would be subject to the limitations imposed by section 14. From what has been pointed out above, it is clear that the legislative power of the State, under entry 54 of State List, to impose tax on sale or purchase of goods is subject to two limitations. One limitation, which flows from the entry itself, is that the State's legislative power is subject to the provisions of entry 92A of List I and the other one flows from the restrictions contained in article 286. Under entry 92A of List I, Parliament has the power to make laws in respect of taxes on sales and purchases, which take place in the course of inter-State trade and commerce. The levy and collection of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be a sale of goods involved in the execution of the works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. Thus, what was, before the 46th Amendment, not regarded as a sale, because it was, initially, not a sale, became, with the help of the deeming provisions introduced by sub-clause (b) of clause (29A), a sale of goods. The object of the new definition of sale , introduced by clause (29A), was, thus, as observed by the Constitution Bench, in Builders Association [1989] 73 STC 370 (SC); [1989] 2 SCC 645, to enlarge the scope of tax on sale or purchase of goods so that it may include, within its sweep, transfer, delivery or supply of goods even in execution of a works contract. So construed, points out the Supreme Court, in Builders Association [1989] 73 STC 370; [1989] 2 SCC 645, the expression tax on the sale or purchase of goods , in entry 54 of the State List, includes a tax on the transfer of property in goods involved in the execution of the works contract. Referring to clause (3) of article 286, the Supreme Court, in Builders Association [1989] 73 STC 370; [1989] 2 SCC 645, observes that clause (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that where a contract entered into in connection with the construction of a building consisted of two parts, namely, one part relating to the sale of materials to be used in the construction of a building by the (1)Here italicised. contractor to the person, who had assigned the contract, and the other part dealt with the supply of labour and services, sales tax was leviable on the goods, which were agreed to be sold under the first part in such a contract. What could not have been done, in the light of the decision in Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353 (SC); AIR 1958 SC 560, was that sales tax could not have been levied, when the contract for construction was a single and indivisible one. After the 46th Amendment, a works contract, which was, otherwise, an indivisible one, has been, by a legal fiction, converted into a contract, which is divisible one for sale of goods used in the execution of the works contract, and the other for supply of labour and rendering services. Thus, with the 46th Amendment, it has become possible for the State to levy sales tax on the value of the goods involved in a works contract in the same way in which sales tax was leviable on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue prior to the 46th Amendment that when the goods and materials had been supplied under a distinct and separate contract by the contractor for the purpose of construction of a building the assessment of sales tax could be made ignoring the restrictions and conditions incorporated in article 286 of the Constitution. If that was the position can the States contend after the 46th Amendment under which by a legal fiction the transfer of property in goods involved in a works contract was made liable to payment of sales tax that they are not governed by article 286 while levying sales tax on sale of goods involved in a works contract? They cannot do so. When the law creates a legal fiction such fiction should be carried to its logical end. There should not be any hesitation in giving full effect to it. If the power to tax a sale in an ordinary sense is subject to certain conditions and restrictions imposed by the Constitution, the power to tax a transaction which is deemed to be a sale under article 366(29A) of the Constitution should also be subject to the same restrictions and conditions. Ordinarily unless there is a contract to the contrary in the case of a works contract the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le, a deemed sale also suffers from same limitations. In short, whether an actual sale by transfer of property in goods or by a deemed sale, when the property in goods is deemed to have been transferred, the limitations, imposed on the power of the State to levy sales tax, remain the same. Following the case of Builders Association [1989] 73 STC 370 (SC); [1989] 2 SCC 645, a Constitution Bench had to deal with the subject of deemed sale in Gannon Dunkerley and Co. v. State of Rajasthan reported in [1993] 88 STC 204 (SC); [1993] 1 SCC 364. In Gannon Dunkerley and Co. [1993] 88 STC 204 (SC); [1993] 1 SCC 364, it was contended, on behalf of the State, that State's power, under entry 54 of the State List, to impose tax on transfer of property in goods involved in the execution of a works contract can be restricted if the Parliament makes law under article 269(3) and since no law has been made so far by the Parliament under article 269(3), the restrictions, imposed by the Central Sales Tax Act, 1956, which stand enacted by virtue of the Parliament's power under article 286(2), are not applicable to transfer of property in goods involved in the execution of a works contract. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Sales Tax Act would also be applicable to the deemed sales resulting from transfer of property in goods involved in the execution of a works contract and the legislative power under entry 54 in State List will have to be exercised subject to the restrictions and conditions prescribed in the said provisions in respect of goods that have been declared to be of special importance in inter-State trade or commerce. (emphasis(1) is added) (1)Here italicised. The observations made, at para 37, make it abundantly clear that the limitations, imposed by sections 14 and 15 of the Central Sales Tax Act, 1956, would also apply to the deemed sale, which results from transfer of property in goods involved in the execution of a works contract and the legislative power, under entry 54 of the State List, will have to be exercised subject to the restrictions and conditions prescribed in section 14 read with section 15 of the Act of 1956. Leaving no room for doubt that a State Legislature is not competent to impose a tax on goods declared to be of special importance in inter-State trade or commerce except in accordance with the restrictions and the conditions contained in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays down the conditions subject to which sale and purchase of declared goods within the State can be subjected to tax. The underlined object of sections 14 and 15 is to achieve a kind of uniformity in respect of States Sales Tax Act in respect of declared goods. It is, no doubt, true that the transfer of goods involved in the execution of works contract is taxable as per the Schedule to the Assam VAT Act, 2003, at the rate of 12.5 per cent. Though in respect of transfer of property in goods involved in the execution of works contract, rate of local tax has been prescribed at 12.5 per cent, yet as far as declared goods are concerned, the State's power to impose sales tax on declared goods cannot exceed three per cent as imposed by section 15 of the Act of 1956. It could not have been the legislative intent of the Assam VAT Act, 2003, to impose the same rate of tax on declared as well as undeclared goods involved in the execution of the works contract. What logically follows from the above discussion is that while the State, under the Scheme of the Assam VAT Act, 2003, is competent to levy sales tax on transfer of property in goods involved in the execution of works contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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