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TMI Blog2009 (3) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... een enacted with the object of levying consumption tax, on goods consumed in the State of Arunachal Pradesh, through a combination of tax on entry of goods into the local area as defined in the Act of 2005 and value added sales tax on the business carried out in the said State. In the year 2007, the State of Arunachal Pradesh enacted Arunachal Pradesh Goods Tax (Amendment) Act, 2007, whereby the Act of 2005 has been amended. By this amendment, section 47A has been inserted providing for deduction of tax at source. After the insertion of section 47A, the Superintendent of Tax and Excise, West Kameng, District Bomdila, issued a notice, dated February 15, 2008, to respondent No. 4 informing the latter that the Government has, vide its Notification No. 158 Vol. XIV, dated April 11, 2007, directed all the Government Departments to deduct tax, at source, at the time of payment to the "dealer", by adjustment or any other manner, an amount calculated at 12.5 per cent on the total value of the works contract. Respondent No. 4 has been accordingly directed to deduct tax at 12.5 per cent on the payments to be made to the works contractors. On the basis of such notice, respondent No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 12.5 per cent on the total turnover, meaning thereby that by making deduction, at source, the petitioner is being forced to pay, with the help of the impugned statutory provisions, much more than what the petitioner's legal liability would be. In the process, the State, according to Dr. Saraf, is seeking to realize tax from the petitioner without the petitioner being liable to pay such taxes. Such realization of tax, submits Dr. Saraf, is wholly against the Constitutional Scheme, particularly, article 265, which makes it clear that no person shall be liable to pay tax except what the law provides. As far as learned Government Advocate is concerned, he has merely submitted that clause (3) of article 246 of the Constitution has conferred powers upon the State Legislature to make laws, for the State or any part thereof, with respect to any of the matters enumerated in List II of the Seventh Schedule to the Constitution of India. In the present case, according to the learned Government Advocate, the power of the State Legislature to enact the Act of 2005 can be traced to entries 52 and 54 enumerated in List II of the Seventh Schedule to the Constitution of India. Mr. Nabam fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement between the parties is that the contractor should construct the building according to the specifications contained in the agreement and, in consideration therefor, receive payment as provided by the contract agreement and that in such an agreement, there is neither contract to sell the materials used in the construction nor does the property, in the goods, used in the construction work, pass, as movables to the person, who allots the works contract. The apex court, therefore, took the view that it was not within the legislative competence of the Provincial Legislature, under entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935, to impose tax on the supply of materials used in a works contract by treating the supply of such materials as a "sale". In Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353; AIR 1958 SC 560 the apex court also clarified that while the Legislature is incompetent to impose sales tax on the goods used in execution of those works contracts, wherein the contracts are entire and indivisible, there may be a case, wherein the parties have entered into a distinct and separate contract, one for transfer of the materials for mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 366 of the Constitution, which is the definition clause, stood accordingly amended by insertion of clause (29A). This clause of article 366 reads as under: "(29A) 'tax on the sale or purchase of goods' includes- (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (b) 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; (c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endments made in the State legislations came to be considered by a Constitution Bench, in Builders Association of India v. Union of India reported in [1989] 73 STC 370 (SC); [1989] 2 SCC 645, wherein the apex court pointed out that what the 46th Amendment has done is that it has clarified that a transfer of property in goods (whether as goods or in some other form), involved in the execution of a works contract, would be deemed to 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 taxation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of, the territory of India. By clause (2) of article 286, Parliament is authorized to formulate principles for determining as to when a sale of purchase of goods takes place in any of the ways mentioned in clause (1), namely, outside the State or in the course of import into, or export out of, the territory of India. Clause (3) of the article 286 provides that any law of the State, in so far as it imposes or authorizes imposition of tax on the sale or purchase of goods declared by Parliament by law to be of special importance in the inter-State trade or commerce or a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) and sub-clause (d) of clause (29A) of the article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of tax as the Parliament may by law specify. The object of article 286 of the Constitution is to invest the Parliament with exclusive authority to enact laws imposing tax on sale or purchase of goods, where such sale or purchase takes place in the course of inter-State trade or commerce or in the course of import into, and export out of, the territor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tax is governed by article 269. This shows that the State's legislative power, under entry 54, does not extend to imposing of tax on sale or purchase of goods, which takes place outside the State or in the course of import or export of goods. Naturally, therefore, the State's legislative power to impose sales tax on sale or purchase of declared goods too shall be, if I may reiterate, subject to the restrictions imposed by law, which may be made by the Parliament. In view of these limitations imposed by the Constitution on the legislative powers of the State under entry 54 of the State List, it is clear that it is beyond the competence of the State Legislature to make a law imposing tax, with the aid of sub-clause (b) of clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke place outside the State or in the course of import of the goods into, or export of the goods out of, the territory of India nor will such power of legislation entitles the State to make law on sale or purchase of goods, which are of special importance in inter-State trade or commerce, including transfer, supply or delivery of declared goods, which are deemed to be sales under clause (29A) of article 366. If any declared goods, which are referred to in section 14 of the Central Sales Tax Act, 1956, are involved in such transfer, supply or delivery of goods in execution of the works contract, State cannot impose sales tax on those goods. Bearing in mind the Constitutional limitations on the power of the State to impose tax even on deemed sale, which take place in the case of execution of "works contract", let me, now, turn to, and look into, the various provisions of the Act of 2005, which have some bearing in the present writ petition. Let me, first, turn to section 2(zf), which defines "sale". A careful reading of section 2(zf) shows that the definition of "sale" is inclusive in nature. No wonder, therefore, that, as defined in section 2(zf)(v), "sale" includes a transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person, who may not have been registered, but is required to be registered, under the Act of 2005, as a "dealer", shall be liable to pay tax as calculated under the Act. Section 3(2) provides that a "dealer" shall be liable to pay tax on every sale of goods effected by him. From the provisions contained in section 3, it becomes clear that every person, who is a "works contractor" and who uses materials in execution of "works contract", the materials having not been supplied to him, in the execution of the "works contract", by the other person to the contract, such a "works contractor" shall be liable, as a "dealer" to pay sales tax on the materials used by him in the execution of the "works contract" provided, however, that the value of the materials, so used, is included within the valuable consideration receivable by the "works contractor" from the other party to the contract. When the provisions contained in section 3(2) are read in the light of the provisions of section 2(zf), it becomes clear that a person, who uses goods, in execution of a "works contract", is liable to pay sales tax on the goods used by him in the execution of "works contract" provided that the goods have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s listed in the First Schedule shall be exempted from tax subject to the conditions and exceptions set out therein. (2) The dealers or class of dealers as may be notified and specified from time to time in the Fifth Schedule shall be exempted from payment of tax on all sales of goods effected by them subject to such condition as may be prescribed. Explanation.-This exemption does not extend to the import of any goods made by the dealer. (3) Exemption for goods used exclusively in making non-taxed sales. Where a dealer sells goods that it has used since the time of purchase exclusively for purposes other than making sales of goods, and has not claimed a tax credit in respect of those goods under section 9, the sale of those goods shall be exempted from tax." Close on the heels of section 6, section 7 of the Act provides that certain "sales" shall not be liable to be taxed under the Act. This section, (i.e., section 7) is reproduced hereinbelow: "Section 7. Certain sales not liable to tax.-(1) Nothing contained in this Act or the Rules made thereunder shall be deemed to impose, or authorise, the imposition of tax on any sale of goods when such sale takes place: (a) in the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst Schedule to the Act of 2005, but also exempts, from payment of tax, certain transactions, indicated hereinbefore, which are constitutionally and statutorily not permissible to be taxed. Hence, while calculating the taxable "turnover" of a dealer, who may be a "works contractor", apart from those transactions of sale, which take place (i) in the course of inter-State trade or commerce, (ii) outside Arunachal Pradesh and (iii) in the course of import of the goods into, or the export of the goods out of, the territory of India, the sale prices of those goods, which are listed in the First Schedule, have to be deducted and/or kept excluded. Coupled with the above, rule 5(2) of the Arunachal Pradesh Goods Tax Rules, 2005 (in short, "the Rules of 2005"), provides that in the case of "turnover" arising from execution of "works contract", the amount, representing the charges towards labour, services and like charges, shall be excluded from the "taxable turnover" of the "dealer". Rule 5(2) of the Rules of 2005 reads: "Rule 5. Works contract.-(1) in case of turnover arising from the execution of the works contract, the amount representing the charges towards labour, services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsible for making any payment of discharging any liability on account of any amount purporting to be full or part payment of 'sales price' or consideration for the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall, deduct at the time of credit to the account of or payment to the dealer (hereinafter referred to as, 'the contractor') of such amount in cash, by cheque, by adjustment or in any other manner, an amount calculated at the rate of twelve-andhalf paise in the rupee, from such sum towards part or, as the case may be, full satisfaction of the tax payable under this Act on account of total value of such works contract. (b) Where, on an application being made by any contractor in this behalf, the prescribed authority is satisfied that any works contract under reference is separable and involves only labour and services and accordingly, justifies deduction of tax on a part of the sum payable in respect of any works contractor, as the case may be, justifies no deduction of tax at all, he shall, after giving the contractor a reasonable opportunity of being heard, grant him such certificate as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and paying it into the Government account shall issue to the payee a certificate of tax deduction and payment in such form and manner and within such time as may be prescribed. (6) Any deduction made in accordance with the provisions of this section and credited into the Government account, shall be treated as payment of tax on behalf of the person from whose bills and invoices, the deduction has been made and credit shall be given to him for the amount of tax finally assessed or determined as being payable by the concerned person in the assessment for the relevant assessment year and any amount deducted in excess of the tax so assessed or determined shall be refundable in accordance with the provisions of this Act. (7) The person responsible for deduction of tax shall within the prescribed time after the end of each year, file a return in the prescribed form to the prescribed authority. (8) No interest or penalty shall be imposed or no recovery proceedings against the dealer or payee shall be initiated in respect of deduction of tax under this section. (9) Where the amount has not been, deposited after deduction, such amount and any other sum which may be payable und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the works contract. In short, thus, section 47A does not make room for non-deduction of those components of such bills, which may not be, otherwise, exigible to tax. While considering the impact of the provisions contained in section 47A, what is necessary to bear in mind is that under the scheme of the Act of 2005, in respect of those "sales", which take place (i) in the course of interState trade and commerce or (ii) outside the State of Arunachal Pradesh or (iii) in the course import of the goods into, or export of the goods out of, the territory of India, no tax is payable at all. Hence, all the said classes of "sale", which may take place, even in execution of "works contract", shall be kept excluded, while calculating the "taxable turnover". This apart, while calculating the "taxable turnover" of a "works contractor", the "sale price" of those goods, which are used in the execution of the "works contract", but are listed in the First Schedule to the Act of 2005 shall also be kept excluded, while determining "taxable turnover". Further, in respect of the turnover, arising out of the execution of works contract, certain further deductions are to be made as have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly depend on the facts of the given case. While imposing sales tax on the value of the goods, used in a works contract, the value of the labour and service components, which is not taxable by virtue of the legal fiction of "deemed sale" (which Forty-sixth Amendment to the Constitution, has introduced) has to be kept excluded. It is the transfer of property in goods involved in the execution of a works contract that constitutes the taxable event. Hence, when tax is sought to be deducted at source at a flat rate of 12.5 per cent on the entire turnover of a "dealer", it clearly follows that before such deduction is authorized to be made by the State Legislature, the State Legislature must give to the authority, who is required to make deduction, the freedom and responsibility to ensure that the total value of the works contract is exigible to sales tax. If, in a given case, it is found that the total value of the "works contract" is not subject to payment of sales tax and/or that only a part of the total value of the works contract is exigible to sales tax, it will be wholly illegal to make deduction at a flat rate of 12.5 per cent on the total value of the works contract. If this is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inery and tools for the execution of the works contract, cost of consumables, such as, water, electricity, fuel, etc., used in the execution of works contract, wherein the property in the goods is not transferred in the course of execution of works contract, cost of establishment of the contractor to the extent it is relatable to supply of labour and services and profit earned by the contractor. The apex court has further clarified, in Gannon Dunkerley & Co. [1993] 88 STC 204, that the amounts, deductible under various heads, will have to be determined in the light of the facts of a given case on the basis of the materials produced by the contractors. Section 47A of the Act has not provided any mechanism to exclude any transaction from its purview, even if, ultimately, the transaction is found to be not at all exigible to sales tax. If section 47A is allowed to survive as it exists today, the result would be that even in a case, wherein labour and service form part of the works contract, the person, responsible for making payment to a "works contractor", would have no option, but to deduct tax at the rate of 12.5 per cent on the entire turnover, though the contractor may not be li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , with a possible contingency of refund at a later stage, will not make the original levy valid; because if particular sales or purchases are exempt from taxation all together, they can never be taken into account, at any stage, for the purpose of calculating or arriving at the taxable turnover and for levying tax." From the decision of Bhawani Cotton Mills Ltd. [1967] 20 STC 290 (SC), it becomes clear that if a person is not liable to pay tax on a given item or is not liable to pay tax at a rate, which is not permissible, no tax, even at source, can be deducted from him. To levy a tax means "to impose or assess" or "to impose, assess or collect under authority of law". It is a unilateral act of superior legislative power to declare the subjects and rates of taxation and to authorize the collector to proceed to collect the tax. Assessment is the official determination of liability of a person to pay a particular tax. Collection is the power to gather money by enforcing payment if necessary. The levy of taxes is, generally, a legislative function; assessment is a quasi-judicial function and collection an executive function. These three expressions "levy", "assessment" and " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction, at source, does not take into account those components of sale or purchase, which are not exigible to the State's power to impose sales tax, provisions for such deduction must be held to be, in the light of the decision in Steel Authority of India Ltd. [2000] 118 STC 297 (SC), beyond the powers of the State Legislature inasmuch as no law made by the State can authorize imposition of sales tax, amongst others, in respect of sales in the course of import of the goods into, or export of the goods out of, the territory of India or "sales" outside the State or inter-State sale. The apex court further held, in Steel Authority of India Ltd. [2000] 118 STC 297, that section 13AA should have been precisely drafted to make it clear that no tax was levied on that part of the amount credited or paid that related to inter-State sales, outside sales and sales in course of import. Pointing out these deficiencies in the legislation, in question, the apex court further observed, in Steel Authority of India Ltd. [2000] 118 STC 297, as under: (page 305) "... Unfortunately, it would appear that the State Legislature overlooked its limitations, even as contained in the preamble, when ena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent, as the case may be. Though the object of the provision is to meet the tax in respect of the transaction on all works contract on the valuable consideration payable for the transfer of property in goods involved in the execution of the works contract, the effect of the provision is that, irrespective of whether the sales are inter-State sales or outside sales or export sales which are outside the purview of the State Act and those transactions in respect of which no tax can be levied even in terms of the enactment itself, such deductions have to be made in the bills or invoices of the contractors. To say that a person is not liable for payment of tax inasmuch as on completion of the assessment refund can be obtained at a later stage is no solace ..." The apex court further held, in Nathpa Jhakri [2000] 118 STC 306, as under: "Section 12A of the Himachal Pradesh General Sales Tax Act, 1968, which provides for the deduction of a percentage towards sales tax of the contractor from payments under a works contract, is invalid. Though the object of the section is to meet the tax in respect of the transactions on all works contracts on the valuable consideration payable for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd-half paise in the rupee: Provided that the rate of tax on packing materials or containers shall be the same as the rate in which the goods sold are chargeable to tax. (2) The Government may, if it deems necessary, reduce the rates of tax as prescribed in sub-section (1), by a notification to that effect in the Official Gazette." A minute reading of section 4 of the Act of 2005 would go to show that different rates of tax have been fixed in respect of goods, which are specified in Second, Third and Fourth Schedules and it is only in respect of those goods, which do not fall under any of the said three Schedules, that tax is realizable at the rate of 12.5 paise in a rupee. It is not in dispute that the goods used in execution of "works contract", are treated as "sale" and, hence, tax is leviable on the goods, used in the execution of "works contract," at such rate(s) as may have been prescribed in the said Schedules. Hence, unless and until a uniform rate of tax is prescribed for all goods used in execution of the "works contract", it is not possible to realize or even deduct tax at source at a uniform or flat rate. To put it a little differently, since no uniform rate has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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