KEC INTERNATIONAL LIMITED Vs. STATE OF KARNATAKA

JUDGEMENT

(1.) THESE appeals are by the petitioners in the writ petitions, wherein, they had challenged the constitutionality of section 19a of the Karnataka Sales Tax Act and to restrain the respondents from deducting any amount as tax from the amounts due to each of the petitioner and for certain other incidental reliefs.

(2.) THE petitioners had entered into contracts with the Karnataka Electricity Board for survey, design, erection, stringing and commissioning of transmission lines of different voltage ranging from 66 KV. to 400 KV. The Karnataka Sales Tax Act was amended in 1988 providing for tax in relation to the works contracts enumerated in the Sixth schedule to the Act. While so, section 19a of the Act was introduced with effect from April 1, 1988 making provisions for deduction of amounts payable to a dealer in respect of works contracts of the nature specified in the 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 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 work 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 recovery or preventing evasion has to be confined to matters within the State List. The petitioners have also challenged the section on the ground that it is against article 286 (1) of the Constitution in respect of outside the State sales and import and export sales having regard to the principles under sections 4 and 5 of the Central Sales Tax Act, 1956. Here again, the State cannot impose or authorise imposition of tax on these elements which are embedded in the total contract receipts, and which are excluded from the purview of state legislation. Article 366 (29a) only enables legislation on sales tax on the transfer of goods involved in the execution of works contracts and the State cannot legislate on the total amount payable under a works contract. It is also contended that the provision contained in section 19a is arbitrary and without any adjudicatory machinery or mechanism, by which, either the Sales tax Officer or the assessee-contractor, or the owner may make a fair determination of the likely tax liability which could be deducted at source.

(3.) THE learned single Judge after noting the aforesaid contentions, upheld the constitutional validity of section 19a on the ground that it is a machinery provision and necessary adjustments will have to be made at the time of final assessment of tax. It was held by the learned Judge that, though the provision made under section 19a is intended to cover situations arising under the karnataka Sales Tax Act alone, it gets extended to transactions in relation to inter-State transactions only by reason of section 9 of the Central Sales Tax Act and in that view of the matter, section 19a is valid by the application of section 9 of the Central Sales Tax Act, the machinery provision can be made applicable to tax payable under the Central Sales Tax Act as well. On these findings, the learned single Judge dismissed the writ petition upholding the validity of section 19a of the Karnataka Sales Tax Act (hereinafter referred to as "the Act") and the appeals are filed by the writ petitioners against the above decision.