Y K SINGHAL Vs. STATE OF U P

JUDGEMENT

(1.) A. N. GUPTA, J. In this batch of writ petitions, the valid, "type of the provisions contained in the U. P. Trade Tax Act, formerly known as the U. P. Sales Tax Act, 1948 (hereinafter REFERRED TO as "the U. P. Act"), relating to imposition of sales tax on works contracts has been challenged. Since these petitions involve common questions, they are being disposed of by a common judgment. Before the, Constitution (Forty-sixth Amendment) Act, 1982, indivisible works contracts were not eligible to sales tax due to judicial pronouncements. To overcome this difficulty, the Constitution was amended and the Constitution (Forty-sixth Amendment) Act came into force with effect from February 3, 1983. It introduced clause (29a) to article 366, clause (b) of which is material which runs as follows : " 366. Definitions.- In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say - (29a) 'tax on the sale or purchase of goods' includes - (a ). . . . . . . . . . . . . . . . . (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) to (f ). . . . . . . . . . . . . . . . . and such transfer,. . . . . . . . . . . . . . . . of any goods shall be deemed to be a sale of those goods by the person making the transfer. . . . . . . . . . . . . . . . . . . and a purchase of those goods by the person to whom such transfer. . . . . . . . . . . . is made;" Article 286 of the Constitution puts restrictions on the imposition of tax by the States on the sale or purchase of goods, which runs as follows : " 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 the 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 to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify. " Sub-clause (b) of clause (3) of article 286 provides that 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, shall be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents as Parliament may by law specify. It is not disputed that so far Parliament has not made any law under this provision. In fact the Central Sales Tax Act, 1956 (hereinafter REFERRED TO as "the Central Act"), has not yet been amended so as to tax transfer of property in goods involved in the execution of a works contract relating to the Central sales. However, provisions have been made in the Central Sales Tax Act relating to article 286 (1) (a) (b), (2) and (3) (a ). These provisions are contained in sections 3, 4, 5, 14 and 15 of the Central Act. Section 3 defines when a sale or purchase of goods is said to take place in the course of inter-State trade or commerce. Section 4 lays down when a sale or purchase of goods is said to take place outside the State. Section 5 provides when a sale or purchase of goods is said to take place in the course of import or export. Section 14 gives a list of those goods which have been declared to be goods of special importance in inter-State trade or commerce. Section 15 lays down restrictions and conditions in regard to tax on sale or purchase of declared goods within a State. It provides that the sales tax laws of a State for the imposition of a tax on the sale or purchase of declared goods shall be subject to two main conditions. Firstly, rate of tax shall not exceed 4 per cent and, secondly, it shall not be levied at more than one stage. As mentioned above, the Constitution (Forty-sixth Amendment) enabled the State Governments to levy sales tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. In pursuance of this enabling provision, the U. P. Sales Tax Act was amended providing for imposition of sales tax on the transfer of property in goods involved in the execution of a works contract. Section 2 (h) defines sale, sub-clause (ii) of which includes transfer of property in goods involved in the execution of a works contract. It runs as follows : " 2 (h ). 'sale' with its grammatical variations and cognate expressions, means any transfer of property in goods (otherwise than by way of a mortgage, hypothecation, charge or pledge) for cash or deferred payment or other valuable consideration and includes - (i ). . . . . . . . . . . . . . . . . (ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract : (iii) to (vi ). . . . . . . . . . . . . . . " The following two Explanations were inserted by the U. P. Sales Tax (Amendment) (Second) Ordinance, 1994 (21 of 1994) : " Explanation I.- A sale or purchase shall be deemed to take place in the State - (i) in a case falling under sub-clause (ii), if the goods are in the State at the time of their use, application or appropriation for the execution of the works contract notwithstanding that the agreement for the works contract has been wholly or in part entered into outside the State or that the goods have been wholly or in part moved from outside the State : (ii) in a case falling under sub-clause (iv), if the goods are used by the lessee within the State during any period, notwithstanding that the agreement for the lease has been made outside the State or that the goods have been delivered to the lessee outside the State. Explanation II.- Notwithstanding anything contained in this Act, two independent sales or purchases shall, for the purposes of this Act, be deemed to have taken place - (a) when the goods are transferred from a principal to his selling agent and from the selling agent to his purchaser; (b) when the goods are transferred from the seller to a buying agent and from the buying agent to his principal, if the agent is found in either of the cases aforesaid - (i) to have sold the goods at one rate and passed on the sale proceeds to his principal at another rate; or (ii) to have purchased the goods at one rate and passed them on to his principal at another rate; or (iii) not to have accounted to his principal for the entire collection or deductions made by him, in the sales or purchases effected by him on behalf of his principal; or (iv) to have acted for a fictitious or non-existent principal. " Explanation I comes into retrospective effect from September 13, 1985 and Explanation II is operative with effect from September 28, 1994. However, we are not concerned with these Explanations in these cases because they came to be filed before the promulgation of the said Ordinance and have not been challenged before us. Section 2 (i) defines "turnover" as follows : " 2 (i ). 'turnover' means the aggregate amount for which goods are supplied or distributed by way of sale or are sold, by a dealer, either directly or through another, on his account or on account of others, whether for cash or deferred payment or other valuable consideration. " " Works contract" has been defined in section 2 (m) as below : " 2 (m ). 'works contract' includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. " After the Constitution (Forty-sixth Amendment), section 3-F was introduced which is the charging section for the works contract. It runs as follows : " 3-F. Rate of tax on the right to use any goods or goods involved in the execution of a works contract.- Notwithstanding anything contained in section 3-A, or section 3-AAA or section 3-D, the turnover relating to the business of transfer of the right to use any goods for any purpose or of transfer of the property in goods whether as goods or in some other form involved in the execution of a works contract shall be determined in the manner prescribed and shall be liable to tax at such rate not exceeding fifteen per cent, as the State Government may, by notification, declare, and different rates may be declared for different goods or different classes of dealers. " Rule 44-B prescribes the manner in which the sales tax relating to works contract shall be levied. It reads as under - " 44-B. Determination of turnover of goods involved in the execution of works contracts.- The tax under section 3-F on the turnover relating to the business of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be computed on the net turnover relating to works contracts. In determining the net turnover, the amounts specified below shall be deducted if they are included in the gross turnover - (a) the amounts representing the purchase price of such goods, involved in the execution of such works contract, on the sale or purchase whereof the tax under the Act is shown to the satisfaction of the assessing authority to have been paid; (b) the amounts representing the purchase price of such goods involved in the execution of such works contract, as are exempt from tax under section 4 or have been purchased from an industrial unit which is exempt from tax under section 4-A; (c) the amounts representing the value of such of the goods, involved in the execution of such works contract, as were supplied to the contractor by the contract himself, provided the property in such goods remains under the terms of the contract throughout with the contractee and the contractor is bound to return the unused goods to the contract. Explanation.- For the purposes of this rule, gross turnover shall mean the aggregate of the amounts received or receivable by a dealer in an assessment year as valuable consideration for the transfer of property in goods used in the execution of a works contract after the commencement of this rule, whether or not the amount receivable as valuable consideration for such transfer is separately shown in the works contract and whether the execution of such works contract commenced during the year or earlier, and includes any advance received by the dealer towards valuable consideration for the works contract. " The Notification No. ST-II-2399/x-9 (195)/85 - U. P. Act XV/48 - Order-87, dated April 27, 1987 issued under section 3-F runs as follows : " In exercise of the powers under section 3-F of the U. P. Sales Tax Act, 1948 (U. P. Act No. 15 of 1948), the Governor is pleased to declare that, with effect from May 1, 1987, every dealer to whom subsection (3) of section 3 applies and every other dealer, liable to tax under the aforesaid Act, the aggregate of whose turnover in a year relating to the business of transfer of property in goods (whether as goods or in some other form) involved in the execution of works contracts specified in column 2 of the Schedule hereunder exceeds one lakh rupees, shall in respect of such turnover, which shall be determined in the manner specified in rule 44-B of the Uttar Pradesh Sales Tax Rules, 1948, be liable to tax at the rate specified in the relevant notification relating to the said goods issued under section 3-A or section 3-D of the aforesaid Act. SCHEDULe ----------------------------------------------------------------------- Sl. No. Description of works contract.----------------------------------------------------------------------- 1. Fabrication and installation of plant and machinery.

(2.) FABRICATION and erection of structural works including fabrication, supply and erection of iron trusses purloins, etc.

(3.) FABRICATION and installation of rolling shutters and collapsible gates.