JUDGMENT
S. Sankarasubban, J.
1. This original petition challenges the vires of item (c) of Explanation 4 of Clause (xxi) of Section 2 of the Kerala General Sales Tax Act, 1963 (hereinafter referred to as “the Act”). This was introduced by Act 11 of 1995 which repealed Ordinance No. 11 of 1995. Item (c) of Explanation 4 of Section 2 of the Act says that for the purpose of this Act, the transfer of property in goods whether as goods or in some other form involved in the execution of a works contract shall be deemed to have taken place in the State, if the goods are within the State at the time of such transfer, irrespective of the place where the agreement of works contract is made, whether the assent of the other party to the contract is prior or subsequent to such transfer.
2. According to the petitioner, it deals with works contract and the contract consists of both sale of goods as well as sale of labour. But so far as the sale of goods is concerned, according to the petitioner, goods sold are sales of inter-State and hence, not liable to be taxed by the State Legislature. Before we deal with the contentions of both parties, it is necessary to state in brief the law regarding the works contract.
3. Tax on the sale of goods and purchase is the subject coming under entry 54 of List II of the Constitution of India. But this is subject to entry 92-A of List l’ of the Seventh Schedule. Under entry 92-A it is within the province of the Central Legislature to legislate with regard to tax on the sale or purchase of goods where such sale or purchase takes place in the course of inter-State trade or commerce. The question arose as to whether a works contract can be taxed under the definition of “sale” comes under the Act. This was resolved by the Supreme Court in the decision reported in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353. This decision, as already stated, gave difficulty in assessing the works contract under the Act.
4. Thereafter, Forty-sixth Amendment of the Constitution took place. As per the amendment, Article 466(29-A) was introduced which gave a definition of tax on the sale or purchase of goods. As per this, tax on the sale or purchase of goods includes a tax on the transfer of the property in goods involved in the execution of a works contract. Consequential amendment was also made under Article 286 of the Constitution of India. Article 286(3)(b) of the Constitution of India enabled the State to 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 (29-A) of Article 466. Thus, by the Forty-sixth Amendment, State Legislature is enabled to tax on the sale or purchase of goods involved in a works contract The State Legislature accordingly passed various legislations for enforcing the tax on the sale of goods involved in a works contract. Such legislations immediately paved the way for litigations and the validity of this enactment including the validity of Article 466(29-A) of the Constitution of India was challenged before the Supreme Court in Builders Association of India v. Union of India [1989] 73 STC 370. Two points were taken attacking the imposition of tax on the sale of goods involved in a works contract. The first point was that the Forty-sixth Amendment was unconstitutional, because it was not ratified by the Legislature of not less than one half of the State. The second point was that it was not open to ignore the provisions contained in Article 286 of the Constitution of India and the provisions of the Central Sales Tax Act, 1956, while making assessment under the sales tax laws passed by the Legislature. The first point was found against the petitioner. It was found that the constitutional amendment was validly passed. In answering the second point, at page 403 of the above decision, the court observed as follows :
“We, therefore, declare that sales tax laws passed by the Legislatures of States levying taxes on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract are subject to the restrictions and conditions mentioned in each clause or sub-clause of Article 286 of the Constitution. We, however, make it clear that the cases argued before and considered by us relate to one specie of the generic concept of ‘works contracts’. The case-book is full of the illustrations of the infinite variety of the manifestation of ‘works contracts’. Whatever might be the situational differences of individual cases, the constitutional limitations on the taxing-power of the State as are applicable to ‘works contracts’ represented by ‘building contracts’ in the context of the expanded concept of ‘tax on the sale or purchase of goods’ as constitutionally defined under Article 466(29-A), would equally apply to other species of ‘works contracts’ with the requisite situational modifications.”
Thus, in the above decision, the Supreme Court held that just as any other tax on the sales, in a works contract also, it is bound by the restrictions under Article 286 of the Constitution of India and the Central Sales Tax Act.
5. The next case that came before the Supreme Court was Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204. In the above case, an attempt was made to re-open the decision in Builders Association of India v. Union of India [1989] 73 STC 370 (SC). But that was negatived. Another ground raised was regarding the validity of Section 5(3) of the Rajasthan Sales Tax Act. After exhaustively discussing the entire aspect, at page 237 of the above decision, the Supreme Court held as follows :
“(1) In exercise of its legislative power to impose tax on sale or purchase of goods under entry 54 of the State List read with Article 466(29-A)(b), the State Legislature, while imposing 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 is not competent to impose a tax on such a transfer (deemed sale) which constitutes a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import or export.
(2) The provisions of Sections 3, 4, 5 and Sections 14 and 15 of the Central Sales Tax Act, 1956, are applicable to a transfer of property in goods involved in the execution of a works contract covered by Article 466(29-A)(b).
(3) While defining the expression ‘sale’ in the sales tax legislation it is open to the State Legislature to fix the situs of a deemed sale resulting from a transfer falling within the ambit of Article 466(29-A)(b) but it is not permissible for the State Legislature to define the expression ‘sale’ in a way as to bring within the ambit of the taxing power a sale in the course of inter-State trade or commerce, or a sale outside the State or a sale in the course of import and export.”
After laying down the above proposition, the court went on to consider the validity of Section 5(3) of the Rajasthan Sales Tax Act. Section 5(3) of the Rajasthan Sales Tax Act states as follows :
“5(3) Notwithstanding anything contained in this Act, in the case of a works contract, the turnover of such contract shall be subjected to tax :
Provided that such deductions, as may be prescribed, may be allowed to a contractor while determining his tax liability.”
The expression “turnover” is defined in Clause (t) as follows : “(t) ‘turnover’ means the aggregate amount of sale prices received or receivable for a sale, transfer, delivery or supply by a dealer in any of the ways referred to in Clause (o).” Dealing with the validity of Section 5(3) of the Rajasthan Sales Tax Act, the Supreme Court held as follows: “A comparison of the provisions contained in Subsection (3) of Section 5 read with Section 2(t) and Sub-section (1) of Section 5 read with Section 2(s) would indicate that in relation to works contracts the Legislature has made a departure in the matter of charge ability of the tax and by using the expression ‘turnover’ instead of ‘taxable turnover’ in Section 5(3) it has enlarged the field of taxability to permit tax being levied on sales in the course of inter-State trade or commerce, sales outside the State and sales in the course of import and export and to ignore the conditions and restrictions placed by Section 15 of the Central Sales Tax Act in relation to imposition of tax on goods which are declared to be of special importance in inter-State trade or commerce under Section 14 of the Central Sales Tax Act. The proviso to Section 5(3) does not oblige the rule-making authority to frame a rule allowing deductions for the turnover of the amount of proceeds of sale of goods on which no tax is leviable under the Act so as to exclude the abovementioned sales from levy of tax…..”. Further, the court held as follows : “We are, therefore, unable to uphold the decision of the High Court in this regard and it must be held that Sub-section (3) of Section 5 transgresses the limits of the legislative power conferred on the State Legislative under entry 54 of the State List inasmuch as it enables tax being imposed on deemed sales resulting from transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract which take place in the course of inter-State trade or commerce, or which take place outside the State or which take place in the course of import and export within the meaning of Sections 3, 4 and 5, respectively of the Central Sales Tax Act and it does not take into account the conditions and restrictions imposed by Section 15 of the Central Sales Tax Act on goods declared to be of special importance in inter-State trade or commerce under Section 14 of Central Sales Tax Act.”
6. The Supreme Court had occasion to decide this question in the case reported in Bharat Heavy Electricals Limited v. Union of India [1996] 102 STC 373. In that decision, the Supreme Court held as follows :
“If a question arises whether a sale is an inter-State sale or not, it has to be answered with reference to and on the basis of Section 3 of the Central Sales Tax Act, 1956, and Section 3 alone.”
In that case, on facts, the court considered the validity of certain assessments made on works contract. Thus, on the basis of the above decisions, it is clear that even though the transfer of property in goods involved in a works contract is liable to be taxed under the Act, that is subject to the limitations under Article 286 of the Constitution of India and the provisions of the Central Sales Tax Act.
7. Now, the contention before us is that the present item (c) of explanation 4 of Clause (xxi) of Section 2 of the Act was introduced by Act 11 of 1995 with retrospective effect from April 1, 1984. Section 2(xxi) defines “sale” as every transfer (whether in pursuance of a contract or not) of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge. By explanation 4(c) for the purpose of this Act, the transfer of property in goods whether as goods or in some other form involved in the execution of a works contract shall be deemed to have taken place in the State, if the goods are within the State at the time of such transfer, irrespective of the place where the agreement of works contract is made, whether the assent of the other party to the contract is prior or subsequent to such transfer. Importance is given to the situs of the goods in the State at the time of transfer. Learned counsel for the petitioner submits that the explanation is very wide and can rope in any transfer which takes place under Section 3 of the Central Sales Tax Act. According to the counsel, as per the decisions of the Supreme Court, one has to look into Section 3 of the Central Sales Tax Act to find out when is a sale or purchase of goods is to take place in the course of inter-State trade or commerce. A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase occasions the movement of goods from one State to another or is effected by a transfer of documents of title to the goods during their movement from one State to another. According to the counsel, the explanation ignores sales mentioned in Section 3 of the Central Sales Tax Act and hence, the explanation is invalid. Learned counsel placed reliance on the decisions of the Supreme Court mentioned supra, particularly at page 231 of the decision reported in [1993] 88 STC 204 (Gannon Dunkerley & Co. v. State of Rajasthan): “The location of the situs of the sale in sales tax legislation of the State would, therefore, have no bearing on the chargeability of tax on sales in the course of inter-State trade or commerce since they fall outside the field of legislative competence of the State Legislatures and will have to be excluded while assessing the tax liability under the State legislation. The same is true of sales which are outside the State and sales in the course of import and export. The State Legislature cannot so frame its law as to convert an outside sale or a sale in the course of import and export into a sale inside the State. The question whether a sale is an outside sale or a sale inside the State or whether it is a sale in the course of import or export will have to be determined in accordance with the principles contained in Sections 4 and 5 of the Central Sales Tax Act and the State Legislature while enacting the sales tax legislation for the State cannot make a departure from those principles.” According to the counsel, the delivery of goods and use in Kerala in the execution of works contract would not be the condition to deem a sale inside the State if the transfer of property in goods as such has already taken place and the movement effected as per Section 3 of the Central Sales Tax Act. Irrespective of where the goods are delivered, used and the written contract is entered into, the situs of sale is the State from where the goods moved pursuant to the contract of sale which includes a deemed sale also. The fact that goods are put into use in the execution of works contract carried out in the State of Kerala cannot be ground for determining the tax liability that the goods are located in the State for deeming a sale under Explanation 4(c) to Section 2(xxi) read with Section 5(1)(iv)(a).
8. Learned Government Pleader submitted that the clause is not violative of Article 286 of the Constitution of India or the provisions of the Central Sales Tax Act. According to him, the impugned amendment is only to explain or clarify the statutory provisions, which are already in the statute. No new liability intended to be cast on any dealer by the impugned amendment. The Legislature has to deal with complex problems which do not admit of solution through any doctrinaire or straight jacket formula and this is particularly true in case of legislation dealing with economic matters. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation. Further, it was stated that it was not against the decisions of the Supreme Court.
9. This case was heard along with W.A. No. 944 of 1997. That was an appeal from the judgment rendered by Shanmugam, J. in O.P. No. 4085 of 1997 Reported in [1997] 107 STC 420 (Ker) (Hydrotec Engineers India Private Limited v. State of Kerala).- Ed. In that case also, the validity of the explanation was sought to be challenged. The learned Judge relied on the decisions in Builders Association of India v. State of Karnataka [1990] 79 STC 442 (Kar), and 20th Century Finance Corporation Limited v. State of Maharashtra [1989] 75 STC 217 (Bom) and held that the explanation is valid. The learned Judge held thus : “The Supreme Court also held that the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works and not the cost of acquisition of the goods by the contractor.”
Thus the learned Judge held that the situs of the sale for the purpose of sales tax is the State.
10. The deeming provision under explanation 4(c) means that if the goods are within the State, transfer shall be deemed in the State itself irrespective of any agreement of works contract. According to the learned Government Pleader, in all works contract, transfer takes place at the time of delivery and no question of inter-State sale arises and ‘hence, he submitted that the provision is valid. The learned Government Pleader relied on the decisions in [1990] 79 STC 442 (Kar) (Builders Association of India v. State of Karnataka) and [1989] 75 STC 217 (Bom) (20th Century Finance Corporation Limited v. State of Maharashtra). Of course, both these decisions were rendered before [1993] 88 STC 204 (SC) (Gannon Dunkerley & Co. v. State of Rajasthan). In [1989] 75 STC 217 (Bom) (20th Century Finance Corporation Limited. v. State of Maharashtra), the Bombay High Court had occasion to deal with the definition of “sale” in the Maharashtra Sales Tax on the Transfer of the Right to use any Goods for any purpose Act. There, the provision, which came for scrutiny was as follows : “For the purposes of this clause, the transfer of the right to use any such goods shall be deemed to have taken place in the State of Maharashtra, if the goods are in the State of Maharashtra at the time of their use irrespective of the place where the agreement for such transfer of the right to use such goods is made, and whether the assent of the party is prior or subsequent to such transfer of the right to use any such goods.” Dealing with this contention, the High Court held as follows : “The validity of a tax on such transfer of right to use ought not to be tested by applying these reported decisions regarding the meaning of sale. It would not be also appropriate to apply the tests applicable for deciding when property in goods passes in case of transfers of the right to use goods for any purpose. The legal concepts of transfer of the right to use goods are quite different”. At page 229 of the above decision, it was observed as follows : “Only when the transferee or the lessee is put in possession of the goods, there would be a concluded transaction between the parties.” It was in the above context that the Bombay High Court held that there is no inter-State sale.
11. Builders Association of India v. State of Karnataka [1990] 79 STC 442, is a decision rendered by the Karnataka High Court, which was considering the Karnataka Sales Tax Act. Similar provision occurred in explanation (3)(c). The division Bench followed the decision of the Bombay High Court in [1989] 75 STC 217 (20th Century Finance Corporation Limited v. State of Maharashtra) and held that it does not affect any inter-State sale. In [1993] 88 STC 204 (Gannon Dunkerley & Co. v. State of Rajasthan) the same contention was raised by the State before the Supreme Court. At page 230 of the above decision, it was observed as follows :
“On behalf of the States it has been seriously contended that a deemed sale resulting from transfer of property in goods involved in the execution of a works contract can never be a sale in the course of inter-State trade or commerce and it cannot be an outside sale or a sale in the course of import since the transfer of property in the goods takes place only at the stage when the goods are incorporated in the works and that can take place only in the State where the work is required to be executed. On behalf of the contractors, on the other hand, it has been urged that a works contract can involve transactions constituting a sale in the course of inter-State trade and commerce as well as an outside sale or a sale in the course of import and that is a matter which will have to be considered in accordance with the principles contained in Sections 3, 4 and 5 of the Central Sales Tax Act keeping in view the terms and conditions of the particular contract. In this regard, the learned counsel have placed reliance on a number of decisions of this Court wherein the provisions of Sections 3 and 4 of the Central Sales Tax Act, 1956, have been considered. We do not propose to go into this controversy because the question whether a deemed sale resulting from transfer of property in goods involved in the execution of a particular works contract amounts to a sale in the course of inter-State trade or commerce under Section 3 of the Central Sales Tax Act or an outside sale under Section 4 of the Central Sales Tax Act or a sale in the course of import under Section 5 of the Central Sales Tax Act has to be decided in the light of the particular terms of the works contract and it cannot be decided in the abstract. As at present advised, we are not in a position to say that in no case, can there be a sale in the course of inter-State trade or commerce or an outside sale or a sale in the course of import in respect of a deemed sale resulting from transfer of property in goods involved in the execution of a works contract falling within the ambit of Sub-clause (b) of Clause (29-A) of Article 466 of the Constitution.
It must, therefore, be held that while enacting a law imposing a tax on sale or purchase of goods under entry 54 of the State List is read with Sub-clause (b) of Clause (29-A) of Article 466 of the Constitution, it is not permissible for the State Legislature to make a law imposing tax on such a deemed sale which constitutes a sale in the course of inter-State trade or commerce under Section 3 of the Central Sales Tax Act or an outside sale under Section 4 of the Central Sales Tax Act or sale in the course of import or export under Section 5 of the Central Sales Tax Act.”
Thus, the Supreme Court has categorically stated in the above decision that a deemed sale under Article 466(29-A)(b) cannot violate the provisions of the Central Sales Tax Act and thus such sale may take in sale in the course of inter-State trade or outside sale or in the course of import or export. We are of the view that the definition takes in even inter-State trade or commerce in the course of export or outside sale and hence, it goes against the decision of the Supreme Court. As has been rightly observed by the Supreme Court, the question whether the sale is in the course of inter-State or outside has to be examined with the documents in question and such documents cannot be ignored by means of explanation. Hence, we are of the view that the explanation is very wide.
12. The next question is whether explanation 4(c) to Section 2(xxi) should be declared as unconstitutional. According to us, it is not necessary to strike down the said provision. It is enough, if we read down the provision. We declare that explanation 4(c) to Section 2(xxi) of the Act will not take in sales under Sections 3, 4 and 5 of the Central Sales Tax Act and if the assessee is able to prove on the basis of the materials that the property in the goods transferred in accordance with the principles under Sections 3, 4 and 5, then the explanation will hot apply.
13. In O.P. No. 14939 of 1995, the assessment order is exhibit P8. According to us, the assessment proceedings have to be reconsidered in the light of our observations and in the light of the decisions of the Supreme Court in [1993] 88 STC 204 (Gannon Dunkerley & Co. v. State of Rajasthan). Hence, we quash exhibit P8 and direct the assessing officer to pass fresh assessment orders in accordance with law after giving an opportunity to the assessee to produce fresh documents, if any, and after hearing the assessee. So far as W.A. No. 944 of 1997 is concerned, we set aside the judgment of the learned single Judge Reported in [1997] 107 STC 420 (Ker) (Hydrotec Engineers India Private Limited v. State of Kerala).–Ed. We also quash exhibits P4, P5, P8, P10 and P11 orders of assessment and direct the assessing officer to reconsider and pass fresh assessment orders in accordance with law and on the basis of the principles stated in this judgment and in the judgment of the Supreme Court in [1993] 88 STC 204 (Gannon Dunkerley & Co. v. State of Rajasthan). It is made clear that any tax deposited on the basis of the assessment order and on the basis of the interim orders passed by this Court, need not be refunded to the petitioner now. Fresh assessment orders shall be passed within three months from today. Refund, if any, shall be made after fresh assessment orders are passed.
Original petition and the writ appeal are disposed of as above.
Order on C.W.P. No. 20739 of 1995 in O.P. No. 14939 of 1995 dismissed.