JUDGMENT
Sachchida Nand Jha, J.
1. The vires of Section 25-A of the Bihar Finance Act, 1981 and the related rules and notification regarding deduction of sales tax at source from the contractors’ bills has again been called in question in these writ petitions.
2. Entry 54 of the State List of the Seventh Schedule to the Constitution of India authorizes the State Legislatures to make law with respect to imposition of taxes on the sale and purchase of goods other than newspapers, subject to the provisions of entry 92 A of the Union List. In State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353, the Supreme Court held that the expression “sale of goods” in entry 54 has the same meaning as in the Sale of Goods Act, 1930. The essential ingredients of sale being an agreement to sell movables for a price and transfer of property pursuant thereto, in works contract there is no sale of goods because such a contract is indivisible in which there is neither agreement to sell the materials used in the construction nor there is passing of the property in such materials pursuant to any such agreement. The State Legislatures were therefore, not competent to impose tax on the supply of materials used in such a contract treating them as sale under entry 54 of the State List.
3. In order to overcome the effect of the abovesaid decision and to confer power upon the State Legislatures to make law for imposition of taxes on the sale and purchase of goods involved in the execution of works contract, a new definition clause “tax on sale or purchase of goods” was inserted in Article 466 of the Constitution by the Constitution (Forty-sixth Amendment) Act, 1982 to include amongst others, “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” within the ambit of tax on sale and purchase of goods, wherever the term occurs in the Constitution. Article 286 which contains provisions relating to restrictions on the State’s power to impose tax on the sale and purchase of goods was also amended by substituting Clause (3). So amended, Article 286 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 (29-A) of Article 466,
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.”
4. Entry 92A of the Union List (List I), which finds mention in entry 54 of the State List (List-II), may also be quoted to complete the reference, as under :
Taxes on the sale or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter-State trade or commerce.
5. After the 46th Amendment, different States amended their respective tax laws making provisions for imposition of tax on transfer of goods involved in the execution of works contract and recovery of such tax in advance by way of deduction at source from the contractors’ bills and invoices. In Bihar, Section 25-A was inserted in the Bihar Finance Act, 1981 by the Finance Act of 1984.
6. The amendments brought about in different State enactments gave rise to dispute as to the power of the State Legislature to, firstly, impose tax and secondly, make deductions from the bills towards collection of tax at source. In fact, the vires of the 46th Amendment itself was challenged. The dispute as to the validity of the 46th Amendment was set at rest by the Supreme Court in the case of Builders Association of India v. Union of India [1989] 73 STC 370, on March 31, 1989. While upholding the amendment, the Supreme Court clarified that the exercise of legislative power by the State in the matter of imposition of tax on the items specified in different sub-clauses of Clause (29A) of Article 466 of the Constitution was subject to the same discipline which any levy under entry 54 of the State List is made subject to under the Constitution, and further subject to the restrictions and conditions mentioned in each clause or sub-clause of Article 286 of the Constitution.
7. The Supreme Court observed that even after the decision in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353, where a building contract consisted of two parts, one part relating to the sale of materials used in the construction of the building by the contractor to the person who had assigned the contract and the other part relating to supply of labour and services, it was possible to levy sales tax on the sale of goods under the first part. But sales tax could not be levied where the contract was single and indivisible. After the 46th Amendment, the works contract which was indivisible became a divisible one by legal fiction and it became possible for the States to levy sales tax on the value of goods involved in a works contract in the same way as ordinary sales of goods. Naturally, levy of tax on such “deemed sales” would be subject to the same incidents or restrictions and prohibitions as ordinary sales under the Constitution. The court clarified that the object of the new definition introduced by Clause (29A) of Article 466 was merely to enlarge the scope of “tax on sale or purchase of goods” wherever it occurs in the Constitution so as to include within its scope the transfer, supply or delivery of goods that may take place under any of the transactions referred to in Sub-Clauses (a) to (f), and nothing more.
8. The ratio of the decision of the Supreme Court in Builders Association case [1989] 73 STC 370, thus is that while by virtue of 46th Amendment it is permissible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax is leviable on the price of the goods sold or the price of the materials supplied in the case of construction of building, such levy would have to be subject to restrictions and conditions incorporated in Article 286 of the Constitution as well as entry 54 of List II itself. In other words, sales which are covered by Article 286 of the Constitution would stand out of the purview of the State Legislatures and they would not be competent to impose tax on those sales.
9. Having thus laid down the law the Supreme Court refrained from examining the validity of the respective statutory provisions of different State enactments giving opportunity to the concerned petitioners to approach the authorities under the Sales Tax Act of the State or the High Court concerned for necessary relief.
10. In the light of the abovesaid decision of the Supreme Court, writ petitions pending in this Court were disposed of in the following manner :
In Jamshedpur Contractors’ Association v. State of Bihar [1989] 75 STC 132, decided on August 2, 1989, this Court held that Article 286 of the Constitution which prohibits the States from imposing tax on sales and purchases of goods outside the State and restricts the quantum of tax leviable by States on sale or purchase of goods declared by the Central Sales Tax Act to be of special importance in inter-State trade, applied also to transfer of property in goods involved in the execution of works contract. Therefore, where any of the goods used in the execution of works contract by a contractor are “declared goods”, the assessing officer must take notice of Section 15 of the Central Sales Tax Act, 1956 while passing final order of assessment of the taxable turnover of the contractor. The court further held that no sale or purchase of goods is involved when a works contractor spends any amount on account of labour. “Labour” is not “goods” and therefore, the total amount spent by a contractor as labour charges, in the execution of works contract has to be excluded from the gross turnover of the contractor for purposes of assessment to sales tax. Rule 13A of the Bihar Sales Tax Rules, 1983 which provided for deduction of a fixed percentage from gross turnover, on account of labour charges, was held to be ultra vires because contractor might have spent more on account of labour charges. The court observed that deduction of tax on percentage basis in effect amounted to tax on labour which is not permissible.
11. In Hindustan Dorr-Oliver Ltd. v. Union of India [1989] 75 STC 21l decided on September 7, 1989, the court followed the abovesaid decision in Jamshedpur Contractors’ Association case [1989] 75 STC 132 (Pat), and further held that a sub-contract, if granted validly and in terms of the provisions of contract entered into between the principal and the main contractor, is a part of the main contract. In terms of the Bihar Finance Act and the rules framed thereunder goods which are supplied in execution of works contract alone are liable to be taxed. Therefore, whether the goods are supplied by the sub-contractor or by the contractor himself, title therein passes to the principal only on execution of the main contract. Thus, the goods in question would be liable to the sales tax only once. If the subcontractor had already been assessed to sales tax on goods supplied by him in execution of his portion of the contract, no further sales tax would be leviable in relation thereto, on the main contractor.
12. In Shewaram Hirwani v. State of Bihar [1990] 77 STC 55 (Pat), decided on February 2, 1990, it was held that since Rule 13-A of the Bihar Sales Tax Rules, 1983, has been declared ultra vires by this Court, assessment in respect of works contracts has to proceed ignoring Rule 13-A. The court further held that the deduction Under Rule 26-A of the Bihar Sales Tax Rules, 1983, should be made reading the words “from all payments being made in respect of works contract executed” to mean the amount of consideration paid for the transfer of property in goods, whether goods or in some other form, involved in the execution of the works contract and would not include the payments made on account of labour charges.
13. In Construction & Construction v. Union of India [1990] 77 STC 405 (Pat) decided on February 26, 1990 the court held that as no tax can be levied on the entire value of contract which includes the labour charges as well, the provision regarding deduction from “all payments made in respect of works contract” has to be understood, so as to make it valid, to mean payment in respect of transfer of property in goods and not in respect of labour charges.
14. All these judgments were rendered on the interpretation of Section 25-A of the Bihar Finance Act, as it originally stood, and the related provisions, before the section was amended in 1990. There is one more decision in the context of unamended provisions in the case of Geeta Prasad Singh and Co. v. State [1986] 63 STC 337 (Pat) rendered prior to the decision of the Supreme Court in Builders Association case [1989] 73 STC 370. Reliance was placed on the said decision by the learned Advocate-General of Bihar on behalf of Revenue and I shall refer to the case later.
15. In 1990 Section 25-A was amended by the Bihar Taxation Laws (Amendment and Validation) Act, 1990. The Builders Association of India and others challenged the amended provisions in different writ petitions which came up for disposal before a Full Bench of which I had the privilege of being a member. By majority Section 25-A was held to be ultra vires. While one of the learned Judges (S. Roy, J.) constituting the majority held the provision to be ultra vires Section 15 of the Central Sales Tax Act, 1956, the other learned Judge (S.B. Sinha, J.) held that as no guidelines had been laid down and no machinery had been provided to ascertain prima facie as to whether any tax at all was payable, the provision was arbitrary and unreasonable and ultra vires the Constitution. Since conflicting views were expressed in the said judgment, different portions thereof were relied upon by both the learned counsel for the petitioners and the learned Advocate-General in so far as favourable to them. The judgment is reported in [1992] 85 STC 362 (Pat) (Builders Association of India v. State of Bihar) and I shall refer to it again soon hereinafter.
16. In 1993 Section 25-A was amended yet again by the Bihar Taxation Laws (Amendment and Validation) Act, 1993 giving it retrospective effect as if deemed to have been always so substituted. Since the validity of the amended provisions is under challenge it would be only proper to quote the section in extenso as hereunder :
“25-A. Advance recovery of tax.–(1) Notwithstanding anything contained in Section 26, every person responsible for. making any payment of sale price or any amount purporting to be the full or part payment of the sale price or any payment in discharge of any liability on account of valuable consideration payable in respect of transfer of property in goods, whether as goods or in some other form, involved in the execution of a works contract shall be lawfully competent to deduct an amount at the rate or rates specified by the State Government in a notification published in the Official Gazette, purporting to be a part or full amount of tax payable on the sale of such goods from every bill or invoice raised by the works contractor as payable by the person :
Provided that no such payment or discharge of any such bill or invoice raised by a works contractor shall be made without deduction referred to in subsection (1):
Provided further that the rate or rates to be specified by the State Government under Sub-section (1) shall not exceed four per centum.
Explanation.–‘Person’ in this section includes all officers and authorities of the Centra! or State Government or of a company, corporation, board, authority, co-operative society, undertaking or any other body constituted or formed under any Act and of any firm or association of persons and organisation.
(2) The amount deducted under Sub-section (1) shall be adjusted against the amount of tax finally assessed or determined as being payable by the concerned works contractor and any amount deducted in excess of the tax so assessed or determined shall be refunded in accordance with the provisions of the Act.
(3)(a) The deduction referred to in Sub-section (1) shall be made in the manner prescribed.
(b) The person making the deduction shall deposit the amount deducted into the Government treasury in the manner prescribed.
(4) The person making the deduction shall issue a deduction certificate in the prescribed manner and form containing all particulars required to be mentioned therein to the works contractor or person from whose bill or invoice such deduction has been made.
(5) If any person contravenes any or all of the provisions of sub-sections (1), (2), (3) and (4), the prescribed authority shall after giving a reasonable opportunity of being heard, by order in writing direct, that such person shall pay by way of penalty, a sum not exceeding twice the amount of tax deducted or deductible under Sub-section (1).
(6) The provisions of Section 27 for recovery of any amount of tax due from a dealer shall, mutatis mutandis, apply for recovery of any amount of tax deducted and or any penalty imposed under this section but not deposited into Government treasury.
(7) Notwithstanding any judgment, decree or order of any court, Tribunal or authority any deduction made purporting to be part or full amount of tax payable on the sale of goods from any bill or invoice raised by the works contractor by any person on or after 1st April, 1984 shall be adjusted against the amount of tax finally assessed or determined as being payable by the concerned works contractor and any amount deducted in excess to amount so assessed or determined shall be refunded in accordance with the provisions of the Act.”
The notification specifying the rates of deduction and the manner in which the deduction is to be made, contained in S.O. No. 214 dated June 19, 1993, which is also under challenge may also be quoted here itself:
“S.O. No. 214, dated the 19th June, 1993.
In exercise of the powers conferred by Sub-section (1) of Section 25-A of Part 1 of the Bihar Finance Act, 1981 (Act 5 of 1981), the Governor of Bihar is pleased to specify the rates in column (3) of the Schedule below at which the amount of sales tax shall be deducted in respect of the works contracts mentioned in column (2) from the bills or invoices of the works contractor.
SCHEDULE
Sl. No.
Description of works contract
Rate
(1)
(2)
(3)
1.
Contract in the execution of which no transfer of property in goods (whether as goods or in some other form) is involved.
Nil
2.
(a)
Civil works contract that is to say, works contract which includes any or all of the following works,
namely, construction or repairs of embankment, dam or canal the gross contract value centum of which comprises more than 33 per cent of earth
work and for which there is clear mention in the estimates. In such cases on the balance amount
after excluding the amount equal to the amount exceeding 33 per cent.
2 per centum
(b)
Civil works contract that is to say, works contract which includes any or all of the following works namely,
2 per centum
(i)
Construction or repairs of buildings, roads, causeway, spillway, diversion, drains, sewerages, bridge, embankment, dam, canal and barrage;
(ii)
Fitting of doors, windows and frames thereof, grill shutters, structures and other fabricated materials
which are used in the work mentioned in sub-clause (i) irrespective ofwhether these have been made at the works site or not ;
(iii)
Setting of tiles, stone or slabs, or sheets of stores in the work mentioned in sub-clause (i).
(iv)
Electrification and plumbing the works mentioned in sub-clause (i).
3. All other works contract of any type or description excluding 4 per centum civil works contract mentioned above.
2. This notification shall be deemed to have come into force from 15th June, 1993.”
17. It has been contended on behalf of the petitioners that Section 25-A mandates deduction at the specified rate/rates of tax on the basis of sale price of goods involved in the execution of works contract irrespective of whether the transfer of the goods, or portion of it, took place in the course of inter-State trade or commerce or outside the State or in course of import, and whether they are declared goods under sections 14 and 15 of the Central Sales Tax Act. It is submitted that entry 54 of List II authorises the State Legislature to make law subject to restrictions as contained in entry 54 itself read with entry 92-A of List I and Article 286 of the Constitution, as clearly laid down by the Supreme Court in Builders Associations case [1989] 73 STC 370 and further explained by it in Gannon Dunkerky & Co. v. State of Rajasthan [1993] 88 STC 204. Section 25-A of the Bihar Finance Act, however, makes it obligatory to deduct tax in respect of the sale price of the entire goods—whether as goods or in some other form. It is submitted that such transfer of goods which does not constitute sale exigible to sales tax has to stand out of the purview of the deductions because deduction can be made of something on which sales tax can be imposed by the State. Where in the matter of supply of goods involved for the execution of works contract, transfer has taken place in the course of inter-State trade or commerce or outside the State or in course of the import, covered by sections 3, 4 and 5 of the Centra! Sales Tax Act, or they are declared goods and therefore covered by sections 14 and 15 of the Central Sales Tax Act read with Article 286 of the Constitution, the State Legislature is neither competent to impose sales tax thereon nor it can authorise recovery/deduction of any amount towards such tax. It has also been submitted that the Full Bench having already held Section 25-A to be ultra vires in Builders Association case [1992] 85 STC 362 (Pat), the present amended section containing similar provisions has to meet the same fate. Apart from the said Full Bench decision, reliance was placed on Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204 (SC), Brajendra Mishra v. State of Orissa [1994] 92 STC 17 (Orissa) and KEC International Limited v. State of Karnataka [1997] 105 STC 192 (Kar) besides, of course, Builders Association of India v. Union of India [1989] 73 STC 370 (SC).
18. Before noticing the submissions of the learned Advocate-General on behalf of the Revenue, \ may deal with the last piece of argument based on the Full Bench decision in Builders Association case [1992] 85 STC 362 (Pat). As indicated above, there was conflict of opinion amongst the members of the Full Bench. There was also difference of opinion between the two learned Judges inter se constituting the majority. According to S. Roy, J., Section 12 of the Bihar Finance Act contained enough guidelines for making deductions of tax on the contractors’ bills, Section 25-A was ultra vires Section 15 of the Central Sales Tax Act inasmuch as it seeks to realise tax even in respect of declared goods and nothing has been provided in Section 25-A to enable the person making payment to a works contract not to make any deduction of sales tax from bills and invoices on the ground that payment of tax has already been made at the first point. There was thus conflict between the two sections of the Bihar Finance Act and the Central Sales Tax Act. S.B. Sinha, J., disagreed with S. Roy, J. on both the points. He held that while Section 25A was not ultra vires Section 15 of the Central Sales Tax Act, in the absence of any guidelines or machinery provisions for ascertaining prima facie as to whether any tax at all was payable, the provisions of Section 25-A were arbitrary, unreasonable and also ultra vires the Constitution. I agreed with S.B. Sinha, J., on the first point. On the second point I agreed with S. Roy, J. Thus, the learned Judges constituting the majority were in fact in minority on both the points. Relevant provisions of Section 25-A was nonetheless held to be ultra vires as they came to that conclusion, albeit for different reasons and on different grounds. In this view of the matter, it may plausibly be argued that the opinion of the majority of the Judges on the points at issue was in fact in favour of the Revenue. However, it is not necessary to go into this aspect of the matter as the law has been further explained by the Supreme Court subsequently in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204.
19. On behalf of the Revenue, Mr. Shashi Anugrah Narayan, learned Advocate-General, submitted that Section 25-A of the Bihar Finance Act is not the charging provision, which is contained in Section 3 of the Act. The provisions as contained in Section 25-A being in the nature of ancillary or machinery provisions designed to recover the tax in advance, subject to assessment of the tax liability, the petitioners cannot make any grievance of it because their rights are to be finally determined at the stage of final assessment under Section 17 of the Act. In this connection he referred to provisions of Section 194C of the Income-tax Act, 1961 and placed reliance on Geeta Prasad Singh and Co. v. State [1986] 63 STC 337 (Pat). It was also submitted that Section 18-A of the Bihar Finance Act provides for composition of tax liability and if the petitioners find the provisions of Section 25A to be onerous, it is open to them to opt for composition. In this connection he relied on National Heavy Engineering Co-operative Limited v. State of Haryana [1994] 93 STC 265 (P&H), S.P. Narang v. Union of India [1994] 95 STC 120 (P&H) and State of Kerala v. Builders Association of India [1997] 104 STC 134 (SC) ; (1997) 2 SCC 183. He pointed out that a notification in this regard was also issued by the State Government vide S.O. No. 216 dated June 19, 1993 along with S.O. No. 214 dated June 19, 1993 (supra) specifying the rate/rates, deduction and its manner, but unfortunately, the same was not brought to the notice of the Full Bench in Builders Association case [1992] 85 STC 362 (Pat). On the point of validity of the substantive provisions of Section 25-A, he relied on Symon v. State of Kerala [1995] 97 STC 283 (Ker).
20. It is true, as contended by the learned Advocate-General, that Section 25-A does not contain the charging provision ; that it is only an ancillary provision intended to collect tax in advance. Conferment of even ancillary power, however, must be within the legislative competence of the State. A provision intended to collect tax in advance can be sustained only if the State is competent to impose tax. The machinery provision has an inevitable nexus with the charging provision. If the charging provision cannot be sustained, the machinery provision also cannot be sustained. If the State does not have power to impose tax on the sale of goods which does not fall within the realm of its legislative competence, any provision regarding recovery of such tax on such sale of goods cannot be within its legislative power and has to be declared ultra vires. In this connection the following observations of the Supreme Court in the case of Khyerbari Tea Co. Ltd. v. State of Assam AIR 1964 SC 925, may be noticed :
“It may be conceded that when the Legislature constructs a machinery for the recovery of the taxes which it is within its competence to impose, the said machinery should have some rational or intelligent connection with the tax.”
21. Where the Legislature imposes tax, it has inevitably to provide a machinery for its collection. If the levy is valid machinery provided to make it effective cannot be said to be bad. This principle is well-known but is subject to the exception that the machinery section cannot be stretched to forbidden territory. The law on the point now stands well-settled by later decision of the Supreme Court in Gannon Dunkerley & Co. v. Slate of Rajasthan [1993] 88 STC 204 to which I shall presently refer but before that I may deal with the other submissions of the learned Advocate-General based on Section 194-C of the Income-tax Act.
22. Reference to Section 194-C of the Income-tax Act appears on first blush to be attractive but has little substance. Section 194-C of the said Act lays down that any person responsible for paying any sum to a contractor or sub-contractor shall at the time of payment in cash or otherwise deduct certain percentage of the amount as income-tax on income comprised therein. The provision thus prima facie, appears to be similar to the one contained in Section 25-A of the Bihar Finance Act. Sub-section (4) of Section 194C of the Income-tax Act, however, provides that where the assessing officer is satisfied with the total income of the contractor or the sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the assessing officer shall, on an application made by the contractor or the sub-contractor in this behalf, give to him such certificate as may be appropriate. The Central Government has framed rule vide Rule 28(2) of the Income-tax Rules and prescribed form being form No. 13C, for grant of such certificate. In the Bihar Finance Act, the contractor has no right to approach any authority under that Act and to point out to him that the deduction is to be made at a lower rate or no deduction at all is to be made (with respect to certain items or goods) and therefore they may be excluded as falling outside the purview of the legislative competence of the State and Section 25-A.
23. There is another aspect of the matter. It is true that if the contractee or any other person, making the payment, makes deduction under Section 25-A of the Bihar Finance Act on the full or gross value of the works contract, the amount deducted can be adjusted against the amount of tax finally assessed by the department at the time of assessment, and if the same is found to be in excess it may also be refunded, vide sub-sections (2) and (7) of Section 25-A. It may however, be pointed out that the Bihar Finance Act prescribes a period of 4 years as the period of limitation for making assessment which means that the assessing authority may not complete the assessment till the limitation is about to expire. Since the assessee can make application for refund of the excess amount only after the assessment is complete, it is obvious that he cannot get back the amount which would continue to lie with the State for as long as 4 years. Again, the assessee becomes entitled to interest on the amount to be refunded only after expiry of six months from the date of application for refund is made. Thus even after the assessment is completed and the assessee becomes entitled to the refund, where the refund is not actually made, interest becomes payable only after six months. Under the Income-tax Act, where the amount deducted at source or paid as advance tax is to be refunded, interest accrues and becomes payable from the first day of April of the assessment year till the date when refund is made.
24. It would thus appear that the provisions of the Income-tax Act are materially different from those of Section 25-A of the Bihar Finance Act and reliance placed thereon is completely misconceived. In Geeta Prasad Singh and Co. v. State [1986] 63 STC 337 (Pat), the distinction does not appear to have been pointed out to the court and therefore not discussed in the judgment. If the State is not competent to impose tax on certain sale but is permitted to collect the tax on it and keep the amount so collected for years without any compensation (because the interest is payable only after six months of the date of application for refund after completion of assessment which may take up to four years), the provision is liable to be invalidated as being confiscatory in nature. It is true that in fiscal matters the Legislature has a latitude which should not be interfered with by courts, but not so where it relates to the legislative competence.
25. At this stage the decision in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204 (SC), on which frontal reliance has been placed on behalf of the petitioners, may be noticed. After an exhaustive discussion, if 1 may say so with respect, the Constitution Bench of the court concluded :
“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 read with Sub-Clause (b) of Clause (29A) 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. So also it is not permissible for the State Legislature to impose a tax on goods declared to be of special importance in inter-State trade or commerce under Section 14 of the Central Sales Tax Act except in accordance with the restrictions and conditions contained in Section 15 of the Central Sales Tax Act.”
Clarifying further, the court held :
“……..The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover :
(a) labour charges for execution of the works ;
(b) amount paid to a sub-contractor for labour and services ;
(c) charges for planning, designing and architect’s fees ;
(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract ;
(e) cost of consumables such as water, electricity, fuel, etc., used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract ; and
(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services ;
(g) other similar expenses relatable to supply of labour and services ; (h) profit earned by the contractor to the extent it is relatable to supply of labour and services.
The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor.
We may, however, make it clear that apart from the deductions referred to above, it will be necessary to exclude from the value of the works contract the value of the goods which are not taxable in view of sections 3, 4 and 5 of the Central Sales Tax Act and goods covered by sections 14 and 15 of the Central Sales Tax Act as well as goods which are exempt from tax under the sales tax legislation of the State. The value of goods involved in the execution of a works contract will have to be determined after making these deductions and exclusions from the value of the works contract.”
26. Two things broadly emerge from the decision in Gannon Dunkerley case [1993] 88 STC 204 (SC)–first, the provisions of sections 3, 4 and 5 as well as sections 14 and 15 of the Central Sales Tax Act are applicable to transfer of property in goods involved in the execution of works contract falling within the ambit of Article 466(29A)(b) of the Constitution, and in exercise of its legislative power to impose tax on sale or purchase of goods in terms of entry 54 of the State List read with Article 466(29A)(b), the State Legislature is not competent to impose tax on such a transfer which constitutes sale in course of inter-State trade or commerce or sale outside the State or sale in course of import or export, nor is it competent to define the expression “sale” in a way as to bring within the ambit of its taxing power such sales.
27. Second, the measurement for the levy of the tax contemplated by entry 54 read with Article 466(29A)(b) is the value of the goods involved in the execution of a works contract. In order to determine the value of the goods which are involved in the execution of a works contract for the purpose of levying the tax, it is permissible to take the value of the works contract as the basis ; but after deducting therefrom expenses incurred by the contractor for providing labour and other services, namely, labour charges, amount paid to a sub-contractor for labour and services, charges for obtaining on hire or otherwise machinery for execution of the works contract, charges for claiming design or architect fee, etc., referred to above.
28. In the backdrop of the above legal position it is to be considered as to whether the provisions of Section 25-A of the Bihar Finance Act are constitutionally valid.
29. Section 25-A has been quoted above. It would appear that the measure for making deductions from the bills is the “sale price” or any amount purporting to be full or part payment of “sale price” or “any payment in discharge of any liability on account of valuable consideration payable in respect of transfer of property in goods, whether as goods or in some other form, involved in the execution of works contract”. “Sale price” has been defined under Section 2(u) of the Bihar Finance Act to mean “the amount payable to a dealer as valuable consideration in respect of the sale or supply of goods”. The only thing excluded from the purview of definition, as per Explanation II, is cash discount allowed by the dealer according to the ordinary trade practice, if shown separately, and the cost for transport of the goods from the seller to the buyer provided such cost is separately charged to the buyer. It may also be useful to notice the corresponding definition of the term “purchase price” which has been defined under Section 2(v) to mean “the amount paid or payable by a dealer as a valuable consideration in respect of the purchase of goods”.
30. It would thus, appear that the definition of the term “sale price” which is the measure for making deduction from the contractors’ bills is wide enough to include whole amount payable as valuable consideration for the sale or supply of all goods. It does not exclude goods supplied in execution of works contract, the transfer of which took place in the course of inter-State trade or commerce or outside the State or in the course of import within the meaning of sections 3, 4 and 5 of the Central Sales Tax Act or are “declared goods”. As per the law laid down by the Supreme Court, the State Legislature is not competent to impose any tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract, which constitutes a sale in the course of inter-State trade or commerce or sale outside the State or a sale in course of the import or export, nor it is competent to impose tax on “declared goods” within the meaning of sections 14 and 15 of the Central Sales Tax Act.
31. It is true that the definition of “sale price” in Section 2(u) is narrower than the definition of the term “sale” in Section 2(t) of the Bihar Finance Act which has been defined “to include transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract”. By making “sale price” as the measure for making deduction of the tax, in contradistinction to “sale” as the measure for imposition of tax, it would appear at the first instance that different items of labour charges have been excluded from the purview of this section. However, by further providing that such deduction is to be made while making payment in discharge of any liability on account of valuable consideration payable in respect of transfer of property in goods, whether as goods or in some other form without simultaneously making provision for exclusion of such transfers in other form, in which no transfer or property is involved, what perhaps was intended to be the basis for making deduction, that is, the amount payable as valuable consideration for the sale or supply of goods [within the meaning of Section 2(u) as distinct from the wider definition of the sale under Section 2(t) of the Act], has been undone by including the suffix “as goods or in some other form” without any qualification.
32. Notification issued under Section 25-A, S.O. No, 214 dated June 19, 1993, no doubt, provides for “NIL” rate of deduction in respect of contract in the execution of which no transfer of property in the goods (whether as goods or in some other form) is involved. In other words,–no deduction is to be made in case of contract coming in this category. But whether this would also apply to such contract, execution of which involves incorporation of goods in the works ? Taxable event is the transfer of property in goods involved in the execution of a works contract and the transfer of property in such goods takes place when the goods are incorporated in the works. True, the 46th Amendment fictionally makes two parts of the same contract divisible. The words “whether as goods or in some other form” in Section 25-A without any qualification, however, make it imperative for the persons responsible for making any payment in discharge of his liability on account of valuable consideration payable in respect of transfer of property in goods involved in execution of works contract to also include the transfer of goods, “in some other form”, that is to say, payments made on account of labour charges, etc., as well, by providing for deduction on percentage basis worked out on the value of contract as a whole.
33. It would thus appear that the section includes within its ambit not only the goods which stand out of the purview of entry 54 of the State List read with Article 286 of the Constitution but also such items which do not involve any transfer of property in goods or some other form in execution of works contract, which is the essential feature of Sub-Clause (b) of Article 466(29A) of the Constitution. It is by virtue of Article 466(29A)(b) that the State Legislature is competent to impose tax on goods (whether as goods or in some other form) involved in execution of works contract.
34. In Symon v. Slate of Kerala [1995] 97 STC 283 (Ker) and State of Kerala v. Builders Association of India [1997] 104 STC 134 (SC) ; (1997) 2 SCC 183, relied upon on behalf of the Revenue, law was upheld because the provision was different. It would be useful to quote the provision contained in Rule 22A(2) of the Kerala General Sales Tax Rules, 1963 so far as relevant, to bring home the point :
“Wherever payment is made by the awarder to the contractor either in lump sum for the whole contract or in instalments, the awarder shall withhold an amount equal to the tax due in accordance with the provisions of the Act……………..”(emphasis Here italicised added).
35. When the matter went to the Supreme Court in State of Kerala v. Builders Association of India [1997] 104 STC 134 ; (1997) 2 SCC 183 from the judgment Builders Association of India v. State of Kerala [1995] 98 STC 490 (Ker) of the division Bench which had upturned the decision of the single Judge in Symon v. State of Kerala [1995] 97 STC 283 (Ker), the Supreme Court reversing the judgment of the division Bench and allowing the State’s appeal, observed :
“What the sub-rule says is that wherever payment is made by the awarder to the contractor, ‘the awarder shall withhold an amount equal to the tax due’ and remit the same to the assessing authority. It is evident that Sub-Rule (2) does not provide for deduction of tax at source like the one provided by Section 194C of the Income-tax Act, 1961. Sub-Rule (2) merely says that where tax is due from a contractor, the awarder shall withhold an amount equal to the tax due while making payment to the contractor. In the case of a contractor who has not opted for the alternate method of taxation and is governed by Section 5( 1 )(iv), this sub-rule means that where tax is due from him according to law and the awarder is apprised of the said fact, the awarder comes under an obligation to deduct the amount equal to the tax due and remit it to the assessing authority. It needs to be emphasised that the sub-rule speaks of ‘tax due’.” (emphasis Here italicised in the judgment)
36. No wonder that for the aforesaid reason, counsel for the petitioners also relied on the decision in course of their arguments in reply. In Brajendra Mishra v. State of Orissa [1994] 92 STC 17 (Orissa), while considering the validity of the similar provision contained in Section 13AA of the Orissa Sales Tax Act providing for deduction of an amount towards sales tax equal to two per centum of such sum in respect of the works contract held that as the section does not provide any mechanism to exclude the transactions from its purview even if the transaction may not ultimately be liable to sales tax at all, the provision is liable to be struck down.
37. In KEC International Limited v. State of Karnataka [1997] 105 STC 192, the Karnataka High Court took similar view. It held that although the provision was only incidental and ancillary to the main charging sections, even such ancillary power must be within the competence of the State Legislature.
Whether it is possible to read down the provisions of Section 25-A so as to exclude the transfer of goods taking place in course of inter-State trade or commerce or outside the State or in the course of import or the declared goods, within the meaning of Central Sales Tax Act, or the transfer of goods in some other form such as labour charges, etc.?
38. In Delhi Transport Corporation v. D.T.C. Mazdoor Congress AIR 1991 SC 101, it has been held that while the courts have no power to mend it by process of interpretation they do have power to mend it so as to be in conformity with the legislative intendment by reading down the offending provisions, but not so when the provision unambiguously violates the provisions of the Constitution. The unconstitutionality may arise from either the incompetence of the Legislature to enact the statute or from violation of any of the provisions of the Constitution.
39. Besides, a practical difficulty which may arise in giving effect to the provisions of Section 25 A in the aforesaid manner would be that in the absence of any mechanism or laid down guidelines in the section, the person required to make deduction may not be able to determine the amount. I am conscious of the fact that the question as to whether a particular transaction falls within the realm of inter-State trade or commerce or outside State sale or a sale in course of import or export within the meaning of sections 3, 4 and 5 of the Central Sales Tax Act is more often than not a ticklish question which the courts find difficult to decide even where the facts have been determined in regular assessment proceedings. It may be more difficult to decide such a question at an early stage before assessment proceeding has not even commenced. Nonetheless, allowing, nay, mandating deductions from payments even in respect of transfer of property in such goods which takes place in course of inter-State trade or commerce or outside the State or so on in violation of the constitutional provisions and keeping the proceeds for an indefinite period, up to four and half years or so cannot be approved.
40. In my opinion, in order to sustain such a provision some mechanism has to be provided in the statute for excluding such transactions on the basis of prima facie adjudication subject to the final determination of the rights at the stage of assessment of the tax liability. While the result of the adjudication in a regular assessment proceeding can be challenged by way of appeal/revision or reference, as provided under the Finance Act, summary adjudication made under Section 25-A may be made final (subject, of course, to the writ jurisdiction of the High Court under Articles 226/227 of the Constitution).
41. The submission of the learned Advocate-General based on the provisions of Section 18A of the Bihar Finance Act and the corresponding Notification S.O. No. 216 dated June 19, 1993, regarding composition of the tax liability has little relevance for the simple reason that no person can be compelled to opt for composition. He would obviously do so only when he finds the option more favourable to him. It is the specific case of the petitioner in C.W.J.C. No. 2501 of 1996(R), vide annexure 5, that 98 per cent of the contract comprises of labour charges and other services. It is said that as against total deductions of Rs. 2,11,289 between April, 1995 and March, 1996 vide annexure 4, the tax liability of the said petitioner was assessed at Rs. 17,166.16. It is said that despite the petitioner being thus entitled to refund of about Rs. 1,94,000 the amount is being neither refunded nor adjusted. It has been contended that in the majority of the works contract the amount of labour charges and other services which have to be excluded for determining the value of the works contract for the purpose of deduction of tax in advance comprises of very large proportion of the total contract and it may not be worthwhile for the contractor to opt for composition. In this view of the matter, the decisions cited in this regard by the learned Advocate-General on the cases of State of Kerala v. Builders Association of India [1997] 104 STC 134 (SC) ; (1997) 2 SCC 183 (so far as it relates to composition), the National Heavy Engineering Co-operative Limited v. State of Haryana [1994] 93 STC 265 (P&H), S.P. Narang v. Union of India [1994] 95 STC 120 (P&H), are of hardly any assistance to the Revenue.
42. It has been pointed out that in terms of Notification S.O. No. 214 dated June 19, 1993 (supra) only in cases covered by Clause 2(a) where earthwork accounts for more than 33 per cent of the total value of the contract and is so mentioned in the estimates, that the deduction is to be made at 2 per cent but here also only the amount in excess of 33 per cent and not the whole of the amount of earthwork is excluded. In all other types of civil contract, described in Sub-Clause (b), deduction is to be made at the uniform rate of 2 per cent. In other cases not coming under any of the sub-clauses of Clause 2, the deduction is to be made at 4 per cent. In Gannon Dunkerley’s case [1993] 88 STC 204, the Supreme Court has observed that while it is permissible for the State to prescribe formula on the basis of fixed percentage of the value of the contract as expenses towards labour and services and the same may only be deductible from the value of the works contract, it has to be ascertained that the amount deductible under such formula “does not differ appreciably from the expenses on labour and services that would be incurred in normal circumstances in that particular type of works contract”.
43. Another aspect highlighted on behalf of the petitioner is that under Section 16 of the Bihar Finance Act, a dealer is required to file regular quarterly return and/or a monthly statement, and he is also required to deposit tax as per the return. In the case of contractor-dealer, thus, while filing his return in respect of his liability for supply of materials in the execution of works contract, he is required to deposit tax as per the return ; for the same works contract, the contractee while making payment to the contractor-dealer would also deduct tax under Section 25-A. The amount so deducted under Section 25-A by the contractee can be adjusted only after completion of the assessment which may take several years. Thus, during the intervening period, the contractor would suffer double taxation as on the basis of the same transaction he has already paid tax at the time of submission of the return and he is also made to part with the tax at the time of payment under Section 25-A. No machinery has been provided in the Act to take into account the possible loss of the contractor in this manner.
44. It is unfortunate that although the mistakes have been pointed out and the provisions declared ultra vires, the amended provisions suffer from more or less the same mistakes and defects. The State has power to impose tax to augment its revenue within its permissible field and make provisions for its recovery ; but at the same time development of the economy has also to be taken into account. If a taxing statute contains provisions implementation of which is likely to obstruct the economic growth, that may not be in the interest of the State itself.
45. To conclude, the provisions of Section 25-A of the Bihar Finance Act to the extent they relate to transfer of property in goods taking place in course of inter-State trade or commerce or a sale outside the State or in the course of import within the ambit of sections 3, 4 and 5 of the Central Sales Tax Act, or the “declared goods” within the meaning of sections 14 and 15 of the said Act, must be held to be ultra vires entry 54 of the State List read with entry 92A of the Union List and Article 286 of the Constitution. Further, to the extent they provide for deduction from payment made on account of labour charges and other services towards sales tax, the provisions must be held to be ultra vires entry 54 read with Article 466(29A)(b) of the Constitution.
These writ petitions are accordingly allowed, but without any order as to costs.
Aftab Alam, J.
46. I agree.