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2007 DIGILAW 319 (GAU)

Associated Tyre Company v. Commissioner of Taxes

2007-05-02

RANJAN GOGOI

body2007
JUDGMENT Ranjan Gogoi, J 1. The liability of the petitioner to payment of tax under the Assam General Sales Tax Act, 1993 (hereinafter referred to as, "the Act") on the deemed sale of goods arising from the works contract executed by it, is the precise issue for consideration in the present writ petition. 2. The petitioner would like to contend that the resolution of the issue raised ought to be in its favour as the aforesaid consequence is apparent and obvious. However, as nothing can be understood in law to be obvious until logically established, the necessary adjudication that has to take place would require a brief narration of the relevant facts. 3. The petitioner is a proprietorship concern engaged in the business of tyre retreading. According to the petitioner, it received a notice dated March 16, 2000 from the Superintendent of Taxes, Jorhat, proposing summary assessment under Section 17(5) of the Act on the ground that the petitioner had failed to furnish its returns and produce its books of account for the period March 31, 1997-March 31, 1999. On receipt of the said notice, the petitioner submitted its reply (annexure 3) dated March 28, 2000 denying any liability to pay tax under the provisions of the Act. Specifically, the petitioner had contended that though the business of tyre retreading has been enumerated as a works contract under the Act and included under item 23 of Schedule VI to the Act, the raw materials/basic goods used in the business of the petitioner are "rubber and synthetic rubber products", falling under item 105 of Schedule II to the Act. According to the petitioner, it had procured the said basic goods by local purchase within the State of Assam and, on payment of tax, as applicable to the particular item under Schedule II to the Act. It was therefore, contended by the petitioner that as basic goods used by it in the business of tyre retreading had already been subjected to tax at the point of first sale under Schedule II, the said goods will not be exigible to any further tax even in case of a deemed sale arising in the course of the execution of the works contract by the petitioner. 4. 4. The reply of the petitioner did not find the approval of the assessing officer who subjected the petitioner to an assessment under the provision of Section 17(5) of the Act. The said assessment was followed by a notice of demand dated May 29, 2000. Aggrieved, this writ petition has been filed. 5. I have heard Sri R. Agarwal, learned Senior Counsel appearing on behalf of the petitioner and Sri R. Dubey, learned Counsel for the respondents. 6. Sri Agarwal, learned Senior Counsel for the petitioner, though brief, has been emphatic in his submission that if the basic goods used by the petitioner in the execution of the works contract have already been subjected to payment of tax under Schedule II to the Act, there can be no further levy of tax on the deemed sale of the goods in the course of the execution of the works contract performed by the petitioner. In this regard it must be noticed, at this stage, that though in the pleadings advanced by the petitioner contentions have been advanced to the effect that the business transactions undertaken by the petitioner in respect of "tyre retreading" do not amount to a works contract, in the course of the oral arguments advanced, the said point has not been urged and the challenge made has been sought to be fortified on the additional/alternative plank, i.e., that the goods having been subjected to tax at the point of first sale, there can be no further tax levied on the deemed sale of the same goods. 7. In this regard Sri Agarwal, learned Senior Counsel, by relying on the decision of the apex court in Builders Association of India v. Union of India reported in [1989] 2 SCR 320, has contended that there can be no manner of doubt that the power to tax a transaction of a works contract is really in respect of the deemed sale of the goods involved in the works contract and not the entire transaction of the works contract itself. It has been submitted that the Forty-sixth Amendment of the Constitution and insertion of article 366(29A) have been understood by the apex court in the aforesaid manner and by expressly negating the claim of the States that article 366(29A) confers any additional power on the State beyond entry 54 of the State List. It has been submitted that the Forty-sixth Amendment of the Constitution and insertion of article 366(29A) have been understood by the apex court in the aforesaid manner and by expressly negating the claim of the States that article 366(29A) confers any additional power on the State beyond entry 54 of the State List. Sri Agarwal has, therefore, submitted that the goods, involved in the execution of a works contract of tyre retreading, property in respect of which is transferred and, therefore, there is a deemed sale, having already been subjected to tax at the point of first sale there can be no further tax levied on the same goods transferred as a consequence of the works contract performed by the petitioner. Any other view, according to Sri Agarwal, would be contrary to the constitutional scheme as interpreted by the apex court in Builders Association of India [1989] 2 SCR 320 as well as in Gannon Dunkerley & Co. v. State of Rajasthan reported in (1993) 1 SCC 364 . Furthermore, according to the learned Counsel, such a view would also be plainly opposed to the scheme of taxation under the provisions of the Assam General Sales Tax Act, 1993. 8. Controverting the submissions advanced on behalf of the petitioner, Sri R. Dubey, learned Counsel for the respondents has, contended that the power to tax a transaction amounting to a works contract having been specifically conferred by section 8(1)(e) of the Act read with Schedule VI and, in the instant case, the business of the petitioner, i.e., tyre retreading, being squarely covered by item 23 of Schedule VI, the assessment made and the demand raised is authorised by the provisions of the Act and, therefore, the action of the State respondents will not call for any interference by the court. 9. The rival submissions advanced on behalf of the respective parties have received the due and anxious consideration of the court. 10. 9. The rival submissions advanced on behalf of the respective parties have received the due and anxious consideration of the court. 10. The position prevailing prior to the Forty-Sixth Amendment of the Constitution and the incorporation of article 366(29A) was that unless a works contract was clearly distinct and divisible into a contract for transfer of materials and the other for services rendered and work done, the works contract was to be understood as an indivisible contract and, therefore, not exigible to sales tax, which the States were empowered to levy by entry 48, List II of the Seventh Schedule to the Government of India Act, 1935 which corresponds to entry 54 of List II of the Seventh Schedule to the Constitution. The aforesaid position was a sequel to the judgment of the apex court in the State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1959] 1 SCR 379 . In the said decision the apex court took the view that the expression "sale of goods" in entry 48 of List II to the Seventh Schedule to the Government of India Act, 1935, has the same meaning as in the Sale of Goods Act, 1930. After so holding, the apex court in the above case took the further view that "in a building contract, which is entire and indivisible, there is no sale of goods because in such a contract the agreement between the parties is that the contractor should construct the building according to the specifications contained in the agreement and in consideration therefore receive payment as provided therein and in such an agreement, there was neither a contract to sell the materials used in the construction nor does the property pass therein as moveables." 11. After the decision in Gannon Dunkerley & Co. After the decision in Gannon Dunkerley & Co. (Madras) Ltd. Clause (29A) was inserted in article 366 of the Constitution in the following terms: (29A) 'tax on the sale or purchase of goods' includes: (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. 12. The Constitution Amendment, as aforesaid, came to be challenged before the apex court in Builders Association of India v. Union of India reported in [1989] 2 SCR 320. Though the first ground of challenge to the constitutional validity of the amendment made, on the ground that the same was not ratified by the Legislatures of not less than one-half of the States by resolution passed to that effect, was negatived, the apex court, thereafter, dwelt at length with the second ground urged, namely, that it was not open to the States to ignore the provisions contained in article 286 of the Constitution and the provisions of the Central Sales Tax Act, 1956 while making assessment under the sales tax laws of the States on the turnover arising out of such deemed sales. In the course of the discussion on the said second issue, the following observations made as contained in paragraph 32 See at [1989] 73 STC 396 of the judgment in Builders Association of India [1989] 2 SCR 320 would be of particular significance: ...Sub-clause (b) of Clause (29A) states that 'tax on the sale or purchase of goods' includes among other things a tax on the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract. It does not say that a tax on the sale or purchase of goods included a tax on the amount paid for the execution of a works contract. It refers to 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. The emphasis is on the transfer of property in goods (whether as goods or in some other form). The latter part of Clause (29A) of article 366 of the Constitution makes the position very clear. While referring to the transfer, delivery or supply of any goods that takes place as per Sub-clauses (a) to (f) of Clause (29A), the latter part of Clause (29A) says that 'such transfer, delivery or supply of any goods' shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. Hence, a transfer of property in goods under Sub-clause (b) of Clause (29A) is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. The object of the new definition introduced in Clause (29A) of article366 of the Constitution is, therefore, to enlarge the scope of 'tax on sale or purchase of goods' wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in Sub-clauses (a) to (f) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression 'tax on the sale or purchase of goods' in entry 54 of the State List, therefore, includes 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 also. The tax leviable by virtue of Sub-clause (b) of Clause (29A) of article 366 of the Constitution thus becomes subject to the same discipline to which any levy under entry 54 of the State List is made subject to under the Constitution.... 13. On the basis of the above view taken in Builders Association of India [1989] 2 SCR 320 and its further dilation as available in the text of the judgment, the apex court held that a deemed sale of goods involved in the execution of works contract, which has been made exigible to tax under the State sales tax laws, as may be framed, would be subject to the conditions as spelt out by the provisions contained in article 286 of the Constitution and those contained in the Central Sales Tax Act, 1956. Of particular significance to the present case would be the following observations of the apex court contained in paragraph 36 [See at page of 1989 73 STC 400 of the judgment in Builders Association of India 1989 73 STC 370 ; which may be usefully extracted hereinbelow: ...If the power to tax a sale in an ordinary sense is subject to certain conditions and restrictions imposed by the Constitution, the power to tax a transaction which is deemed to be a sale under article 366(29A) of the Constitution should also be subject to the same restrictions and conditions.... 14. The above view was reiterated by the apex court in Gannon Dunkerley & Co. v. State of Rajasthan reported in (1993) 1 SCC 364 , in which case the assessments made by several States under the respective State laws, notwithstanding the views of the apex court expressed in the case of Builders Association of India [1989] 2 SCR 320, came to be challenged. Paragraph 17 [See [1993] 88 STC 219] of the aforesaid judgment in the case of Gannon Dunkerley (1993) 1 SCC 364 amply sums up the situation and, therefore, needs to be extracted hereinbelow: 17. Paragraph 17 [See [1993] 88 STC 219] of the aforesaid judgment in the case of Gannon Dunkerley (1993) 1 SCC 364 amply sums up the situation and, therefore, needs to be extracted hereinbelow: 17. The contention urged on behalf of the States that the properties that are transferred to the owner in the execution of a works contract are not the goods involved in the execution of the works contract, but a conglomerate, that is the entire building that is actually constructed, was rejected by the court and it was observed that after the Forty-sixth Amendment it is not possible to accede to the plea of the States that what is transferred in a works contract is the right in the immovable property (STC page 402; SCC page 674, para 39; SCR page 354). This Court also rejected the plea put forward on behalf of the States that the Forty-sixth Amendment had conferred on the States a larger freedom than what they had before in regard to their power to levy sales tax under entry 54 of the State List. It was held that the Forty-sixth Amendment does no more than making it possible for the States to levy sales tax on the price of goods and materials used in works contracts as if there was a sale of such goods and materials. (STC page 402; SCC page 674, para 40; SCR page 354) 15. It must also be noticed at this stage that in the aforesaid judgment (paragraph 47 1993 88 STC 234 the apex court laid down how the value of the goods involved in the execution of works contract is required to be determined. Thereafter in paragraph 48 [See at page 1993 88 STC 235, the apex court laid down that apart from the deductions mentioned in paragraph 47 [See at page of 1993 88 STC 234, it will be necessary to exclude from the value of the works contract, inter alia, the value of the goods which are exempted from tax under the sales tax legislation of the State. The above discussions leave no room for doubt that if the goods that constitute the basic inputs in the execution of a works contract are exempted from payment of tax under the relevant State Act, the value of such goods has to be excluded from the value of the works contract along with other eligible components, for the purpose of determination of liability to tax. If under the State Act a particular item is made exigible to tax at a particular point of sale and tax has already been paid on the said item, naturally, if the particular item/commodity is to be resold, no tax can be levied on such sale. If that be so and if the incident of a deemed sale is no different from an actual sale as laid down by the apex court, the natural corollary to the above proposition would be that goods which have already suffered taxation at an earlier point of sale, cannot be made liable to tax at a subsequent point of time even if such a sale is a deemed sale within the meaning of Section 366(29A) of the Constitution. 16. In the present case the petitioner has contended that it had used particular rubber products in the execution of the works contract undertaken by it and that the same have been locally purchased on payment of tax at the point of first sale. If the above claim is correct, naturally, the deemed sale of the same goods arising from the execution of the works contract of tyre retreading cannot be made liable to payment of tax merely because such deemed sale has been also made exigible to tax by the Act. Recognition of any such power in the State would not only be contrary to the provisions of the Act but the same would be unauthorised under the provisions of the Constitution as has been held by the apex court in the case of Builders Association of India [1989] 2 SCR 320 and Gannon Dunkerley (1993) 1 SCC 364 . The argument advanced by Sri R. Dubey, learned Counsel for the respondents, as already noticed, can hardly be accepted in view of the decision of the apex court in the above two cases. The argument advanced by Sri R. Dubey, learned Counsel for the respondents, as already noticed, can hardly be accepted in view of the decision of the apex court in the above two cases. Under the guise of the power to tax a works contract, the goods used in execution thereof, if had been already subjected to tax under the State Act, cannot be made exigible to tax once again, as has been asserted by Sri Dubey on behalf of the Revenue. 17. What must, however, be noticed in the present case is that the claim made by the petitioner-assessee that the goods used by it in the execution of a works contract had been locally purchased and has been subjected to tax at the point of first sale has remained unsubstantiated. The above is on account of the fact that the State did not make any endeavour to crosscheck what was urged by the petitioner in its reply dated March 28, 2000 to the notice received by it under Section 17(2) of the Act. Instead of proceeding in the manner as was required by verifying the facts urged by the petitioner, the State had proceeded to make the assessment merely by claiming a power to levy tax on the deemed sale of goods involved in the execution of the works contract. 18. For the aforesaid reasons, I am of the view that this writ petition has to be allowed and the impugned assessment order and the notice of demand dated May 29, 2000 have to be set aside, which I hereby do. The contentions of the petitioner as urged in its reply dated March 28, 2000 will now have to be verified by the authority and thereafter the matter has to be dealt with in accordance with what has been observed and held in the present order. 19. The writ petition, consequently, is partly allowed to the extent indicated above.