1. In all these matters the validity of Section 3-B of the Tamil Nadu General Sales Tax Act, 1959 and especially Section 3-B(2)(b) questioned. In O.P. No. 1708 of 1998 the petitioner is an engineering company and it is engaged in the fabrication, supply and erection of rolling shutters on works contract basis, and the company is not selling anything. The petitioner was assessed to sales tax for 1988-89 to 1995-96 and his claim for deduction of turnover in respect of works contract was not considered by the assessing officer for 1990-91 and on appeal before the Appellate Assistant Commissioner his claim was allowed for deduction. However, the Joint Commissioner who initiated the suo motu revision had held that the deduction allowed was against the decision of the apex Court in [1978] 42 STC 409 (Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax) and he set aside the order of the Appellate Assistant Commissioner and remanded the matter for fresh consideration. After passing the order for the year 1988 to 1989, the matter was taken before the Appellate Assistant Commissioner who dismissed the appeal and when the matter was taken up to the second appellate authority, namely, Tamil Nadu Taxation Appellate Tribunal, it remanded the matter once again to the assessing officer to consider the claim of exemption applying strictly Section 3-B(2)(b) of the Tamil Nadu General Sales Tax Act, 1959 (hereinafter called as "the Act"). The petitioner would submit that there is no element of sale in his transaction, however, invoking Section 3-B(2)(b) of the Act, the materials used by him have been taxed and the appellate authorities have frequently remanded the matter as they were not certain about the remedy contemplated under Section 3-B of the Act and as the legal position has not been decided properly, the vires of Section 3-B(2)(b) of the Act have to be considered. Further, in S.P.No. 406 of 1998 in A.P. No. 412 of 1998 dated August 5, 1998 pertaining to the year 1991-92 a conditional stay was granted directing the petitioner to pay 25 per cent of taxes on or before September 4, 1998 and this order is sought to be stayed.
2. In O.P. No. 2016 of 1998 the petitioner is a dealer, manufacturing and selling pollution control equipments, steel plant machineries and spares wind electrical generators. His company has also been assessed to tax for 1995-96, overruling the claim of the assessee for exemption with regard to certain materials used in the works undertaken by him.
The petitioner in this O.P. would allege that Section 3-B of the Act substituted by Act 25 of 1993 has been enacted in contravention of the Constitution of India and the words in Sub-section (2)(b) to Section 3-B "in the same form" are unwarranted as they place a restriction, which was not contemplated in the Constitution of India and the levy of tax on the deemed sales is contrary to Clause (29A) to Article 366 of the Constitution of India. He further stated that levy of tax on the transfer of property in the goods that are used in the execution of works contract is not in consonance with the constitutional provisions as the works contractor is unable to avail of second sales exemption in respect of First Schedule single point commodities and Second Schedule declared goods, unless the goods in question are transferred "in the same form". Therefore, this petitioner challenges the validity of Section 3-B(2)(b) of the Act. The petitioner in T.P. No. 2971 of 1997 is the skin and hide tanners merchants association serving for the cause of its members providing necessary assistance, especially in securing the materials for the business. This association also has alleged that Section 3-B of the Act is contrary to Clause (29A) to Article 366 of the Constitution making a deemed sale even for the works contract and in the contract of coolie for tanning or dyeing, there is no sale of any material and the rules framed thereunder to Section 3-B have fixed 30 per cent towards the labour to claim deduction and the rest of the 70 per cent is said to be the sale value which is taxable, that this percentage of labour charges fixed under Rule 6-B is arbitrary and therefore a writ of declaration has to be issued declaring that the sales tax on works contract in respect of the business of coolie for tanning and dyeing contract is illegal and ultra vires to the Constitution.
3. As a matter of fact, the test as to the validity of Section 3-B(2)(b) of the Act, is undertaken by this Tribunal for the second time, as already this question be considered by this Tribunal in O.P.No. 1964 of 1998 upholding the validity of the provision, in the light of the decisions of the High Court. When these matters were taken up, the learned Counsel in O.P. No. 1708 of 1998 was not ready and sought for adjournment. As the Full Bench was constituted to hear this matter, adjournment was refused, and all the contentions raised in the affidavit filed in O.P. were carefully considered for the disposal of the petition. In the other two matters, the learned Counsel confined their representations to the points raised in the affidavits of the petitioners.
4. To put it concisely, from the averments of the affidavits, the validity of Section 3-B is attacked on three grounds. The first ground is the wording "in the same form" found in Sub-section (2)(b) to Section 3-B of the Act. The second ground is Section 3-B(2)(b) is contrary to the Article 366(29A) of the Constitution of India as the definition of "sale" under Section 2(n)(ii) is not in consonance with the Constitutional provisions under 46th Amendment to the Constitution.
The third ground relates to the percentage fixed towards the labour charges at 30 per cent under Rule 6-B of the Tamil Nadu General Sales Tax Rules, 1959 which according to the petitioner is arbitrary.
5. The petitioner in O.P. No. 1708 of 1998 is conscious to the decision of the Madras High Court in [1994] 95 STC 378 [Kamatchi Lamination (P) Ltd. v. State of Tamil Nadu] and also the Bench decision of the same High Court in [1995] 97 STC 503 (Tamil Nadu Mosaic Manufacturers Association v. State of Tamil Nadu) upholding the validity of Section 3-B of the Act. However, the petitioner contends that the single Judge has not considered all the issues raised by the petitioner and therefore the matter has to be again considered by this Tribunal. As Sub-section (2)(b) of the Section 3-B is said to be discriminative by using the words "in the same form" it is proper to reproduce the provision which is as hereunder : 3-B. Levy of tax on the transfer of goods involved in works contract.--(1) Notwithstanding anything contained in Sub-sections (2-A), (2-B), (3), (4), (7) and (8) of Section 3, or Section 7-A, but subject to the other provisions of this Act including the provisions of Sub-section (1) of Section 3, every dealer referred to in item (vi) of Clause (g) of Section 2 shall pay, for each year, a tax on his taxable turnover of transfer of property in goods involved in the execution of works contract at the rates mentioned in Sub-section (2) of Section 3 or, as the case may be, in Section Explanation.--Where any works contract involves more than one item of work, the rate of tax shall be determined separately for each such item of work.
(2) The taxable turnover of the dealer of transfer of property involved in the execution of works contract shall, on and from the 26th day of June, 1986, be arrived at after deducting the following amounts from the total turnover of that dealer :-- (a) all amounts involved in respect of goods involved in the execution of works contract in the course of export of the goods out of the territory of India, or in the course of import of the goods into the territory of India or in the course of inter-State trade or commerce ; (b) all amounts for which any goods, specified in the First Schedule or Second Schedule, are purchased from registered dealers liable to pay tax under this Act and used in the execution of works contract in the same form in which such goods were purchased ; (c) all amounts relating to the sale of any goods involved in the execution of works contract .which are specifically exempted from tax under any of the provisions of this Act ; (d) all amounts paid to the sub-contractors as consideration for execution of works contract whether wholly or partly ; (e) all amounts towards 'labour charges and other like charges' not involving any transfer of property in goods, actually incurred in connection with the execution of works contract, or such amounts calculated at the rate specified in column (3) of the Table below, if they are not ascertainable from the books of accounts maintained and produced by a dealer before the assessing authority.Serial Type of works contract Labour or other charges as a percentage valueNo. of the works contract.(1) (2) (3) 6. Section 3-B of the Act has been substituted after the 46th Amendment to Article 366 of the Constitution and Clause (29A) is the relevant passage in the article which reads as follows : (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.
7. As mentioned above, the petitioners have disputed the validity of Section 3-B(2)(b) of the Act, for the reason that the exemption could be claimed for the transfer of property in goods involved in the execution of works contract only if they are "in the same form" in which such goods were purchased. According to the petitioners, when already the goods involved in the execution of works contract have suffered tax, the goods of single point tax cannot be taxed for the second time on the ground that the goods were not in the same form, when involved in the execution of works contract and this is against the scheme of the Act. It is further contended that even in respect of the declared goods when the Central Sales Tax Act has fixed the maximum rate of tax at 4 per cent, the State cannot levy tax at more than 4 per cent as its original form is changed when used in the execution of works contract and it amounts to violation of the provisions of the Central Sales Tax Act and hence Section 3-B(2)(b) is to be declared as invalid. This attack has been considered by the Bench of the Madras High Court in Tamil Nadu Mosaic Manufacturers Association v. State of Tamil Nadu reported in [1995] 97 STC 503 and the Bench gives the following answer : 11. Having regard to the legal position stated above, we see no infirmity in Sub-section (2)(b) of Section 3-B which says that in computing the taxable turnover of a dealer of transfer of property involved in the execution of works contract he is entitled to deduct all the amounts for which any goods specified in the First or Second Schedule are purchased from registered dealers and used in the execution of works contract in the same form in which such goods were purchased. If the goods purchased by a dealer is a distinct commercial commodity falling under a particular sub-item of section 14 such commodity should be used in the execution of the works contract either in the form in which such goods were purchased or in some other form falling under the very same sub-item of Section 14 as the goods purchased, to enable the dealer to get deduction from the total turnover under Section 3-B(2)(b). In other words, if the declared goods purchased by the dealer falling under a particular sub-item of Section 14 of the Central Sales Tax Act is converted into different commercial commodity which also falls under the very same sub-item like the goods purchased by the dealer, even then, the dealer is entitled to claim deduction under Section 3-B(2)(b), because the principle is the goods in the same sub-item of Section 14 have to be taken as one commercial commodity and not different commodities. In that case, it should be taken that the goods purchased by the dealer are used in the execution of works contract in the same form in which they were purchased.
However, if the goods purchased by the dealer fall under one sub-item of Section 14 and thereafter it is converted into another distinct commercial commodity falling under a different sub-item of Section 14, it cannot be held that the goods purchased by the dealer are used in the execution of works contract in the same form in which such goods were purchased and therefore the dealer cannot claim deduction under Section 3-B(2)(b) of the Act. As already pointed out, when two different kinds of goods fall under two different sub-items of Section 14 of the Central Sales Tax Act, 1956 they are different commercial commodities and in such a case Section 15 of the Central Sales Tax Act, 1956 which prohibits multipoint tax on declared goods will have no application.
22-A. The requirement of Sub-section (2)(b) of Section 3-B of the Act that the dealer must prove that the declared goods are purchased from registered dealers liable to tax is necessary in order to fix the identity of the antecedent seller which is possible only when the dealers are registered dealers. As already pointed out, the insistence of proof of purchase from registered dealers by Sub-section (2)(b) of Section 3-B does not result in the shift in the point of taxation or taxing at more than one stage. The reason is the price charged from such assesses by the antecedent seller would normally take into account sales tax on such sales to be paid by the works contractor to the seller. Further, in the case of declared goods, wherever the proof was not forthcoming from the assessee to show that the anterior sale was a taxable sale, and hence the sale by the assessee was held to be a taxable sale the courts have taken the view that there was no shift in the point of taxation. Vide (Commissioner of Sales Tax v. Bansal Brothers), (Vasu General Traders v. State of Tamil Nadu) and [1995] 96 STC 60 (Mad.) (Heat Transfer Developments v. State of Tamil Nadu). Under these circumstances, we are of the view that there is no shifting of the charge or taxing at more than one stage violating Section 15 of the Central Sales Tax Act when Sub-section (2)(b) of Section 3-B insists proof of purchase of goods from registered dealers liable to pay tax. For all the reasons, stated above, we are of the view that the condition prescribed in Sub-section (2Kb) of Section 3-B that in order to claim deduction from the total turnover in respect of the amounts for which the goods specified in First or Second Schedule are purchased, such goods must be purchased from registered dealers liable to pay tax, will not result in levying tax at more than one stage, contravening Section 15(a) of the Central Sales Tax Act.
Point No. 2 is answered accordingly.
From the above thorough consideration of all contentions it is made clear that the exemption allowed for the goods involved in the works contract, when remained in the same form without any changes, cannot be taxed though there is a deemed sale as it amounts to second sale, whereas, the goods involved in the works contract, when became a different commercial commodity, different from its original character, it becomes taxable, under the deemed sale as it became a different commercial commodity. This logic cannot be disputed as contrary to the scheme of the Act. Only on this view, the Bench has held that the Section 3-B(2)(b) is in consonance with the other provisions of TNGST Act and also of the CST Act.
8. Next contention is with regard to the sale. It is contended that Section 2(n)(ii) is not in line with Article 366(29A) of the Constitution of India and in the works contract there is no element of sale because labour alone is involved and the parties never intend to sell or purchase any commodity and therefore when there is no sale, the tax on the deemed sale is improper. Sub-section (n)(ii) to Section 2 reads : a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.
9. This definition of "sale" is practically adopted from Article 366 of the Constitution and Clause (29A)(b) is repeated in Section 3-B of the Act. In [1993] 88 STC 289 (Larsen and Toubro Limited v. State of Tamil Nadu), the Madras High Court has observed as follows : As a matter of fact, the amendment introduced to the definition of 'sale' in Section 2(n) of the main Act was in substance a repetition and incorporation of Clause (29A) of Article 366 of the Constitution of India. The constitutional validity and legality of the said amendment was the subject-matter of a decision of the Constitution Bench of the apex Court in Builders Association of India v. Union of India 10. In the above observation of the High Court, as the constitutional validity to Clause (29A) to Article 366 is upheld by the apex Court, the reproduction of the same clause for the deemed sale in the works contract incorporated in Section 3-B of the TNGST Act, cannot become defective. As the deemed sale is upheld by the Supreme Court, the adoption of the same in TNGST Act can, in no way affect its validity.
Therefore, this ground raised by the petitioners also is not sustainable.
11. Lastly, coming to the percentage fixed for the labour charges, it is contended in T.P. No. 29-71 of 1997 that 30 per cent towards the labour charges fixed at that time to claim deduction is arbitrary, as the rest of the 70 per cent is taxable and therefore this provision has to be struck down. This aspect also has been considered by the Bench of the High Court in Tamil Nadu Mosaic Manufacturers Association v. State of Tamil Nadu [1995] 97 STC 503 and the Bench would observe as follows : (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 ; and (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.
...In cases where the contractor does not maintain proper accounts or the accounts maintained by him are not found worthy of credence it would, in our view, be permissible for the State Legislature to prescribe a formula for determining the charges for labour and services by fixing a particular percentage of the value of the works contract and to allow deduction of the amount thus determined from the value of the works contract for the purpose of determining the value of the goods involved in the execution of the works contract.
It must, however, be ensured that the amount deductible under the formula that is prescribed for deduction towards charges for labour and services does not differ appreciably from the expenses for labour and services that would be incurred in normal circumstances in respect of that particular type of works contract. Since the expenses for labour and services would depend on the nature of the works contract and would not be the same for all types of works contracts, it would be permissible indeed necessary, to prescribe varying scales for deduction on account of cost of labour and services for various types of works contracts.
12. As the labour charges can be claimed for deduction, the Bench has held that the contractor is entitled to produce the materials to work out the actual labour charges and in the case where accounts were not maintained and materials were not produced to find out the labour charges, the State is entitled to fix the percentage towards the labour charges. The Bench has considered the Clause (2)(e) to Section 3B with the following observation : Further, we are of the view that the provisions contained in the Section 3-B particularly, the deduction provisions contained in Sub-section (2)(b) of Section 3-B are quite in accordance with the principle laid down by the Supreme Court in Gannon Dunkerley's case [1993] 88 STC 204 and the Builders' Association case [1993] 88 STC 248. In these circumstances, we are of the view that the Sub-section (2Kb) and Sub-section (2)(e) of Section 3B of the Act are perfectly valid and we reject the contention of the learned Counsel for the appellant that Section 3-B is invalid because Sub-section (2)(e) limits the expenses towards labour charges and other like charges only to the actual charges incurred in connection with the execution of the works contract without providing for the inclusion of the profit margin of the contractor. Accordingly, the question raised in points Nos. 3 and 4 are answered in the negative.
13. Of course the above observations relate to amended Section 3-B of the Act after introduction of Act 25 of 1993. The points raised in T.P.No. 2971 of 1997 do not survive after the introduction of Act 25 of 1993.
14. So the Bench of the Madras High Court has thoroughly considered the pros and cons of Section 3-B and it has ultimately held that the section is valid. It also has affirmed the decision of the single Judge in Kamatchi Lamination (P) Limited v. State of Tamil Nadu reported in [1994] 95 STC 378. As a matter of fact the petitioners in that case took the matter on appeal to Supreme Court, but they withdrew the appeal without pressing it, as is reported in [1996] 103 STC 363 (South Indian Photographic and Allied Traders Association v. State of Tamil Nadu). As the points raised in these O.Ps. and T.P. have been directly covered by the above decision, the petitioners are not entitled to any relief asked for by them and therefore the O.Ps. and T.P. are dismissed, but without costs, except modifying the order of the appellate authority in S.P. No. 406 of 1998 in A.P. No. 412 of 1998 dated August 5, 1998 as indicated below : (a) The petitioner will pay 25 per cent of the disputed tax, surcharge and additional sales tax on or before December 30, 1998 instead of September 4, 1998 as ordered by the appellate authority.
(b) The petitioner will pay a further 25 per cent of disputed tax surcharge and additional sales tax on or before January 30, 1999 ; and (c) For the balance of taxes and penalty the petitioner will file a personal bond to the satisfaction of the assessing authority on or before December 30, 1998 in lieu of security.
And this Tribunal doth further order that this order on being produced be punctually observed and carried into execution by all concerned.
Issued under my hand and the seal of this Tribunal on the 15th day of December, 1998.