Important point
When the law provided that something is to be prescribed in the rules then that thing must be prescribed in the rules to make the provisions workable and constitutionally valid.

JUDGMENT

MARKANDEY KATJU, J. —

1.Leave granted.

2.This appeal by special leave has been filed against the impugned judgment & order 22.6.2006 of the Jharkhand High Court in Writ Petitions Nos. 482, 467, 493 and 466 of 2005.

3.Heard learned counsel for parties and perused the record.

4.The respondent, a company registered under the Indian Companies Act, 1913 is engaged inter alia in the execution of works contracts of designing, supplying, installation, fabrication, testing and commissioning of air-conditioning plants. The assessing authority acknowledged that the contracts in question were works contracts and the material supplied in the execution of the works contracts only are liable to be taxed. However, the Sales Tax Authorities had sought to levy a uniform rate of tax @ 16% holding that in the instant case the incidence of tax is commensurate with actual transfer of property that takes place in the execution of works contract.

5.Although the respondent had deposited with the appellant the entire amount of the sales tax charged and demanded @ 16%, it passed on to its customers sales tax restricted to the rate of 8% because in terms of the Circular letter No. 3971 dated 18.5.1984 issued by the Government of Bihar, Finance (Commercial Tax) Department (Annexure P-4 of the affidavit on behalf of the respondent with additional documents), the appellant was entitled to charge sales tax only @ 8%.

6.In State of Madras vs. Gannon Dunkerley & Co. (Madras),1 [(1959) SCR 379], this Court held that the State legislature cannot impose sales tax on a works contract because a works contract is an indivisible contract whereas sales tax can only be imposed on a sale. The Court held that a works contract is not a sale.

7.Parliament, thereafter amended the Constitution of India by the Constitution (Forty Sixth) Amendment Act, 1982 introducing clause 29A (b) in Article 366 therein. The aforesaid clause 29-A states that the words “tax on the sale or purchase of goods” include inter alia “(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”.

8.In Gannon Dunkerley and Co. & Ors. vs. State of Rajasthan & Ors,2 [(1993) 1 SCC 364], this Court specified the principles as to what could be taxed in a works contract. In paragraph 47 of the judgment it has been observed that the value of the goods involved in the execution of a works contract will have to be determined after 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 value of these items, therefore, have to be deducted from the value of the entire works contract, because what can be taxed is only on the sale of goods and not anything else. The State legislature under Entry 54 of List II of the Seventh Schedule can tax only on the sale or purchase of goods. If an item does not come within List II or List III of the Seventh Schedule to the Constitution, then it can only be the Central legislature i.e. the Parliament which can levy tax either under List I or under the residual provision contained in Article 248 thereof.

9.Section 21 of the Bihar Sales Tax Act, as amended states :

“Sec. 21. - Taxable Tur