The State Legislature has the power to impose taxes on the sale or purchase of goods under entry 54 of List II of the Seventh Schedule of the Constitution and the power to impose tax also includes the power of collection by means of advance payment of tax or deduction of tax at source.

Headnote:
CONSTITUTIONAL LAW - SALES TAX - WORKS CONTRACT - VALIDITY OF PROVISIONS RELATING TO IMPOSITION OF SALES TAX ON WORKS CONTRACTS - U. P. TRADE TAX ACT, 1948 (U. P. ACT XV OF 1948), SECTIONS 2(H)(II), 3-F, 8-D, RULE 44-B - CONSTITUTION OF INDIA, 1950, ARTICLES 286, 366(29A) - CENTRAL SALES TAX ACT, 1956 (CENTRAL ACT 74 OF 1956), SECTIONS 3, 4, 5, 14, 15 - NOTIFICATION NO. ST-II-2399/X-9(195)/85-U. P. ACT XV/48-ORDER-87, DATED APRIL 27, 1987 - WRIT PETITIONS - CONSTITUTION BENCH OF SUPREME COURT IN BUILDERS ASSOCIATION OF INDIA V. UNION OF INDIA [1989] 73 STC 370 (1989) 2 SCC 645 - SUPREME COURT IN GANNON DUNKERLEY & CO. V. STATE OF RAJASTHAN [1993] 88 STC 204 - SUPREME COURT IN BUILDERS ASSOCIATION OF INDIA V. STATE OF KARNATAKA [1993] 88 STC 248 - SUPREME COURT IN ORIENT PAPER MILLS LTD. V. STATE OF ORISSA [1961] 12 STC 357 - SUPREME COURT IN CHHOTABHAI JETHABHAI PATEL & CO. V. STATE OF MADHYA PRADESH [1972] 30 STC 1 - SUPREME COURT IN COLLECTOR OF CUSTOMS V. NATHELLA SAMPATHU CHETTY [1962] 3 SCR 786 - CONSTITUTION (FORTY-SIXTH AMENDMENT) ACT, 1982.
Fact of the Case:

A batch of writ petitions challenging the validity of provisions contained in the U. P. Trade Tax Act, formerly known as the U. P. Sales Tax Act, 1948 (hereinafter REFERRED TO as "the U. P. Act"), relating to imposition of sales tax on works contracts.
Finding of the Court:

1. Section 2(h)(ii) of the U. P. Act, which defines "sale" to include transfer of property in goods involved in the execution of a works contract, is valid as it merely reproduces clause (29a)(b) of article 366 of the Constitution and is not a charging section. 2. Sub-section (1) of section 8-D of the U. P. Act, which provides for advance payment of tax or deduction of tax at source relating to a works contract, is valid as the State Legislature has the power to impose taxes on the sale or purchase of goods under entry 54 of List II of the Seventh Schedule of the Constitution and the power to impose tax also includes the power of collection by means of advance payment of tax or deduction of tax at source. 3. Sub-section (2) of section 8-D of the U. P. Act, which provides for deduction of tax at source by a contractor from payments made by him to his sub-contractor, is ultra vires and bad in law as it results in double taxation and is unreasonable and arbitrary. 4. Section 3-F and rule 44-B of the U. P. Sales Tax Rules, which provide for imposition of sales tax on the transfer of property in goods involved in the execution of a works contract, are ultra vires as they do not provide for exclusion of certain items and deductions as mandated by the Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204.
Issues: 1. Whether section 2(h)(ii) of the U. P. Act, which defines "sale" to include transfer of property in goods involved in the execution of a works contract, is valid? 2. Whether sub-section (1) of section 8-D of the U. P. Act, which provides for advance payment of tax or deduction of tax at source relating to a works contract, is valid? 3. Whether sub-section (2) of section 8-D of the U. P. Act, which provides for deduction of tax at source by a contractor from payments made by him to his sub-contractor, is valid? 4. Whether section 3-F and rule 44-B of the U. P. Sales Tax Rules, which provide for imposition of sales tax on the transfer of property in goods involved in the execution of a works contract, are valid?
Ratio Decidendi: 1. The definition of "sale" in section 2(h)(ii) of the U. P. Act is valid as it merely reproduces clause (29a)(b) of article 366 of the Constitution and is not a charging section. 2. Sub-section (1) of section 8-D of the U. P. Act is valid as the State Legislature has the power to impose taxes on the sale or purchase of goods under entry 54 of List II of the Seventh Schedule of the Constitution and the power to impose tax also includes the power of collection by means of advance payment of tax or deduction of tax at source. 3. Sub-section (2) of section 8-D of the U. P. Act is ultra vires and bad in law as it results in double taxation and is unreasonable and arbitrary. 4. Section 3-F and rule 44-B of the U. P. Sales Tax Rules are ultra vires as they do not provide for exclusion of certain items and deductions as mandated by the Supreme Court in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204.
Final Decision: All the writ petitions were allowed to the extent that section 3-F of the U. P. Trade Tax Act and rule 44-B framed thereunder were declared ultra vires. Sub-section (2) of section 8-D was also declared ultra vires. Similarly, sub-section (3) to sub-section (9) of section 8-D were also declared ultra vires in so far as they provided for deposit of deduction of tax at source into Government Treasury by a contractor from the payments made by him to his sub-contractor and the penalty provision including the provision for levy of interest relating thereto.

A. N. GUPTA, J.

In this batch of writ petitions, the valid, "type of the provisions contained in the U. P. Trade Tax Act, formerly known as the U. P. Sales Tax Act, 1948 (hereinafter REFERRED TO as "the U. P. Act"), relating to imposition of sales tax on works contracts has been challenged. Since these petitions involve common questions, they are being disposed of by a common judgment.

Before the, Constitution (Forty-sixth Amendment) Act, 1982, indivisible works contracts were not eligible to sales tax due to judicial pronouncements. To overcome this difficulty, the Constitution was amended and the Constitution (Forty-sixth Amendment) Act came into force with effect from February 3, 1983. It introduced clause (29a) to article 366, clause (b) of which is material which runs as follows :

" 366. Definitions.- In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say -

(29a) tax on the sale or purchase of goods includes -

(a ). . . . . . . . . . . . . . . . .

(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

and such transfer,. . . . . . . . . . . . . . . . of any goods shall be deemed to be a sale of those goods by the person making the transfer. . . . . . . . . . . . . . . . . . . and a purchase of those goods by the person to whom such transfer. . . . . . . . . . . . is made;"

Article 286 of the Constitution puts restrictions on the imposition of tax by the States on the sale or purchase of goods, which 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 (29a) of article 366,

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. "

Sub-clause (b) of clause (3) of article 286 provides that 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, shall be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents as Parliament may by law specify. It is not disputed that so far Parliament has not made any law under this provision. In fact the Central Sales Tax Act, 1956 (hereinafter REFERRED TO as "the Central Act"), has not yet been amended so as to tax transfer of property in goods involved in the execution of a works contract relating to the Central sales. However, provisions have been made in the Central Sales Tax Act relating to article 286 (1) (a) (b), (2) and (3) (a ). These provisions are contained in sections 3, 4, 5, 14 and 15 of the Central Act. Section 3 defines when a sale or purchase of goods is said to take place in the course of inter-State trade or commerce. Section 4 lays down when a sale or purchase of goods is said to take place outside the State. Section 5 provides when a sale or purchase of goods is said to take place in the course of import or export. Section 14 gives a list of those goods which have been declared to be goods of spec

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1995 Supreme(All) 52

The State Legislature has the power to impose taxes on the sale or purchase of goods under entry 54 of List II of the Seventh Schedule of the Constitution and the power to impose tax also includes the power of collection by means of advance payment of tax or deduction of tax at source.

Cases Referred (5)