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Judgment
R. Jayasimha babu, J.—The assessee had opted to pay tax on the total contract value in respect of civil works executed by it under contract
the option having been given by Section 7C of the Tamil Nadu General Sales Tax Act, 1959 (hereinafter referred to as ""the TNGST Act"") which
provision was meant as an alternative mode of discharging the liability for tax on transfer of goods involved in works contract, the levy of which is
provided for u/s 3B of the Act.
By reason of the amendment effected to the Constitution in Article 466 and the introduction of Clause (29A) thereunder, the scope of the words
tax on the sale or purchase of goods"" was expanded to include, inter alia, ""the tax on the transfer of property in goods (whether as goods or in
some other forms) involved in the execution of works contract"". After that amendment to the Constitution the State Act had been amended and
Section 3-B was introduced in 1986, which was recast and substituted in the year 1993 by Act 25 of 1993 which amending Act also introduced
Section 7C into the State Act.
The Constitution Bench of the Supreme Court in the case of Builders Association of India v. Union of India [1989] 73 STC 370 held that
Constitution amendment enabling the States to levy tax on transfer of property in the goods involved in the execution of contract created a legal
fiction dividing that contract into two, one of which dealt with transfer of property of the goods involved in the execution of the works contract. The
constitutional amendment introducing Clause (29A) in Article 466, it was observed by the court, was made in order to overcome the effect of
decision of the Supreme Court in the case of State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353 wherein it was held
that a works contract was an indivisible contract and the turnover of the goods used in execution of the works contract would not be exigible to
sales tax.
The later Constitution Bench of the apex Court in the case of Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204, held that
measure of the tax leviable on the transfer of property of the goods involved in the execution of the works contract is the value of the goods
involved in such execution and may be arrived at by reducing from the value of such contract, expenses incurred and labour and other charges. The
court also held that where account books are not maintained or are not reliable the percentage value of the works contract may be taken for
deduction.
The conclusions reached by the Constitution Bench in that case are set out in the judgment. Conclusion (7) therein reads thus (page 238 of 88
STC) :
(7) To deal with cases where the contractor does not maintain proper accounts or the account books produced by him are not found worthy of
credence by the assessing authority the Legislature may prescribe a formula for deduction of cost of labour and services on the basis of a
percentage of the value of the works contract but while doing so it has to be ensured that the amount deductible under such formula 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. It would be permissible for the Legislature to prescribe varying scales for deduction on account of cost of labour and services for various
types of works contract.
That judgment of the apex Court was rendered in November 17, 1992. The amendments to the State Act were effected by Act 25 of 1993 which
took the effect from April 1, 1994.
Section 3-B of the Act after the amendment reads thus :
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 4.
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 :
Provided that no such deduction shall be allowed unless the dealer claiming deduction, produces proof that the sub-contractor is a registered
dealer liable to pay tax under this Act and that the turnover of such amounts is included in the return filed by such subcontractor ; and
(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.
TABLE
Serial Type of works contract Labour or other charges as a percentage value
number of the works contract
(1) (2) (3)
Electrical contracts 15
All structural contracts 15
Sanitary contracts 25
Watch and/or clock 50
repair contracts
Dyeing contracts 50
All other contracts 30
(f) all amounts (including the tax collected from the customer) refunded to the customer or adjusted towards any amount payable by the customer,
in respect of unexecuted portion of works contract based on the corrections on account of measurements or check measurements, subject to the
conditions that--
(i) the turnover was included in the return and tax paid ; and
(ii) the amount (including the tax collected from the customer) is so refunded or adjusted, within a period of six months from the due date for filing
of the return in which the said amount was included and tax paid.
Section 7-C introduced by the amending Act reads thus :
7-C. Payment of tax at compounded rates by works contractor.-- (1) Notwithstanding anything contained in Section 3-B, every dealer referred
to in item (vi) of Clause (g) of Section 2, may, at his option, instead of paying tax in accordance with Section 3-B, pay, either on the total value of
each works contract or on the total value of all works contract, executed by him in a year, tax calculated at the following rate, namely :--
(i) Civil works contract ... Two per cent of the total contract
value of the civil works executed ;
(ii) All other works contract ... Four per cent of the total contract
value of the works executed
(2) Any dealer who executes works contract may apply to the assessing authority along with the first monthly return for the financial year, his
option to pay the tax under Sub-section (1) and shall pay the tax during the year in monthly instalments and for this purpose, he shall furnish such
return within such period and in such manner as may be prescribed :
Provided that the option under this sub-section for the financial years commencing on the 1st day of April, 1993 and the 1st day of April, 1994,
shall be exercised on or before the 30th day of June 1994 :
Provided further that the option under this sub-section in respect of works contract other than civil works contract for the financial year
commencing on the 1st day of April, 1999 shall be exercised on or before the 31st day of January, 2000.
(3) Where a dealer has exercised his option under Sub-section (1),--
(a) in respect of each works contract, such option shall be final till the completion of such works contract ;
(b) in respect of all works contract, such option shall be final for that financial year.
(4) A dealer, exercising option under Sub-section (1) shall, so long as the option remains in force, not be required to maintain accounts of his
business under this Act or the rules made thereunder except the records in originals of the works contract, extent of their execution and payments
received or receivable in relation to such works contract, executed or under execution.
While Section 3-B conforms to the law laid down by the apex Court in the second Gannon Dunkerley''s case [1993] 88 STC 204, Section 7-C
gives an option to the dealer to pay prescribed percentage of the contract value instead of ""paying tax in accordance with Section 3-B"". The
Legislature was obviously conscious of the fact that the adoption of the contract value as the basis for calculating the tax was not a permissible
mode of levy and that it was only with the consent of the dealer that such a mode can be adopted.
It is evident that the contract value includes many things besides the value of the goods agreed to be transferred in the course of the execution of
the works contract. All such amounts are not exigible to tax. Collecting a percentage of the total contract value is obviously a convenient mode
which it is open to a dealer to either accept or reject. So far as the State is concerned while giving that option the State has expressed its readiness
to accept the prescribed percentage of the contract value as an equivalent to or at any rate a payment made in full discharge of the liability of the
dealer liable to pay tax on the transfer of goods involved in the works contract in respect of which option has been examined by the dealer.
The tax provided for in Section 3-B is on the taxable turnover of the dealer on the transfer of property in the execution of the works contract.
The turnover is defined in Section 2(r) of the Act as under :
''turnover'' means the aggregate amount for which goods are bought or sold, or delivered or supplied or otherwise disposed of in any of the ways
referred to in Clause (n), by a dealer either directly or through another, on his own account or on account of others whether for cash or for
deferred payment or other valuable consideration, provided that the proceeds of the sale by a person of agricultural or horticultural produce, other
than tea, and rubber (natural rubber, latex and all varieties and grades of raw rubber), grown within the State by himself or on any land in which he
has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover.
""Taxable turnover"" is defined in Section 2(p) of the Act as under :
''""taxable turnover'' means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total
turnover and in such manner as may be prescribed.
The Act does not anywhere provide that the total value of the works contract in respect of which a dealer has exercised the option to pay the
prescribed percentage towards tax instead of paying in accordance with Section 3-B, shall be deemed to be either the turnover of such dealer or
the taxable turnover of such dealer in so far as the works contract in which he is engaged is concerned.
It is in this background that the arguments advanced for the dealer that the Tamil Nadu Additional Sales Tax Act which imposes an additional
tax on the tax payable under the TNGST Act with reference to taxable turnover of such dealer--a tax which cannot be passed on by the dealer to
any other--is not attracted to the amounts paid by the dealer u/s 7-C of the TNGST Act, 1959 is required to be considered.
The Tamil Nadu Additional Sales Tax Act, 1970 provides for levy of additional tax on the sale or purchase of goods. Section 2 of that Act
provides for the levy. Section 2(l)(aa) provides thus :
Section 2 : Levy of additional tax in the case of certain dealers.-- (1)(aa) The tax payable under the Tamil Nadu General Sales Tax Act, 1959
(Tamil Nadu Act 1 of 1959) (hereafter in this section referred to as ""the said Act""), shall, in the case of a dealer including the principal selling or
buying goods through agents, whose taxable turnover for a year exceeds twenty-five crores of rupees, be increased by an additional tax, calculated
at the following rates, namely :--
(i) Where the taxable turnover exceeds twenty-five crores of 1.5 per cent of the
rupees but does not exceed fifty crores of rupees. taxable turnover.
(ii) Where the taxable turnover exceeds fifty crores of rupees but 2 per cent of the
does not exceed one hundred crores of rupees. taxable turnover.
(iii) Where the taxable turnover exceeds one hundred crores of 2.5 per cent of the
rupees but does not exceed three hundred crores of rupees. taxable turnover.
(iv) Where the taxable turnover exceeds three hundred crores of 3 per cent of the
rupees. taxable turnover.
As the additional tax is thus levied at the prescribed percentage on the taxable turnover of the dealer that percentage varying from 1.5 to 3
depending on the turnover of the assessee for the purpose of levy of this additional tax, the determination of the taxable turnover is crucial. Despite
the declared intention to levy additional tax on the sale or purchase of goods, the tax levied under that Act having been linked solely to the taxable
turnover, mere payment of tax under the principal enactment would not render the dealer liable for the additional sales tax unless taxable turnover
of that dealer is determinable under the principal Act.
While there is no difficulty in determining the taxable turnover of a dealer who is engaged in the execution of a works contract in cases where
the tax is computed in terms of Section 3-B of the Act, the determination of turnover of a dealer who has opted for payment of tax u/s 7-C is not
possible at all under the parent Act, as the amount computed u/s 7-C is not an amount which is determined as tax on the taxable turnover, but is
determined with reference to the total value of the works contract in respect of which option is exercised. As already noticed there is no provision
in the Act which deems such a total contract value as total turnover.
Turnover, as defined in the Act, is the aggregate of value of sales effected or purchase effected by the dealer. The works contract not only
involves the transfer of goods but also involves the rendering of several services which cannot be subjected to tax under the Sales Tax Act. The
consent given by the dealer u/s 7-C for the levy of percentage of total contract value towards the tax otherwise payable u/s 3-B cannot be
stretched to include the payment of additional sales tax under any other enactment by treating the contract value as taxable turnover for the
payment of tax under the Additional Sales Tax Act.
In the absence of any determination of the value of the goods transferred under the works contract in cases where a dealer has exercised an
option u/s 7-C, there is no determination of the taxable turnover as the dealer is not required to maintain books of accounts and is not called upon
to render any account in relation to the actual value of the goods transferred under the works contract. There is no scope of determining the actual
value of the goods transferred under such contract in cases where option has been exercised u/s 7-C.
While it may be convenient to the Revenue to treat the value of the works contract as the turnover of the dealer and even regard it as taxable
turnover the limits of the legislative competence of the State Legislature render any such exercise wholly impermissible. In the absence of any
determination of taxable turnover, no tax under the Additional Sales Tax Act can be levied. The claim for additional sales tax by treating the
contract value as the taxable turnover is not permissible under the provisions of either the TNGST Act or the Additional Sales Tax Act.
The demand for payment of additional tax on the contract value was therefore not a payment which the Tribunal should have upheld. The
impugned order of the Tribunal is set aside. The writ petition is allowed.