The Judgment Information
Appeal (civil) 2408 of 2007
State of Jharkhand and others
Voltas Ltd, East Singhbhum
DATE OF JUDGMENT: 09/05/2007
S. B. Sinha & Markandey Katju
J U D G M E N T
CIVIL APPEAL NO. 2408 OF 2007
(Arising out of Special Leave Petition (Civil) No.19327 of 2006)
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)
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 (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
(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
(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 Turnover (1) For the purpose of
this part the taxable turnover of a dealer shall be that
part of his gross turnover which remains after
deduction therefrom –
(a)(i) in case of the works contract the amount
of labour and any other charges in the manner and to
the extent prescribed".
10. Rule 13A of the Bihar Sales Tax Rules which was also amended
by a notification dated 1st February, 2000 read as follows:
"Rule 13A. Deduction in case of works contract on
account of labour charges. [if the dealer fails to
produce any account or the accounts produced are
unreliable] deduction under sub-clause (i) of clause
(a) of sub-section (1) of section 21 on account of
labour charges in the case of works contract from
gross turnover shall be equal to the following
11. The aforesaid provisions have been adopted by the State of
Jharkhand vide notification dated 15.12.2000 and thus are applicable in
the State of Jharkhand.
12. Interpretation of the amended Section 21(1) and the newly
substituted Rule 13A fell for consideration of a Division Bench of the
Patna High Court in the case of Larsen & Toubro Ltd. vs. State of
Bihar 134 STC 354. The Patna High Court in the said decision
observed as under:
"Rule 13A unfortunately does not talk of "any other
charges". Rule 13A unfortunately does not take into
consideration that under the Rules the deduction in relation
to any other charges in the manner and to the extent were
also to be prescribed. Rule 13A cannot be said to be an
absolute follow-up legislation to sub-clause (i) of clause (a)
of section 21(1). When the law provides 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. In the matter of Gannon
Dunkerley & Co. (1993) 88 STC 204 the Supreme Court
observed that as sub-section (3) of section 5 and sub-rule
(2) of rule 29 of the Rajasthan Sales Tax Act and the Rules
were not providing for particular deductions, the same were
invalid. In the present matter the constitutional provision
of law says that particular deductions would be provided
but unfortunately nothing is provided in relation to the
other charges either in section 21 itself or in the rules
framed in exercise of the powers conferred by section 58 of
the Bihar Finance Act.
In our considered opinion sub-clause (i) of clause (a)
of section 21(1) read with rule 13A of the Rules did not
make sub-clause (1) fully workable because the manner and
extent of deduction relating to any other charges has not
been provided prescribed by the State."
13. We fully agree with the view taken by the Patna High Court in
the aforesaid decision. It is not merely the labour charges which are
deductible from the value of the works contract, but all other
charges/amounts also, except the value of the goods sold in execution
of the works contract. This is because only the value of the goods sold
can be taxed as sales tax. It may be mentioned that the respondent had
initially only claimed deduction of labour charges, but that was in view
of the understanding of the law at that time. The matter became clear
only after the decision of this Court in Gannon Dunkerley & Co. vs.
State of Rajasthan (supra).
14. It may further be mentioned that the observations made by the
Division Bench of the High Court about the rate of tax were
unnecessary, and they are therefore set aside.
15. We also agree with the view taken in the impugned judgment that
the proceedings in question were beyond limitation. It appears that
against three assessment orders for the period 1990-91, 1991-92 and
1992-93, the respondent preferred three appeals i.e. JUSTA 56/97-98,
57/97-98 and 58/97-98 before the Joint Commissioner, Commercial
Taxes (Appeal), Jamshedpur Division, Jamshedpur. The appellate
authority passed a common order on 31st August, 1998 and
communicated the decision vide Memo No. 2177 dated 5th November,
1998 to the assessing authority and other officers. The assessing
authority was directed to make a re-assessment. As per the proviso to
Section 24 of the Bihar Finance Act, the assessing authority was
supposed to complete and pass the re-assessment order pursuant to the
remand by 5th November, 2000, two years from the date of
communication of such order to the assessing authority. However, the
assessment was not concluded and fresh assessment on remand was
made on 27th November, 2004 i.e. after more than six years of
communication of the said order. Hence, it was clearly time barred.
16. From the records, it appears that the appellate order passed on
31st August, 1998 was communicated to the assessing authority vide
Memo No. 2177 dated 5th November, 1998. The respondent obtained a
certified copy of the same in January, 1999. Memo No. 204 dated 6th
August, 2003, as referred to by the counsel for the State is the second
time communication, which was only a reminder. Thus, the appellate
order having been communicated to the assessing authority vide Memo
No. 2177 dated 5th November, 1998 for the purposes of limitation the
period will start from 5th November, 1998 and will be complete on 5th
November, 2000 i.e. two years from the date of communication of such
order to the assessing authority. We accordingly hold that the
assessment order made after remand on 27th November, 2004 and the
consequential demand of notice raised in pursuance of such order of re-
assessment, all dated 29th November, 2004 are time-barred under
Section 24 of the Bihar Finance Act.
17. However, the contention of the respondent herein is that the
assessment should be directed to be completed on the basis that the rate
of tax would be 8%. As at present advised, this Court need not go into
the said question.
18. Thus we find no infirmity in the impugned judgment. The appeal
is accordingly dismissed. No costs.