Tax on Works Contract
The Supreme Court recently agreed to reopen the case of sales tax on works contracts. Notices have been served to ALL the state governments calling for their side of the case in the matter. There are serious doubts about workability of the tax in agreement to the previous ruling of the Court that the value of goods used in the execution of a contract is by force of the Forty-sixth Amendment subject to `sales' tax. Following the ruling, Maharashtra demanded tax from a backdate, i.e., from '86 but then agreed to give up its claim to tax on past transactions. According to the last decision of the Supreme Court, the Forty-sixth Amendment empowers the states to tax, not the entire value of a works contract, but only the value of goods involved in such contracts. In other words, by resort to fiction, the value of a contract for the purposes of the tax is to be divided into that for `sale of goods' and for labour and incidental expenses.
The Forty-sixth Amendment inserted a clause, (29-A), into Article 366 which defines the terms used in the Constitution. Sub clause (b) of the clause so inserted runs as under:
"(29-A) `tax on the sale or purchase of goods' includes-
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.
The Amendment obviously attempts to pass off something as something else, which it is not. The Court clearly erred in its decision which subjects the contractors to acrobatics in accountancy just to honour what might be said to be a legislative gymnastics. The Court has, perhaps, realised this, and, hence, the rehearing on the tax so soon, within two years.
The scope of meanings of words cannot be so enlarged as to traverse the sense generally carried by the terms, though it may be restricted by legislation. It is especially so when such enlargement adversely affects the citizen vis-a-vis a government. In short, dictionaries cannot be amended by legislation. Hence the term sale of goods cannot, even by the force of a constitutional amendment, include works contract even if some sale may be inherent in the execution of such a contract.
That apart, and after acknowledging validity of the Forty-sixth Amendment, still, the essential fact remains that the tax is only on `sale of goods'. The expression in clause (29-A) of Article 366 cannot be so construed as to add anything to the existing concept of `sale of goods'. In fact, even the present concept is wider than what the term actually warrants. The subclause only lays down that the tax on sale or purchase of goods includes a tax on the transfer of property in goods and nothing more. Obviously, it cannot affect those transfers that are made otherwise than by sale.
It is not the Forty-sixth Amendment that is invalid but it is the latter part of the expression in parenthesis, (whether in goods or some other form), that is invalid, and that because of the simple reason that it actually means nothing. The sum total of the expression in parenthesis is nil because goods cannot be anything but goods. It is only the first part of the expression `whether in goods' that is true and applicable; the latter part `or in some other form' envisages to pass something as `goods' that is acknowledged `not goods' and, therefore, it being rubbish -not making any sense, is invalid.
So, the Forty-sixth Amendment does not bring into the purview of the tax anything that is not goods including the goods that have ceased to be goods having been used up in the fulfillment of a works contract. E.g. if there is a tax on horses and legislature wants the tax to be applicable to donkeys too, it just cannot do so by definition that the term `horse' includes the animal generally known as `donkey' or that a donkey shall be deemed to be a horse for the purposes of the tax. The municipality supplies water. It cannot be said to supply hydrogen and oxygen just because a legislature might prefer to put it in that manner even though it is a fact that water is composed of these two elements. Regulations affecting these two gases, including tax laws, cannot be applied to water just because the legislature in its moment of unwisdom might have so decreed. So also a law-making body cannot decree that 4 and 4 shall henceforth make nine as well as eight. Hence, it cannot lay down that goods will be goods and also something else that is no longer goods. And if such a language is used, it makes no sense and means nothing, the expression being incapable of intelligent interpretation. It is not the law but the expression that is invalid.
The Supreme Court erred in holding that Article 366(29-A) as introduced by the Forty-sixth Amendment enables the State to tax `sale' element involved in the execution of a works contract. No such element can be visualized in the process of execution of contracts. In such a situation the alleged sale is the product of imagination, a fiction that no sensible law can allow.
A taxing statute in its application to the citizen is at par with penal statutes. Just as a citizen cannot be convicted on the basis of fictional evidence, so also he cannot be taxed on the basis of fiction even if that fiction has the backing of a constitutional fiat. It is an unamendable Basic Feature of the Constitution that a law adversely affecting the citizen shall be based on facts as perceived by common sense and common experience and not on fiction.
Even if the goods used in works contract remain identifiable and detachable, they have not been `sold' as `goods' because the principal function was fulfillment of the works contract, the transfer of goods in original form being only incidental to it. As against this in a contract for sale/purchase the principal factor is sale/purchase and it is contract that is incidental. The seller in such a contract is interested in selling while the buyer is interested in purchasing what is offered by the seller. The contract is a result of such desire on the part of both. In a works contract any transfer of property in goods that may result, cannot by any stretch of imagination be said to be sale.
Article 366(12): Definition of `goods' as given uses the term `includes', and, therefore, is not exhaustive. Even then, it is only the general meaning commonly given to the term that is to be applied and not the `stretched' meaning endeavored by the Forty-sixth Amendment. In a sale of goods, the goods are the prime consideration while the identities of the sellers and purchasers, the contracting parties, have secondary importance, at times none at all. There may be a transaction of sale/purchase between perfect strangers who may remain so even after completion of the deal. While in contracts, identity of the contracting parties have the prime significance; the terms of the contract, which may be about sale/purchase, are secondary being incidental to the contract. There cannot be a contract without identified, specific parties.
Since the tax itself is invalid, Article 286(3)(b) is rendered redundant. Had it been valid, still, it would not have been mandatory for Parliament to put the kind of restrictions mentioned in the Article on the taxing power of the States. Absence of any such restriction by Parliament only means that it does not see any need to interfere which implies that the States have, in its eyes, acted within proper limits.
But the major point to stress is that the dictionary cannot be amended by means of a law, by even a constitution.
The retrospective application of taxing statutes is also governed by the same principle as that which governs criminal law. If we allow a taxing statute to take effect from last year, what is going to prevent us from applying a law, just made, from last decade or last century? It is futile to expect that the legislature in its wisdom will not make any such law. But hasn't it made a law that has taken effect 3 years before?
Taxes cannot be so levied as to be effective from either previous or subsequent financial years. Such levies would be offending the budgetary provisions of the Constitution which are mandatory. A tax that has not figured in the budget of a year, termed `annual financial statement' in the Constitution, Articles 112 and 202, cannot be said to have been lawfully levied, and, hence, would be in breach of Article 265. It is the budget that gives teeth to all revenue and expenditure statutes including a taxing one. While the budgets for previous years become a matter of history which cannot be retrospectively amended to validate a tax, a taxing statute being at par with penal statutes; the budgets for the years to come cannot be presented before its proper time which is previous year of the relevant one.
Since the Maharashtra budgets for the years '85-86 to '90-91 have already been presented and passed, any amendment of them will not be valid unless it applies from the next day which must necessarily be in the current year. Even a current year amendment that affects a citizen adversely cannot apply from the beginning of the year. A tax law, like a criminal statute, has always to have prospective effect and has to be confined to the relevant financial year, budgetary or current. A citizen must always be able to know in advance his tax liabilities so that he may arrange his affairs accordingly.
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