Questions & Answers

Q.1 In case of Mahim Patram P. Ltd. (6 VST 248), the Supreme Court has held that the State Act/Rules can be applied for determining the tax liability on Works Contracts under CST Act, 1956. In certain States like, Maharashtra, there is no direct provision in State Act/Rules to apply local provisions to CST Act, 1956 as it was under U.P. (CST) Rules, 1957. In such case also, whether the above judgment of Supreme Court will apply ? What is the ratio of above judgment?

Ans. The Supreme Court has delivered the above judgment, which has far reaching effects. The main aspects of above judgment can be first noted as under and then the above issues can be opined upon.

The facts of the case were that M/s. Mahim Patram was a printer and registered dealer in Uttar Pradesh. It supplied printed question papers for examination boards etc. The transaction was liable to tax under CST Act, 1956 as Works Contract. The sales tax authorities in U.P. applied the local rules for determining taxable turnover in such contract. In otherwords, by giving deduction for labour charges as per U.P. Trade Tax Act/Rules, the sales tax authorities assessed the turnover to CST Act. The appellant took objection to assessment in above manner. The main argument of the appellant was that the definition of ‘sale price’ in CST Act does provide for prescribing rules for determination of taxable turnover in case of works contract. An argument was made that since these rules are still not prescribed the works contracts cannot be assessed under CST Act.

Supreme Court did not accept the above argument. Supreme Court observed that only because rules have not been framed under the CST Act the same per se would not mean that no tax is leviable. In spite of no rules prescribed, the taxes can be levied, held Supreme Court.

Supreme Court then examined the correctness of applying U.P. rules for determination of taxable turnover.

Supreme Court made reference to section 13(3) of CST Act and observed that so long as Central Government does not make Rules under CST Act for determination of turnover in case of inter-State works contract, determination of the turnover can be carried out in terms of rules made by the State Government. Supreme Court observed that section 9(2) of CST Act, dealing with assessment is of wide amplitude, it confers power on the sales tax authorities in the State to make assessment or reassessment and to carry out assessment under CST Act, as if it is assessment under the local Act. Supreme Court gave stress on the words ‘as if’ used in the section. Therefore, observed Supreme Court, that the powers conferred and the procedures laid down under the State Sales Tax Laws would apply for carrying out assessment under the CST Act. ‘Assessment’ Comprehend the power to even compute the amount chargeable to tax in terms of the procedure prescribed under the State Act, held Supreme Court. If the rules made by State Government are not inconsistent with rules, if any, under CST Act, the said rules will apply to CST Act also. Supreme Court also observed that the courts would construct the machinery provisions for calculating the tax or procedure for its calculation in such a manner so as to make it workable. The measure or value to which rate will be applied is one thing but how the turnover would be determined is another. Applying state rules for determination falls in second category and hence the State rules can apply.

Supreme Court also referred to the Rule 9 of C.S.T. (U.P.) Rules, 1957, which specifically stated that the provisions of the U.P. Act/Rules should apply to dealer liable to assessment under CST Act, 1956. Thus referring to both, the provision of CST Act and CST (U.P.) Rules, Supreme Court came to above conclusion.

The queries raised can now be answered as under.

Though in above judgment Supreme Court has taken note of specific provision of application of State Act/Rules to CST Act, the equal importance is also given to the provisions of section 9(2) of CST Act,1956.

It can be said that in absence of similar provision, as in C.S.T. (U.P.) Rules, 1957, the dealers in other States may not be entitled to ask for the application of provisions of State Act/Rules to CST Act as a matter of right. However, when in absence of the relevant Rules in CST Act and when the dealer is not in position to identify the various deductions in relation to Works Contract, the resort will be to best judgment assessment. When the best judgment assessment is to be followed, in my opinion, the dealer can ask for application of State Rules in light of above judgment. Here the other part of judgment in relation to section 9(2) of CST Act will be useful. Thus the judgment will be useful at least in case of best judgment assessments.

Q.2 The dealer has sold the goods in course of inter-State trade. However he has not charged CST separately. A note to the effect that ‘price inclusive of tax’ is put on the invoice. The dealer is claiming deduction of tax element under Section 8A of CST Act, 1956. Whether his claim will be tenable in law ?

Ans. The deduction u/s. 8A(1)(a) is available as per conditions in said section. The said section 8A(1)(a) reads as under.

“S. 8A. Determination of turnover

(1) In determining the turnover of a dealer for the purpose of this Act, the following deductions shall be made from the aggregate of the sale prices, namely:-—

(a) the amount arrived at by applying the following formula-

rate of tax X aggregate of sale prices
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100 plus rate of tax

Provided that no deduction on this basis of the above formula shall be made if the amount by way of tax collected by a registered dealer, in accordance with the provisions of this Act, has been otherwise deducted from the aggregate of sale prices. “

It can be seen that the above section provides for deduction where the tax collection by the dealer is otherwise not allowed as deduction. In case dealer has collected the tax separately then the said amount is not forming part of turnover and question of claiming deduction does not arise.

The question will arise where price is inclusive. In case of Rallis India Ltd. vs. State of A.P. (53 STC 267) the Andhra Pradesh High Court has held that though tax is not collected separately the dealer has to lead other evidence to show that the same is included in the price. If the dealer fails to show the same then deduction cannot be allowed. The dealer can show that the tax is included in price by some positive evidence like the invoice mentioning “inclusive of tax” or some sale related documents show the same.