1956 (10) TMI 43 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the term "Sale of goods" in Entry No. 54 of the List is wide enough to include works contracts such as those in question.
2. Whether the transactions, even if they are held to involve the sale of goods, can be said to involve the sale of goods in the course of inter-State trade or commerce.
3. Whether the power of the State of Madhya Bharat to tax such transactions is validated by Act No. 7 of 1956.
4. Whether Rule No. 8 of the Madhya Bharat Sales Tax Rules is invalid as it lays down an artificial or arbitrary test for determining the sales price of goods supplied in works contracts.

Detailed Analysis:

I. Inclusion of Works Contracts in "Sale of Goods":
The court examined whether works contracts, which involve the supply of materials and labor, fall under the term "Sale of goods" as per Entry No. 54 of the List. The petitioner argued that the Madhya Bharat Sales Tax Act's definitions of 'Turnover', 'Taxable turnover', 'Sale', and 'Contract' artificially enlarged the scope of 'Sale' to include works contracts, which is beyond the State Legislature's power. The court referred to the legislative practice in India and England, emphasizing the essential ingredients of a sale: the existence of goods, a contract resulting in the transfer of property for a price, the payment or promise of payment, and the passing of title. The court concluded that works contracts involving substantial supply of materials for money consideration do indeed involve the sale of goods and fall within the legislative competence of the state under Entry 54.

II. Inter-State Trade or Commerce:
The petitioner contended that the transactions involved inter-State trade, as the materials were dispatched from New Delhi to Indore. The court referred to the Supreme Court's decision in Bengal Immunity Co. v. State of Bihar, which held that even if goods are delivered in a state for consumption as a direct result of a contract of sale, the sale should be considered as taking place in the course of inter-State trade or commerce. Therefore, the court agreed that the transactions involved inter-State trade elements.

III. Validation by Act No. 7 of 1956:
The court examined the impact of the Sales Tax Validation Act No. 7 of 1956, which validates state laws imposing tax on sales or purchases in the course of inter-State trade or commerce from April 1, 1951, to September 6, 1955. The petitioner argued that Section 23A of the Madhya Bharat Sales Tax Act already exempted such transactions, making the Validation Act ineffective. However, the court referred to the Supreme Court's decision in Bengal Immunity Co. v. State of Bihar, which declared the charging sections of the Act invalid for taxing inter-State sales. The court concluded that the Validation Act effectively validated the Madhya Bharat Sales Tax Act's provisions for the relevant period.

IV. Validity of Rule No. 8:
The petitioner challenged Rule 8 of the Madhya Bharat Sales Tax Rules, which allowed deduction of a fixed percentage for labor and skill from the total contract value to determine the taxable turnover. The court referred to Hidayatullah J.'s reasoning in Banarasidas v. State of Madhya Pradesh, which criticized the artificial determination of the price of goods based on pre-determined proportions. The court agreed that Rule 8 laid down an artificial and arbitrary test for determining the sales price of goods in works contracts, making it ultra vires and void.

Conclusion:
The court held that:
1. The transactions in question involve the sale of goods and fall within the legislative competence of the state under Entry 54.
2. The transactions involved inter-State trade or commerce.
3. The power of the State of Madhya Bharat to tax such transactions was validated by Act No. 7 of 1956.
4. Rule 8 of the Madhya Bharat Sales Tax Rules is ultra vires and void.

The petitions were partially allowed, declaring Rule 8 invalid while upholding the other provisions of the Madhya Bharat Sales Tax Act. The parties were ordered to bear their own costs.