2020 (6) TMI 181 - SC - VAT and Sales Tax

Reimbursement of the sales tax paid - Scope of terms of works contract - contract inclusive of taxes - as per the contract the stipulation that any Central or State sales tax and other taxes on completed items of works (excluding penalty), as may be levied and paid by the contractor shall be reimbursed by the employer on proof of payment (and) on production of assessment certificate. - Circulars dated 07.11.2001 and 19.06.2002 - main plank of the case of the appellant about the nature, extent and implication of the levy of sales tax in relation to a works contract, it could be usefully recapitulated that in view of the forty sixth amendment to the Constitution of India, Clause (29-A) came to be inserted to Article 366; and, by virtue of sub-clause (b) thereof, it became permissible for the States to levy sales tax on the price of goods and materials used in works contracts as if there was a sale of such goods and materials HELD THAT - Heavy reliance on behalf of the appellant on the expression completed item of work , as occurring in the first part of Clause 45.2, is entirely misplaced. The only implication of this expression is that a claim for reimbursement of sales tax cannot be made in relation to a particular work or item whose execution is pending or is in progress and has not been completed. So far the levy of sales tax in relation to a works contract is concerned, the same is on taxable turnover and not on the entire turnover. It follows necessarily that the claim for reimbursement could only be made of the amount of sales tax that had been levied; and had been paid by the contractor. Hence, the suggestion as if the expression completed item of work refers to the end-product of a works contract is without any substance. The contentions urged in that regard are required to be, and are, rejected. It remains trite that the terms of contract bind the parties thereto and unless there be any case of ambiguity or violation of law, ordinarily, the terms of contract, revealing the intent of parties, are required to be given effect to - It is, therefore, crystal clear that even when the contract provided that the rates quoted by the contractor shall be deemed to be inclusive of sales and other taxes and royalties on the materials, it was agreed to between the parties that sales tax and other taxes under completed items of work, as paid by the contractor were to be reimbursed. On a plain reading of the aforesaid relevant terms of the contract, it is clear that while the contractor cannot claim any payment towards the taxes/duties/royalties etc. on the goods/materials purchased by it for performance of the contract but that does not disentitle the contractor from claiming reimbursement of the sales tax levied upon it by the employer, of course after proof of payment/assessment. It is also pertinent to mention that the respondent No.1 only claimed reimbursement of the sales tax paid by it on the turnover of the works contract and not of any tax or duty or royalty paid by it on the material procured for the purpose of execution of the works contract. On a comprehensive reading of the Circular dated 04.11.1986, it is evident that the State Government was fully conscious of its obligation towards reimbursement under the existing terms of contracts and hence, issued directions for due discharge of such obligation with necessary safeguards and, at the same time, provided that henceforth, neither such a clause be inserted in the contract documents nor any tender containing such a clause or condition be accepted. Evidently, the doubts at the later stage, as indicated in the Circular dated 27.01.2000, and converse decision against the obligation of reimbursement, as stated in the Circular dated 07.11.2001, had only been of unwarranted attempts to wriggle out of the contractual obligations with rather perverse construction of the plain terms of the existing contracts - appeal dismissed.

Issues Involved:

1. Condonation of Delay
2. Reimbursement of Sales Tax
3. Interpretation of Contractual Clauses
4. Validity of Government Circulars

Issue-wise Detailed Analysis:

1. Condonation of Delay:
The petition for special leave to appeal was barred by a period of 274 days. Despite objections from the respondent, the Supreme Court condoned the delay, noting that notices had been issued long ago and the matter had been pending for a significant time awaiting service on the respondents. The Court decided to hear the case on merits, finding no reason to dismiss it solely on the ground of delay.

2. Reimbursement of Sales Tax:
The appeal was directed against the Orissa High Court's order which accepted the contractor company's claim for reimbursement of sales tax levied on works contracts executed by it. The High Court had directed the Opposite Parties to grant appropriate reimbursement as claimed by the contractor company in terms of Clause 45.2 of the General Conditions of Contract (GCC) under the National Competitive Bidding Contract (NCB), while quashing the clarification Circular dated 07.11.2001 issued by the Government of Orissa.

3. Interpretation of Contractual Clauses:
The appellant State of Orissa challenged the High Court's decision, arguing that the sales tax levied on the works contracts was not reimbursable under Clause 45.2 of GCC. The appellant contended that the sales tax was only levied on the value of goods used in the execution of the works contract, not on the "completed item of work," which becomes immovable property and thus not exigible to sales tax. The appellant also argued that the contractor was supposed to include all duties, taxes, and other levies in its bid price as per Clause 13.3 of ITB and Clause 45.1 of GCC.

The Supreme Court, however, found that the sales tax was indeed levied on the taxable turnover of the works contracts, and the contractor was entitled to reimbursement under Clause 45.2 of GCC. The Court held that the expression "completed item of work" in Clause 45.2 signifies that reimbursement is permissible only after the execution of a particular item of work is completed. The Court rejected the appellant's contention that the reimbursement clause did not apply to works contracts, noting that such an interpretation would render Clause 45.2 otiose and redundant.

4. Validity of Government Circulars:
The Supreme Court observed that the Circulars issued by the Government of Orissa, particularly the Circular dated 07.11.2001, which denied the claim for reimbursement, were not determinative of the matter. The Court noted that the earlier Circular dated 04.11.1986 had acknowledged the obligation to reimburse the sales tax paid by the contractor. The Court held that the vacillating understanding of the State Government, as reflected in these Circulars, could not override the clear terms of the contract.

Conclusion:
The Supreme Court upheld the High Court's decision, affirming the contractor company's right to reimbursement of the sales tax levied on the taxable turnover of the works contracts executed by it. The Court dismissed the appeal, concluding that the appellant's contentions were untenable and that the State Government was obligated to honor the reimbursement claim as per Clause 45.2 of GCC. The Court also disapproved the propositions in the Circular dated 07.11.2001, which attempted to deny the reimbursement obligation.

← Previous Next →