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TMI Blog1989 (3) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... t Petition (Civil) No. 196, Writ Petition (Civil) No. 201, Writ Petition (Civil) No. 212, Writ Petition (Civil) No. 319, Writ Petition (Civil) No. 336, Writ Petition (Civil) No. 109, Writ Petition (Civil) No. 414, Writ Petition (Civil) No. 68, Writ Petition (Civil) No. 208, Writ Petition (Civil) No. 401, Writ Petition (Civil) No. 203, Writ Petition (Civil) No. 214, Writ Petition (Civil) No. 345, Writ Petition (Civil) No. 474, Writ Petition (Civil) No. 446, Writ Petition (Civil) No. 485, Writ Petition (Civil) No. 545, Writ Petition (Civil) No. 488, Writ Petition (Civil) No. 233, Writ Petition (Civil) No. 303, Writ Petition (Civil) No. 470, Writ Petition (Civil) No. 547, Writ Petition (Civil) No. 145, Writ Petition (Civil) No. 148, Writ Petition (Civil) No. 259, Writ Petition (Civil) No. 261, Writ Petition (Civil) No. 262, Writ Petition (Civil) No. 608, Writ Petition (Civil) No. 609, Writ Petition (Civil) No. 116, Writ Petition (Civil) No. 617, Writ Petition (Civil) No. 12, Writ Petition (Civil) No. 13, Writ Petition (Civil) No. 67, Writ Petition (Civil) No. 80, Writ Petition (Civil) No. 81, Writ Petition (Civil) No. 82, Writ Petition (Civil) No. 86, Writ Petition (Civil) No. 37, Wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imha Murty and N.N. Gooptu (Advocates-General), R.P. Gupta, S. Krishnan, J.B. Dadachanji, D.N. Mishra, Mrs. A.K. Verma, Vijay Hansaria, Sunil K. Jain, A.T.M. Sampath P.N.Ramalingam, C. Natarajan, N. Inbarajan, M.S. Sinha, Madhu Khatri, Ms. Bina Gupta, K.M. Rai, Ms. Panaki Misra, Harish Salve, Ajay K. Jain, Pramod Dayal, K.M. Vyayar, Badar Durraj Ahmed, Ms. Parijat Sinha, J.R. Das, P.R. Seetharaman, R.P. Gupta, Ranjit Kumar. A. Sharan, J.D. Jain, C.S. Vaidyanathan, R.R. Setia, N.N. Keswani, R.N. Keswani Pramod Dayal, Dilip Tandon, R.B. Mehrotra, M.C. Dhingra, M. Qamaruddin, Ashok Kunar Gupta, M.M. Kashyap, S.B. Upadhya, R.N. Karanjawala, Mrs. Manik Karanjawala, G.S. Vasisht, S.K. Gambhir, Amlan Ghosh, A.K. Singla,K.K. Khurana, L.K. Pandey, Mahabir Singh, E.C. Agarwala, Ms. Purnima Bhatt, Vineet Kumar, K.J. John, Ms. Naina Kapur, Ms. Hemantika Wahi, Sarva Mitter, P.K. Jain, Ms. A. Subhashini, B.V. Desai, M.N. Shroff, R. Mohan, R.A. Perumal, R.N. Patil, S.K. Agnihotri, Ashok K. Srivastava, Manoj swarup, Pramod Swarup, T.V.S.N. Chari, S.K. Dhingra, A.M. Khanwilkar, A.S. Bhasme, Amip Sachthey, P.N. Misra, Ajay K. Jha, K.R. Nambiar, P.R. Ramasesh, H.K. Puri, P.R. Mondal, M.P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was made an additional ground. A net of the widest range perhaps was laid in Central Provinces and Berar where it was sufficient if the goods were actually found in the Province at any time after the contract of sale or purchase in respect thereof was made. Whether the territorial nexus put forward as the basis of the taxing power in each case would be sustained as sufficient was a matter of doubt not having been tested in a court of law. Such claims to taxing power led to multiple taxation of the same transaction by different Provinces and cumulation of the burden falling ultimately on the consuming public. By the time the Constituent Assembly took up for consideration the provisions relating to the power of the State Legislatures to levy sales tax the difficulties created by the sales tax laws passed by the various Provinces and their effect on inter-State trade and commerce had come to be felt throughout the country. In order to minimise the adverse effects of the sales tax laws passed by the Legislatures of States the Constituent Assembly enacted articles 286, 301 and 304 of the Constitution. Introducing an amendment to article 264-A to the draft Constitution, which u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax upon such a commodity, the law made by the Province should have the assent of the President, so that it would be possible for the President and the Central Government to see that no hardship is created by the particular levy proposed by a particular Province. The proviso to sub-clause (2) is also important and the attention of the House might be drawn to it. It is quite true that some of the sales taxes which have been levied by the Provinces do not quite conform to the provisions contained in article 264-A. They probably go beyond the provisions. It is therefore felt that when the rule of law as embodied in the Constitution comes into force all laws which are inconsistent with the provisions of the Constitution shall stand abrogated. On the date of the inauguration of the Constitution this might create a certain amount of financial difficulty or embarrassment to the different Provinces which have got such taxes and on the proceeds of which their finances to a large extent are based. It is therefore proposed as an explanation to the general provisions of the Constitution that notwithstanding the inconsistency of any sales tax imposed by any Province with the provisions of artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory of India shall be free." "304. Restrictions on trade, commerce and intercourse among States.- Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law- (a) impose on goods imported from other States any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest: Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President." The power to levy sales tax was conferred on the Legislatures of States by the Constitution by entry 54 of List II of the Seventh Schedule to the Constitution of India which, as originally enacted, read thus: "54. Taxes on the sale or purchase of goods other than newspapers." The power to levy tax on purchase of goods was expressly stated in entry 54 even though it was implicit in the expression "taxes on the sale " which was fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates and thus not valid. On appeal to this Court the decision of the High Court of Bombay was reversed by the majority in the State of Bombay v. United Motors (India) Ltd. [1953] 4 SIC 133 (SC); [1953] SCR 1069. Soon doubts came to be entertained about the correctness of the above decision and this Court got the opportunity to reconsider the correctness of the decision in the United Motors' case [1953] 4 STC 133 (SC); [1953] SCR 1069 in the Bengal Immunity Co. Ltd. v. State of Bihar [1955] 6 STC 446 (SC); [1955] 2 SCR 603. In the case of the Bengal Immunity Co. Ltd. [1955] 6 STC 446 (SC) [1955] 2 SCR 603 the majority held that the operative provisions of the several parts of article 286 of the Constitution, namely, clause (1)(a), clause (1)(b) and clauses (2) and (3) were intended to deal with different topics and one could not be projected or read into another. The bans imposed by article 286 of the Constitution on the taxing powers of the States were independent and separate and each one of them had to be got over before a State Legislature could impose tax on transactions of sale or purchase of goods. The explanation to article 286(1)(a) determined by the legal fiction created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... except in so far as those proceeds represent proceeds attributable to States specified in Part C of the First Schedule, shall not form part of the Consolidated Fund of India, but shall be assigned to the States within which that duty or tax is leviable in that year, and shall be distributed among those States in accordance with such principles of distribution as may be formulated by Parliament by law. (3) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce." By the above amendment Parliament was empowered to levy tax on the sale or purchase of goods other than newspapers where such sale or purchase took place in the course of inter-State trade or commerce and was also empowered to formulate by law principles for determining when a sale or purchase of goods took place in the course of inter-State trade or commerce. By the very same Sixth Amendment article 286 of the Constitution was amended. The explanation to clause (1) was omitted by that amendment. Clauses (2) and (3) of article 286 were substituted by two new clauses. After such amendment article 286 of the Constitution read th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in regard to tax on sale or Purchase of declared goods within a State.-Every sales tax law of State shall, in so far as it imposes or authorises the imposition of a tax on the sale or purchase of declared goods, be subject to the following restrictions and conditions, namely: (a) the tax payable under that law in respect of any sale or purchase of such goods inside the State shall not exceed four per cent of the sale or purchase price thereof, and such tax shall not be levied at more than one stage; (b) where a tax has been levied under that law in respect of the sale or purchase inside the State of any declared goods and such goods are sold in the course of inter-State trade or commerce, and tax has been paid under this Act in respect of the sale of such goods in the course of inter-State trade or commerce, the tax levied under such law shall be reimbursed to the person making such sale in the course of inter-State trade or commerce, in such manner and subject to such conditions as may be provided in any law in force in that State; (c) where a tax has been levied under that law in respect of the sale or purchase inside the State of any paddy referred to in sub-clause (i) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which stipulated a price for the materials. The property in the materials passed to the owner of the land because they were fixed in pursuance of the contract to build and along with the corpus, which ultimately resulted by the erection of the superstructure, the materials also passed to the owner of the land. It was urged that a contract to build was not a contract to sell goods used in the construction of a building. The High Court of Madras on a consideration of the submissions made before it came to the conclusion that the transactions in question were not contracts for sale of goods as defined under the provisions of the Sale of Goods Act, 1930, which was in force on the date on which the Constitution came into force and therefore the assessees were not liable to pay sales tax on the amounts received by them from the persons for whom they had constructed buildings, etc., during the year of assessment. But a petition filed by the very same assessees for similar relief in the Gannon Dunkerley and Co., Madras (P.) Ltd. v. Sales Tax Officer [1957] 8 STC 347; AIR 1957 Ker 146 was dismissed by the Kerala High Court affirming the imposition of sales tax on the turnover relating to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or whom he had constructed the building could not be taxed under the sales tax law of the State of Hyderabad. A similar question arose before the High Court of Rajasthan in Bhuramal v. State of Rajasthan [1957] 8 STC 463; AIR 1957 Raj 104. The High Court of Rajasthan held that the definition of "dealer" in the Rajasthan Sales Tax Act, 1954 included not only those who sold goods, but also those who supplied goods, whether on commission, or for remuneration or otherwise and the said definition was very wide and included persons like the building contractors who in the course of their business as building contractors supplied goods to those who gave them contracts. Since the said supply was not gratis such building contractors should be held to be dealers within the meaning of that expression in the Rajasthan Sales Tax Act. Ultimately the question whether the cost of the goods supplied by a building contractor in the course of the construction of building could be subjected to payment of sales tax was finally resolved by this Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353; [1959] SCR 379 which was an appeal filed against the decision of the High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en though they involved transfer of property in goods. In New India Sugar Mills Ltd. v. Commissioner of Sales Tax [1963] 14 STC 316; [1963] Supp 2 SCR 459 this Court took the view that in the transfer of controlled commodities in pursuance of a direction under a control order, the element of volition by the seller, or mutual assent, was absent and therefore there was no sale as defined in the Sale of Goods Act, 1930. However, in Oil and Natural Gas Commission v. State of War [1976] 38 STC 435; [1977] 1 SCR 354 this Court had occasion to consider its earlier decisions with regard to the liability of transfers of controlled commodities to be charged to sales tax. This Court held that where there were any statutory compulsions, the statute should be treated as supplying the consensus and furnishing the modality of the consensus. In Vishnu Agencies (P.) Ltd. v. Commercial Tax Officer [1978] 42 STC 31 (SC); [1978] 2 SCR 433 the decision in New India Sugar Mills' case [1963] 14 STC 316 (SC); [1963] Supp 2 SCR 459 was held to be not good law. Even after the decision in Vishnu Agencies' case [1978] 42 STC 31 (SC); [1978] 2 SCR 433 there was a certain area of doubt about the liability of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Constitution. Clause (29-A) of article 366 of the Constitution reads thus: "366. Definitions.-In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say............ (29-A) 'tax on the sale or purchase of goods' includes- (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (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; (c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature referred in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29-A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify." The 46th Amendment also validated laws levying tax and also collection by way of tax under such law subject to the conditions mentioned therein. On the passing of the 46th Amendment the State Governments after making necessary amendments in their laws commenced to levy sales tax on the turnover of the works contracts entered into by the building contractors for constructing houses, factories, bridges, etc. In some States taxable turnover was determined by deducting the money spent on labour engaged in connection with the execution of the works contracts from the amount received by the contractor for the execution of the works contracts. In some other States a certain fixed percentage of the total turnover was deducted from the total turnover as labour charges before arriving at the taxable turnover. Each State adopted its own method of determining taxable turnover either by framing rules under its sales tax law or by issuing adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pressed before us in these cases only two points, namely, (i) that the 46th Amendment is unconstitutional because it has not been ratified by the Legislatures of not less than one-half of the States by resolutions passed to that effect by those Legislatures before the Bill which led to the amendment in question was presented to the President for assent; and (ii) that it was not open to the States to ignore the provisions contained in article 286 of the Constitution and the provisions of the Central Sales Tax Act, 1956, while making assessments under the sales tax laws passed by the Legislatures of the States. By an order made by this Court on 20th of September, 1988, notices were issued to the Attorney-General for India and the Advocates-General for the concerned States. The Attorney-General and some of the Advocates-General appeared before us in response to the notices issued to them and made their submissions. The first contention raised before us regarding the constitutionality of the 46th Amendment need not detain us long. This contention was based on the assumption that the Legislatures of not less than one-half of the States which were in existence during the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Secretary to the President, (Through the Secretary, Ministry of Law)" The Attorney-General has also produced before us the file containing the resolutions passed by the Legislatures of the 12 States referred to in the Memorandum, set out above. We are satisfied that there has been due compliance of the provisions contained in the proviso to article 368(2) of the Constitution. We, therefore, reject the first contention. Before proceeding further, we should observe that there would have been no occasion for an argument of this type being urged in court if at the commencement of the Act it had been stated that the Bill in question had been presented to the President for his assent after it had been duly ratified by the required number of Legislatures of States. We hope that this suggestion will be followed by the Central Secretariat hereafter since we found that even the Attorney-General was not quite sure till the case was taken up for hearing that the Bill which had become the 46th Amendment had been duly ratified by the required number of States. We shall now proceed to consider the other contention of the petitioners and the appellants, namely, that the States were bound to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, on the power of the States to levy tax on the sale of declared goods apply equally and fully to transfer of property in goods under works contracts, even as they apply to ordinary sales. Therefore, if there is a transfer of property in declared goods-for example steel products-in the process of execution of works contract, the State can levy tax only at 4 per cent and only at one stage. It is clear that the entire works contract is not deemed by the 46th Amendment to be a sale. Therefore only the price reasonably allocable to goods transferred under works contracts can be taxed, and not the totality of the consideration paid for the works contract. If goods-for example fuel and power-are used in the process of executing a works contract but are consumed in the process, the property in such goods cannot conceivably be transferred, because the goods themselves cease to exist. Such goods cannot be the subject-matter for the levy of sales tax at all. These in brief are the contentions of the petitioners and the appellants. The above-mentioned contentions of the petitioners and the appellants are met by the States thus. When a works contract is executed property does not pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the construction had suffered tax earlier did not arise. In other words it was urged that the goods involved in a works contract were different from the works contract. It was, however, argued that if any goods had been supplied by the person for whose benefit a building, factory or bridge was being constructed for the purpose of such construction the value of those goods would not be included in the taxable turnover. Before proceeding further it is necessary to understand what sub- clause (b) of clause (29-A) of article 366 of the Constitution means. Article 366 is the definition clause of the Constitution. It says that in the Constitution unless the context otherwise requires, the expressions defined in that article have the meanings respectively assigned to them in that article. The expression "goods" is defined in clause (12) of article 366 of the Constitution as including all materials, commodities and articles. It is true that in the State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353; [1959] SCR 379 this Court held that a works contract was an indivisible contract and the turnover of the goods used in the execution of the works contract could not, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus becomes subject to the same discipline to which any levy under entry 54 of the State List is made subject to under the Constitution. The position is the same when we look at article 286 of the Constitution. Clause (1) of article 286 says that no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place- (a) outside the State! or (b) in the course of the import of the goods into, or export of the goods out of, the territory of India. Here again we have to read the expression "a tax on the sale or purchase of goods" found in article 286 as including the transfer of goods referred to in sub-clause (b) of clause (29-A) of article 366 which is deemed to be a sale of goods and the tax leviable thereon would be subject to the terms of clause (1) of article 286. Similarly, the restrictions mentioned in clause (2) of article 286 of the Constitution which says that Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1) of article 286 would also be attracted to a transfer of goods contemplated under article 366(29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution and the transfers and deliveries that take place under sub-clauses (b), (c) and (d) of clause (29-A) of article 366 of the Constitution are subject to an additional restriction mentioned in sub-clause (b) of article 286(3) of the Constitution. It is useful to refer at this stage to the corresponding law in Australia. In Sydney Hydraulic and General Engineering Co. v. Blackwood & Son 8 NSWSR 10, the Supreme Court of New South Wales held that the works contract entered into between the parties which came up for consideration in that case was one to do certain work and to supply certain materials and not an agreement for the sale or delivery of the goods. Accordingly, no sales tax was payable thereon. In 1932 the legislature intervened and amended the statute of 1930 by introducing a new provision, section 3(4) in the following terms: "For the purpose of this Act, a person shall be deemed to have sold goods, if, in the performance of any contract (not being a contract for the sale of goods) under which he has received, or is entitled to receive, valuable consideration, he supplies goods the property in which (whether as goods or in some other form) passes, under the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y third person and were not of a class of goods manufactured for sale by any person and therefore the price of piles was not liable to payment of sales tax. Latham, C.J., with whom Justice Rich and Justice Starke agreed (Justice McTiernan dissenting) held as under: "Section 3(4) of the Act, referred to in par. f above quoted, was at the relevant time in the following form: 'For the purposes of this Act, a person shall be deemed to have sold goods, if, in the performance of any contract under which he has received or is entitled to receive valuable consideration he supplies goods, the property in which (whether as goods or in some other form) passes under the terms of the contract to some other person.' In my opinion the Commissioner is right in his contention that this provision applies to the present case. The appellant-company, in the performance of a contract for building a bridge under which contract it was entitled to receive and doubtless has received valuable consideration, has supplied goods, namely, reinforced concrete piles. Such piles are plainly manufactured articles. They are chattels. They were intended to be incorporated in a structure and were so incorporated. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orks contract? They cannot do so. When the law creates a legal fiction such fiction should be carried to its logical end. There should not be any hesitation in giving full effect to it. If the power to tax a sale in an ordinary sense is subject to certain conditions and restrictions imposed by the Constitution, the power to tax a transaction which is deemed to be a sale under article 366(29-A) of the Constitution should also be subject to the same restrictions and conditions. Ordinarily unless there is a contract to the contrary in the case of a works contract the property in the goods used in the construction of a building passes to the owner of the land on which the building is constructed, when the goods or materials used are incorporated in the building. The contractor becomes liable to pay the sales tax ordinarily when the goods or materials are so used in the construction of the building and it is not necessary to wait till the final bill is prepared for the entire work. In Hudson's Building Contracts (8th edition) at page 362 it is stated thus: "The well-known rule is that the property in all materials and fittings, once incorporated in or affixed to a building, will pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g fixed to the freehold after the expiration of the term they became the property of the landlord (c). Until, however, the materials are actually built into the work in the absence of some stipulation intended to pass the property in them when delivered on the site, they remain the property of the contractor (d)." In Benjamin's Sale of Goods (3rd edition) in para 43 at page 36 it is stated thus: "Chattel to be affixed to land or another chattel.-Where work is to be done on the land of the employer or on a chattel belonging to him, which involves the use or affixing of materials belonging to the person employed, the contract will ordinarily be one for work and materials, the property in the latter passing to the employer by accession and not under any contract of sale. Sometimes, however, there may instead be a sale of an article with an additional and subsidiary agreement to affix it. The property then passes before the article is affixed, by virtue of the contract of sale itself or an appropriation made under it." In view of the foregoing statements with regard to the passing of the property in goods which are involved in works contract and the legal fiction created by clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before and considered by us relate to one specie of the generic concept of "works contracts". The case-book is full of the illustrations of the infinite variety of the manifestation of "works contracts". Whatever might be the situational differences of individual cases, the constitutional limitations on the taxing-power of 'the State as are applicable to "works contracts" represented by "building contracts" in the context of the expanded concept of "tax on the sale or purchase of goods" as constitutionally defined under article 366(29-A), would equally apply to other species of "works contracts" with the requisite situational modifications. The constitutional amendment in article 366(29-A) read with the relevant taxation-entries has enabled the State to exert its taxing-power in an important area of social and economic life of the community. In exerting this power particularly in relation to transfer of property in goods involved in the execution of "works contracts" in building activity, in so far as it affects the housing-projects of the under-privileged and weaker sections of society, the State might perhaps, be pushing its taxation-power to the peripheries of the social limits ..... X X X X Extracts X X X X X X X X Extracts X X X X
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