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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 ..... icle 286 of the Constitution. We, however, make it clear that the cases argued 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. Thus civil appeals filed against the orders of the High Courts, however, shall be placed before the appropriate Bench hearing tax matters to decide the other questions raised in them including the validity of any statutory provision or rule in the light of this judgment. - Civil Appeal No. 2122-2163 of 1989, - - - Dated:- 31-3-1989 - VENKATACHALIAH M.N. AND OJHA N.D. JJ. Writ Petition (Civil) No. 1060 of 1987, Writ Petition (Civil) No. 1355, Writ Petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vil) No. 435, Writ Petition (Civil) No. 111, Writ Petition (Civil) No. 335 of 1988, Writ Petition (Civil) No. 1563, Writ Petition (Civil) No. 1502 of 1987, Writ Petition (Civil) No. 853, Writ Petition (Civil) No. 877, Writ Petition (Civil) No. 38, Writ Petition (Civil) No. 150, Writ Petition (Civil) No. 222, Writ Petition (Civil) No. 313, Writ Petition (Civil) No. 314, Writ Petition (Civil) No. 349, Writ Petition (Civil) No. 374, Writ Petition (Civil) No. 564, Writ Petition (Civil) No. 993, Writ Petition (Civil) No. 1013 of 1988, Writ Petition (Civil) No. 942, Writ Petition (Civil) No. 90, Writ Petition (Civil) No. 671, Writ Petition (Civil) No. 1029, Writ Petition (Civil) No. 862, Writ Petition (Civil) No. 135, Writ Petition (Civil) No. 578, Writ Petition (Civil) No. 801 of 1988, Writ Petition (Civil) No. 469, Writ Petition (Civil) No. 1696 of 1987, Writ Petition (Civil) No. 935, Writ Petition (Civil) No. 556, Writ Petition (Civil) No. 1049, Writ Petition (Civil) No. 371, Writ Petition (Civil) No. 1206, Writ Petition (Civil) No. 1228, Writ Petition (Civil) No. 10, Writ Petition (Civil) No. 300, Writ Petition (Civil) No. 329 of 1988, Writ Petition (Civil) No. 106, Writ Petition (Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orty-sixth Amendment) Act, 1982 (hereinafter referred to as "the 46th Amendment") by which the Legislatures of the States were empowered to levy sales tax on certain transactions described in sub-clauses (a) to (f) of clause (29-A) of article 366 of the Constitution and the second question is whether the power of the State Legislature to levy tax on the transfer of property in goods involved in the execution of works contracts referred to in sub- clause (b) of clause (29-A) of article 366 of the Constitution is subject to the restrictions and conditions contained in article 286 of the Constitution. An account of the history of the relevant constitutional and statutory provisions and of judicial decisions having a bearing on the said provisions has to be set out at this stage to appreciate the contentions of the parties. Prior to the commencement of the Constitution of India the power to levy sales tax had been conferred on the Provincial Legislatures by entry 48 of the List II of the Seventh Schedule to the Government of India Act, 1935 which read as "taxes on the sale of goods and on advertisements". In exercise of the said power some of the Provincial Legislatures had passed la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this kind of chaos ought not to be allowed and that while the Provinces may be free to levy the sales tax there ought to be some regulations whereby the sales tax levied by the Provinces would be confined within the legitimate limits which are intended to be covered by the sales tax. It is, therefore, felt that there ought to be some specific provisions laying down certain limitations on the power of the Provinces to levy sales tax. The first thing that I would like to point out to the House is that there are certain provisions in this article 264-A which are merely re- productions of the different parts of the Constitution. For instance, in sub-clause (1) of article 264-A as proposed by me, sub-clause (b) is merely a reproduction of the article contained in the Constitution, the entry in the Legislative List that taxation of imports and exports shall be the exclusive province of the Central Government. Consequently so far as sub-clause (1)(b) is concerned there cannot be any dispute that this is in any sense an invasion of the right of Provinces to levy sales tax. Similarly, sub-clause (2) is merely a reproduction of Part XA which we recently passed dealing with provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. Explanation .-For the purposes of sub-clause (a), a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State. (2) Except in so far as Parliament may by law otherwise provide, no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter-State trade or commerce: Provided that the President may by order direct that any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of this Constitution shall, notwithstanding that the imposition of such tax is contrary to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the State of Bombay exceeded Rs. 5,000 during the prescribed period. The term "sale" was defined as meaning any transfer of property in goods for cash or deferred payment or other valuable consideration, and an explanation to this definition provided that the sale of any goods which have actually been delivered in the State of Bombay as a direct result of such sale for the purpose of consumption in the said State shall be deemed, for the purposes of the Act, to have taken place in the said State irrespective of the fact that the property in the goods has, by reason of such sale, passed in another State. Rules 5 and 6 of the Bombay Sales Tax Rules, 1952, which were brought into force on the same day on which sections 5 and 10 of the Bombay Sales Tax Act came into force provided for the deduction of the following sales in calculating the taxable turnover, viz., sales which took place (a) in the course of the import of the goods into, or the export of the goods out of, the territory of India, and (b) in the course of inter-State trade or commerce [being the two kinds of sales referred to clauses (1)(b) and (2) respectively of article 286 of the Constitution]. Rule 5(2)(i), how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Taxation Enquiry Commission as regards the amendment of the constitutional provisions relating to sales tax, Parliament passed the Constitution (Sixth Amendment) Act, 1956, which received the assent of the President on 11th September, 1956. By the said amendment the Constitution was amended in the following way. In List I of the Seventh Schedule to the Constitution entry 92-A was added. It reads as follows: "92-A. Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter- State trade or commerce." In List II existing entry 54 was substituted by the following entry: "54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92-A of List I." Article 269 of the Constitution which enumerated the taxes that were to be levied and collected by the Government of India but were to be assigned to the States was amended by adding sub-clause (g) to clause (1) and clause (3) to it. After such amendment article 269 read thus: "269. (1) The following duties and taxes shall be levied and collected by the Government of India but shall be assigned to the States in the manner pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny of the ways mentioned in clause (1). (3) Any law of a State shall, in so far as it imposes, or authorises the imposition of, a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce, 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." Pursuant to the power conferred on it Parliament enacted the Central Sales Tax Act, 1956, which received the assent of the President on 21st December, 1956. The said Act was passed to formulate principles for determining when a sale or purchase of goods took place in the course of inter-State trade or commerce or outside a State or in the course of import into or export from India, to provide for the levy, collection and distribution of taxes on sales of goods in the course of inter-State trade or commerce and to declare certain goods to be of special importance in inter-State trade or commerce and specify the restrictions and conditions to which State laws imposing taxes on the sale or purchase of such goods of special importance shall be subject. Section 3 of the Central S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... versy had arisen before some of the High Courts about the liability of contractors who had undertaken to carry out works contracts to pay sales tax on the transfer of property in the goods involved in works contracts. In Gannon Dunkerley Co. (Madras) Ltd. v. State of Madras [1954] 5 STC 216 (Mad.); AIR 1954 Mad. 1130, the assessees were carrying on business as engineers and contractors. Their business consisted mainly of execution of contracts for constructions of buildings, bridges, dams, roads and structural contracts of all kinds. During the assessment year the return made by the assessees showed as many as 47 contracts, most of which were building contracts, which were executed by the assessees. From the total of the amount which the assessees received in respect of sanitary contracts and other contracts 20 per cent and 30 per cent respectively were deducted for labour and the balance was taken as the turnover of the assessees for the assessment year in question. Sales tax was levied on the said balance treating it as taxable turnover under the Madras General Sales Tax Act, 1939. The assessees questioned the levy of sales tax on the said amount treated as taxable turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure to levy sales tax on the supply of building materials for execution of building contracts came up for consideration before the Nagpur High Court in Pandit Banarsi Das v. State of Madhya Pradesh [1955] 6 STC 93. The assessees in the said case were Madhya Pradesh Contractors' Association and the Jabalpur Contractors' Association. They instituted a petition before the Nagpur High Court through their President and Secretary questioning the power of the State Legislature to levy sales tax on the turnover consisting of the amounts received by the building contractors from the persons for whom they had constructed buildings by supplying the required materials. They relied upon the decision of the High Court of Madras in Gannon Dunkerley's case [1954] 5 STC 216; AIR 1954 Mad. 1130. The Nagpur High Court while declining to follow the decision of the High Court of Madras was of opinion that the State Legislature could pick out a sale from the composite transaction of a building contract which included transfer of property in materials and could make the portion attributable to the cost of such materials subject to payment of sales tax in exercise of its undoubted and plenary powers. Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in the agreement and in consideration therefor received payment as provided therein, there was neither a contract to sell the materials used in the construction nor the property passed therein as movables. This Court further held that the expression "sale of goods" was at the time when the Government of India Act, 1935, was enacted, a term of well-recognised legal import in the general law relating to sale of goods and in the legislative practice relating to that topic and should be interpreted in entry 48 in List II in Schedule VII of the Government of India Act, 1935, as having the same meaning as in the Sale of Goods Act, 1930. This Court further held that in a building contract which was one, entire and indivisible, there was no sale of goods and it was not within the competence of the Provincial Legislature under entry 48 in List II in Schedule VII of the Government of India Act, 1935, to impose a tax on the supply of the materials used in such a contract treating it as a sale. The above decision though it was rendered on the basis of the provisions in the Government of India Act, 1935, is equally applicable to the provisions found in entry 54 of List II of the Seventh Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, as to the large scale avoidance of Central sales tax leviable on inter-State sales of goods through the device of consignment of goods from one State to another. In Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi [1978] 42 STC 386; [1979] 1 SCR 557 this Court held that there was no sale when food and drink were supplied to guests residing in the hotel and that supply of meals was essentially in the nature of a service provided to the guests and could not be identified as a transaction of sale. This Court declined to accept the position that the Revenue was entitled to split up the transaction into two parts, one of service and the other of sale of foodstuffs and accordingly the proprietor of a restaurant who provided many services in addition to the supply of food was not liable to pay sales tax on the value of the goods supplied by him. The various problems which arose on account of the above decisions were referred to the Law Commission of India and its advice was sought as to the manner in which the types of transactions involved in the above decisions could be made exigible to sales tax. The Law Commission considered these matters in its 61st Report and rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chedule to the Constitution as entry 92-B to enable the levy of tax on the consignment of goods where such consignment took place in the course of inter-State trade or commerce: "92-B. Taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce." Clause (1) of article 269 was amended by adding sub-clause (h) thereto. Clause (3) of that article was amended to enable Parliament to formulate by law principles for determining when a consignment of goods took place in the course of inter-State trade or commerce. After the amendment the relevant portion of article 269 of the Constitution reads thus: "269. Taxes levied and collected by the Union but assigned to the States.- (1) The following duties and taxes shall be levied and collected by the Government of India but shall be assigned to the States in the manner provided in clause (2), namely: ............ (h) taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he building contractors not merely on the value of materials supplied by them in connection with the works contracts but also on the expenditure they had incurred in securing the services of architects and engineers who had supervised the execution of the works and also on the amount which they were entitled to receive for supervising the execution of the works. While levying sales tax on the price of the materials supplied for the construction of houses, factories, bridges, etc., the sales tax authorities of the States did not take into account the conditions and restrictions imposed by article 286 of the Constitution and the provisions of the Central Sales Tax Act, 1956. The assessing authorities did not make any attempt to ascertain whether the sales of the goods involved in execution of works contract had taken place in favour of the person who had assigned the contract outside the State in which the works contract was being executed or whether any part of the goods so used in a works contract had been imported from abroad on account of the person who had assigned the contract or whether any part of the goods, such as, iron and steel, etc., which were declared goods, had alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions referred to in sub-clauses (a) to (f) of clause (29-A) of article 366 of the Constitution which they could not have done before the 46th Amendment. It was contended that irrespective of the fact whether the amendment of an entry in any of the lists of the Seventh Schedule to the Constitution had the effect of either curtailing or enlarging the powers of Parliament or the Legislatures of States, a Bill making provision for such amendment had to be ratified by the Legislatures of not less than one-half of the States by resolutions passed to that effect before such a Bill was presented to the President for assent in view of the express provisions contained in clause (c) of the proviso to article 368(2) of the Constitution. At the hearing of the above case the learned Attorney-General for India produced before us the Memorandum dated the 31st January, 1982, signed by the Secretary-General of the Rajya Sabha which reads thus: "RAJYA SABHA SECRETARIAT PARLIAMENT HOUSE, NEW DELHI. No. RS. 1/21/81-B Dated the 31st January, 1982 MEMORANDUM In pursuance of article 368 of the Constitution of India, the assent copy of the Constitution (Forty-sixth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods involved in the execution of a works contract which was held by this Court in the State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353; [1959] SCR 379 to be not a sale is deemed by a fiction of law to be a sale and is made taxable as such. In no other respect does the 46th Amendment enlarge the power of the States to levy sales tax. Articles 269, 286, 366(29-A), entry 92-A in List I of the Seventh Schedule and entry 54 in List II of the Seventh Schedule to the Constitution should be read together. Reading the above provisions together the position which emerges may be summed up as follows: The 46th Amendment has no bearing on the location of the sale. It does not deem an outside sale to be an inside sale. It does not confer on the States the power to tax sales outside the State. Therefore, if in the process of executing a works contract, a transfer of property in the goods takes place outside the State, the State would have no power to levy sales tax on such a transfer. The 46th Amendment does not deem an inter- State sale to be an intra-State sale. It does not confer on the State the power to tax inter-State sales. Therefore, if in the process of executing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act for sale of goods and a contract for work and labour only. When a house or a factory or a bridge constructed by a building contractor is handed over to the person who had assigned the contract, what is handed over is a conglomerate of all the goods used in the construction of the building which was different from the specific goods used in the construction. Sub-clause (b) of clause (29-A) of article 366 of the Constitution has conferred on the Legislatures of States the power to levy tax on works contract which is independent of the power conferred on the Legislatures of States under entry 54 of the State List. It is thus argued that it was not possible to break-up the house, factory or bridge, etc., which is constructed by a building contractor into individual items of goods and to tax the transfer of property in each of them in accordance with the provisions contained in article 286 of the Constitution and the Central Sales Tax Act, 1956. It was further urged that in the case of a works contract there could not be a sale of goods which had taken place outside the State in which the work was executed, there could not be any sale of the goods in the course of import into Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase of goods included a tax on the amount paid for the execution of a works contract. It refers to 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 emphasis is on the transfer of property in goods (whether as goods or in some other form). The latter part of clause (29-A) of article 366 of the Constitution makes the position very clear. While referring to the transfer, delivery or supply of any goods that takes place as per sub-clauses (a) to (f) of clause (29-A), the latter part of clause (29-A) says that "such transfer, delivery or supply of any goods" shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. Hence, a transfer of property in goods under sub-clause (b) of clause (29-A) is deemed to be a sale of the goods involved in the execution of works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. The object of the new definition introduced in clause (29-A) of article 366 of the Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply or delivery of goods which are deemed to be sales under clause (29-A) of article 366 of the Constitution. If any declared goods which are referred to in section 14 of the Central Sales Tax Act, 1956 are involved in such transfer, supply or delivery, which is referred to in clause (29-A) of article 366, the sales tax law of a State which provides for levy of sales tax thereon will have to comply with the restrictions mentioned in section 15 of the Central Sales Tax Act, 1956. Clause (b) is an additional provision which empowers Parliament to impose any additional restrictions or conditions in regard to the levy of sales tax on transactions which will be deemed to be sales under sub- clause (b) or sub-clause (c) or sub-clause (d) of clause (29-A) of article 366 of the Constitution. We do not find much substance in the contention urged on behalf of the States that since sub-clause (b) of clause (3) of article 286 of the Constitution refers only to the transactions referred to in sub-clauses (b), (c) and (d) of clause (29-A) of article 366, the transactions referred to under those three sub-clauses would not be subject to any other restrictions set out in clause (1) or clause (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd goods for use in contracts undertaken, manufactured items of plants for its own use. In the years 1934 and 1935, M.R. Hornibrook (Pty.) Ltd. constructed under contract for Hornibrook Highway Ltd. at a price set out in the contract, the Hornibrook Highway connecting Sandgate and Redcliffe, Queensland. Part of the highway consisted of a bridge of 1 miles in length over an arm of Moreton Bay. The bridge was built on reinforced concrete piles, which were driven into the bed of the sea in series of three in line, each set of three being connected by a headstock of reinforced concrete. The piles varied in length depending upon the depth to which they had to be driven into the bed of the sea. They were made of a mixture of cement, crushed metal, sand and water, and reinforced with steel bars. The piles were constructed on the bank of Moreton Bay adjacent to the site of the bridge. The headstock was built in the same manner as the piles. So far as was known, concrete piles of the class used in the construction of the bridge were not manufactured for sale anywhere in Australia, nor were they an article of commerce in Australia or anywhere else in the world. Such piles had not been stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 3(4) of the Australian Act. Even after the decision of this Court in the State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353; [1959] SCR 379 it was quite possible that where a contract entered into in connection with the construction of a building consisted of two parts, namely, one part relating to the sale of materials used in the construction of the building by the contractor to the person who had assigned the contract and another part dealing with the supply of labour and services, sales tax was leviable on the goods which were agreed to be sold under the first part. But sales tax could not be levied when the contract in question was a single and indivisible works contract. After the 46th Amendment the works contract which was an indivisible one is by a legal fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labour and services. After the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The builder has no right to detach them from the soil or building, even though the building owner may himself be entitled to sever them as against some other person-e.g., as tenant's fixtures. Nor can the builder reclaim them if they have been subsequently severed from the soil by the building owner or anyone else. The principle was shortly and clearly stated by Blackburn, J., in Appleby v. Myers [1867] LR 2 CP 651 at p. 659: 'Materials worked by one into the property of another become part of that property. This is equally true, whether it be fixed or movable property. Bricks built into a wall become part of the house; thread stitched into a coat which is under repair, or planks and nails and pitch worked into a ship under repair, become part of the coat or the ship.'" In Emden and Watson-Building Contracts and Practice (6th edition) (pages 229-230) it is stated thus: "A. VESTING OF PROPERTY IN MATERIALS 1.. By affixing materials, etc., to the freehold. Vesting of materials when built into the work. As soon as materials of any description are built into a building or other erection they cease to be the property of the contractor and become that of the freeholder (a). I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred in a works contract is the right in the immovable property. We are surprised at the attitude of the States which have put forward the plea that on the passing of the 46th Amendment the Constitution had conferred on the States a larger freedom than what they had before in regard to their power to levy sales tax under entry 54 of the State List. The 46th Amendment does no more than making it possible 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. We do not accept the argument that sub-clause (b) of article 366(29-A) should be read as being equivalent to a separate entry in List II of the Seventh Schedule to the Constitution enabling the States to levy tax on sales and purchases independent of entry 54 thereof. As the Constitution exists today the power of the States to levy taxes on sales and purchases of goods including the "deemed" sales and purchases of goods under clause (29-A) of article 366 is to be found only in entry 54 and not outside it. We may recapitulate here the observations of the Constitution Bench in the case of Bengal Immunity Co. Ltd. [1955] 6 STC 446; [1955 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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