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TMI Blog2006 (10) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... ution of India and the scheme of levy and recovery of taxes both at the hands of the nominated sub-contractors, who are registered dealers, remitting taxes as well as the main contractor like the petitioners, is beyond the legislative competence of the State Legislature under Serial No. 54 of List II of the Seventh Schedule to the Constitution of India and the resultant assessment and recovery is violative of Articles 14, 19(1)(g) and 265 of the Constitution of India, and consequently to set aside the order of the third respondent in form VAT 305 dated May 31, 2006, or pass such further or other orders as it may deem fit and proper in the circumstances of the case. 2. The second petitioner, obviously, joined the first petitioner as the first petitioner cannot claim a fundamental right under Article 19(1)(g) of the Constitution of India, in view of the decision of the Supreme Court in Rustom Cavasjee Cooper v. Union of India . The first petitioner-company, inter alia, is engaged in the execution of civil, mechanical and other contracts throughout the territory of India. The first petitioner is a dealer registered under the APVAT Act, 2005 and the CST Act, 1956 on the rolls of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, tax can be collected only once for such taxable event. The objection of the petitioner was not accepted, resulting in the impugned assessment and demand. Hence, the writ petition. 5. Admittedly, the APVAT Act, 2005, is made by the Legislature of Andhra Pradesh in exercise of the authority vested in it by virtue of entry 54 of List II of the Seventh Schedule to the Constitution, which authorises the State to levy tax on the sale or purchase of goods. The scope and amplitude of this entry has been the subject-matter of incessant litigation for the last half a century in this country. 6. Whether the goods utilised by a contractor in the execution of a building contract (one of the categories of the works contracts) could legitimately be made exigible to the sales tax in exercise of the legislative competency under entry 48 of the List II of the Seventh Schedule to the Government of India Act, 1935 (which corresponds to the present entry 54 of the List II of the Seventh Schedule to the Constitution of India), fell for the consideration of the Supreme Court as early as in the year 1958 and a Constitution Bench of the Supreme Court in State of Madras v. Gannon Dunkerley and Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent became a defined expression. 8. Right from the case of Gannon Dunkerley , the States took a stand in law that in a works contract like the construction contract, the property in the materials used therein passes to the employer and the contract could be split up into its component parts. This stand of the State was rejected by the Supreme Court in State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd. (at page 385 of STC), the Supreme Court held that in the absence of any specific agreement between the parties to the contrary in a contract to construct a building, the materials used in execution of such contract would become the property of the other party (employer) to the contract only on the theory of accretion. Another difficulty in the way of accepting the contention of the appellant as to splitting up a building contract is that the property in materials used therein does not pass to the other party to the contract as movable property. It would so pass if that was the agreement between the parties. But if there was no such agreement and the contract was only to construct a building, then the materials used therein would become the property of the other party to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tanding the amendment of the Constitution by way of Sub-article (29A) of Article 366. 12. The principle was reiterated after taking note of the 46th Amendment of the Constitution by another Constitution Bench of the Supreme Court in Builders Association of India v. Union of India [1989] 73 STC 370. The Supreme Court observed at page 400 as follows: 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 entered into in two distinct and separate parts as stated above. It could not have been the contention of the Revenue prior to the 46th Amendment that when the goods and materials had been supplied under a distinct and separate contract by the contractor for the purpose of construction of a building the assessment of sales tax could be made ignoring the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise than by way of utilisation in execution of the works contract. Under the proviso, if the dealer/contractor does not maintain the accounts to enable the State to determine the correct value of the goods at the time of incorporation, such dealers are required to pay tax at the rate of 12.5 per cent on the total consideration of the contract. Section 4(7)(b), (c) and (d) deal basically with dealers who exercise an option to pay tax by way of composition. [The procedure for composition is stipulated under Rule 17(2), (3) and (4) of the Rules made under the Act.] While the abovementioned three Sub-clauses of Section 4(7) deal with those contractors who opt for the payment of tax by way of composition, Sub-clause (b) deals with those contracts entered into between such a dealer on one hand and the Government or a local authority, on the other hand. Sub-clause (c) deals with contracts entered into between such a dealer and persons other than a Government or local authority. Sub-clause (d) specifically deals with the contracts of construction and selling of residential apartments, houses etc. Each one of these Sub-clauses stipulate a specific rate of tax computed at a percentage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (7) of Section 4; 20. In substance, Sub-section (5) denies the benefit of the input tax credit provided under Sub-section (1) to the dealers who are taxable under Sub-section (7) of Section 4 if they happen to opt for payment of tax by way of composition. 21. The questions raised in this writ petition are that: (1) Section 4(7), (2) Section 2(28); Explanation VI; and (3) Rule 17(1)(a), (c), and (e), of the Rules made under the VAT Act; are unconstitutional for the reasons: (i) that they are repugnant to Article 366(29A)(b) and consequently beyond the legislative competency of the State in exercise of the power under entry 54 of List II of the Seventh Schedule; and (ii) violative of Articles 14, 19(1)(g) and 265 of the Constitution of India. 22. A counter-affidavit is filed by the third respondent. The respondents : have identified the issues correctly. Paragraph No. 4 of the counter is as follows: It is submitted that the petitioner precisely raised the following issues in the writ petition for adjudication by this honourable court. (a) Under Article 366, Clause (29A)(b), there is only one transfer, which attracts tax on the deemed sales of goods involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of incorporation, such dealer shall pay tax at the rate of 12.5 per cent on the total consideration received or receivable subject to such deductions as may be prescribed; (b) Any dealer executing any works contracts for the Government or local authority may opt to pay tax by way of composition at the rate of 4 per cent on the total value of the contract executed for the Government or local authority and in such cases, the tax at 4 per cent shall be collected at source by such contractee and remitted to Government in such manner as may be prescribed; (c) Any dealer executing works contracts other than for Government and local authority may opt to pay tax by way of composition at the rate of 4 per cent of fifty per cent (50%) of the total consideration received or receivable for any specific contract subject to such conditions as may be prescribed; (d) Any dealer engaged in construction and selling of residential apartments, houses, buildings or commercial complexes may opt to pay tax by way of composition at the rate of 4 per cent of twenty-five per cent (25%) of the consideration received or receivable or the market value fixed for the purpose of stamp duty whichever is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued by the sub-contractor shall be accounted by him in his returns. 17(2)(j) : In the case of a contractor mentioned in Clause (a), if any part of the contract is awarded to a sub-contractor, the sub-contractor shall be exempt from tax on the value of the sub-contract. The subcontractor shall not be eligible to claim input tax credit on the inputs used in the execution of such sub-contract; 17(3)(g) : Where the contractor VAT dealer awards any portion of his contract to a sub-contractor, such contractor shall not be eligible for any deduction relating to the value of the sub-contract. The subcontractor if he is a VAT dealer, in such a case may either opt for composition under Clause (c) of Sub-section (7) of Section 4, or pay tax under Clause (a) of Sub-section (7) of Section 4. 17(4)(g) : Where the contractor VAT dealer specified in Clause (f) above, awards any portion of his contract to a sub-contractor, such contractor shall not be eligible for any deduction relating to the value of the sub-contract. The sub-contractor if he is a VAT dealer, in such a case may either opt for composition under Clause (d) of Sub-section (7) of Section 4, or pay tax under Clause (a) of Sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for carrying out for cash or for deferred payment or for any other valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, laying, fitting out, improvement, modification, repair or commissioning of any movable or immovable property; 35. It can be seen from the definition that essentially a works contract is an agreement between two parties for carrying out any one or some of the various activities enumerated in the definition, like construction of a building etc., for a valuable consideration. By definition, it pre-supposes the existence of an agreement. The expression "agreement" though not defined under the VAT Act, in the realm of the law of contract is understood as defined under the Indian Contracts Act, 1872 as a set of promises forming the consideration for each other. Therefore, in a works contract, the contractor promises to carry out some obligations like the construction of a building, fabrication of machinery, etc., in consideration of the employer promising to pay a certain amount either in cash or in the form of some other valuable consideration. 36. Similarly, when the contractor awards either wholly or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods. Unless all these elements are present, there can be no sale. Thus, if merely title to the goods passes but not as a result of any contract between the parties, express or implied, there is no sale...". The Supreme Court came to the conclusion in the said case that in a transaction of a works contract like a construction contract in the absence of a specific agreement to the contrary, unless the property in goods used in the execution of a contract passes to the employer, there is no sale of goods and consequently there is no taxable event falling within the ambit of entry 54 of List II of the Seventh Schedule to the Constitution. Parliament defined the expression "tax on sale or purchase of goods" by introducing Sub-article (29A) of Article 366 and created a legal fiction that the transfer of property in goods involved in the execution of works contract shall be deemed to be sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elivery or supply and correspondingly a purchase in the hands of the person receiving the goods. Without going into the details of the historical background which necessitated the incorporation of the various clauses, it is sufficient to mention that each of those clauses was intended to get over some decision of the Supreme Court or the other which declared those various transactions (now sought to be covered under these various clauses) to be not involving the transaction of sale of goods for the purpose of entry 54 of the List II of the Seventh Schedule. 42. For the purpose of the present case, the relevant clause under Sub-article (29A) is Clause (b). The said clause obviously was intended to remove the basis of the decisions of the Supreme Court commencing with Gannon Dunkerley [1958] 9 STC 353 : AIR 1958 SC 560. 43. In view of the amendment, the transfer of property in goods utilised in execution of a works contract though did not amount to sale of such goods prior to the introduction of Sub-article (29A), it does amount to sale of goods in view of the legal fiction newly created and consequently is a taxable event within the ambit of entry 54 of List II. 44. In a trans ..... X X X X Extracts X X X X X X X X Extracts X X X X
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