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TMI Blog2013 (9) TMI 853X X X X Extracts X X X X X X X X Extracts X X X X ..... t be said that the characteristics of works contract are not involved in that transaction. When the transaction involves the activity of construction, the factors such as, flat purchaser has no control over the type and standard of the material to be used in the construction of building or he does not get any right to monitor or supervise the construction activity or he has no say in the designing or lay-out of the building, in our view, are not of much significance and in any case these factors do not detract the contract being works contract insofar as construction part is concerned. In a contract to build a flat there will necessarily be a sale of goods element. Works contracts also include building contracts and therefore without any fear of contradiction it can be stated that building contracts are species of the works contract. For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled, there must be a works contract, the goods should have been involved in the execution of a works contract and the property in those goods must be transferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEN & TOUBRO LIMITED & ANR. VERSUS STATE OF KARNATAKA & ANR. [2008 (8) TMI 28 - SUPREME COURT OF INDIA] – Decided against assesse. - Civil Appeal No. 8672 of 2013 (Arising out of SLP(C) No.17741 of 2007), Civil Appeal Nos. 8673-8684 of 2013 (Arising out of SLP(C) Nos. 30581-30592 of 2009) Civil Appeal No. 8685 of 2013 (Arising out of SLP(C) No.17709 of 2012), Civil Appeal No. 868 - - - Dated:- 26-9-2013 - R. M. Lodha, J. Chelameswar And Madan B. Lokur,JJ. JUDGMENT R. M. Lodha, J. Leave granted in all these special leave petitions. 2. Does the two-Judge Bench decision of this Court in Raheja Development K. Raheja Development Corporation v. State of Karnataka; (2005) 5 SCC 162 lay down the correct legal position? It is to consider this question that in Larsen and Toubro M/s. Larsen Toubro Limited Anr. v. State of Karnataka Anr.; SLP(C) No. 17741 of 2007 a two-Judge Bench of this Court has referred the matter for consideration by the larger Bench. In the referral order dated 19.8.2008, the two-Judge Bench after noticing the relevant provisions of the Karnataka Sales Tax Act, 1957 and the distinction between a contract of sale and a works contract made the refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals are concerned, it is appropriate that we take the facts from the leading case being Larsen and Toubro M/s. Larsen Toubro Limited Anr. v. State of Karnataka Anr.; SLP(C) No. 17741 of 2007. The ECC division of Larsen and Toubro (for short, L T ) is engaged in property development along with the owners of vacant sites. On 19.10.1995, L T entered into a development agreement with Dinesh Ranka, owner of the land bearing survey numbers 90/1, 91, 92 (Part), 94, 95 and 96/1 (Part) together measuring 34 acres all situated at Kothanur Village, Begur Hobli, Bangalore South Taluk, Bangalore, for construction of a multi-storeyed apartment complex. The owner was to contribute his land and L T was to construct the apartment complex. After development, 25% of the total space was to belong to the owner and 75% to L T. A power of attorney was executed by the owner of the land in favour of L T to enable it to negotiate and book orders from the prospective purchasers for allotment of built up area. Accordingly, L T entered into agreements of sale with intended purchasers. The agreements provided that on completion of the construction, the apartments would be handed over to the purchaser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tices raising a total demand of ₹ 3,99,28,636/-. 10. Initially, L T preferred a writ petition before this Court challenging the above demands but that writ petition was withdrawn and a writ petition under Article 226 of the Constitution of India was filed before the Karnataka High Court. 11. The Single Judge of the Karnataka High Court noted that the controversy raised by the L T was covered by the decision of this Court in Raheja Development K. Raheja Development Corporation v. State of Karnataka; (2005) 5 SCC 162 and, accordingly, dismissed the writ petition on 10.07.2007 by observing as follows:- From the aforesaid observations of the Apex Court it is very much clear that as the petitioner No. 1 had entered into an agreement to carry out construction activity on behalf of someone else for cash or for deferred payment or for any other valuable construction, it would be carrying out works contract and therefore would become liable to pay turnover tax on the transfer involved in such work contracts. It is also not in dispute in this matter that the agreement of sale is entered into between the first petitioner and the buyers of the flat even prior to completion of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract; (b) the provisions of MOFA recognise an interest of the purchaser of the apartment, not only in respect of the apartment which forms the subject matter of the purchase, but also an undivided interest, described as a percentage in the common areas and facilities; (c) the amendment to Section 2(24) clarifies the legislative intent that a transfer of property in goods involved in the execution of works contract including an agreement for building and construction of immovable property would fall within the description of a sale of goods within the meaning of that provision and it brings within the ambit of that expression transactions of that nature which are referable to Article 366 (29-A)(b); (d) by amended definition of the expression sale in clause (b)(ii) of the explanation to Section 2(24), the transactions which involve works contract have been covered; (e) the amendment in Section 2(24) does not transgress the boundary set out in Article 366(29-A); (f) Rule 58(1A) of the MVAT Rules provides that in the case of construction contracts where the immovable property, land or as the case may be, interest therein is to be conveyed and the property involved in the executi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this would be outside Entry 54 List II of the Seventh Schedule of the Constitution for the reason that works contract as understood in Gannon Dunkerley-I State of Madras v. Gannon Dunkerley and Co.; (1959) SCR 379 has not in any manner been upset by the constitutional amendment and would have to mean works contract as commonly understood. 19. Criticizing the conclusions drawn in paragraph 20 of the judgment in Raheja Development K. Raheja Development Corporation v. State of Karnataka; (2005) 5 SCC 162 , it is argued by Mr. Rohinton F. Nariman that these conclusions are incorrect for, (a) the well known tests to determine as to whether a particular contract is a works contract or contract of sale have not been adverted to; (b) the contract is not read as a whole. Its substance and the main object has not been looked at and one phrase is torn out of context without adverting to any other part of the contract and based on this reasoning the contract is said to be a works contract; (c) though it is noticed that construction/development is to be on payment of a price in various installments but does not draw any conclusion from it; (d) it is noticed that developer has a lien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstance of the agreement is to sell and convey fraction of the land together with a fully constructed flat only when all installments have been fully paid. The work undertaken is for the joint development of the project as a whole, i.e., work is undertaken by the developer for himself and for the owner. The construction is not carried out for and on behalf of the purchaser, but it is carried out entirely by the owner/developer in order to exploit or get the best price for the land and the structure built thereon from various flat purchasers. The flat is to be sold as a flat and not an aggregate of its component parts. No work is carried out for the purchaser who gets title to the property only after all work is complete. Learned senior counsel argued that the ultimate test would be: if a suit for specific performance is filed by the flat purchaser against the owner/developer, such suit would invariably be for the conveyance of title and not for the construction of a building. Conversely a suit by an owner/developer against the flat purchaser would be for payment of consideration of a flat/fractional interest in the land. Such suit would never be for payment of work done at the behe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and others; (1989) 2 SCC 645 is relied upon. It is contended that an agreement to sell entered into between the promoter and purchaser continues to remain an agreement to sell and the provisions of MOFA does not change the nature of such agreement. Reference is made to the decision of this Court in Nahalchand Laloochand Nahalchand Laloochand Private Limited v. Panchali Cooperative Housing Society Limited; (2010) 9 SCC 536. 25. And fourthly, that if State s submissions are accepted, Article 366 (29-A)(b) has to be read as a tax on the transfer of property (whether as goods or in some other form) involving works which will not only distort the amendment but will render the words in goods redundant. Article 366 (29-A)(b) does not provide for such an interpretation. The phrase in some other form takes its colour from the preceding words namely, transfer of property in goods and whether as goods . The said phrase in some other form cannot and would not mean the transfer of an indivisible immovable property as a whole. Reliance is placed on the decision of this Court in Purshottam Premji Commissioner of Sales Tax, M.P. v. Purshottam Premji; [1970] 26 S.T.C. 38 to different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esigning and lay-out of the building to be constructed. The flat purchaser does not have any control over the type and standard of the material to be used in the construction of the building. He does not get any right to monitor or supervise the construction activity; (iv) the ownership in the material used in the construction remains with the promoter/developer and the said ownership passes to the flat purchaser only on the eventual conveyance of the flat; (v) the accretion to the goods happens in the hands of the promoter/developer and not when the flat is conveyed to the flat purchaser; and (vi) the construction linked payment schedule is nothing but a method of payment in installments. 27. It is the submission of Dr. Abhishek Manu Singhvi that Article 366(29-A)(b) by a deeming fiction only deems the transfer of property in goods in execution of a works contract as a sale but the said amendment does not contemplate a deemed transfer of goods which actually does not happen at the time of execution of the contract. The provisions of MOFA do not change the character of the transaction entered into between the promoter/developer and the flat purchaser from that of a pure sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue addition made to the goods transferred after the agreement is entered into with the flat purchaser can be made chargeable under MVAT Act. VAT cannot be charged on the entire sale price as described in the agreement entered into between developer and flat purchaser as sought to be done under the composition scheme. Secondly, it is submitted that assuming that the agreement entered into between the developer and the flat purchaser has two components, namely, a works contract and sale of proportionate share in the land then the stamp duty on such transaction should be levied under Article 25 (stamp duty for conveyance) only on the component sale of proportionate share in the land and the stamp duty on the value of construction carried out ought to be charged under Article 63 (stamp duty for works contract). 31. Mr. N. Venkatraman, learned senior counsel for Builders Association while highlighting the background in which clause (29-A) came to be inserted in Article 366 and drawing distinction between a conventional sale and a works contract submits that transfer is imminent and indispensable requirement in both but in the case of a conventional sale, property in goods gets tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... execution of a works contract. In the case of a building contract on land, the contractor must be carrying out the building activity for consideration which obviously means that he should be receiving consideration from the person who has engaged him as contractor. The provision does not cover an owner or developer of land who is constructing a building for the purpose of ultimately selling the flats therein to purchasers. Such owner or developer does not receive any consideration from anyone for carrying out of the building activity; what he receives is simply the sale price of the flats from the purchasers. According to Mr. Vinod Bobde, the provisions so read would not transgress Article 366 (29-A) but if it is read as was done in Raheja Development (2005) 5 SCC 162, it would be unconstitutional. 35. It is argued by Mr. Vinod Bobde that an agreement of sale whether simplicitor or in Form V under the MOFA is not a works contract . It only settles terms for the sale of property and the sale ultimately takes place in pursuance thereof unless the contract is terminated. The works component and goods component are totally absent in the agreement. There is no question of taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel also submits that if Section 2(24) explanation b(ii) of the MVAT Act is read in the manner suggested by this Court in Raheja Development1, such provision is rendered unconstitutional. As regards Rule 58(1) and Rule 58 (1-A), the submission of the learned counsel is that these Rules suffer from various infirmities and are unable to carry out the objectives of MVAT Act. 39. In the counter arguments advanced on behalf of the two States Karnataka and Maharashtra - Raheja Development (2005) 5 SCC 162 has been stoutly defended. Mr. K.N. Bhat, learned senior counsel for Karnataka submits that view taken in Raheja Development (2005) 5 SCC 162 is correct and needs no reconsideration both on merits as well as on the basis of binding precedents on the principles governing reconsideration of an earlier decision. He submits that Article 366(29-A) uses the phraseology employed in Entry 54 of List II that reads, taxes on sale or purchase of goods . For the purpose of Entry 54 List II, taxes on the sale or purchase of goods includes tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract . Transfer of property i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kerley-II M/s. Gannon Dunkerley Co. and others v. State of Rajasthan and Others; [(1993) 1 SCC 364]. So construed works contract simply means a construction activity. If the building is retained by the builder himself, there is no deemed sale. 42. Mr.K.N. Bhat, however, submits that the statement of law in Raheja Development (2005) 5 SCC 162 that when a completed building is sold, there is no works contract and, therefore, no liability to tax, may not be correct statement of law. If the building was intended for sale and is in fact sold, tax is attracted to the deemed sale. Even in such cases, goods used in the construction are deemed to have been sold by the builder (dealer) to the purchaser. 43. It also urged by Mr. K.N. Bhat that in the referral order, the Bench has entertained certain doubts in respect of the decision of this Court in Raheja Development (2005) 5 SCC 162 . However, such doubts that a better view was possible is not good enough to reconsider the decision. Relying upon decisions of this Court in Gannon Dunkerley-II [(1993) 1 SCC 364] and the earlier decision in Keshav Mills[AIR 1965 SC 1636], he submits that while recommending reconsideration of an earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being works contract. It is possible that there could be a works contract coupled with the sale of immovable property. The transaction does not cease to be a works contract merely because it may include other obligations. 46. Learned Advocate General argues that even in the case of a works contract, the ownership of the goods need not pass only by way of accretion or accession to the owner of the immovable property to which they are affixed or upon which the building is built; property can pass under the terms of a contract or by statute. He submits that the tests laid down in judgments prior to Forty-sixth Constitutional Amendment for determining whether a contract is a works contract or a sale of goods are no longer applicable. There is no question of ascertaining the dominant intention of the contract now since the sale of goods element is a deemed sale under Article 366(29-A)(b) and can be taxed separately. Hindustan Shipyard [(2000) 6 SCC 579] was distinguished and it was submitted that in Associated Cement [(2001) 4 SCC 593] a three- Judge Bench of this Court has overruled the decision in Rainbow Colour Lab [(2000) 2 SCC 385] and it has been expressly noted that cases such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vocate General submits that Section 2(24) explanation b(ii) of MVAT Act has been rightly held to be constitutional as the provisions in the MVAT Act offer diverse options for valuation of the sale of goods element in a works contract. Each of these options is consistent with the methods approved of by this Court in Gannon Dunkerley-II[(1993) 1 SCC 364]. 50. As regards challenge to the constitutional validity of Rule 58A and Rule 58(1A), it is submitted by learned Advocate General that these provisions are consistent with the principles laid down in Gannon Dunkerley-II[(1993) 1 SCC 364]. The measure of tax is not determinative of its essential character or of the competence of the legislature. He sought to dispel the impression that Rule 58(1A) may result in double taxation. Distinguishing the decision of this Court in Larsen Toubro-II [(2008) 9 SCC 191], learned Advocate General submits that the observations made in para 19 does not apply to Maharashtra inasmuch as Section 45(4) of the MVAT Act ensures that it is either the builder or the sub-contractor who pays the tax (being treated as one and jointly/severally liable). In any case all claims of alleged double taxation will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it it had constructed buildings. The Madras High Court concluded 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 assessee was not liable to pay sales tax on the amounts received by it from the persons for whom it had constructed buildings during the year of assessment. It is from this judgment that the matter reached this Court. The Constitution Bench of this Court held that in a building contract where the agreement between the parties was that the contractor should construct the building according to the specifications contained in the agreement and in consideration 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. It was 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 State Legislature to impose tax on the supply of the materials used in such a contract treating it as a sale. The Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 366 a wide definition of sale so as to include works contract. It preferred the last one, as, in its opinion, this would avoid multiple amendments. 55. Having regard to the above recommendation of the Law Commission, the Constitution Bill No.52 of 1981 was introduced in the Parliament. The relevant portion of statement of objects and reasons reads : STATEMENT OF OBJECTS AND REASONS Sales tax laws enacted in pursuance of the Government of India Act,1935 as also the laws relating to sales tax passed after the coming into force of the Constitution proceeded on the footing that the expression sale of goods , having regard to the rule as to broad interpretation of entries in the legislative lists, would be given a wider connotation. However, in Gannon Dunkerley's case (A.I.R. 1958 S.C. 560), the Supreme Court held that the expression sale of goods as used in the entries in the Seventh Schedule to the Constitution has the same meaning as in the Sale of Goods Act, 1930. This decision related to works contracts. 2. By a series of subsequent decisions, the Supreme Court has, on the basis of the decision in Gannon Dunkerley's case, held various other transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply of food or drink for consideration and also the collection or recoveries made by way of tax under any such law. However, no sales tax will be payable on food or drink supplied by a hotelier to a person lodged in the hotel during the period from the date of the judgment in the Associated Hotels of India case and the commencement of the present Amendment Act if the conditions mentioned in subclause (2) of clause 6 of the Bill are satisfied. In the case of food or drink supplied by restaurants this relief will be available only in respect of the period after the date of judgment in the Northern India Caterers (India) Limited case and the commencement of the present Amendment Act. 56. The Parliament then enacted the Constitution (Forty-sixth Amendment) Act, 1982 which received the assent of the President on 02.02.1983. Accordingly, clause 29-A was inserted in Article 366 of the Constitution which is set out as below.** ** (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 propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6th 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 . 39. 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 (29-A) of Article 366 of the Constitution it is difficult to agree with the contention of the States that the properties that are transferred to the owner in the execution of a works contract are not the goods involved in the execution of the works contract, but a conglomerate, that is the entire building that is actually constructed. After the 46th Amendment it is not possible to accede to the plea of the States that what is transferred in a works contract is the right in the immovable property. 40 . 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ways mentioned in clause (1). As regards inter-state trade and commerce, clause (3) puts two restrictions. It provides that any law of a State shall, insofar as it imposes, or authorises the imposition of (a) 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; (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) and 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 tax as the Parliament may by law specify. Clause (3) was substituted by Constitution Forty-sixth Amendment Act, 1982 with effect from 02.02.1983. 59. Clause 29-A was inserted in Article 366 by the Forty-sixth Amendment with effect from 02.02.1983. Entry 54 of List II (State List) enables the State to make laws relating to taxes on the sale or purchase of goods other than the newspapers, subject to the provisions of Entry 92-A of List I. Entry 63 of List II enables the States to provide rates of stamp duty in respect of documents other than those specified in provisions of Lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods and have acquired some other form involved in the execution of a works contract. 61. Viewed thus, a transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. 62. The States have now been conferred with the power to tax indivisible contracts of works. This has been done by enlarging the scope of tax on sale or purchase of goods wherever it occurs in the Constitution. Accordingly, the expression tax on the sale or purchase of goods in Entry 54 of List II of Seventh Schedule when read with the definition clause 29-A, includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract. The taxable event is deemed sale. 63. Gannon Dunkerley-I (1959) SCR 379and few other decisions following Gannon Dunkerley-I (1959) SCR 379 wherein the expression sale was given restricted meaning by adopting the definition of the word sale contained in the Sale of Goods Act has been undone by the Forty-sixth Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt was faced with in Gannon Dunkerley-I (1959) SCR 379 and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley-I (1959) SCR 379 was directly overcome . It then went on to say that all the sub-clauses of Article 366(29-A) serve to bring transactions where essential ingredients of a sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of purchase or sale for the purposes of levy of sales tax. 66. It then clarified that Gannon Dunkerley-I (1959) SCR 379 survived the Fortysixth Constitutional Amendment in two respects. First, with regard to the definition of sale for the purposes of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Article 366(29-A) operate and second, the dominant nature test would be confined to a composite transaction not covered by Article 366 (29-A). In other words, in Bharat Sanchar (2006) 3 SCC 1, this Court reiterated what was stated by this Court in Associated Cement [(2001) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of law having been made by Parliament under Article 286(3)(b), the exercise of the legislative power of the State under Entry 54 in List II to impose tax of the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366 would be subject to restrictions and conditions in regard to the system of levy, rates and other incidents of tax contained in the said law; (iv) while enacting law imposing a tax on sale or purchase of goods under Entry 54 of the State List read with Article 366 (29-A)(b), it is permissible for the State legislature to make a law imposing tax on such a deemed sale which constitutes a sale in the course of the inter-state trade or commerce under Section 3 of the Central Sales Tax Act or outside under Section 4 of the Central Sales Tax Act or sale in the course of import or export under Section 5 of the Central Sales Tax Act; and (v) measure for the levy of tax contemplated by Article 366 (29-A)(b) is the value of the goods involved in the execution of a works contract. Though the tax is imposed on the transfer of property in goods involved in the execution of a works contract, the measure for levy of such imposition is the value of the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract but then what is its meaning. The term works contract needs to be understood in a manner that the Parliament had in its view at the time of Forty-sixth Amendment and which is more appropriate to Article 366(29-A)(b). 73. The ordinary dictionary meaning of the word work means a structure or apparatus of some kind; architecture or engineering structure, a building edifice. When it is used in the plural, i.e., as works, it means architectural or engineering operations, a fortified building, a defensive structure, fortification or any of the several parts of such structures. In Webster Comprehensive Dictionary, International Edition the term work is stated to be, (2) that upon which labor is expended; an undertaking task. (3) that which is produced by or as by labor, specifically, an engineering structure; ...... In the same dictionary, the term works is stated as a manufacturing establishment including buildings and equipment. 74. In Radha Raman [AIR (1954) Allahabad 700], Allahabad High Court stated (although in the context of Section 40 of the Land Acquisition Act, 1894) that the work has a very wide meaning. It is really used in two senses of bestowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional obligations, such contract would be covered by the term works contract . Nothing in Article 366(29-A)(b) limits the term works contract to contract for labour and service only. Learned Advocate General for Maharashtra was right in his submission that the term works contract cannot be confined to a contract to provide labour and services but is a contract for undertaking or bringing into existence some works . We are also in agreement with the submission of Mr. K.N. Bhat that the term works contract in Article 366(29-A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services above. The Parliament had all genre of works contract in view when clause 29-A was inserted in Article 366. 77. The difference between a contract for work (or service) and a contract for sale (of goods) has come up for consideration before this Court on more than one occasion. Before we consider some of the decisions of this Court in this regard, it is of interest to refer to two old decisions of English courts. In Lee [(1861) 1 B. S. 272], it was laid down that if a contract would result in the transaction of prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. In our view, there are not and there cannot be absolute tests to distinguish a sale and works contract. 82. This Court in Associated Hotels [(1972) 1 SCC 472], stated that the determination as to whether the contract involved in a transaction constitutes a contract of sale or a contract of work or service depends in each case upon its facts and circumstances. Mere passing of property in article or commodity during the course of the performance of the transaction does not render it a transaction of sale. For even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work and property in such cases articles or materials where passed to the other party. That would not necessarily convert the contract into one of sale of those materials. It is stated in Associated Hotels [(1972) 1 SCC 472] that in every case the Court will have to find out what is the primary object of the transaction and the intention of the parties while entering upon it. It has been clarified that in some cases it may be that even while entering into a contract of work or even service, parties might enter into separate agreements, one of work and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessarily implied the sale of the component parts which go to make up the repair. That question would naturally depend upon the facts and circumstances of each case. Mere passing of property in an article or commodity during the course of performance of the transaction in question does not render the transaction to be transaction of sale. Even in a contract purely of works or service, it is possible that articles may have to be used by the person executing the work, and property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials 87. In Kone Elevators [(2005) 3 SCC 389], the Court again highlighted the tests to distinguish a works contract and a contract for sale of goods. The Court said; 5. It can be treated as well settled that there is no standard formula by which one can distinguish a contract for sale from a works contract . The question is largely one of fact depending upon the terms of the contract including the nature of the obligations to be discharged thereunder and the surrounding circumstances. If the intention is to transfer for a price a chattel in which the transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the above question, the Court in para 6 stated, the distinction between a contract of sale and works contract is not free from difficulty and has been the subject matter of several judicial decisions. No straitjacket formula can be made available nor can such quick-witted tests be devised as would be infallible. It is all a question of determining the intention of the parties by culling out the same on an overall reading of the several terms and conditions of a contract . The Court did note the observations made in Variety Body Builders [(1976) 3 SCC 500], that there is no standard formula by which one can distinguish a contract of sale from a contract for work and labour. There may be many common features in both the contracts, some neutral in a particular contract, and yet certain clinching in a given case may fortify conclusion one way or the other. 89. The Court then analysed the recitals and terms and conditions of the contract and also took into consideration para 603 of Halsbury s Laws of England, Fourth Edition, Volume 41, Benjamin s Sale of Goods, Fourth Edition, Para 1.042 and Pollock and Mulla on Sale of Goods [1990, Fifth Edition, Page 53] and summed up the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustan Shipyard [(2000) 6 SCC 579] also says that there is no absolute rule for distinguishing a contract for sale (of goods) and a contract for labour (or services). 92. It seems to us (and that is the view taken in some of the decisions) that a contract may involve both a contract of work and labour and a contract of sale of goods. In our opinion, the distinction between contract for sale of goods and contract for work (or service) has almost diminished in the matters of composite contract involving both (a contract of work/labour and a contract for sale for the purposes of Article 366 (29-A)(b). Now by legal fiction under Article 366(29-A)(b), it is permissible to make such contract divisible by separating the transfer of property in goods as goods or in some other form from the contract of work and labour. A transfer of property in goods under clause 29(A)(b) of Article 366 is deemed to be a sale of goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. For this reason, the traditional decisions which hold that the substance of the contract must be seen have lost their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rks contract the property in the goods used in the construction of the building passes to the owner of the land on which the building is constructed when the goods and materials used are incorporated in the building. But there may be contract to the contrary or a statute may provide otherwise. Therefore, it cannot be said to be an absolute proposition in law that the ownership of the goods must pass by way of accretion or exertion to the owner of the immovable property to which they are affixed or upon which the building is built. 96. Value addition as a concept after Forty-sixth Amendment to the Constitution has been accepted by this Court in P.N.C. Construction [(2007) 7 SCC 320]. While dealing with this concept, the Court said that value addition was important concept which had arisen after the Forty-sixth Amendment by insertion of sub-clause (b) of clause (29-A) in Article 366. It has now become possible for the States to levy sales tax on the value of the goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods in a building contract. On account of the Forty-sixth Amendment in the Constitution the State Governments are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Australian Act. 99. Learned Advocate General for Maharashtra vehemently argued that there was nothing to prevent the taxation of different aspects of the same transaction as separate taxable events. Pressing into service the aspects theory, he argued that a contract for carrying out works coupled with the sale of immovable property may be taxed by both, the State legislatures and the Parliament within their respective spheres of legislative competence as there is deemed sale of goods involved in works contracts. The works contract aspect can be taxed by the State legislatures under Entry 54 of List II of Seventh Schedule read with Article 366 (29-A)(b) of the Constitution. The transfer of immovable property can be taxed by the Parliament under Entry 97 of List I. Mr. K.V. Vishwanathan, however, argued that the aspect theory has no application as the State legislatures inherently lack the legislative competence to tax the transfer of an immovable property. According to him, the aspect theory would apply when a tax is sought to be imposed on more than one distinct field of legislation in relation to the same matter provided that there exists in the States/Union legislative compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods. (iii) Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term works contract in Article 366 (29- A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term works contract . (iv) Building contracts are species of the works contract. (v) A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished. (vi) The dominant nature test has no application and the traditional decisions which have held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods. 102. The crucial question would now remain: whether the view taken in Raheja Development (2005) 5 SCC 162 with reference to definition of works contract in KST Act is legally unjustified? The following definition of works contract was under consideration before this Court in Raheja Development(2005) 5 SCC 162: works contract includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property . 103. The Court also noticed the definition of dealer and taxable turn over . 104. The broad facts in Raheja Development (2005) 5 SCC 162 were these: Raheja Development carried on the business of real estate develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit is not resold but retained by the developer, there would be no works contract to that extent. (viii) If the agreement is entered into after the flat or unit is already constructed then there would be no works contract. But, so long as the agreement is entered into before the construction is complete it would be works contract. 108. The correctness of the view taken in Raheja Development (2005) 5 SCC 162 has been doubted in the referral order principally for the reasons: (a) the developer had undertaken the contract to develop the property of the owner. It is not alleged by the department that there is monetary consideration involved in the development agreement. If the development agreement is not a works contract, could the department rely upon the second contract which is the tripartite agreement and interpret it to be a works contract; (b)if the ratio in Raheja Development (2005) 5 SCC 162 is to be accepted then there would be no difference between works contract and a contract for sale of chattel as a chattel and (c) from the definition of works contract, the contractor must have undertaken the work of construction for and on behalf of the flat purchaser for cash, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m V reads, the promoter shall construct the said building/s .in accordance with the plans, designs, specifications ..which have been seen and approved by the flat purchaser with the owner, such variations and modifications as the promoter may consider necessary or as may be required by the concerned local authority/the government ..provided that the promoter shall have to obtain prior consent in writing to the flat purchaser in respect of variations or modifications which may adversely affect the flat of the purchaser . It is, thus, not correct to say that the work is undertaken by the developer for himself and for the owner and the construction is not carried for and on behalf of the purchaser. 111. In the development agreement between the owner of the land and the developer, direct monetary consideration may not be involved but such agreement cannot be seen in isolation to the terms contained therein and following development agreement, the agreement in the nature of the tripartite agreement between the owner of the land, the developer and the flat purchaser whereunder the developer has undertaken to construct for the flat purchaser for monetary consideration. Seen thus, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works contract is inclusive and refers to building contracts and diverse construction activities for monetary consideration viz; for cash, deferred payment or other valuable consideration as works contract. Having regard to the factual position, inter alia, Raheja Development (2005) 5 SCC 162 entered into development agreements with the owners of the land and it also entered into agreements for sale with the flat purchasers, the consideration being payment in installments and also the clauses of the agreement the Court held that developer had undertaken to build for the flat purchaser and so long as there was no termination of the contract, the construction is for and on behalf of the purchaser and it remains a works contract . The legal position summarized by us and the foregoing discussion would justify the view taken by the two Judge Bench in Raheja Development (2005) 5 SCC 162. 115. It may, however, be clarified that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Clause (b)***** ***** (b)(i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration; (ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract .. (iii) a delivery of goods on hire-purchase or any system of payment by instalments; (iv) the transfer of the right to use any goods for any propose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (v) the supply of goods by any association or body of persons incorporated or not, to a member thereof for cash, deferred payment or other valuable consideration; (vi) 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 consumption or any drink (whether or not intoxicating), where such supply or service is made or given for cash, deferred payment or other valuable consideration; of the explanation to Section 2(24) defines what would be a sale for the purpose of the clause and brought in its ambit the transactions mentioned therein. Explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a comprehensive or all encompassing list of what contracts constitute works contracts. Section 2(24) properly construed, even after its amendment, reaches out to those cases which fall within the ambit of Article 366(29A). Explanation b(ii) to Section 2(24) in other words covers those transactions where there is a transfer of property in goods, whether as goods or in any other form, involved in the execution of a works contract. Once those parameters are met, the amended definition in the State legislation in the present case provides a clarification or clarificatory instances. When constitutional norms govern state legislation such as those provided in Article 366(29A) in this case, the legislation must be construed in the context of those norms which it cannot transgress. The law is valid because it does not breach those boundaries. There is no breach of constitutional boundaries. 122. We are in agreement with the above view and reject challenge to amendment to the provisions of explanation (b)(ii) to Section 2(24) of MVAT Act. 123. Sub-rule (1A)****** ****** (1A) In case of a construction contract, where along with the immovable property, the land or, as the case may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made from the entire value of the works contracts. This was permitted to the States as a convenient mode for determining the value of the goods in the execution of the works contract. Similarly, the cost of the land is required to be excluded from the total agreement value. Sub-rule (1A) stipulates that the cost shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 as applicable on 1 January of the year in which the agreement to sell the property is registered. The Proviso stipulates that deduction towards the cost of land under the sub-rule shall not exceed 70% of the agreement value. The petitioners have not brought on the record any material to indicate that the proviso to sub-rule (1A) of Rule 58 is arbitrary. Rule 58(1A) provides for the measure of the tax. The measure of the tax, as held by the Supreme Court in its decision in Union of India v. Bombay Tyre International Ltd. [(1984) 1 SCC 467], must be distinguished from the charge of tax and the incidence of tax. The Legislature was acting within the filed of its legislativ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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