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TMI Blog2020 (6) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... g in the first part of Clause 45.2, is entirely misplaced. The only implication of this expression is that a claim for reimbursement of sales tax cannot be made in relation to a particular work or item whose execution is pending or is in progress and has not been completed. So far the levy of sales tax in relation to a works contract is concerned, the same is on taxable turnover and not on the entire turnover. It follows necessarily that the claim for reimbursement could only be made of the amount of sales tax that had been levied; and had been paid by the contractor. Hence, the suggestion as if the expression completed item of work refers to the end-product of a works contract is without any substance. The contentions urged in that regard are required to be, and are, rejected. It remains trite that the terms of contract bind the parties thereto and unless there be any case of ambiguity or violation of law, ordinarily, the terms of contract, revealing the intent of parties, are required to be given effect to - It is, therefore, crystal clear that even when the contract provided that the rates quoted by the contractor shall be deemed to be inclusive of sales and other taxes a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as also on the petition for leave to appeal were issued way back on 18.11.2011 and for a long time, the matter remained pending while awaiting service on the respondents. Ultimately, after completion of service, we had heard learned counsel for the contesting parties on merits. Having regard to the circumstances of the case and after having heard the contesting parties on merits, we find no reason to close the matter only on the ground of delay. Accordingly, delay in filing is condoned. 1.1. Leave granted. 2. This appeal by special leave is directed against the judgment and order dated 05.08.2008 as passed by the Orissa High Court at Cuttack in W.P. (C) No. 8857 of 2003, whereby the High Court accepted the claim of the respondent No. 1 of present appeal- Hereinafter also referred to as the writ petitioner or the contractor company , for reimbursement of the amount of sales tax levied in respect of the works contracts executed by it. The High Court also directed the Opposite Parties to grant appropriate reimbursement as claimed by the writ petitioner in terms of Clause 45.2 of the General Conditions of Contract- GCC for short under the National Competitive Biddin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect from 07.04.1984 whereby, inter alia, the definition of expression Works contract was inserted; the definition of the expression Sale was expanded so as to include therein the transfer of property in goods involved in the execution of a works contract; and specific meaning was also assigned to the expression taxable turnover in respect of a works contract for the purpose of the rate of tax payable by a dealer. The rate of tax payable by a dealer on the taxable turnover in respect of works contract was fixed at 4%. 3.4. On 04.11.1986, the Government of Orissa, in its Department of Irrigation and Power, issued a Circular to the effect that in case of works contract executed on or after 07.04.1984, containing the specific clause for reimbursement of sales tax, the Department of Irrigation and Power would be liable for reimbursement of the amount of sales tax actually paid by the concerned contractor on production of necessary documentary evidence. Pursuant to these observations and directions, reimbursement of the sales tax paid by the contractor company in respect of assessment years 1995-1996 to 1997-1998 was allowed. 3.5. Later on, the State Government issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount already reimbursed looming large, the contractor company preferred the writ petition leading to this appeal, while seeking the following reliefs: (i) Issue a Rule Nisi Calling upon the Opposite Parties to show cause as to why the alleged clarification dated 07.11.2001 under Annexure-1, and the subsequent direction for recovery of the amount earlier reimbursed, vide letter dated 19.6.2002 under Annexure-3 ought not to be declared illegal, invalid and non-est in the eyes of law; And (ii) issue a further Rule Nisi Calling upon the Opp. Parties to show cause as to why the reimbursement claims made by the petitioner under Annexure-5 series may not be granted with a period stipulated by this Hon ble Court; And (iii) in the event the Opp. Parties fail to show cause or show insufficient cause make the said Rule Nisi absolute and issue an appropriate writ of Mandamus or a writ of certiorari in line with the aforesaid Rule Nisi; And/or (iv) further be pleased to direct either of the Opp. Parties i.e., the contracting parties (Opp. Parties 6-18) or the Sales-tax Authorities (Opp. Parties 3-5) to effect reimbursement or refund along with interest from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned senior counsel for the appellant has strenuously argued that the impugned order is contrary to the facts of the case as also the principles of law applicable and hence, deserves to be set aside. 5.1. The learned senior counsel for the appellant has referred to Clause (29-A) of Article 366 of the Constitution of India; and the principles enunciated by this Court in the cases of Builders Association of India and Ors. v. Union of India and Ors.: (1989) 2 SCC 645 and Gannon Dunkerley and Co. and Ors. v. State of Rajasthan and Ors.: (1993) 1 SCC 364 to submit that by the forty-sixth amendment of Constitution, a fiction was created for treating the works contract as deemed sale on which, sales tax would be leviable but, only on the value of goods which went into the execution of any works contract. 5.2. Further, with reference to the definitions of sale , goods and works contract as contained in the Act of 1947 as also Section 5(2)(AA) thereof and the relevant clauses governing the contracts in question, the learned counsel has submitted that any payment against the monthly running bill to the contractor does not constitute payment for any completed item of work ; an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an immovable property. The learned counsel would submit that earlier, the Circular dated 04.11.1986 came to be issued on an erroneous understanding of Clause 45.2 in relation to works contract but subsequently, clarificatory Circulars dated 07.11.2001 and 19.06.2002 were issued, stating the correct position of law that the said Clause 45.2 applied only to the sales tax on completed item of work ; and the sales tax levied in terms of Section 5(2)(AA) of the Act of 1947 was not reimbursable and had to be borne by the contractor in view of clear stipulation in Clause 45.1 of the General Conditions of Contract. According to the learned counsel, reliance on the Circular dated 04.11.1986 on behalf of the respondent No. 1 is entirely misplaced and the said Circular, by no means, could be construed as that of amending the contractual terms as also the liability of the contractor in terms of Section 5(2)(AA) of the Act of 1947. 6. Per contra, learned senior counsel for the contractor company (the respondent No. 1 herein) has duly supported the order impugned with reference to the reasonings therein. 6.1. Learned senior counsel for the contractor company has contended that the arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to levy sales tax on certain transactions described in sub-clauses (a) to (f) of Clause (29-A) of Article 366 of the Constitution as also the question, as to whether the power of the State legislature to levy tax on the transfer of property in goods involved in the execution of works contracts is subject to the restrictions and conditions contained in Article 286 of the Constitution, were considered and decided by the Constitution Bench of this Court in the case of Builders Association (supra). Therein, while upholding the constitutional validity of the aforementioned provisions, the Constitution Bench explained the unique features of a composite contract relating to work and materials; and expounded on the meaning, effect and amplitude as also contours of the provisions pertaining to the taxing power of the States in relation to works contract in the following words: - 38. In Benjamin s Sale of Goods (3rd Edn.) in para 43 at p. 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l with different topics and one could not be projected or read into another and each one of them has to be obeyed while any sale or purchase is taxed under Entry 54 of the State List. (emphasis supplied) 8.1.2. In the case of Gannon Dunkerley (supra), while dealing with the scope of the legislative power of State under Entry 54 of the State List contained in Seventh Schedule to the Constitution, particularly in the context of inter-State trade or commerce, another Constitution Bench of this Court found no reason to reopen the issues covered by the decision in Builders Association case (supra) and held on the limitations of the powers of State legislature as under:- 31 ..the legislative power conferred under Entry 54 of the State List does not extend to imposing tax on a sale or purchase of goods which takes place outside the State or which takes place in the course of import or export of goods. In view of the aforesaid limitations imposed by the Constitution on the legislative power of the States under Entry 54 of the State List, it is beyond the competence of the State Legislature to make a law imposing or authorising the imposition of a tax on transfer of proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planning, designing and architect s fees; (d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract; (e) cost of consumables such as water, electricity, fuel, etc. used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and (f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services; (g) other similar expenses relatable to supply of labour and services; (h) profit earned by the contractor to the extent it is relatable to supply of labour and services. The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor. (emphasis supplied) 8.1.4. The salient features of the legal fiction introduced by sub-clause (b) of Clause (29-A) of Article 366 of the Constitution and the co-related concept of value addition came to be succinctly explained by this Court in the case of P.N.C. Construction Co. (supra) in the following words: - 21. Value addition is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immoveable property. S.5(2)(AA)- Notwithstanding anything contained in subsection (2)(A), taxable turnover in respect of: (i) works contract shall be deemed to be the gross value received or receivable by dealer for carrying out such contract, less the amount of labour charges and service charges incurred for the execution of this contract 8.3. As noticed, the claim for reimbursement made by the contractor company is based on Clause 45.2 of GCC whereas this claim is being resisted by the appellant State with reference to Clause 13.3 of ITB and Clause 45.1 of GCC. The referred clauses, as placed before us for consideration, read as under: - Clause 13.3 of ITB 13.3 All duties, taxes and other levies including royalty payable by the contractor under the contract or for any other cause shall be included in the rates, price and total bid price submitted by the bidder. Clauses 45.1 and 45.2 of GCC 45.1 The rates quoted by the contractor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks Contracts with effect from 07.04.1984. 2. Under the Law, Sales Tax is payable by the concerned contractor/dealer, and not by this Department. Yet, a question arose as to whether this Department was legally liable to reimburse the amount of sale tax actually paid or payable by the Contractor/dealers in so far as the contracts relating to this Department are concerned. After due consideration of the legal aspects of the problem, the following instructions are issued for information and guidance of all concerned. (i) In case of Works- Contracts executed on or after 07.04.1984 which contained specific clauses for reimbursement of Sales Tax, this Department is liable to reimburse the amount of sale tax actually paid by the concerned contractor on production of necessary documentary evidence in token of making such payment, after obtaining an undertaking from the concerned contractor to the following effect:- If the Contractor prefers or has preferred appeal/revision before the concerned appellate authority under the Sales Tax Law for remission of the Sales Tax dues paid by him and said appeal/revision results in any reduction of such dues, the differential amount, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Engineer-in-Chief, Water Resources/ Engineer-in-Chief, Planning Designs/ Engineer-in-Chief, Rengali Irrigation Project/ All the Chief Engineers Basin Manages/ All the Chief Engineers/ All the Chief Construction Engineers/ Director, Ground Water Survey and Investigation Sub: Reimbursement of Sales Tax on Works contract. Sir, I am directed to say that clause 13.3 of ITB of the NCB bid document approved by World Bank stipulates that All duties, taxes and other levies including royalty payable by the contractor under the contract or for any other cause shall be included in the rates, prices and total bid price submitted by the Bidder. The clause 45.2 at G.C.C. of the said document stipulates that Any Central or State Sales Tax and other Taxes on completed item of work of this contract as may be levied excluding penalty levied for contractor s default and paid by the contractors shall be reimbursed by the employer to the contractor on proof of payment. During the course of contract period deduction of Sales Tax on works contract turn over at the sources shall be made from each bill at such rate and conditions as may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. involved in execution of the contract are subject to levy of sales tax. The completed item i.e., a bridge, a building, a road, or a canal, as the case may be, is not subjected to levy of sales tax because after construction these become immovable property not susceptible to transfer of property for the purpose of sales tax assessment. As per clause 13.3 of I.T.B. of the NCB bid document read with clause 45.1 of the general conditions of the contract the rates quoted by the contractor shall be deemed to be inclusive of sales and other taxes including royalties on all materials that the contractor will have to purchase for performance of the contract. Clause 45.2 of the G.C.C. speaks that any Central or State Sales Tax and other taxes on completed items of work of the contract as may be levied, excluding penalty levied for contractors default and paid by the contractor shall be reimbursed by the employer to the contractor on proof of payment. It is clarified that a completed item of work for which the contractor has entered into agreement with the department is either immovable property or a works contract and in either case is not exigible to sales tax. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same in its rates, as envisaged by Clauses 13.3 of ITB and 45.1 of GCC. 9.2. So far as the basic factual aspects are concerned, it is not in dispute that the respondent No. 1 indeed undertook execution of various works contracts with the respective offices of the appellant State of Orissa. It remains indisputable that in relation to such contracts, Clause 13.3 of ITB stipulated that all duties, taxes and other levies including royalties payable by the contractor were to be included in the bid price and Clause 45.1 of GCC specifically provided that the rates quoted by the contractor shall be deemed to be inclusive of the sales and other taxes including royalties on all materials that the contractor was to purchase for performance of the contract. However, and at the same time, it is also indisputable that as per Clause 45.2 of GCC, any Central or State Sales Tax and other taxes on completed items of works of the contract as might be levied upon, and paid by, the contractor (excluding penalty levied for contractor s fault) were to be reimbursed to the contractor on proof of payment and assessment. This Clause 45.2 further envisaged that during the course of contract period, ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as being made of the tax that was levied on the turnover of the works contracts and not of the tax paid by the contractor on the materials procured by it. The High Court has also found that the sales tax was levied after necessary deductions and in accordance with the decision in Gannon Dunkerley (supra) for which, the contractor was entitled to claim reimbursement under Clause 45.2 of GCC and that the clarification Circular dated 07.11.2001 cannot take away the effect of statutory provisions. 10. Having taken all the relevant aspects in comprehension and having examined the matter in its totality, we are clearly of the view that the High Court has rightly allowed the writ petition filed by the respondent No. 1 and no case for interference in this appeal is made out. 11. Before proceeding further, we may at once observe that so far as the aforesaid Circulars are concerned, neither of them could be decisive of the issues at hand. As noticed, in the Circular dated 04.11.1986, the State Government expressed the view that the reimbursement in question was required to be allowed in terms of Clause 45.2 of GCC but later on, in the Circular dated 07.11.2001, the State Government too ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e leviable amount of sales tax on goods/materials in its rates and hence, the contractor cannot claim any reimbursement thereof. The question is as to whether such contentions of the appellant against the operation of first part of Clause 45.2 of GCC could be countenanced? In our view, the answer could only be in the negative. 13. Taking up the main plank of the case of the appellant about the nature, extent and implication of the levy of sales tax in relation to a works contract, it could be usefully recapitulated that in view of the forty sixth amendment to the Constitution of India, Clause (29-A) came to be inserted to Article 366; and, by virtue of sub-clause (b) thereof, it became permissible for the States to levy sales tax on the price of goods and materials used in works contracts as if there was a sale of such goods and materials. In other words, after the forty-sixth amendment to the Constitution, the works contract is divided into two parts by a legal fiction: one for sale of goods/materials and other for supply of labour/services; and it is possible for the States to levy sales tax on the value of goods/materials involved in such works contract. These features have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 947. There had neither been any levy of the sales tax on the entire turnover of the works contracts nor any such levy could have been effected because, as noticed, the taxing event of sale in a works contract is confined to the use of the goods/materials in execution of the contract. 14. While the aforesaid legal and factual aspects remain more or less indisputable, what the appellant seeks to contend is that the reimbursement envisaged by the first part of Clause 45.2 of GCC is of the tax levied on the completed item of work but in a works contract, sales tax is not levied on the completed item of work because such completed item in a works contract becomes an immovable property. Such a contention of the appellant remains wholly untenable in view of the scheme of levy of sales tax in a works contract as also the scheme of reimbursement envisaged by Clause 45.2 of GCC. 14.1. Contextually read, it is but apparent that the expression completed item of work in Clause 45.2 ibid., signifies the intent that reimbursement would be permissible only after execution of a particular item of work has been completed and accomplished. In other words, this expression is clearly intended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar work or item whose execution is pending or is in progress and has not been completed. So far the levy of sales tax in relation to a works contract is concerned, the same is on taxable turnover and not on the entire turnover. It follows necessarily that the claim for reimbursement could only be made of the amount of sales tax that had been levied; and had been paid by the contractor. Hence, the suggestion as if the expression completed item of work refers to the end-product of a works contract is without any substance. The contentions urged in that regard are required to be, and are, rejected. 15. We may now take up the other line of argument on behalf of the appellant that as per Clause 45.1 of GCC read with Clause 13.3 of ITB, the contractor is deemed to have provided for the leviable amount of sales tax on goods/materials in its rates and hence, the contractor cannot claim any reimbursement thereof. 15.1. It remains trite that the terms of contract bind the parties thereto and unless there be any case of ambiguity or violation of law, ordinarily, the terms of contract, revealing the intent of parties, are required to be given effect to. The submission on the part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CC, which prohibit the contractor from demanding taxes, duties, royalties etc. on the materials procured by it for performance of the contract do not, and cannot, conversely operate over the sales tax which is levied upon the contractor and which is primarily recovered with deductions from the running bill payments. In other words, in our view, on a plain reading of the aforesaid relevant terms of the contract, it is clear that while the contractor cannot claim any payment towards the taxes/duties/royalties etc. on the goods/materials purchased by it for performance of the contract but that does not disentitle the contractor from claiming reimbursement of the sales tax levied upon it by the employer, of course after proof of payment/assessment. It is also pertinent to mention that the respondent No.1 only claimed reimbursement of the sales tax paid by it on the turnover of the works contract and not of any tax or duty or royalty paid by it on the material procured for the purpose of execution of the works contract. Therefore, the contentions urged on behalf of the appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC over the claim of the contractor also deserve to be, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contractor; and (c) obtaining undertaking from the contractor to refund the excess amount of reimbursement, in case of reduction of its liability towards sales tax in appeal or revision [vide sub-paragraphs (i) to (iii) of paragraph 2 of the Circular dated 04.11.1986]. However, the significant feature is that in the second set of instructions in this very Circular, as contained in subparagraph (iv) of paragraph 2 thereof, the Engineers-incharge were instructed that no such clause for reimbursement of sales tax or payment of such tax by the department to the contractor be inserted in the Notice Inviting Tenders or Tender document; and no tender containing any clause or condition to that effect be accepted. The said second set of instructions in sub-paragraph (iv) of paragraph 2 of this Circular was, obviously, meant for future contracts, but, its contrast with the first set of instructions in the preceding sub-paragraphs fortifies the conclusion that the State Government was fully conscious of its obligation to make reimbursement in relation to the existing contracts which carried such reimbursement clause/s. 17.2. As to what stipulations, terms and conditions are to form the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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