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TMI Blog1956 (10) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 8 of the Madhya Bharat Sales Tax Rules. The validity of the Act and particularly of Section 3 of the Act read with the definitions of 'Turnover', Taxable turn-over, 'Sale' and 'Contract' as given' in Section 2, is challenged on the ground that these provisions seek to bring under levy of sales tax transactions other than transactions of sale of goods and further on the ground that they seek to bring under levy of sales tax transactions involving inter-State trade or commerce. 2. The Petitioner Messrs. F. C. Osler (India) Ltd., is a public limited company having its registered office at Calcutta and branch office at New-Delhi, Bombay, Madras, Kanpur, Gouhatt and Jullunder. This company carries on business of electrical engineers and undertaking electrical contracts and also sells and supplies of electrical goods and appliances. 3. The Petitioner has no branch office, Shop or godown nor has any manager or agent carrying on business on its behalf anywhere in the state of Madhya Bharat. It is however alleged that as part of inter-State trade or commerce it sells| and supplies goods to various parties in that State. The tenders for contracts are s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts fixing the amount of turnover of electrical goods in question for the assessment year 1951-52 to the sum of ₹ 31,109-9-0 and determined taxable turnover at ₹ 24,888/- after making deduction of 20 per cent, in accordance with Rule 8 of Madhya Bharat Sales Tax Rules and directed the Petitioner to pay ₹ 1,660-8-0. The Petitioner lodged protest with Respondent No. 2. In reply the said Respondent asserted that the sales in respect of these goods took place at Indore as they had an agent at Indore to whom the goods were sent and further called upon the Petitioner to produce accounts for determining turnover for assessment years 1952-53, 1953-54 and 1954-55 intimating that on failure he would proceed to make best judgment assessment. By letter dated 9-7-1955 the Respondent No. 2 required the Petitioner to appear before the former on 25-1955 with books of account pertaining to assessment year 1952-53. The Petitioner had preferred appeal against the earlier order and a request was made to Respondent No. 2 to wait until the appeal was decided. This was disallowed and notice was issued to the Petitioner to show cause why action under Section 14(1)(a), (b) and (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation that the provisions of the said Act, in so far as and to the extent to which they seek, to bring under levy of sales tax transactions of, sale of goods despatched and supplied from places outside Madhya Bharat to customers in Madhya Bharat by persons belonging to other State and who do not carry on business of buying or selling goods within that State are bad in law. 12. They further pray for issue of writ of mandamus and prohibition requiring the opponent not to give effect to the provisions of the Act against them in respect of the contract in question and not to take steps coercive or otherwise pursuant to the notices dated 24-11-1955 and 5-12-1955. 13. In the return filed on behalf of the Respondent the inter-State trade character of the dealings of the Petitioners was denied. It was asserted that the Petitioner had offered tenders called for electrical installations to the buildings in question which were accepted by the Chief Engineer Madhya Bharat and Principal, Mahatma Gandhi Memorial Medical College and the con-tracts were made and executed at Indore and were to be executed there. It was further assserted that the contracts in question consisted of two distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons will be considered by me seriatim. 19. Before considering the actual arguments advance on either side on these questions it will be useful to refer to certain provisions of the Madhya Bharat Sales Tax Act which are material for their consideration. 20. Madhya Bharat Sales Tax Act 30 of 1956 came into force on 1-5-1950. 21. Section 3 of the Madhya Bharat Sales Tax Act is the charging section. It reads as follows: (1) Subject to the provision of this Act, every dealer his turnover in the previous year in respect (sic) sales or supplies of goods exceeds: (a) in the case a dealer who imports goods in-to Madhya Bharat, ₹ 5,000/- (Rupees five thousand); (b) In the case of a manufacture, ₹ 5,000/-(Rupees five thousand); and (c) in the case of any other, ₹ 12,000/-(Rupees twelve thousand); Shall be liable to pay tax under this Act on his taxable; turnover in respect of sales or supplies of good effected in Madhya Bharat from the 1st day of May 1950: Provided that a dealer who comes from out-side Madhya Bharat and carries on business during a Mela shall be liable to pay tax under this Act of his average sales during the course of the Mela-exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y motor vehicle. Taxable Turnover' for a specified period means that part of a dealer's turnover for such period which remains alter deducting therefrom: (i) the sale of goods declared tax-free under Section 4 without payment of fees; (ii) the sale of goods declared tax-free under Section 4(3) with payment of fees: (iii) turnover of goods for which no rate of tax has been notified or which have already been sub-jected to sales tax under this Act. (iv) all such other deductions as may be pre-scribed in the Rules made under this Act; (v) 2 per centum of balance remaining after making all the above deductions, 'Goods' means all kinds of movable property other than actionable claims, stocks, snares and securities, and includes electrical energy and all materials, articles and commodities, whether or not to be used in construction, fitting out, improvement or repair of immovable property. 23. Section 23A which was added by Section 8 of Amendment Act No. 11 of 1955 and published in the Madhya Bharat Government Gazette on 15th of April 1955 reads as follows: Nothing in this Act or the Rules made or deemed to have been made thereunder shall be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Law and Indian Law to include works contract. It is also relevant and material to take into account the exact scope of the expression as used in Indian Sale of Goods Act. Considering the matter thus it will be found that the term 'Sale of goods' does not include supply of material in pursuance of works contract particularly in those cases where there is no separate provision in the contract for supply of material at a stated price. 28. It will appear from the decisions of the Supreme Court in State of Bombay v United Motors Ltd. AIR 1953 SC 252(A); Poppatlul shah v. State of Madras AIR 1953 SC 274(B); Sales Tax Officer, Pillibhit v. Budh Prakash Jai Prakash AIR 1954 SC 459 (C) and Bengal Immunity Co. v. State of Bihar (S) AIR 1955 SC 661 (D) that the terms sale of goods has the same meaning for the purpose of sales tax laws as it bears in the law relating to sale of goods. The provisions of Indian Sale of Goods Act and the legislative practice both in England and in India at the time when the Constitution was framed and promulgated are material. In English Law works contracts involving supply of materials, are not treated as sale of goods and are considered as a distinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. 34. If all these three things are satisfied then it is immaterial whether the contract is purely for goods or is a mixed one involving supply of material and application of labour and skill or whether the consideration is distinct in respect of materials or is a composite one or whether the title passes while they are in the form of chattels or have become affixed to Immovable property. Even where the transaction is a composite one involving supply of material and application of labour and skill for money consideration it is competent for the legislature in exercise of Its plenary power to pro-vide for a machinery by which it will be possible to determine the aloe of that part which involves essentials of sale of goods and to tax that much only. (35) The legislative practice prevailing at the time when the Constitution was framed and promulgated is not a decisive test and can be taken to be helpful within limits. (33) He mainly relied upon the decision reported in Pandit Banaras Das v. State of Madhya Pradesh 1955 6 STC 93 (Nag)(J), in support of his contention. 37. In order to appreciate these two lines of reasoning we shall first consider the implications of the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s transferred to the buyer under the term of the contract itself. 42. The third case of the Supreme Court is AIR 1954 SC 459 (C). In that caves the question was. whether forward contracts of sale are liable to tax under U.P Sales Tax Act: Under the statute law of India which is based on English Law on the subject, a sale of goods and an agreement for the sale of goods are treated as two distinct and separate matters. Section 4 of the Indian Sale of Goods Act (Act 111 of 1930) runs as follows: (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part owner and another. (2) A contract of sale may be absolute or conditional. (3) Where under a contract of sale the property in the goods transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell become a sale when the time elapses or the conditions are fulfille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goods is to be transferred. Section 16 enacts that: Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained. Section 18 Rule 5 provides for the passing of property in future goods after they are ascertained. X X X X X The position therefore is that a liability to be Assessed to Sales Tax can arise only if there is a completed sale under which price is paid or is payable and not when there is only an agree-ment to sell, which can only result in a claim for damages. It would be contrary to all principles to hold that damages for breach of contract are liable to be Assessed to sales tax on the ground that they are in the same position as the sale price. 43. In (S) AIR 1955 SC 661 (D) his Lordship Bhagwati J. referred to the above observations of Venkatarama Ayyar J. with approval and observed This being the legislative practice in India as well as in England at the time when the power to tax sales or purchases of goods was conferred on the State Legislatures the scope of that power would have been ordinarily determined by the definition of the sale of goods to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent for the State Legislature in exercise of its plenary power to segregate the 'supuly of material' part and to tax that much. It is considered immaterial that the material get affixed or embedded to the Immovable property when the title passes. In the Madras case the learned Judges say: It must be remembered that the Constitution Act was enacted by the British Parliament and the draftsmen and the Parliament must have been well aware, that the expression 'sale or goods had acquired a legal import by that time, and it is legitimate therefore to presume that, the expression was used in the sense in which it was understood by the English lawyers and also in India. The drafts-men must have intended to define the power of the Legislature to tax only the transaction of sale of goods, which was understood in law as meaning and as constituting those composite series of acts beginning with the agreement of sale and ending with transfer of property for a price, which constitute sale of goods. That the expression sale of goods acquired a definite meaning in England under the Sale of Goods Act, 1893, which was modelled on the English Act, does not admit of serious doubt. 48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n them any element of sale of goods to justify the imposition of Sales Tax upon them. It was held on consideration of some of the English decisions and concluded: It therefore follows that the building contracts which the Assesses entered into during the assessment year, on which the turnover was calculated, do not involve any element of sale of the material and are not in any sense contracts for the sale of goods as understood in Law. Having regard to the terms of particular contracts, there may be an intention to pass the ownership in the materials for a price agreed upon between the parties, in which case such contracts might contain an element of sale of goods, but that is not the case here. 51. This decision was before the learned Judges of the Nagpur High Court when they decided 1955 6 STC 93 (J). 52. The line of reasoning adopted by Hidayatullah J. with whom Sinha C. J. concurred' was that out of the two principles upon which the reasoning in the Madras case was based, the one regarding legislative practice existing in England and in India when the Constitution Act of 1935 was passed, us helpful within limits but is not conclusive and the other with regard to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossible. The natural and full scope of the entry cannot be cut down by anything not found in the Constitution Act 1935. Lord Selbourn's dictum in the R. v. Burah 1878-3 AC 889 (L) has often been quoted in this connection. When Entry No. 43 was framed it conferred on the Provincial Legislature powers of the widest amplitude to tax the sale of goods in all the aspects and forms. The text being explicit, is conclusive alike in what it directs what it prohibits. The necessary conditions the impost however, were that there a sale of goods. The selection of tax-and the severance of transactions of sale from other transactions in which they might be embedded was a necessary part of the power, The Legistature could not say that a contract of service amounted to sale of service, but it could line transaction of sale of goods what sever from it took. 54. He finally concluded: we are here concerned with a taxing measure and the power to levy the tax can only be determined by a fair consideration of the ambit of the entry by which the power is conferred. If the pith and substance of the Act come within that ambit, the power is there, otherwise not. If a building contract was not spli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he observations of their Lordships in Budh Prakash's case (C) were sought to be in terpreted. 60. That was a case in which the State of U.P. under its Sales Tax Law sought to imposed sales tax on forwarded contracts of sale. Venkatrama Ayyar J. who delivered the judgment began by observing that under the statute law of India which is based on English Law on the Subject of sale of goods, a sale of goods and an agreement for the sale of goods are treated as district and seperate matters. 61. To bring out this fact his Lordshp examined the definition of Sale of Goods in Section 4 of the Indian Sale of Goods Act, Section 77 of Indian Contract Act and Sections 1.16 and Rule 5 of Section 13 of the English Act. The learned Judge then referred to the standard works on the subject in England for the same purpose and concluded by observing that there having existed at the time of the enactment of the Government of India Act, 1935 a well Refined and well established distinction between a sale and an agreement of sale it would be proper to interpret Entry 48 (corresponding to Entry 54) in, the sense in which it was used in legislation both in England and India and to hold that it aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said whether basically on consideration of what may be said to be essential ingredients of sale is it or is it not correct to limit the scope Of entry 54 so as to exclude from Its operation works contracts involving supply of material by one who is engaged to do both. 66. The last case is (S) AIR 1955 SC 661 (D). In that case too Bhagwati J. referred to the legislative practice in India and in England at the time the power to tax sale was conferred and observed that the scope of the power would have been ordinarily determined by the definition of rule of goods to be found in these respective Sale of Goods Acts and that the State Legislatures would have had the power to tax sales or purchases of goods in which the property in the goods passed within the respective territories of the states. 67. Thus the legislative practice was invoked to draw an inference that the ordinary power of states to impose sales tax depend upon passing of property within them. The observations of his Lordship at the most indicate that the scope of Entry 54 is limited by the definition of sale found both in the English and Indian Acts. 68. All that this decision means is that the essential ingredi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e viz. delivery or goods and passing of title they are no longer goods but have already become part and parcel of Immovable property and are therefore immovable. 72. Thus both on the aforesaid analyses of the reason given by Benjamin on Sale a d t e argument of the learned Counsel for the Petitioner three aspects distinguish the building contracts from those of sale. 73. In both cases viz. in building contracts involving supply of materials for money consideration and the contracts of sale there are contracts in respect of good in existence, there is money consideration there is delivery of property and lastly the property in chattels passes from the transferor to the transferee. But the factors which are said to distinguish them are firstly that whereas in the former the contract is not confined to chattels in the latter it is so, secondly whereas consideration is composite one in the former it is one and distinct for the latter and-thirdly whereas delivery and passing of title take place when the goods cease to be moveable they continue to remain so when they take place in the latter. 74. The question then for consideration is whether, these distinguished factors are suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the building contract is complete is not sufficient to lead to the conclusion that there cannot be sale of materials involved 86. As put by Hidayatullah J. there is always a sale if goods are transferred to another and paid for by him. 87. Even assuming that in some of the contracts, where there is affixing of what at one time were chattels the element of sale of chattel may be less predominant than the element of bringing into existence an Immovable property and that for that reason they may not be said to involve sale, yet in the contracts of the nature under consideration such as electric installations or sanitary fittings the element of supply of materials for money consideration, is more predominant than the labour of affixing the same therefore in any case there is sale of goods in these cases. 88. Moreover the principle to be borne in mind in construing the scope of legislative entries is as is stated by their Lordships of the Supreme Court in Navinchandra v. Commissioner of Income Tax Bombay City (S) AIR 1955 SC 58 (M). In para 6 they observe: It should be remembered that the question-before us relates to the correct interpretation of a word appearing in a Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Madras division. 91. Therefore the provisions in the Madhya Bharat Sales Tax Act, in so far as they seek to tax transactions of the nature in question, are not beyond the legislative competence of the state Legislature under Entry 54 of the State List. 92. This brings us to the second question. 93. The facts pertaining to this are that the Petitioner has a branch office at Delhi from where the electric goods needed for installation in the two Government buildings were sent by rail. They were taken delivery of by the workman of the Petitioner and affixed to the building. 94. The question is whether, if the transactions involve sale of the materials needed for making electric installation, can they be said to contain inter-state trade element in them. 95. After the decision in the case of Bengal Immunity Co. v. State of Bihar (D) it cannot be doubted that although these goods are delivered in the State of Madhya Bharat for the purpose of consumption as a direct result of the contract of sale yet their sale ought to be held to have taken place in the course of inter-state trade or commerce. 96. They would therefore be held to be not subject to sales tax but for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent that it was contended that by that charging Section inter-State sales could be taxed. In other words, the view of the Supreme Court was that the charging Section of the Act could not operate to tax inter-State sales and therefore the relevant Section was invalid. And when we turn to the final order, which is at p. 849 (of SCR) at p. 75G (of AIR), the Supreme Courts makes it clear by directing that, Until Parliament by law provides otherwise, the State of Bihar do forbear and abstain from imposing sales tax on out-of-State dealers in respect of sales or purchases that have taken place in the course of inter-State trade or commerce even though the goods have been delivered as a. direct result of such sales or purchases for consumption in Bihar. Therefore, the flaw or the defect which the Supreme Court found in Bihar Act was the failure by Parliament providing otherwise within the meaning of Article 286(2), and the injunction was to last only so long as Parliament stepped in, provided otherwise, removed the restriction, lifted the ban, and validated the charging Section so as to make it operative upon the inter-State sales. Therefore, in our opinion, it is entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts with which he is concerned work and labour part exceeds 20% of the total value. In the absence of such a position the Petitioner cannot obtain a declaratory opinion about the invalidity the Rule. 113. I DO not however feel that the challenge in this case is abstract in the sense that impugning the validity of the provision will confer no benefit upon him or will not affect the question of levy and collection. 114. Similar provision existed in the Madhya Pradesh Sales Tax Rules in Rule No. 4. 115. Hidayatullah J. observed in Paras 31 and 32 of Banarasidas case (J) referred to above as follows: There being no provision for entering into agreement on the basis of 'cost-plus contract' the Legislature has to hunt about for some means to determine the price of goods on which tax could be laid. It is plain that there is no ready basis in the bills themselves on which the cost of materials can be the from the contract charges. In this state of affairs, the Legislature hit upon the expedient of allowing the State Government to fix the proportion of contract charges to the cost of goods in building contracts. The State Government fixed the ceiling proportion and wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a distinct probability that the tax falls on services by inclusion into the price of materials deter-mined in the artificial manner. 116. I fully agree with the reasoning of the learned Judge and hold that the artificial test laid down in the Act to determine sale price of goods in respect of 'Contracts' as defined in the Act and the Rule 8 prescribing the proportion between the value of materials and value of works and labour part are clearly not within the power granted to the Legislature of the State of Madhya Bharat and must be declared as ultra vires. 117. One more argument remains to be considered. It was contended that Rule 8 is ultra vires as the Act does not contain a scheme for segregating value of materials and value of work and labour in works contracts in the main Act and in the absence of such a scheme the defect cannot be remedied by resorting to the rule making] power and supplying the defect. 118. I do not find much force in this argument Under the Act by reason of definitions of 'Goods', 'Contract'. 'Turnover' and 'Sale' the Act contains sufficient scheme to permit taxing of 'supply of materials' part ou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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