Carl Still G. M. B. H. & ANR Vs.
The State of Bihar & Ors [1961] INSC 168 (19 April 1961)
AIYYAR, T.L. VENKATARAMA DAS, S.K.
KAPUR, J.L.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION: 1961 AIR 1615 1962 SCR (2) 81
CITATOR INFO :
R 1965 SC1655 (24) R 1969 SC 556 (3)
ACT:
Sales Tax-Construction works-Interpretation
of contract-Supply of materials Legality of tax thereon-Sales Tax authorities
taking Proceedings to levy tax--Writ Petition to quash Proceedings
Maintainability -Bihar Sales Tax Act, 1947 (Bihar 19 of 1947), S.
2-Constitution of India, Arts. 226, 227.
HEADNOTE:
On December 19, 1953, the appellant, a
company registered in West Germany, entered into a contract with a company in
India to set up a complete coke oven battery ready for production as well as
by-products plants at Sindri in the State of Bihar, agreeing to erect and
construct buildings, plants and machinery and deliver and supply accessories
and articles from Germany and also locally from India, and render services
fully described in the First Schedule, for an all inclusive price of Rs.
2,31,50,000. The contract provided that in case the contractor failed to
complete the works within the period specified therein the Indian company might
take possession of the works and the materials which would become its property
and complete the works and deduct from the agreed price the expenses incurred
in such completion. Under cl. 15(ii) of the contract all materials brought by
the contractor upon the site shall immediately become the company's property,
but such of them as during the progress of the works. were rejected by the
company ceased to be Company's property, and after the coke oven and byproducts
plants had been constructed the contractor was entitled to remove the surplus
materials. The clause further provided that the company shall not be liable for
any loss if the materials were destroyed by fire or otherwise. Under the Bihar
Sales Tax Act, 1947, in a contract for, execution of works, the materials used
11 82 therein are treated as sold by the contractors and their value is taken
as the sale price liable to be taxed. The execution of the works was completed
in 1955 as provided in the agreement and on March 20, 1956, the sales tax
authorities issued a notice to the appellant to the effect that it was liable
to pay tax for the three years 1952 to 1955, under the provisions of the Act.
The appellant represented that it had only supplied materials in execution of
works contract, that there was no sale of any goods or materials by it and that
the proceedings for taxing this supply of materials as if they had been sold
were illegal.
The sales tax authorities having proceeded to
take further steps to levy the tax in spite of its representations, the
appellant filed a petition before the High Court of Patna under Arts. 226 and
227 of the Constitution of India for quashing the proceedings. The High Court
took the view that under cl. 15(ii) of the contract in question the property in
the materials was to pass to the Indian company as soon as they were brought on
the site, and that, in effect, amounted to a sale of those materials by the
appellant to the company. The Court, however, dismissed the petition on the
ground that the facts had not yet been fully investigated and that it would be
open to the sales tax authorities to investigate the facts and upon the proper
construction of the contract come to the finding whether and if so to what
extent, the appellant was liable to pay sales tax.
Held (Shah, J., dissenting): (1) that on its
proper construction the agreement dated December 19, 1953, was a contract
entire and indivisible for the construction of specified works for a lump sum
and not a contract of sale of materials as such and that the sales tax
authorities had no right to impose a tax on the materials supplied in execution
of that contract on the footing that such supply was a sale.
The State of Madras v. Gannon Dunkerley &
Co. (Madras) Ltd., [1959] S.C.R. 379 and Peare Lal Hari Singh v. The State of
Punjab, [1959] S.C.R. 438, followed.
(2) that where proceedings are taken before a
tribunal under a provision of law, which is ultra vires, it is open to a party
aggrieved thereby to move the court under Art.
226 for issuing appropriate writs for
quashing them on the ground that they are incompetent, without his being
obliged to wait until those proceedings run their full course.
The State of Bombay v. The United Motors
(India) Ltd., [1953] S.C.R. 1069, Himmatlal Harilal Mehta v. State of Madhya
Pradesh, [1954] S.C.R. 1122 and The Bengal Immunity Company Ltd. v. State of
Bihar, [1955] 2 S.C.R. 603, relied on.
In the present case, the sales tax
authorities sought to maintain the liability of the appellant to pay tax in
respect of materials supplied by it only under the contract dated December 19,
953, and on the basis of the legality of the provisions 83 of the Bihar Sales
Tax Act, 1947. Consequently, the proceedings taken by them must be held to be
illegal and must be quashed.
Per Shah, J.-Under the agreement dated
December 19, 1953, there was a contract for the construction of a coke oven
battery and by-products plant, and also to deliver and supply accessories and
articles. Even if this delivery and supply was incidental to the works
contract, it could not be assumed without investigation that it was not a part
of a transaction of sale liable to tax. The investigation of facts on the
question of liability to pay tax has to be made by the taxing authorities in
whom that jurisdiction is vested. Before these facts are ascertained, by merely
looking at the terms of the written contract and without any investigation as
to the true nature of the transaction, the High Court could not decide whether
the contract performed was a pure works or construction contract or was a composite
contract. The High Court was, therefore, right in declining to issue the writ
prayed for.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 237 and 238 of 1960.
Appeals by special leave from the judgment
and order dated July 8, 1958, of the Patna High Court, in Misc. Judl.
Cases Nos. 713 and 819 of 1958.
A. V. Viswanatha Sastri, S. R. Banerjee and
S. C. Mazumdar, for the appellants.
S. P. Varma, for the respondents.
1961. April 19. The judgment of S. K. Das, J.
L. Kapur, M. Hidayatullah and T. L. Venkatarama AIyar, JJ., was delivered by
Venkatarama Aiyar, J. J. C. Shah, J., delivered a separate judgment.
VENKATARAMA AIYAR, J.-Both these appeals
arise out of the same facts and involve the determination of the same question,
and this judgment will govern both of them.
The appellant in Civil Appeal No. 237 of 1960
is a company registered at Recklinghausen near Dusseldorf in West Germany, and
carries on business in the manufacture and erection of plants and machinery. On
December 19, 1953, it entered into a contract with a company called Sinclair
Fertilisers and Chemicals (Private) Ltd., hereinafter referred to as the Owner,
for assembling and, installing machinery, plants and 84 accessories for a coke
oven battery and by-products plant at Sindri in the State of Bihar for an
all-inclusive price of Rs. 2,31,50,000. The agreement provides that the
appellants were to supply all the materials and labour required for the
execution of the works, and that the performance was to be split up into two
categories, the German section and the Indian section, that the German section
was to consist of deliveries of materials from Germany Free on Board 'European
ports, cost of technical drawings and services of German specialists, and that
the Indian section was to consist of supply of Indian materials and charges for
Indian labour and services to be performed in India. The German section was to
be paid out of the lump sum stated above a sum of Rs. 1,31,50,000 in pounds
sterling in London on account of the appellant, and the Indian section was to
be paid the balance of Rs. 1,00,00,000 in Indian currency in this country, and
payments were to be made in installments related to the progress of the
contract. Subsequent to the agreement, the appellant entrusted the work of the
Indian section to an Indian company called the Coke Oven Construction Company
(Private) Ltd., and the Owner having accepted this arrangement the said company
has become the assignee of the contract in so far as it relates to the
execution of the Indian section thereof. It is this company that is the
appellant in Civil Appeal No. 238 of 1960. The execution of the works was
completed in 1955 as provided in the agreement, and the amounts due there under
were also paid to the two appellants.
The present dispute between the parties is as
to whether the appellants in the two appeals are liable to pay sales tax on the
value of the materials used by them in the execution of the works under the
contract. It will be convenient now to refer to the relevant provisions of the
Bihar Sales Tax Act (Bihar Act No. XXX of 1947), hereinafter referred to as the
Act. Section2(g)of the Act defines 'sale' as including a transfer of property
in goods involved in the execution. of contract. 'Contract' is defined in s.
2(b) as meaning any agreement for carrying out for cash or 85 valuable
consideration, the construction, fitting out, improvement or repair of any
building, road, bridge or other immovable property; and 'goods' are defined in
s. 2(d) as including "all materials, articles and commodities, whether or
not to be used in the construction, fitting out, improvement or repair of
immovable property." 'Sale price' is defined in s. 2(h)(ii) as meaning the
amount payable to a dealer as valuable consideration for the carrying out of
any contract, less such portion as may be prescribed, of such amount
representing the usual proportion of the cost of labour to the cost of
materials used in carrying out such contract. 'Dealer' is defined in s. 2(c) as
meaning any person who sells or supplies any goods including goods sold or
supplied in the execution of a contract. Section 2(1) defines 'turnover' as
meaning the aggregate of the amounts of sale prices received and receivable by
a dealer in respect of sale or supply of goods or carrying out of any contract,
effected or made during a given period. Section 4 is the charging section, and
it provides that every dealer whose gross turnover during the accounting period
exceeded Rs. 10,000 shall be liable to pay tax on sales which take place in
Bihar, and s. 5 provides that the "tax payable by a dealer under this Act
shall be levied on his taxable turnover at such rate or rates and subject, to
such restrictions and conditions as may be laid down from year to year by an
annual Bihar Finance, Act." The Bihar Finance Act defines 'taxable
turnover' as meaning that part of the dealer's gross turnover on sales which
have taken place in Bihar during any period subject to certain deductions.
Section 9(1) of the Act provides that
"No dealer shall, while being liable under s. 4 to pay tax under this Act,
carry on business as a dealer unless he has been registered under this Act and
possesses a registration certificate".
Section 13(5) of the Act under which the
present proceedings have been initiated is as follows:" If upon
information which has come into his possession, the Commissioner is satisfied
that any dealer has been liable to pay tax under this Act in respect of any
period and has nevertheless wilfully 86 failed to apply for registration, the
Commissioner shall, after giving the dealer a reasonable opportunity of being
heard, assess, to the best of his judgment, the amount of tax, if any due, from
the dealer in respect of such period and subsequent periods and the
Commissioner may direct that the dealer shall pay, by way of penalty, in
addition to the amount so assessed, a sum not exceeding one and half times that
amount." The gist of the above provisions is that in a contract for
execution of works, the materials used therein are treated as sold by the
contractor and their value is taken as the sale price liable to be taxed, and
there are provisions for determining that value.
Acting on these provisions, the
Superintendent of Sales Tax, Dhanbad, the third respondent herein, issued on
March 20, 1956, a notice to the appellant in Civil Appeal No. 237 of 1960,
under s. 13 of the Act, stating that on information which had come to his
possession he was satisfied that the appellant was liable to pay tax for the
periods 1952-53, 1953-54 and 1954-55, that it had wilfully failed to register
itself under s. 9 of the Act, and it was directed to show cause why penalty
should not be imposed. In response to this notice, the appellant appeared
before the third respondent and represented that it had only supplied materials
in execution of works contract, that there was no sale of any goods or
materials by it, and that the proceedings for taxing this supply of materials
as if they had been sold were illegal. Disagreeing with this contention, the
third respondent directed the appellant to produce all its books, accounts and
documents for purposes of assessment, and this is quite understandable, as it
was his duty to levy tax in accordance with the provisions of the Act.
Thereupon, the appellant filed petitions before the High Court of Patna under
Arts. 226 and 227 of the Constitution for the issue of appropriate writs for
quashing the proceedings before the third respondent and for prohibiting
further proceedings under the Act as being wholly incompetent., The grounds put
forward in support of the petition were firstly that the State 87 legislature
having authority to enact a law imposing a tax on the sale of goods was not
competent to tax what under the law was not a sale, and that as the supply of
materials in the course of the execution of works, was not in law a sale of
those goods, a tax on such supply was unauthorized; and secondly that, even if
there was a sale of materials, that was in the course of import from Germany,
and a tax thereon was repugnant to Art. 286(1)(b) of the Constitution.
After taking over the Indian section of the
contract, the appellant in Civil Appeal No. 238 of 1960 had registered itself
on May 11, 1953, as a dealer under s. 9 of the Act and was submitting
periodical returns as required by the certificate and the Act. But its
contention at all times has been that it is not liable to pay sales tax on the
transactions in question, as there were only supplies of materials in execution
of works contract and that they did not amount to sale of goods. This
contention was overruled by the Superintendent of Sales Tax, Dhanbad, the third
respondent herein, and the appellant was assessed to sales tax successively for
the years 1952-53 and 195354. While proceedings by way of appeal or revision by
the appellant against these orders of assessment were pending, the third
respondent issued further notices for assessment of tax for the years 1954-55
and 1955-56, and directed the appellant to produce all its books and accounts
for the above period.
Thereupon the appellant filed in the High
Court of Patna, petitions under Arts. 226 and 227 of the Constitution, similar
to those filed by the appellant in Civil Appeal No. 237 of 1960, for issue of
appropriate writs to quash the orders of the Sales Tax authorities on the
ground that the provisions of the Act, in so far as they sought to tax supply
of materials in works contracts, were ultra vires.
By the time the above petitions came up for
hearing, the decision of this Court in The State of Madras v. Gannon Dunkerley
& Co. (Madras) Ltd. (1), had been reported, wherein it was held that the
expression "sale of goods" in Entry 48 in List II of Sch. VII to (1)
[1959] S.C.R 379.
88 the Government of India Act, 1935,
corresponding to Entry 54 in List 11 of Sch. VII to the Constitution of India
had the same meaning that it has in the Sale of Goods Act, 1930, that where
there is a building contract, under which specified work is to be executed for
a lump sum, there is no contract of sale, as such, of materials used in the
works, and that accordingly, a tax on the supply of those materials treating it
as a sale was ultra vires the powers of the State Legislature under Entry 48 in
List 11 of Sch. VII to the Government of India Act, 1935. The learned Judges
were of opinion that this decision was distinguishable because there was a term
in the agreement before them that the property in the materials was to pass to
the owner as soon as they were brought on the site. Dealing next with the
contention of the present appellants that, as there was no agreement for the
payment of price for the materials, as such, they could not be held to have
been sold, the learned Judges noticed without comment the contention of the
Government Pleader for the respondents, based on s. 9 of the Sale of Goods Act,
that even though no price had been fixed for the materials, that could be
determined from the account books and invoices and the course of dealings
between the parties. The learned Judges then proceeded to observe:
"I wish, however, to state that I do not
express any concluded opinion on the question whether there is sale of
materials liable to be taxed in the present case. The facts have not been fully
investigated by the sales tax authorities and the petitioners have not
furnished all the account books and documents and other relevant information
for the purpose of deciding this question. It would be open to the sales tax
authorities to investigate the facts and Upon proper construction of the
contract come to. the finding whether and if so to what extent, the petitioners
are liable to pay sales tax. I have no doubt that in deciding this question the
sales tax authorities will keep in view the principles laid down by the Supreme
Court in State of Madras versus Gannon Dunkerley and Company (Madras) Limited
(9 Sales Tax Cases 353)".
89 With these observations the learned Judges
dismissed the petitions. It is against this judgment that the present appeals
by special leave are directed.
The first question that arises for our
decision is, whether on the construction of the agreement dated December
19,1953, it could be held that there was a sale by the appellants of the
materials used in the construction works, apart from the execution of those
works. In The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1),
after stating that building contracts could assume several forms, this Court
observed as follows:
"It is possible that the parties might
enter into distinct and separate contracts, one for the transfer of materials
for money consideration and other for the payment of remuneration for services
and for work done.
In such a case there are really two
agreements, though there is a single instrument embodying them and the power of
the State to separate the agreement of sale from the agreement to do work and
render service and to impose a tax thereon, cannot be questioned and will stand
untouched by the present judgment." The point for determination,
therefore, is whether on its true construction, the contract in question is a
Combination of two distinct agreements, one to sell materials and the other to
supply labour and services, or whether it, is only one agreement entire and
indivisible for execution of the works. We will now refer to the relevant
portion of the agreement dated December 19, 1953. The preamble to the agreement
states that the Owner had agreed with the contractor that the latter was to set
up a complete coke oven battery ready for production as well as by-products
plants according to specifications given therein, that the installation was to
be made at a site selected by the Owner and that the contractor was to
"erect and construct buildings, plants and machineries and deliver and
supply accessories and articles from Germany and also locally from India and
render services fully (1) [1959] S.C.R. 379.
12 90 described in the First
Schedule......... for an all-inclusive price of Rs. 2,31,50,000." Then cl.
I provides that the contractor shall execute and complete the works mentioned
in the Schedule, and el. 2 that the Owner shall pay to the contractor for
executing the contract the sum of Rs. 2,31,50,000. Clause 4 requires the
contractor to "provide all labour, materials, machinery, plant, tools,
tackles and other implements for performing the works in a workman-like
manner." Under cl. 11, the contractor guarantees "to accomplish full
production within 22 months from the 15th September, 1952" and further
undertakes to fulfill the guarantees prescribed in Schedule II to the agreement
"to the satisfaction of the Owner within a period of three months from the
date of accomplishment of full production." Clause 28 provides that in
case the contractor fails or is unable to complete the works within the period,
the Owner might take possession of the works and of the materials, "which
will become the property of the owner," and complete the works and deduct
from the agreed price the expenses incurred in such completion.
It is clear from the above clauses that the
subject matter of the agreement was the installation of the coke oven battery
and it accessories, that the sum of Rs. 2,31,50,000 was the price agreed to be
paid for the execution of those works, and that there was no agreement for the
sale of materials, as such, by the appellants to the Owner. In other words, the
agreement in question is a contract entire and indivisible for the construction
of specified works for a lump sum and not a contract of sale of materials as
such.
Now the contention that found favour with the
learned Judges in the High Court was that there was in the contract a clause
that the property in the, materials was to pass to the owner when they are
brought on the site, and that, in effect, amounted to a sale of those materials
by the appellant to the Owner. The clause in question is as follows:"15
(ii). All materials and plant brought by the Contractor upon the site under the
German and Indian Sections in connection with the construction 91 of the Coke
Oven and by-products Plant shall immediately they are brought upon the site
become the Owner's property and the same shall not on any account whatsoever be
removed or taken away by the Contractor or by any other person without the
Owner's prior authority in writing. Such of them as during the progress of the
works will be rejected by the Owner in accordance with the terms agreed upon
between the Contractor and the Owner in this respect shall on such rejection,
cease to be the Owner's property............ The Owner shall not be liable for
any loss or damage which may happen to or in respect of such materials and
plant by the same being lost, stolen or injured or destroyed by fire, tempest
or otherwise for which the contractor will be liable......... The Owner agrees
that after the Coke Oven and by-products Plants have been constructed according
to the agreed terms, the Contractor will be entitled to remove from the site
their tools, tackles, machines, packing materials, protection roof and other
materials as are surplus to the requirements of the normal operation of the
Coke Oven and byproducts Plant provided that no claim for increased cost is
made in respect of anything so removed." In Peare Lal Hagri Singh v. The
State of Punjab (1), a building contract contained the following clause:"All
stores and materials brought to the Site shall become and remain the, property
of Government and shall not be removed off the Site without the prior written
approval of the G. E. But whenever the works are finally completed, the
contractor shall at his own expense forthwith remove from the Site all surplus
stores and materials originally supplied by him and upon such removal, the same
shall revest in and become the property of the Contractor." Discussing the
question whether by reason of this clause there was a Contract of sale of the
materials by the Contractor, distinct from the works contract, this Court held
that its object was only to ensure that (1) [1959] S.C. R. 438.
92 materials of the right sort were used in
the construction and not to constitute a contract of purchase of the materials
separatism. In the present case, el. 15 is even clearer that no sale of
materials, as such, was intended, because it expressly provides that if they
were destroyed by fire, tempest or otherwise, the loss would fall not on the
owner, which must be the result if the property is taken to have been
absolutely transferred to it, but on the contractor.
The argument based on s. 9 of the Sale of
Goods Act is, in our opinion, equally unsound. What that section enacts is that
where there is a contract of sale of movable but the price is not mentioned, it
has to be fixed either in the manner provided in the agreement or by having
regard to the course of dealings between the parties, and where that is not
possible, the buyer has to pay the seller a reasonable price. But the section
presupposes that there is a Contract of sale of goods, and, as held in The
State of Madras V.
Gannon Dunkerley & Co. (Madras) Ltd. (1),
such a contract requires that there must have been an agreement between the
parties for the sale of the very goods in which eventually property passes. If,
as held by us, cl. 15 does not embody an agreement for the sale of materials as
such, there is no contract of sale with respect to them and s. 9 of the Sale of
Goods Act can have no application. The contention, therefore, that el. 15 of
the agreement could be read as amounting to a contract of sale of materials,
and that the price therefore could be fixed as provided in s. 9 of the Sale of
Goods Act by recourse to the account books of the appellants or the invoices or
the course of dealings between them and the owner, must be rejected as
untenable. It follows that the agreement dated December 19, 1953, being a
contract for the construction of works, one and indivisible, the respondents
have no right to impose a tax on the materials supplied in execution of that
contract on the footing that such supply is a sale.
It is next contended for the respondents
that, whatever the merits of the contentions based on the construction of the
contract, the proper forum to agitate (1) [1959] S.C.R. 379.
93 them would be the authorities constituted
under the Act to hear and decide disputes relating to assessment of tax, that
it was open to the appellants to satisfy those authorities that there have been
no sales such as are liable to be taxed, that indeed they were bound to pursue
the remedies under the Act before they could invoke the jurisdiction of the
court under Art. 226 and that the learned Judges of the High Court were,
therefore, right in declining to entertain the present petitions. It is true
that if a statute sets up a Tribunal and confides to it jurisdiction over
certain matters and if a proceeding is properly taken before it in respect of
such matters, the High Court will not, in the exercise of its extraordinary
jurisdiction under Art. 226, issue a prerogative writ so as to remove the
proceedings out of the hands of the Tribunal or interfere with their course
before it. But it is equally well settled that, when proceedings are taken
before a Tribunal under a provision of law, which is ultra vires, it is open to
a party aggrieved thereby to move the court under Art. 226 for issuing
appropriate writs for quashing them on the ground that they are incompetent,
without his being obliged to wait until those proceedings run their full
course. That has been held by this court in The State of Bombay v. The United
Motors (India) Ltd. (1), Himmatlal Harilal Mehta v. The State of Madhya Pradesh
(2). and The Bengal Immunity Company Limited v. The State of Bihar (3). The
position that emerges is that, if the proceedings before the Sales Tax Officer
are founded on the provisions of the Act, which authorizes the levy of the tax
on the supply of materials in construction contracts, then they must in view of
the decision in The State of Madras v. Gannon Dunkerly & Co. (Madras) Lid.
(4), be held to be incompetent and quashed. But if the proceedings relate to
any extent to sales otherwise than under the contract, then the enquiry with
respect to them must proceed (1) [1953] S.C.R. 1069, 1077.
(2) [1954] S.C.R. 1122, 1127.
(3) [1955] 2 S.C.R. 603, 617-619, 764-766.
(4) [1959] S.C.R. 379.
94 before the authorities under the Act and
the application under Art. 226 must fail.
We must now examine the true scope of the
proceedings before the Sales Tax Officer in the light of the above principles.
We start with this that the Act contains
provisions imposing a tax on the supply of materials under a construction
contract. The appellants were indisputably engaged in construction works under
the agreement dated December 19, 1953, and it is not suggested that they were
carrying on any independent business as dealers in the State of Bihar.
Presumably, therefore, when the sales tax
authorities took proceedings against them, it was in respect of materials
supplied by them under their contract dated December 19, 1953. When the
appellants, in response to the notice issued by the third respondent, contested
their liability to be taxed, it was on the ground that the supplies of
materials under the contract were not sales. When the appellants next moved the
court tinder Art. 226 for quashing the proceedings, they urged that the
provisions of the Act, in so far as they purported to impose a tax on the
materials supplied in the performance of the contract, as if they were sold,
were ultra vires. If the respondents sought to tax the appellants on the
footing that sales of materials were effected outside the contract, it was
their duty to have put that case forward in answer to the petition. They did
nothing of the kind. They did not file even a counterstatement. At the time of
the argument, when faced with the decision of this Court in the case of The
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1), their entire
case was that the agreement between the parties should be construed as
involving a sale of materials, and that their value could be ascertained from
the invoices, account books and the course of dealings between the parties. No
contention was urged that there were sales of materials which fell outside the
agreement between the appellants and the Owner. The learned Judges of the High
Court in dismissing the petitions made it clear that the investigation before
the sales (1) [1959] S.C.R. 379.
95 tax authorities must be as regards their
liability to pay sales tax "upon proper construction of the
contract." In this Court also, the respondents seek in their statement to
maintain the liability of the appellants only on the basis of the contract,
reliance being placed on cl. 15 already referred to and on s. 9 of the Sale of
Goods Act. There is no claim that the appellants are liable on the basis of
sales falling outside the agreement. It was stated before us for the
appellants, and not contradicted by the respondents, that the Sindri
Fertilisers and Chemicals (Private) Ltd., is a company controlled by the
Government.
If that is so, the respondents were at all
times in possession of facts which would have shown whether the appellants
entered into any transaction decors the agreement, and it is significant that
at no stage have they alleged any such facts. We are satisfied that the
proceedings have at all stages gone on the footing that the liability of the
appellants arose under the contract and not otherwise. In that view, we must
hold, following the decision in The State of Madras v. Gannon Dunkerley &
Co. (Madras) Ltd. (1) that the proceedings taken by the respondents for
imposing sales tax on the supplies of materials by the appellants, pursuant to
the contract dated December 19, 1953, are illegal and must be quashed. In the
result, the appeals are allowed and appropriate writs as prayed for by the
appellants will be issued. The appellants are entitled to their costs
throughout.
SHAH, J.-In my view these appeals must fail.
The appellants claim that they are not liable
to be taxed in respect of the transaction dated December 19, 1953, because it
is not a sale within the meaning of the Bihar Sales Tax Act, 19 of 1947, but is
a contract to assemble and install machinery, plants and accessories of a coke
oven battery and other plants which under the principle of the decision of this
Court in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1) is
not subject to sales-tax.
The Act defines "sale" as
meaning-omitting parts not material-any-transfer of property in goods for (1)
[1959] S.C.R. 379.
96 cash or deferred payment or other valuable
consideration, including a transfer of property in goods involved in the
execution of contract. "Contract" is defined as meaning any agreement
for carrying out for cash or deferred payment or other valuable consideration,
the construction, fitting out, improvement or repair of any building, road,
bridge or other immovable property. The expression "goods" means all
kinds of movable property other than actionable claims, stocks, shares or securities
and includes all materials, articles and commodities whether or not to be used
in the construction, fitting out, improvement or repair of immovable property.
"Sale price" means the amount payable to a dealer as valuable
consideration for-(1) the sale or supply of any goods, less any sum allowed as
cash discount according to ordinary trade practice, but including any sum
charged for anything done by the dealer in respect of the goods at the time of,
or before, delivery thereof, other than the cost of freight or delivery or the
cost of installation when such cost is separately charged; or (ii) the carrying
out of any contract, less such portions as may be prescribed , of such amount,
representing the usual proportion of the cost of labour to the cost of materials
used in carrying out such contract.
These definitions in so far as they seek to
treat goods supplied or used in the execution of a works or construction
contract, as sold and liable to sales-tax under the Act, must, on the decision
of this Court in Gannon Dunkerley's case (1) be regarded as beyond the
legislative competence of the State Legislature. In Gannon Dunkerley's case
(1), this Court held that in a building contract, the contractor constructs the
building according to the specifications contained in the agreement and in
consideration therefore receives payment as provided therein, and in such an
agreement, there is neither a contract to sell the materials used in the
construction, nor does property pass therein as moveables, and accordingly in a
building contract which is one, entire and indivisible, there is no sale of
goods and it is not within the competence of the Provincial Legislature under
Entry 48 in List 11 in (1) [1959] S.C.R. 379.
97 Sch. VII of the Government of India Act,
1935, to impose a tax on the supply of the materials used in such a contract
treating it as a sale. Relying upon the decision of this court in Gannon
Dunkerley's case (1), the appellants contend that the amount received by them
under the contract dated December 19, 1953, is not liable to be assessed to sales
tax. But the question whether the contract is a pure works contract or a
composite contract has never been investigated. Undoubtedly, the formal
document evidencing the contract suggests, prima facie, that it is a works
contract, but in assessing liability to tax, the taxing authority is not
restricted merely to the letter of the document: he has to enquire into the
true nature of the transaction on all the relevant materials and to ascertain
whether it partakes of the nature of the transaction which the statute renders
taxable. He is, in ascertaining the true nature of the contract, also entitled
to consider how the contract “was performed. The Act entrusts power to
ascertain the facts on which the liability to tax depends to the taxing
authorities and in that behalf, the Act is exhaustive in scope and content. The
appellants in approaching the High Court by petitions under Arts. 226 and 227
of the Constitution sought to eliminate the entire procedure and machinery set
up by the Act for ascertaining facts on which the liability to tax depends.
I strongly deprecate the practice of the
taxpayer being permitted to invoke the jurisdiction of the High Court to issue
high prerogative writs on certain assumed facts-facts the truth of which has
never been subjected to scrutiny in the only manner in which the law provides
they should be scrutinised. The power to assess the facts on which the decision
as to the true nature of the taxable transaction depends by the statute lies
solely with the taxing authorities: it does not lie with any other body or tribunal.
Invoking the jurisdiction of the High Court to adjudicate upon the facts,
directly or indirectly, on which the liability to tax depends, in my view, (1)
[1959] S.C.R. 379.
13 98 amounts to inviting the High Court to
exercise jurisdiction which it does not possess. This is however not to say
that the jurisdiction of the High Court to issue a writ of prohibition
restraining the levy of tax under a statute can never be entertained. If, for
instance, the statute is beyond the legislative competence of the legislature
or defies a constitutional restriction or infringes a fundamental right or the
taxing authority arrogates to himself powers which he does not possess or attempts
to levy tax more than once in respect of the same transaction when it is not
permitted by the statute, or the taxing authority threatens to recover tax on
an interpretation of a statutory provision imposing tax which is on the face of
the statute erroneous, jurisdiction to issue writ of prohibition from the High
Court may properly be invoked. But the High Court cannot be asked to ascertain
disputed facts bearing upon the taxability of a transaction, because that
jurisdiction is vested elsewhere.
The contract in question is principally a
works contract.
The preamble states that the appellants had
agreed with the Sindri Fertilizers and Chemicals Ltd. to set up a complete coke
oven battery ready for production as well as byproducts plant on the site specified
and to construct buildings, plants and machineries and deliver and supply
accessories and articles and to render services fully described in the first
schedule, subject to the guarantees to be fulfilled on the part of the
appellants and terms and conditions mutually agreed and settled and mentioned
in the second schedule for an all-inclusive price in accordance with the
preliminary site plan. It is manifest from the preamble that there is a
contract for the construction of a coke oven battery and by-products together
with the plant, and also to deliver and supply accessories and articles.
Undoubtedly, the price agreed to be paid is
an "inclusive price" in respect of the entire contract, but that does
not affect the nature of the contract to deliver and supply accessories and
articles. The appellants have undertaken, subject to the terms and conditions
mentioned in the contract, to execute and complete the works mentioned in the
first schedule.
99 The contract in so far as it relates to
the installation of plant and construction of building was a works contract and
notwithstanding the definition of "sale" and "contract" in
the Act, was not taxable but the contract contemplates delivery and supply by
the appellant of accessories and articles. Even if this delivery and supply of
accessories and articles is incidental to the works contract, it cannot be
assumed without investigation that it was not a part of a transaction of sale
liable to tax. The appellants asked the High Court to assume that the contract
in question was a pure works contract, but the High Court declined to make that
assumption. Ramaswami, C. J., in dealing with that plea observed:
"I wish, however to state that I do not
express any concluded opinion on the question whether there is sale of
materials liable to be taxed in the present case. The facts have not been fully
investigated by the sales tax authorities and the petitioners have not
furnished all the account books and documents and other relevant information
for the purpose of deciding this question. It would be open to the sales tax
authorities to investigate the facts and upon proper construction of the
contract come to the finding whether and if so to what extent, the petitioners
are liable to pay sales tax," In my view, the learned Chief Justice was
right in so approaching the question. The sales tax authorities have made no
assessment; they merely issued a notice purporting to do so under s. 13(5) of
the Act and required the appellants to produce their books of account and records
for ascertaining whether the transaction or any part thereof was in the nature
of sale of goods. The sales tax authorities had jurisdiction to do so and by
merely looking at the terms of the written contract and without any
investigation as to the true nature of the transaction the High Court could not
decide whether the contract performed was a pure works or construction contract
or was a composite contract. It was urged that in the petition filed by the
appellants before the High Court, an affidavit 100 in rejoinder challenging the
correctness of the averment made in the petition that it was a pure works
contract was not filed by the taxing authorities and therefore the High Court
was bound to decide the dispute on the footing set up by the appellants. But
the taxing authorities could not be expected without investigation to assert a
state of facts which was not and could not be within their knowledge, and their
statutory authority could not, because of their failure to so assert, be
nullified.
As I have already observed, the investigation
of facts on the question of the liability to pay tax has to be made by the
taxing authorities in whom that jurisdiction is vested.
Before the facts on which the liability to
tax depends are ascertained, the High Court could not be asked to assume that
the transaction was in the nature of a pure works contract and to decide the
question as to the liability of the appellants on that footing. There is no
ground for assuming that the taxing authorities will not give effect to the
decision of this court in Gannon Dunkerley's case (1) after the true nature of
the transaction is ascertained.
In my view, the High Court was right in
declining to issue the writ prayed for.
By COURT: In accordance with the opinion of
the majority, the appeals are allowed and it is directed that appropriate writs
as prayed be issued. The appellants are also entitled to their costs
throughout.
Appeals allowed.
(3) [1959] S.C.R. 379.
Back