Builders
Association of India & Ors Vs. Union
of India & Ors [1989] INSC 114 (31 March 1989)
Misra
Rangnath Misra Rangnath Kuldip Singh (J)
CITATION:
1989 SCALE (2)768
ACT:
Constitution
of India 1950: Articles 286, 366(29A) and Seventh Schedule List II Entry
54--Constitutional validity of Constitution (Forty-sixth Amendment) Act
1982--Validity of--Power of State legislature to levy tax on the transfer of
property in goods involved in the execution of works contracts--Suggestion that
Amendment Act should be prefaced by statement that it had been duly ratified by
the States.
Words
and Phrases: "Building Contracts"--Works con- tracts-What are.
HEAD NOTE:
The
petitioners in the writ petition are building contractors engaged in the
business of constructing buildings, factories, bridges etc. They have
challenged the levy of sales tax, by the concerned State Governments under the
sales tax laws passed by them, on the turnover . of the works contracts entered
into by them.
The
petitions raised two questions for the consideration of the Court; the first question
relates to the constitutional validity of the 46th Amendment Act by which the
State legislatures have been empowered to levy sales tax on certain
transactions described in sub-clauses (a) to (f) of clause (29-A) of Article
366 of the Constitution, and the second question is whether the power of the
State legislature to levy tax on the transfer of property in goods involved in
the execution of works contracts referred to in sub-clause (b) of clause (29A) of
Art. 366 of the Constitution is subject to the restrictions and conditions in
Art. 286 of the Constitution.
On the
passing of the 46th Amendment, the State Governments after making necessary
amendments in their laws commenced to levy sales tax on the turn-over of the
works entered into by the building contractors for constructing houses,
factories, bridges etc. In some States taxable turnover was determined by
deducting the money spent on labour engaged in connection with the execution of
the works con- 321 tracts. In some other States a certain fixed percentage of
the total turnover was deducted from the total turnover as labour charges
before arriving at the taxable turnover. Each State adopted its own method of
determining taxable turnover either by framing rules under its sales tax law or
by issuing administrative directions.
Affected
and aggrieved by the levy of sales tax so imposed, the petitioners filed the
writ petitions under Art. 32 of the Constitution challenging inter alia the Constitu-
tional validity of the 46th Amendment Act. Civil appeals were also filed by
some other building contractors against the orders of the High Court for
similar relief.
The
petitioners and the appellants have raised two contentions; viz (1) that the
46th Amendment Act is uncon- stitutional because it had not been ratified by
the legisla- tures of not less than one-half of the states by Resolutions
passed to that effect by these legislatures before the Bill which led to the
amendment in question was presented to the President for assent; and (2) that
it was not open to the States to ignore the provisions contained in Art. 286 of
the Constitution and the provisions of the Central Sales Tax Act, 1966 while
making assessment under the Sales Tax laws passed by the legislatures of the
States.
Notices
were issued to the Attorney General for India and the Advocates General for the concerned States, some of which
contested the Issues.
The
main contention of the States on the second point was that sub-clause (b) of
Article 326(29 A) bestowed on them a power to levy tax on works contract
independent of Entry 54 of List IL Disposing of the Writ Petitions and
directing that the appeals be now placed before the Bench hearing Tax matters,
this Court,
HELD.
There has been in the instant case due compliance of the provisions contained
in the proviso to Art. 368(2) of the Constitution. [344E] Sales tax laws passed
by the legislatures of States levying taxes on the transfer of property in
goods-whether as goods or in some other form-involved in the execution of a
works contract are subject to the restrictions and condi- tions mentioned in
each clause of sub-clauses of Art. 286 of the Constitution. [355B] 322 All
transfers, deliveries and supplies of goods referred to in clauses (a) to (f)
of clause (29-A) of Art. 366 of the Constitution are subject to the
restrictions and conditions mentioned in clause (1), clause (2) and sub-clause
(a) of clause (3) of Art. 286 of the Constitution and the transfers and
deliveries that take place under sub-clauses (h), (c) and (d) of clause (29-A)
of Art. 366 of the Constitution are subject to an additional restriction
mentioned in sub-clause (b) of Art. 286 (3) of the Constitution. [349C] The
power to levy sales-tax was conferred on the legis- latures of States by the
Constitution by Entry 54 of List II of the Seventh Schedule to the Constitution
of India. [329B] State of Bombay and Another
v. The United Motors (India) Ltd. and Others, [1953] S.C.R.
1069 and Bengal Immunity Company Limited v. The State of Bihar & Others, [1955] 2 S.C.R. 503, referred to.
Ordinarily
unless there is a contract to the contrary in the case of a works contract, the
property in the goods used in the construction of a building passes to the
owner as the materials used are incorporated in the buildings. The con- tractor
becomes liable to pay the sales tax ordinarily when the goods or materials are
so used in the construction of the building and it is not necessary to wait
till final bill is prepared for the entire work. [3S2C] Hudson's Building Contracts (8th Edition)
at page 362 and Benjamin's Sale of Goods (3rd Edition) in para 43 at page 36.
The
constitutional-Amendment in Art. 366 (29-A) read with the relevant taxation
entries has enabled the States to exert its taxing power in an important area
of social and economic life of the community. In exercising this power
particularly in relation to transfer of property in goods involved in the
execution of "works-contracts" in building activity, in so far as it
affects the housing projects of the under-privileged and weaker sections of
society, the State might perhaps, be pushing its taxation power to the
peripheries of the social limits of that power and perhaps even of the
constitutional limits of that power, in dealing with unequals. In such class of
cases 'building Activity' really relates to a basic subsistential necessity. It
would he wise and appropriate for the State to consider whether the requisite
and appropriate classifications should not he made of such building-activity attendant
with such social purposes for appropriate separate treatment. [355E-G] 323
Whatever might be the situational differences of indi- vidual cases, the
constitutional limitations on the taxing power of the State as are applicable
to "works-contracts" represented by "building-contracts" in
the context of the expanded concept of "tax on the sale or purchase of
goods" as constitutionally defined under Art. 366 (29-A) would equally
apply to other species of "works-contracts" with the requisite
situational modifications. [355C-D] At the commencement of the Act it should
have been stated that the bill in question had been presented to the President
for his assent after it had been fury ratified by the required number of
legislatures of the States. This suggestion should be followed by the Central
Secretariat hereafter since it was found that even the Attorney General was not
quite aware till the case was taken up for hearing that the bill which had
become the 46th Amendment had been duly ratified by the required number of
States. [344F] Gannon Dunkerley and Co. (Madras) Ltd. v. State of Madras, A.I.R.
1954 Mad. 1130; Gannon Dunkereley & Co. Madras (Pvt.) Ltd. v. Sales Tax Officer, Matrancher,
A.I.R. 1957 Kerala 146; Mohamed Khasim v. State of Mysore, [1955] VI Sales Tax
Cases 211; Pandit Banarsi Das v. State of Madhya Pradesh and Ors., [1955] VI
Sales Tax Cases 93; Jubilee Engineering Co. Ltd. v. Sales Tax Officer,
Hyderabad City & Ors., A.I.R. 1956 HYD. 79; Bhuramal and Ors. v. State of Rajasthan, A.I.R. 1957 Rajasthan 104; State
of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., [1955] S.C.R. 379;
M/s.
New India Sugar Mills Ltd. v. Commissioner Of Sales Tax, Bihar, [1963] Supp. 2
SCR 459; Oil and Natural Gas Commission v. State of Bihar & Ors., [1977] 1
SCR 354; Vishnu Agencies (Pvt.) Ltd. etc. v. Commercial Tax Officer & Ors.
etc., [1978] 2 SCR 433; Northern India Caterers (India) Ltd. v. Lt. Governor of
Delhi, [1979] 1 SCR 557; Sydney Hydraulic and Central Engineering Co. v.
Blackwood & Son, 8 N SWR 10 and M.R. Bornbrook (Pvt.) Ltd. v. Federal Commis-
sioner of Taxation, [1939] 62 C.L.R. 272.
ORIGINAL
JURISDICTION: Writ Petition (Civil) No. 1060 of 1987 etc. etc.
(Under
Article 32 of the Constitution of India) K. Parasaran, Attorney General, G. Ramaswamy,
Additional Solicitor General, N.A. Palkhiwala, Kapil Sibal, A.K. Gan- guli,
A.K. Sen. Shanti Bhushan, Raja Ram Aggarwal, Dr. Shankar Ghosh, 324 Tapas Ray, Devi
Pal, B. Sen. G.A. Shah, Ashwani Kumar, Yogeshwar Prasad, P.A. Choudhary, Dr.
L.M. Singhvi, S.K. Dholakia, R.N. Sachthey, A.B. Misra, P.S. Poti, R.N. Nara- simha
Murty, N.N. Gooptu, Advocate Generals, R.P. Gupta, S. Krishan, J.B. Dadachanji,
D.N. Mishra, Mrs. A.K. Verma, Vijay Hansaria, Sunil K. Jain, A.T.M. Sampath,
P.N. Ramalin- gam, C. Natarajan, N. Inbrajan, M.S. Singh, K.K. Gupta, N.B. Sinha,
Sanjeev B. Sinha, Yogendra B. Sinha, Ms. Madhu Kha- tri, Ms. Bina Gupta, K.N. Rai,
Ms. Panaki Misra, Harish Salve, Ajay K. Jain, Pramod Dayal, K.M. Vyayar, Badar Durraj
Ahmed, Parijat Sinha, J.R. Das, P.R. Seetha. raman, Ranjit Kumar, A. Sharan,
J.D. Jain, C.S. Vaidyanathan, B.R. Setia, N.N. Keswani, R.N. Keswani, Pramod Dayal,
Dilip Tandon, R.B. Mehrotra, M.C. Dhingra, M. Qamaruddin, Ashok Kumar Gupta,
M.M. Kashyap, S.B. Upadhya, R.N. Karanjawala, Mrs. Manik Karanjawala, G.S. Vasisht,
S.K. Gambhir, Amlan Ghosh, A.K. Singla, K.K. Khurana, L.K. Pandey, Mahabir
Singh, E.C. Agarwala, Ms. Pumima Bhatt, Vineet Kumar, K.J. John, Ms. Naina Kapur,
Ms. Hemantika Wahi, Sarva Mittar, P.K. Jain, Ms. A. Subhashini, B.V. Decra,
M.N. Shroff, R. Mohan, R.A. Perumal, R.N. Patil, S.K. Agnihotri, Ashok K. Srivastava,
Manoj Swarup, Pramod Swarup, T.V.S.N. Chaff, S.K. Dhingra, A.M. Khanwilkar,
A.S. Bhasme, Anip Sachthey, P.N. Misra, Ajay K. Jha, K.R. Nambiar, P.R. Ramasesh,
H.K. Puff, P.R. Mondal, M.P. Jha, Sushil Kumar Jain, S.R. Grover, M.P. Sharma,
S.K. Nandy, D. Goburdhan, A. Subba Rao, K. Swami, U.S. Prasad, M. Veerappa,
R.K. Mehta, and Naresh K. Sharma for the appearing parties.
The
Judgment of the Court was delivered by VENKATARAMIAH, J. In this batch of Writ
Petitions and Civil Appeals two questions arise for consideration. The first
question relates to the constitutional validity of the Constitution
(Forty-sixth Amendment) Act, 1982 (hereinafter referred to as 'the 46th Amendment')
by which the Legisla- tures of the States were empowered to levy sales tax on
certain transactions described in sub-clauses (a) to (f) of clause (29-A) of
Article 366 of the Constitution and the second question is whether the power of
the State Legisla- ture to levy tax on the transfer of property in goods in- volved
in the execution of works contracts referred to in sub-clause (b) of clause
(29-A) of Article 366 of the Con- stitution is subject to the restrictions and
conditions contained in Article 286 of the Constitution.
An
account of the history of the relevant constitutional and 325 statutory
provisions and of judicial decisions having a beating on the said provisions
has to be set out at this stage to appreciate the contentions of the parties.
Prior to the commencement of the Constitution of India the power to levy sales
tax had been conferred on the Provincial Legisla- tures by Entry 48 of the List
II of the Seventh Schedule to the Government of India Act, 1935which read as
"Taxes on the sale of goods and on advertisements". In exercise of
the said power some of the Provincial Legislatures had passed laws levying
sales tax on the sale or purchase of certain commodities. There was no specific
restriction or condition on the exercise of the said power under the Government
of India Act, 1935. The Provincial Legislatures exercised the power to levy
sales tax acting on the principles of the territorial nexus, that is to say,
they picked out one or more of the ingredients constituting a sale and made them
the basis of the levy of sales tax under the legislation.
Assam and Bengal made among other things the actual exist- ence of the goods
in the province at the time of the con- tract of sale the test of taxability.
In Bihar the produc- tion or manufacture of
the goods in the Province was made an additional ground. A net of the widest
range perhaps was laid in Central Provinces and Berar where it was sufficient if the
goods were actually found in the Province at any time after the contract of
sale or purchase in respect thereof was made. Whether the territorial nexus put
forward as the basis of the taxing power in each case would be sustained as
sufficient was a matter of doubt not having been tested in a court of law. Such
claims to taxing power led to multiple taxation of the same transaction by
different Provinces and cumulation of the burden falling ultimately on the
consuming public. By the time the Constituent Assembly took up for
consideration the provisions relating to the power of the State Legislatures to
levy sales tax the difficulties creat- ed by the sales tax laws passed by the
various Provinces and their effect on inter-State trade and commerce had come
to be felt throughout the country. In order to minimise the adverse effects of
the sales tax laws passed by the Legisla- tures of States the Constituent
Assembly enacted Articles 236, 301 and 304 of the Constitution. Introducing an
amend- ment to Article 264-A to the draft Constitution, which ultimately became
Article 286 of the Constitution of India, Dr. Ambedkar observed on the floor of
the Constituent Assem- bly thus:
"Sir,
as everyone knows, the sales tax has created a great deal of difficulty
throughout India in the matter of freedom of trade and commerce. It has been
found that the very many sales taxes which are levied by the various Provincial
Governments either cut into goods which are the 326 subject matter of imports
or exports, or cut into what is called inter-State trade or commerce. It is
agreed that this kind of chaos ought not to be allowed and that while the
provinces may be free to levy the sales tax there ought to be some regulations
whereby the sales tax levied by the provinces would be confined within the
legitimate limits which are intended to be covered by the sales tax.
It is,
therefore, felt that there ought to be some specific provisions laying down
certain limitations on the power of the provinces to levy sales tax.
The
first thing that I would like to point out to the House is that there are
certain provisions in this article' 264A which are merely reproductions of the
different parts of the Constitution. For instance, in sub-clause (1) of article
264A as proposed by me, sub-clause (b) is merely a reproduction of the article
contained in the Constitution, the entry in the Legislative List that taxation
of imports and exports shall be the exclusive province of the Central
Government. Conse- quently so far as sub-clause (1)(b) is con- cerned there
cannot be any dispute that this is in any sense an invasion of the right of
provinces to levy sales tax.
Similarly,
sub-clause (2) is merely a reproduction of Part XA which we recently passed
dealing with provisions regarding inter-State trade and commerce. Therefore so
far as sub-clause (2) is concerned there is really nothing new in it. It merely
says that if any sales tax is imposed it shall not be in conflict with the
provisions of Part XA.
With
regard to sub-clause (3) it has also been agreed that there are certain com- modities
which are so essential for the life of the community throughout India that they
should not be subject to sales tax by the province in which they are to be
found. There- fore it was felt that if there was any such article which was
essential for the life of the community throughout India, then it is necessary
that, before the province concerned levies any tax upon such a commodity, the
law made by the province should have the assent of the President, so that it
would be possible for the President and the Central Government to see that no
hardship is created by the particular levy proposed by a particular province.
327
The proviso to sub-clause (2) is also important and the attention of the House
might be drawn to it. It is quite true that some of the sales taxes which have
been levied by the provinces do not quite conform to the provi- sions contained
in article 264-A. They proba- bly go beyond the provisions. It is therefore
felt that when the rule of law as embodied in the Constitution comes into force
all laws which are inconsistent with the provisions of the Constitution shall
stand abrogated. On the date of the inauguration of the Constitution this might
create a certain amount of finan- cial difficulty or embarrassment to the dif- ferent
provinces which have got such taxes and on the proceeds of which their finances
to a large extent are based. It is therefore pro- posed as an explanation to
the general provi- sions of the Constitution that notw ithstanding the
inconsistency of any sales tax imposed by any province with the provisions of
article 264A, such a law will continue in operation until the 31st day of March
1951, that is to say, we practically propose to give the provinces a few months
more to make such adjustments as they can .and must in order to bring their law
into conformity with the provisions of this article." Article 286 of the
Constitution, as it was originally enacted, read as follows:
"286.
Restrictions as to imposition of tax on the sale or purchase of goods--(1) No
law of a State shall impose, or authorise the imposi- tion of, a tax on the
sale or purchase of goods where such sale or purchase takes place-- (a) outside
the State; or (b) in the course of the import of the goods into, or export of
the goods out of, the territory of India.
Explanation--For
the purposes of sub-clause (a), a sale or purchase shall be deemed to have
taken place in the State in which the goods have actually been delivered as a
direct result of such sale or purchase for the purpose of consumption in that
State, notwithstanding the fact that under the gener- al law relating to sale
of goods the property in the goods has by reason of such sale or purchase
passed in another State.
328
(2) Except in so far as Parliament may by law otherwise provide, no law of a
State shall impose, or authorise the imposi- tion of, a tax on the sale or
purchase of any goods where such sale or purchase takes place in the course of
inter-State trade or com- merce.
Provided
that the President may by order direct that any tax on the sale or purchase of
goods which was being lawfully levied by the Government of any State immedi- ately
before the commencement of this Consti- tution shall, notwithstanding that the imposi-
tion of such tax is contrary to the provisions of this clause, continue to be
levied until the thirty-first day of March, 1951.
(3) No
law made by the Legislature of a State imposing, or authorising the impo- sition
of, a tax on the sale or purchase of any such goods as have been declared by
Par- liament by law to be essential for the life of the community shall have
effect unless it has been reserved for the consideration of the President and
has received his assent." Articles 301 and 304 of the Constitution which
were incorporated in Part XIII of the Constitution read thus:
"301.
Freedom of trade, commerce and intercourse-Subject to the other provisions of
this Part, trade, commerce and intercourse throughout the territory of India
shall be free" "304. Restrictions on trade, commerce and intercourse
among States--Notwithstanding anything in article 30 1 or article 303, the
Legislature of a State may by law-- (a) impose on goods imported from other
States any tax to which similar goods manufactured or produced in that State
are subject, so, however, as not to discriminate between goods so imported and
goods so manu- factured or produced; and (b) impose such reasonable restric- tions
on the freedom of trade, commerce or intercourse with or without that State as
may be required in the public interest:
329 Provided
that no Bill or amendment for the purpose of clause (b) shall be introduced or
moved in the Legislature of a State without the previous sanction of the
president." The Power to levy sales tax was conferred on the Legislatures
of States by the Constitu- tion by Entry 54 of List II of the Seventh Schedule
to the Constitution of India which, as originally enacted, read thus:
"54.
Taxes on the sale or purchase of goods other than newspaper." The power to
levy tax on purchase of goods was expressely stated in Entry 54 even though it
was implicit in the ex- pression "taxes on the sale" which was found
in Entry 40 of List II of the Seventh Schedule to the Government of India Act,
1935. In exercise of the power conferred on it by Entry 54 of the State List
the Legislature of Bombay passed an Act called the Bombay Sales Tax Act, 1952
which imposed a gener- al tax on every dealer whose turnover in respect of
sales within the State of Bombay during the prescribed period exceeded Rs.30,000
and a special tax on every dealer whose turnover in respect of sales of special
goods made within the State of Bombay exceeded Rs.5,000 during the prescribed
period. The term 'sale' was defined as meaning any transfer of property in
goods for cash or deferred payment or other veluable consideration, and an
Explanation to this defini- tion provided that the sale of any goods which have
actually been delivered in the State of Bombay as a direct result of such sale
for the purpose of consumption in the said State shall be deemed, for the
purposes of the Act, to have taken place in the said State irrespective of the
fact that the property in the goods has, by reason of such sale, passed in
another State. Rules 5 and 6 of the Bombay Sales Tax Rules, 1952, which were
brought into force on the same day on which sections 5 and 10 of the Bombay
Sales Tax Act came into force provided for the deduction of the following sales
in calculating the taxable turnover, viz., sales which took place (a) in the
course of the import of the goods into, or the export of the goods out of, the
territory of India, and (b) in the course of inter-State trade or commerce
(being the two kinds of sales referred to clauses (1)(b) and (2) respectively
of Article 286 of the Constitution). Rule 5(2)(i), however, required, as a
condition of the aforesaid deductions, that the goods should be consigned by a
railway, shipping or aircraft company or country boat registered for carrying
cargo or public motor transport service or by registered post. In an
application made under Article 226 of the Constitution challenging the validity
of the said Act 330 and praying inter alia for a writ against the State of
Bombay and the Collector of Sales Tax, Bombay, restraining them from enforcing
the provisions of that Act, the High Court of Bombay held that the definition
of 'sale' in that Act was so wide as to include the three categories of sale
exempted by Article 286 of the constitution from the imposi- tion of tax by the
States and thus not valid. On appeal to this Court the decision of the High
Court of Bombay was reversed by the majority in the State of Bombay and Another
v. The United Motors (India) Ltd. and Others, [1953] S.C.R.
1069. Soon doubts came to be entertained about the correctness of the above
decision and this Court got the opportunity to reconsider the correctness of
the decision in the United Motors case (Supra) in the Bengal Immunity Company
Limited v. The State of Bihar and Others, [1955]2 S.C.R. 503.
In the
case of the Bengal Immunity Company Ltd. (supra) the majority held that the
operative provisions of the several parts of Article 286 of the Constitution,
namely, clause 1(a), clause 1(b) and clauses 2 and 3 were intended to deal with
different topics and one could not have pro- jected or read into another. The
bans imposed by Article 286 of the Constitution on the taxing powers of the
States were independent and separate and each one of them had to be got over
before a State Legislature could impose tax on transac- tions of sale or
purchase of goods. The Explanation to Article 286(1)(a) determined by the legal
fiction created therein the situs of the sale in the case of transactions
coming within that category and once it was determined by the application of
the Explanation that a transaction was outside the State, it followed as a
matter of course that the State, with reference to which the transaction could
thus be predicated to be outside it, could never tax the transaction. After the
judgment in the Bengal Immunity Company Ltd. 's (supra) case on the
recommendations of the Taxation Enquiry Commission as regards the amendment of
the constitutional provisions relating to sales tax, Parliament passed the
Constitution (Sixth Amendment) Act, 1955 which received the assent of the
President on 11th September, 1956. By the said amendment the Constitution was
amended in the following way. In List I of the Seventh Schedule to the
Constitution Entry 92A was added. It reads as follows:
"92A.
Taxes on the sale or purchase of goods other than newspapers, where such sale
or purchase takes place in the course of Inter- State trade or commerce."
In List II existing Entry 54 was substi- tuted by the following entry:
331
"54. Taxes on the sale or purchase of goods other than newspapers subject
to the provi- sions of entry 92A of List Article 269 of the Constitution which
enumerated the taxes that were to be levied and collected by the Government of
India but were to be assigned to the States was amended by adding sub-clause
(g)' to clause (1) and clause (3.) to it. After such amendment Arti- cle 269
read thus:
"269.
(1) The following duties and taxes shall be levied and collected by the
Government of India but shall be assigned to the States in the manner provided
in clause (2), namely:
(a) duties
in respect of succession to property other than agricultural land;
(b) estate
duty in respect of proper- ty other than agricultural land;
(c) terminal
taxes on goods or pas- sengers carried by railway, sea or air;
(d) taxes
on railway fares and freights;
(e) taxes
other than stamp duties on transactions in stock-exchanges and futures markets;
(f) taxes
on the sale or purchase of newspapers and on advertisements published therein;
(g) taxes
on the sale or purchase of goods other than newspapers, where such sale or
purchases takes place in the course of inter-State trade or commerce.
(2)
The net proceeds in any financial year of any such duty or tax, except in so
far as those proceeds represent proceeds attributable to States specified in
Part C of the First Schedule, shall not form part of the Consolidated Fund of
India, but shall be assigned to the States within which that duty or tax is leviable
in that year, and shall be 332 distributed among those States in accordance
with such principles of distribution as may be formulated by Parliament by law.
(3)
Parliament may by law formulate principles for determining when a sale or
purchase of goods takes place in the course of Inter-State trade or
commerce-" By the above amendment Parliament was empowered to levy tax . on
the sale or purchase of goods other than newspapers where such sale or purchase
took place in the course of Inter- State trade or commerce and was also
empowered to formulate by law principles for determining when a sale or
purchase of goods took place in the course of Inter-State trade or commerce.
By the
very same Sixth Amendment Article 286 of the Constitution was amended. The
Explanation to clause (1) was omitted by that Amendment. Clauses (2) and (3) of
Article 286 were substituted by two new clauses. After such amendment Article
286 of the Constitution read thus:
"286.
Restrictions as to imposition of tax on the sale or purchase of goods--(1) No
law of a State shall impose, or authorise the imposition of, a tax on the sale
or purchase of goods where such sale or purchase takes place-- (a) outside the
State; or (b) in the course of the import of the goods into, or export of the
goods out of, the territory of India.
(2)
Parliament may by law formulate principles for determining when a sale or
purchase of goods takes place in any of the ways mentioned in clause (1).
(3)
Any law of a State shall, in so far as it imposes, or authorises the imposi- tion
of, a tax on the sale or purchase of goods declared by Parliament by law to be
of special importance in Inter-State trade or commerce, be subject to such
restrictions and conditions in regard to the system of levy, rates and other
incidents of the tax as Par- liament may by law specify." 333 Pursuant to
the power conferred on it Parliament enacted the Central Sales Tax Act 1956
which received the assent of the President on 21st December, 1956. The said Act was passed to formulate principles for
determining when a sale or purchase of goods took place in the course of
Inter-State trade or commerce of outside a State or in the course 'of import
into or 'export from India, to provide for the levy, collection and
distribution of taxes on sales of goods in the course of Inter-State trade or
commerce and to declare certain goods to be of special importance in
Inter-State trade or commerce and specify the restrictions and condi- tions to
which State laws imposing taxes on the sale. or purchase of such goods of
special importance shall be sub- ject. Section 6 of the Central Sales Tax Act
explained when a sale or purchase of goods in the course of Inter-State trade
or commerce took place. Section 4 of the said Act explained when a sale or
purchase of goods took place out- side a State and Section 6 explained when a
sale or purchase of goods took place in the course of import or export for
purposes of that Act. Section 14 of the Central Sales Tax Act enumerated the
goods which were considered to be of special importance in Inter-State trade or
commerce and section 15 of that Act set out restrictions and conditions in
regard to tax on sale or purchase of declared goods within a State. Section 15
of the Central Sales Tax Act as it is in force today reads thus:
"15.
Restrictions and conditions in regard to tax on sale or purchase of declared
goods within a State. Every sales tax law of State shall, in so far as it
imposes or authorises the imposition of a tax on the sale or pur- chase of
declared goods, be subject to the following restrictions and conditions,
namely:
(a)
the tax payable under that law in respect of any sale or purchase of such goods
inside the State shall not exceed four per cent of the sale or purchase price
thereof, and such tax shall not be levied at more than one stage;
(b)
where a tax has been levied under that law in respect of the sale or purchase
inside the State of any declared goods and such goods are sold in the course of
Inter- State trade or commerce, and tax has been paid under this Act in respect
of the sale of such goods in the course of Inter-State trade or commerce, the
tax levied under such law shall be 334 reimbursed to the person making such
sale in the course of Inter-State trade or commerce, in such manner and subject
to such conditions as may be provided in any law in force in that State;
(c)
where a tax has been levied under that law in respect of the sale or purchase
inside the State of any paddy referred to in sub-clause (i) of clause (i) of
section 14, the tax leviable on rice procured out of such paddy shall be
reduced by the amount of tax levied on such paddy;
(d)
each of the pulses referred to in clause (vi-a) of section 14, whether whole or
separated, and whether with or without husk, shall be treated as a single
commodity for the purposes of levy of tax under that law." By the time the
Constitution (Sixth Amendment) Act and the Central Sales Tax Act, 1956 came
into force controversy had arisen before some of the High Courts about the liabili-
ty of contractors who had undertaken to carry out works contracts to pay sales
tax on the transfer of property in the goods involved in works contracts.
In
Gannon Dunkerley and Co. (Madras) Ltd. v. State of Madras, A.I.R. 1954 Mad.
1130 the assessees were carrying on business as engineers and contractors. Their
business con- sisted mainly of execution of contracts for constructions of
buildings, bridges, dams, roads and structural contracts of all kinds. During
the assessment year the return made by the assessees showed as many as 47
contracts, most of which were building contracts, which were executed by the assessees.
From
the total of the amount which the assessees received in respect of sanitary
contracts and other contracts 20% and 30% respectively were deducted for labour
and the balance was taken as the turnover of the assessees for the assess- ment
year in question. Sales tax was levied on the said balance treating it as
taxable turnover under the Madras General Sales Tax Act, 1939. The assessees
questioned the levy of sales tax on the said amount treated as taxable turnover
on the ground that there was no sale of goods as understood in India and,
therefore, no sales tax could be levied on any portion of the amount which was
received by the assessees from the persons for whose benefit they had
constructed buildings. It was urged on behalf of the asses- sees that there was
no element or' sale of the materials in a building contract and 335 that such a
contract was one entire and indivisible. Unless the contract was completed, the
builder was not entitled to the price fixed under the contract or ascertainable
under the terms of the contract. The property in the materials passed to the
owner of the land not by virtue of the delivery of the materials as goods under
and in pursuance of an.
agreement
of sale which stipulated a price for the materi- als. The property in the
materials passed to the owner of the land because they were fixed in pursuance
of the con- tract to build and along with the corpus, which ultimately resulted
by the erection of the superstructure, the materials also passed to the owner
of the land. It was urged that a contract to build was not a contract to sell
goods used in the construction of a building. The High Court of Madras on a
consideration of the submissions made before it came to the conclusion that the
transactions in question were not contracts for sale of goods as defined under
the provisions of the Sale of Goods Act, 1930 which was in force on the date on
which the Constitution came into force and therefore the assessees were not
liable to pay sales tax on the amounts received by them from the persons for
whom they had constructed buildings etc. during the year of assessment.
But a
petition filed by the very same assessees for similar relief in the Gannon Dunkerley
& Co. Madras (Private) Ltd. v. Sales Tax Officer, Mattancheri, A.I.R. 1957 Kerala
146 was dismissed by the Kerala High Court affirming the imposi- tion of sales
tax on the turnover relating to construction works and upholding the rules
providing for apportionment of the determination of the taxable turnover on a
percentage basis. In Mohamed Khasim v. State of Mysore, [1955] VI Sales Tax
Cases 211, the Mysore High Court held that the provisions of the Mysore Sales
Tax Act imposing sales tax on construction of buildings under works contract
were valid and further upheld the determina- tion of the taxable turnover on
percentage basis. The compe- tence of the State Legislature to levy sales tax
on the supply of building materials for execution of building contracts came up
for consideration before the Nagput High Court in Pandit Banarsi Das v. State
of. Madhya Pradesh and Ors., [1955] VI Sales Tax Cases 93. The assessees in the
said case were Madhya Pradesh Contractors' Association and the Jabalpur
Contractors' Association. They instituted a petition before the Nagpur High
Court through their Presi- dent and Secretary questioning the power of the
State Legis- lature to levy sales tax on the turnover consisting of the amounts
received by the building contractors from the per- sons for whom they had
constructed buildings by supplying the required materials. They relied upon the
decision of the High Court of Madras in Gannon Dunkerley's case (supra). The Nagput
High Court while I declining to follow the decision of the High Court of Madras
was 336 of opinion that the State Legislature could pick out a sale from the
composite transaction of a building contract which included transfer of
property in materials and could make the portion attributable to the cost of
such materials subject to payment of sales tax in exercise of its undoubted and
plenary powers. Jubilee Engineering Co. Ltd. v. Sales Tax Officer, Hyderabad
City and Ors., A.I.R. 1956 Hyd. 79 was a case decided by the High Court of
Hyderabad. In that case that High Court held that in a works contract where a
person undertook to build a .particular building or to make a particular thing,
the materials involved in the building or making of the finished product, could
not be the subject matter of sale because there was no agreement to sell the
materials nor was price of the goods fixed. It was also found that in such
cases there was no passing of the title in those goods as such except as part
of the building or the thing in which they were embedded. It accordingly held
that the amount received by a building contractor from the person for whom he
had constructed the building could not be taxed under the sales tax law of the
State of Hyderabad. A similar question arose before the High Court of Rajasthan
in Bhurar- nal and Ors. v. State of Rajasthan, A.I.R. 1957 Rajasthan 104. The High Court of Rajasthan held that the
definition of "dealer" in the Rajasthan Sales Tax Act,, 1954 included
not only those who sold goods, but also those who supplied goods, whether on
commission, or for remuneration or other- wise and the said definition was very
wide and included persons like the building contractors who in the course of
their business as building contractors supplied goods to those who gave them
contracts. Since the said supply was not gratis such building contractors
should be held to be dealers within the meaning of that expression in the
Rajasthan Sales Tax Act.
Ultimately
the question whether the cost of the goods supplied by a building contractor in
the course of the construction of building could be subjected to payment of
sales tax was finally resolved by this Court in State of Madras v. Gannon Dunkerley
& Co. (Madras) Ltd., [1955] S.C.R. 379 which was an appeal filed against
the decision of the High Court of Madras in Gannon Dunkerley & Co. (Madras)
Ltd. v. The State of Madras, (supra). In this case this Court held that on a
true interpretation the expression "sale of goods" meant an agreement
between the parties for the sale of the very goods in which eventually property
passed. In a building contract where the agreement between the parties was that
the contractor should construct the building according to the specifications
contained in the agreement and in consideration therefor received payment as
provided therein, there was neither a contract to sell the materials used in
the construction nor the 337 property passed therein as movables. This Court
further held that the expression "sale of goods" was at the time when
the Government of India Act, 1935 was enacted, a term of well- recognised legal
import in the general law relating to sale of goods and in the legislative
practice relating to that topic and should be interpreted in Entry 48 in List
II in Schedule VII of the Government of India Act, 1935 as having the same
meaning as in the Sale of Goods Act, 1930. This Court further held that in a
building contract which was one, entire and indivisible, there was no sale of
goods and it was not within the competence of the Provincial Legisla- ture
under Entry 48 in List II in Schedule VII of the Gov- ernment of India Act,
1935, to impose a tax on the supply of the materials used in such a contract
treating it as a sale.
The
above decision though it was rendered on the basis of the provisions in the
Government of India Act, 1935 is equally applicable to the provisions found in
Entry 54 of List II of Schedule VII of the Constitution. In the above decision,
the decision of the Nagpur High Court, the Rajas- than High Court, the Mysore
High Court and the Kerala High Court referred to above were overruled and the
decision of the Hyderabad High Court and the decision of the Madras High Court
against which the above appeal had been filed were affirmed. By virtue of the
above decision of this Court no sales tax could be levied on the amounts
received under a works contract by a building contractor even though he had
supplied goods for the construction of the buildings.
In
addition to the building contracts referred to above, certain other kinds of
transactions were also held to be not sales liable to payment of sales tax by
this Court even though they involved transfer of property in goods. In M/s. New
India Sugar Mills Ltd. v. Commissioner of Sales Tax, Bihar, [1963] Supp. 2
S.C.R. 459 this Court took the view that in the transfer of controlled
commodities in pursuance of a direction under a control order, the element of
volition by the seller, or mutual assent, was absent and there- fore there was
no sale as defined in the Sale of Goods Act, 1930. However, in Oil and Natural
Gas Commission v. State of Bihar and Ors., [1977] 1 S.C.R. 354 this Court had
occasion to consider its earlier decisions with regard to the liability of
transfers of controlled commodities to be charged to sales tax. This Court held
that where there were any statutory compulsions, the statute should be treated
as supplying the consensus and furnishing the modality of the consensus.
In
Vishnu Agencies (Pvt.) Ltd. etc. v. Commercial Tax Officer & Ors. etc.,
[1978] 2 S.C.R. 433 the decision in M/s. New India Sugar Mills's (supra) case
was held to be not good law. Even after the decision in Vishnu Agencies's case
(supra) there was a certain area of doubt about the liability of transactions
not 338 consensual in nature in which property in goods passed to exigibility
to sales tax.
Devices
by way of leases of films had also been resulting in avoidance of sales tax.
The main fight in regard to a film related to its exploitation and after
exploitation for a certain period of time, in most cases, the film ceased to
have any value.
There
were also reports received by the State Governments to whom revenues from sales
tax had been assigned, as to the large scale avoidance of central sales tax leviable
on Inter-State sales of goods through the device of consignment of goods from
one State to another.
In
Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi, [1979] 1 S.C.R.
557 this Court held that there was no sale when food and drink were supplied to
guests residing in the hotel and that supply of meals was essentially in the
nature of a service provided to the guests and could not be identified as a
transaction of sale. This Court declined to accept the position that the
Revenue was entitled to split up the transaction into two parts, one of service
and the other of sale of foodstuffs and accordingly the proprietor of a
restaurant who provided many services in addition to the supply of food was not
liable to pay sales tax on the value of the goods supplied by him.
The
various problems which arose on account of the above decisions were referred to
the Law Commission of India and its advice was sought as to the manner in which
the types of transactions involved in the above decisions could be made exigible
to sales tax. The Law Commission considered these matters in its 61st Report and
recommended inter alia certain amendments to the Constitution, if as a matter
of administrative policy it was decided to levy sales tax on transactions of
the nature mentioned above. There were also complaints from the States that
there was a large scale leakage of sales tax revenue by the adoption of devices
such as hire purchase system. In the year 1982 Parliament passed the 46th
Amendment amending the Constitution in several respects in order to bring many
of the transactions, in which property in goods passed but were not considered
as sales for the purpose of levy of sales tax, within the scope of the power of
the States to levy sales tax.
By the
46th Amendment a new clause, namely clause (29A) was introduced in article 349
of the Constitution. Clause (30A) of Article 366 of the Constitution reads
thus:
339
"366, Definitions.--In this Constitution, unless the context otherwise
requires, the following expressions have the meaning hereby respectively
assigned to them, that is. to (29A) tax on the sale or purchase of goods
includes—
(a) a
tax on the transfer, otherwise than in pursuance of a contract, of property in
any goods for cash, deferred payment or other valuable consideration;
(b) a
tax on the transfer of property in goods (whether as goods or in some other
form) involved in the execution of a works contract;
(c) a
tax on the delivery of goods on hire- purchase or any system of payment by instalments;
(d) a tax
on the transfer of the right to use any goods. for any purpose (whether or not
for a specified period)for cash, deferred payment or other valuable
consideration;
(e) a
tax on the supply of goods by any union- corporated association or body of
persons to a member thereof for cash, deferred payment or other valuable
consideration;
(f) a
tax on the supply, by way of or as part. of any service or in any other manner
what so- ever, of goods, being food or any other article for human consumption
or any drink (whether or not intoxicating), where such supply or service, is
for cash, deferred payment or other valuable consideration, and such transfer,
delivery or supply of any goods shall be deemed to be a sale of those goods by
the person making the transfer, delivery or supply and a purchase of those
goods by the person to whom such transfer, delivery or supply is made ;" A
new entry was inserted in List I of the Seventh Schedule to the Constitution as
Entry 92-F to enable the levy of tax on the consign- ment of goods where such
consignment took place in the course of Inter State trade of commerce;
340
"92-F. Taxes on the consignment of goods (whether the consignment is to
the person making it or to any other person), where such consignment takes
place in the course of Inter-State trade or commerce." Clause (1) of
article 269 of mended by adding sub-clause (h) thereto. Clause (a) of that
article was amended to enable Parliament to formulate by law principles for
determining when a consignment of goods took place in the course of Inter-State
trade or commerce. After the amendment the relevant portion of article 269 of
the Constitution reads thus:
"269.
Taxes levied and collected by the Union but assigned to the States.--(1) The
following duties and taxes shall be levied and collected by the Government of
India but shall be as- signed to the States in the manner provided in clause
(2), namely .................................
(h) taxes
on the consignment of goods (whether the consignment is to the person making it
or to any other person), where such consignment takes place in the course of Inter State trade or commerce ......................
(3)
Parliament may by law formulate principles for determining when a sale or
purchase of, or consignment of, goods takes place in the course of Inter-State
trade or commerce." By the 46th amendment article 286 of the Constitution
also was amended by substituting clause (3) thereof by a new clause. After the
amendment clause (3) of article 286 reads thus:
"286.
Restrictions as to imposition of tax on the sale or purchase .of goods
......................
(3)
Any law of a State shall, in so far as it imposes, or authorises the imposition
of, (a) a tax on the sale or purchase of goods declared by Parliament by law to
be of special importance in inter-State trade or commerce; or 341 (b) a tax on
the sale or purchase of goods, being a tax of the nature referred in sub-
clause (b), sub-clause (c) or subclause (d) of clause (29-A) of article 366, be
subjected to such restrictions and condi- tions in regard to the system of
levy, rates and other incidents of the tax as Parliament may by law
specify." The 46th amendment also validated laws levying tax and also
collection by way of tax under such law subject to the conditions mentioned therein.
On the
passing of the 46th Amendment the State Govern- ments after making necessary
amendments in their laws com- menced to levy sales tax on the turnover of the
works con- tracts entered into by the building contractors for con- structing
houses, factories, bridges etc. In some States taxable turnover was determined
by deducting the money spent on labour engaged in connection with the execution
of the works contracts from the amount received by the contractor for the
execution of the works contracts. In some other States a certain fixed
percentage of the total turnover was deducted from the total turnover as labour
charges before arriving at the taxable turnover. Each State adopted its own
method of determining taxable turnover either by flaming rules under its sales
tax law or by issuing administrative directions. It is not necessary for
purposes of this judg- ment to refer in detail to the various patterns of law
in force in the States and the rules or administrative instruc- tions made or
issued thereunder. It is sufficient to say that the methods adopted by the
States for determining the taxable turnover relating to works contracts for
purposes of levy of sales tax were such that sales tax had to be paid by the
building contractors not merely on the value of materi- als supplied by them in
connection with the works contracts but also on the expenditure they had
incurred in securing the services of architects and engineers who had
supervised the execution of the works and also on the amount which they were
entitled to receive for supervising the execution of the works. While levying
sales tax on the price of the materials supplied for the construction of
houses, facto- ries, bridges etc. the sales tax authorities of the States did
not take into account the conditions and restrictions imposed by Article 286 of
the Constitution and the provi- sions of the Central Sales Tax Act, 1956. The
assessing authorities did not make any attempt to ascertain whether the sales
of the goods involved in a execution of works contract had taken place in favour
of the person who had assigned the contract outside the State in which the
works contract was being ex- 342 ecuted or whether any part of the goods so
used in a works contract had been imported from abroad on account of the person
who had assigned the contract or whether any part of the goods, such as, iron
and steel etc. which were declared goods, had already suffered sales tax at an
earlier point in the State and whether on such goods the tax which was being levied
exceeded the limit prescribed by section 15 of the Central Sales Tax Act, 1956.
They did not also take into consideration whether the sale of the goods in
question had been exempted under the sales tax laws of the State from payment
of sales-tax or whether it had already suffered payment of tax earlier where
the sales tax law of the State had prescribed that the sale of such goods could
be subject- ed to the levy of sales tax at a single point. Aggrieved by the
levy sales tax on the turnover relating to works con- tracts in the above
manner, the petitioners and the appel- lants have filed these petitions and
appeals.
The
petitioners and the appellants have pressed before us in these cases only two
points, namely, (i) that the 46th Amendment is unconstitutional because it has
not been rati- fied by the Legislatures of not less than one-half of the States
by resolutions passed to that effect by those Legis- latures before the Bill
which led to the amendment in ques- tion was presented to the President for assent;
and (ii) that it was not open to the States to ignore the provisions contained
in Article 286 of the Constitution and the provi- sions of the Central Sales
Tax Act, 1956 while making as- sessments under the sales tax laws passed by the
Legisla- tures of the States.
By an
order made by this Court on 20th of September, 1988 notices 'were issued to the
Attorney General for India and the Advocates-General for the
concerned States. The Attorney-General and some of the Advocates General
appeared before us in response to the notices issued to them and made their
submissions.
The
first contention raised before us regarding the constitutionality of the 46th
Amendment need not detain us long. This contention was based on the assumption
that the Legislatures of not less than one-half of the States which were in
existence during the relevant period had not rati- fied the Bill which
ultimately became the 46th Amendment before the President gave his assent. It
was argued that such ratification was necessary since the provisions con- tained
in the 46th Amendment had the effect of enlarging the scope of Entry 34 of List
II of the Seventh Schedule to the Constitution by empowering the 343
Legislatures of States to levy Sales-Tax on the turnover relating to the
transactions referred to in sub-clauses (a) to (f) of clause (29-A) of Article
366 of the Constitution which they could not have done before the 46th
Amendment. It was contended that irrespective of the fact whether the Amendment
of an entry in any of the Lists of the Seventh Schedule to the Constitution had
the effect of either cur- tailing or enlarging the powers of Parliament or the Legis-
latures of States, a Bill making revision for such Amendment had to be ratified
by Legislatures. of not less than one- half of the States by resolutions passed
to that effect before such a Bill was presented to the President for assent in
view of the express provisions contained in clause (c) of the proviso to
Article 368(2) of the Constitution.
At the
hearing of the above case the learned Attorney- General for India produced before us the Memorandum
dated the 31st January,
1982 signed by the
Secretary-General of the Rajya Sabha which reads thus:
"RAJYA
SABHA SECRETARIAT PARLIAMENT HOUSE, NEW DELHI.
No. RS.
1/21/81-B Dated the 31st January, 1982 MEMORANDUM In pursuance of article 368 of the
Constitution of India, the assent copy of the Constitution (Forty-sixth
Amendment) Bill, is presented to the President. This Bill has been passed by
the Houses of Parliament and has been also ratified by the Legislatures of not
less than one-half of the States in accordance with the provision of the
proviso to clause (2) of article 368 of the Constitution. Legis- latures of the
following States have passed resolutions ratifying the amendments:
1. Haryana
2. Himachal
Pradesh
3.
Karnataka
4.
Madhya Pradesh
5. Maharashtra 344
6.
Manipur
7. Meghalaya
8. Orissa
9. Punjab
10.
Rajasthan
11. Sikkim
12.
Tamil Nadu
A copy
each of the letters received from these Legislatures is placed below.
Sd/(SUDAR
SHAN AGARWAL) Secretary-General To The Secretary to the President, (Through the
Secretary, Ministry of Law)" The Attorney-General has also produced before
us the file containing the resolutions passed by the Legislatures of the 12
States referred to in the Memorandum, set out above. We are satisfied that
there has been due compliance of the provisions contained in the proviso to
Article 368(2) of the Constitution. We, therefore, reject the first conten- tion.
Before proceeding further, we should observe that there would have been no
occasion for an argument of this type being urged in Court if at the
commencement of the Act it had been stated that the Bill in question had been
pre- sented to the President for his assent after it had been duly ratified by
the required number of Legislatures of States. We hope that this suggestion
will be followed by the Central Secretariat hereafter since we found that even
the AttorneyGeneral was not quite sure till the case was taken up for heating
that the Bill which had become the 46th Amendment had been duly ratified by the
required number of States.
We
shall now proceed to consider the other contention of the petitioners and the
appellants, namely, that the States were bound to comply with the provisions of
Article 286 of the Constitution and the provisions of the Central Sales Tax
Act, 1956, even while levying sales tax on the turnover relating to the
transactions described in sub-clause (b) of clause (29-A) of Article 366 of the
Constitution. The grounds urged on behalf of the petitioners and the appel- lants
may be sum- 345 marised thus. The object of the 46th Amendment is to convert
what is not a sale into a sale. A transfer of property in goods involved in the
execution of a works contract which was held by this Court in the State of
Madras v. Gannon Dunkerley & Co., (Madras) Ltd. (supra) to be not a sale is
deemed by a fiction of law to be a sale and is made taxable as such. In no
other respect does the 46th Amendment enlarge the power of the States to levy
sales-tax. Articles 269, 286, 366 (29-A), Entry 92A in List I of the Seventh
Schedule and Entry 54 in List II of the Seventh Schedule to the Con- stitution
should be read together.Reading the above provi- sions together the position
which emerges may be summed up as follows: The 46th Amendment has no beating on
the loca- tion of the sale. It does not deem an outside sale to be an inside
sale. It does not confer on the States the power to tax sales outside the
State. Therefore, if in the process of executing a works contract, a transfer
of property in the goods takes place outside the State, the State would have no
power to levy sales-tax on such a transfer. The 46th Amend- ment does not deem
an Inter-State sale to be an inter State sale. It does not confer on the State
the power to tax inter-State sales. Therefore, if in the process of executing a
works contract a transfer of property in goods takes place in the course of
inter-State sale, the state would have no power to levy sales-tax on such a
transfer. The 46th Amend- ment does not confer on the State the power to levy
sales- tax on a sale in the course of import. Therefore, if in the process of
executing a works contract, a transfer of proper- ty in goods takes place in
the course of import, the State would have no power to levy sales-tax on such
transfer. The price of goods supplied by a person who has assigned the contract
for the purpose of executing a works contract cannot be treated as a part of
the taxable turnover.The restrictions and conditions contained in section 15 of
the Central Sales-tax Act, 1956, on the power of the States to levy tax on the
sale of declared goods apply equally and fully to transfer of property in goods
under works con- tracts, even as they apply to ordinary sales. Therefore, if
there is a transfer of property in declared goods--for example steel
products--in the process of execution of works contract, the State can levy tax
only at 4 per cent and only at one stage. It is clear that the entire works
contract is not deemed by the 46th Amendment to be a sale. Therefore only the
price reasonably allocable to goods transferred under works contracts can be
taxed, and not the totality of the consideration paid for the works contract.
If goods--for example fuel and power--are used in the process of executing a
works contract but are consumed in the process, the property in such goods
cannot conceivably be transferred, because the goods themselves cease to exist.
Such goods cannot be the subject-matter for the levy of sales tax 346 at all.
These in brief are the contentions of the petition- ers and the appellants.
The
above-mentioned contentions of the petitioners and the appellants are met by
the States thus. When a works contract is executed property does not pass as a
movable property unless there is an express agreement stating that the
properties in such movables will pass to the person who has assigned the
contract as and when the goods are used in the constructions of the building.
In the absence of any such agreement transfer of property in goods passes not
as movables as such but by accretion and in an unidentifiable and indivisible
manner. In all such cases it is not possible to disintegrate the contract into
a contract for sale of goods and a contract for work and labour only. When a
house or a factory or a bridge constructed by a building contrac- tor is handed
over to the person who had assigned the con- tract, what is handed-over is a
conglomerate of all the goods used in the construction of the building which
was different from the specific goods used in the construction.
Sub-clause
(b) of clause (29-A) of Article 366 of the Con- stitution has conferred on the
Legislatures of States the power to levy tax on works contract which is
independent of the power conferred on the Legislatures of States under Entry 54
of the State List. It is thus argued that it was not possible to break up the
house, factory or bridge etc.
which
is constructed by a building contractor into individu- al items of goods and to
tax the transfer of property in each of them in accordance with the provisions
contained in Article 286 of the Constitution and the General Sales Tax Act,
1956. It was further urged that in the case of a works contract there could not
be a sale of goods which had taken place outside the State in which the work
was executed, there could not be any sale of the goods in the course of import
into India, there could not be any sale or purchase of goods which had taken
place in the course of Inter-State trade or commerce and there could not be a
sale of any declared goods attracting section 15 of the Central Sales Act, 1956
since a house, a factory or a bridge was not one of those items specified as
declared goods under section 14 of the said Act. It was next contended that
since in no sales tax law in force in any part of India it was stated that the turnover
relating to a works contract was subject to payment of sales tax at one point
only. the question of considering whether the levy of sales tax relating to a
works contract could be held to be bad on account of the fact that certain
goods which had been used in the construc- tion had suffered tax earlier did
not arise. In other words it was urged that the goods involved in a works
contract were different from the works contract. It was, however, argued that
if any goods had been supplied 347 by the person for whose benefit a building,
factory or bridge was being constructed for the purpose of such construction
the value of those goods would not be included in the taxable turnover.
Before
proceeding further it is necessary to understand what sub-clause (b) of clause
29-A of Article 366 of the Constitution means. Article 366. is the definition
clause of the Constitution. It says that in the Constitution unless the context
otherwise requires, the expressions defined in that article have the meanings
respectively assigned to them in that article. The expression 'goods' is
defined in clause (12) of Article 366 of the Constitution as including all
materials, commodities and articles. It is true that in the State of Madras v.
Gannon Dunkerley & Co. (Madras) Ltd., (supra) this Court held that a works
contract was an indi- visible contract and the turnover of the goods used in
the execution of the works contract could not, therefore, become exigible to
sales-tax. It was in order to overcome the effect of the said decision
Parliament amended Article 366 by introducing sub-clause (b) of clause (29-A)'.
Sub-clause (b) of clause (29-A) states that 'tax on the sale or pur- chase of
goods' includes among other things a tax on the transfer of property in the
goods (whether as goods or in some other form) involved in the execution of a
works con- tract. It does not say that a tax on the sale or purchase of goods
included a tax on the amount paid for the execution of a works contract. It
refers to a tax on the transfer of property in goods (whether as goods or in
some other form) involved in the execution of a works contract. The emphasis is
on the transfer of property in goods (whether as goods or in some other form).
The latter part of clause (29-A) of Article 366 of the Constitution makes the
position very clear. While referring to the transfer, delivery or supply of any
goods that takes place as per subclauses (a) to (f) of clause (29-A), the
latter part of clause (29-A) Says that. 'such' transfer, .delivery or supply Of
any goods' shall be deemed to be a sale of those goods by the person making the
transfer, delivery or supply and a purchase of those goods by the person to
whom such transfer, delivery or supply is made. Hence, a transfer of property
in goods' under sub? clause. (b) of clause (29-A) is deemed to be a sale of the
goods involved in the execution of a works contract by the person making the
transfer and a purchase of those goods by the person to whom such transfer is
made. The object of the new definition introduced in clause (29-A) of Article 366
:of the Constitution is, therefore, to enlarge the scope of 'tax on sale or
purchase of goods' wherever it occurs in the Constitution so that it may
include within its scope the transfer, delivery or supply of goods that may
take place under any of the transactions referred to in sub-clause (a) to (f)
thereof wherever 348 such transfer, delivery or supply becomes subject to levy
of sales tax. So construed the expression 'tax on the sale or purchase of
goods' in Entry 54 of the State List, therefore, includes a tax on the transfer
of property in goods (whether as goods or in some other form) involved in the
execution of a works contract also. The tax leviable by virtue of sub- clause
(b) of clause (29-A) of Article 366 of the Constitu- tion thus becomes subject tO
the same discipline to which any levy under Entry 54 of the State List is made
subject to under the. COnstitution. The position is the same when we look at
Article 286 of the Constitution. Clause (1) of Article 286 says that no law of
a State shall impose, or authorise the imposition of, a tax on the sale or
purchase of goods where such sale or purchase takes place--(a) out- side the
State; or (b) in the course of the import of the goods into, or export of the
goods out of, the territory of India. Here again we have to read the expression
'a Tax on the sale or purchase of goods found in Article 286 as in- cluding the
transfer of goods' referred to in sub-clause (b) of clause (29-A) of Article
366 which is deemed to be a sale of goods and the tax leviable thereon would be
subject to the terms of clause (1) of Article 286. Similarly the re- strictions
mentioned in clause (2) of Article 286 of the Constitution which says that
Parliament may by law formulate principles for determining when a sale or
purchase of goods takes place in any of the ways mentioned in clause (1) of
Article 286 would also be attracted to a transfer of goods contemplated under Article
366(29A)(b). Similarly clause (3) of Article 286 is also applicable to a tax on
a transfer of property referred to in sub-clause (b) of clause (29-A) of
Article 366. Clause (3) of Article 286 consists of two parts. Sub-clause (a) of
clause (3) of Article 286 deals with a tax on the sale or purchase of goods
declared by Parliament by law to be of special importance in inter-State or
commerce, which is generally applicable to all sales including the transfer,
supply or delivery of goods which are deemed to be sales under clause (29-A) of
Article 366 of the Constitution. If any declared goods which are referred to in
section 14 of the Central Sales Tax Act, 1956 are involved in such transfer,
supply or delivery, which is referred to in clause (29-A) of Article 366, the
sales tax law of a State which provides for levy of sales tax thereon will have
to comply with the restrictions mentioned in section 15 of the Central Sales
Tax Act, 1956. Clause (b) is an additional provision which empowers Parliament
to impose any additional restrictions or conditions in regard to the levy of
sales tax on transactions which will be deemed to be sales under sub-clause (b)
or sub-clause (e) or sub-clause (d) of clause (29-A) of Article 366 of the
Constitution. We do not find much substance in the contention urged on behalf
of the States that since sub-clause (b) of clause (3) of Article 286.of the
Constitution refers 349 only to the transactions referred to in sub-clauses
(b), (c) and (d) of clause (29-A) of Article 386, the transactions referred to
under those three sub-clauses would not be subjected to any other restrictions
set out in clause (1) or clause (2) or sub-clause (a) of clause (3) of Article
286 of the Constitution. It may be that by virtue of sub-clause (b) of clause
(3) of Article 286 it is open to Parliament to impose some other restrictions
or conditions which are not generally applicable to all kinds of sales. That
however cannot take the other parts to Article 286 inapplicable to the
transactions which are deemed to be sales under Article 366(29A) of the
Constitution. We are of the view that all transfers deliveries and supplies of
goods referred to in clause (a) to (f) of clause (29-A) of Article 366 of the
Constitution are subject to the restrictions and conditions mentioned in clause
(1), clause (2) and sub-clause (a) of clause (3) of Article 366 of the
Constitution and the trans- fers and deliveries that take place under
sub-clauses (b), (c) and (d) of clause (29-A) of Article 366 of the Constitu- tion
are subject to an additional restriction mentioned in sub-clause (b) of Article
286(3) of the Constitution.
It is
useful to refer at this stage to the corresponding law in Australia. In Sydney Hydraulic and Central
Engineer- ing Co. v. Blackwood & Son, 8N SWR 10 the Supreme Court of South
Sales held that the works contract entered into be- tween the parties which
came up for consideration: in that case was one to do certain work and to
supply certain mate- rials and not an agreement for the sale or delivery of the
goods. Accordingly, no sales tax was payable thereon. In 1932 the Legislature
intervened and amended the statute of 1930 by introducing a new provision,
section 3(4) in the following. terms:
"For
the purpose of this Act, a person shall be deemed to have sold goods, if, in
the performance of any contract (not being a contract for the sale of goods)
under which he has received, or is entitled to receive, valuable consideration,
he supplies goods the property in which (whether as goods or in some other form)
passes, under the terms of the contract, to some other person." After the
above amendment there arose a case in Austra- lia regarding the liability of a
contractor to pay sales tax on the transfer of goods involved in a works contrat,
name- ly: M.R. Hornibrook (Pty.) Ltd. v. Federal Commissoner of Taxation.,
[1939] 62 C.L.R. 272. The relevant facts involved in that case were these. M.R.
Mornibrook 350 (Pty.) Ltd. was a builder and a contractor and in addition to
manufacturing ironwork and goods for use in contracts undertaken, manufactured
items of plants for its own use. In the years 1934 and 1935, M.R. Hornibrook
(Pty.) Ltd. con- structed under contract for Hornibrook Highway Ltd..at a price
set out in the contract, the Hornibrook Highway con- necting Ganagate and Redcliffe, aueensland. Part of the highway
consisted of a bridge of 13/4 miles in length over an arm of Moreton Day. The
bridge was build on reinforced concrete piles, which were driven into the bed
of the sea in series of three in line, each set of three being connected by a
headstock of reinforced concrete. The piles varied in length depending upon the
depth to which they had to be driven into the bed of the sea. They were made of
a mixture of cement, crushed metal, sand and water, and reinforced with steel
bars. The piles were constructed on the bank or' Moreton Day adjacent to the
site of the bridge. The head- stock was built in the same manner as the piles.
So far as was known, concrete piles of the class used in the construc- tion of
the bridge were not manufactured for sale anywhere in Australia, nor were they
an article of commerce in Aus- tralia or anywhere else in the world. Such piles
had not been standardized because the construction of each pile depended upon
the particular load which it was to carry and the nature of the ground into
which it was to be driven, and therefore, each pile in a job might be different
from every other pile in it in length. When the sales tax authorities made an
assessment in respect of the value of the piles, M.R. Hornibrook (Pty.) Ltd.
contended that the said piles had no sale value within the meaning of the Sales
Tax As- sessment Acts, that the said piles were not a 'manufacture' or 'goods
manufactured' within the meaning of the sales Tax Assessment Acts, and that the
said piles formed part Of a bridge and were built on the job and were not
article of commerce and were nor procurable from any third person and were not
of a class of goods manufactured for sale by any person and there-fore the
price of piles was not liable to payment of sales tax. Latham, C.J. with whom
Justice Rich and Justice Starke agreed (Justice McTiernan dissenting) held as
under:
"Sec.
3(4) of the Act, referred to in part of above quoted, was at the relevant time
in the following form: 'For the purposes of this Act, a person shall be deemed
to have sold goods if, in the performance of any contract under which he has
received, or is entitled to receive, valuable consideration, he supplies goods
the property in which (whether as goods or in some other form) passes, under
the terms of the contract, to some other person.' 351 In my opinion the
commissioner is right in his contention that this provision applies to the
present case. The appellant company, in the performance of a contract for
building a bridge under which contract it was entitled to receive and doubtless
has received valuable consideration, has supplied goods, namely, reinforced
concrete piles. Such piles are plainly manufactured articles. They are
chattels. They were intended to be incorporat- ed in a structure and were so
incorporated.
They
lost their identity as goods in that structure. But this fact does not prevent
the piles from being goods any more than it pre- vents bricks or stones, or
nuts and bolts from being goods. The fact that the goods were specially
manufactured and designed for a particular purpose cannot be held to deprive
them of the character of goods." Sub-clause (b) of clause (29-A) of
Article 366 of the Constitution of India more or less has adopted the language
used in section 3(4) of the Australian Act.
Even
after the decision of this Court in the State of Madras v. Gannon Dunkerley
& Co. (Madras) Ltd. (supra) it was quite possible that where a contract
entered into in connection with the construction of a building consisted of two
parts, namely, one part relating to the sale of materi- als used in the
construction of the building by the contrac- tor to the person who had assigned
the contract and another part dealing with the supply of labour and services,
sales tax was leviable on the goods which were agreed to be sold under the
first part. But sales tax could not be levied when the contract in question was
a single and indivisible works contract. After the 46th Amendment the works
contract which was an indivisible one is by a legal fiction altered into a
contract which is divisible into one for sale of goods and the other for supply
of labour and services. After the 46th Amendment, it has become possible for
the States to levy sales tax on the value of goods involved in a works contract
in the same way in which the sales tax was leviable on the price of the goods
and materials supplied in a building contract which had been entered into in
two distinct and separate parts as stated above. It could not have been the
contention of the revenue prior to the 46th Amendment that when the goods and
materials had been supplied under a distinct and separate contract by the
contractor for the purpose of construction of a building the assessment of
sales tax could be made ignoring the restrictions and condi- tions incorporated
in Article 286 of the Constitution. If that was the position can the States 352
contended after the 46th Amendment under which by a legal fiction the transfer
of property in goods involved in a works contract was made liable to payment of
sales tax that they are not governed by Article 286 while levying sales tax on
sale of goods involved in a works contract? They cannot do so. When the law
creates a legal fiction such fiction should be carried to its logical end.
There should not be any hesitation in giving full effect to it. If the power to
tax a sale in an ordinary sense is subject to certain condi- tions and
restrictions imposed by the Constitution, the power to tax a transaction which
is deemed to be a sale under Article 366(29-A) of the Constitution should also
be subject to the same restrictions and conditions. Ordinarily unless there is
a contract to the contrary in the case of a works contract the property in the
goods used in the con- struction of a building passes to the owner of the land
on which the building is constructed, when the goods or materi- als used are
incorporated in the building. The contractor becomes liable to pay the sales
tax ordinarily when the goods or materials are so used in the construction of
the building and it is not necessary to wait till the final bill is prepared
for the entire work. In Hudson's Building Con- tracts (8th
edition) at page 362 it is stated thus:
"The
well-known rule is that the property in all materials and fittings, once
incorporated in or affixed to a building, will pass to the freeholder--quicquid
plantatur solo, solo cedit. The employer under a building contract may not
necessarily be the freeholder, but may be a lessee or licensee, or even have no
interest in the land at all, as in the case of a sub-contract. But once the
builder has affixed materials, the property in them passes from him, and at
least as against him they become the absolute property of his employer,
whatever the latter's tenure of or title to the land. The builder has no fight
to detach them from the soil or building, even though the building owner may
himself be entitled to sever them as against some other person--e.g., as
tenant's fixtures. Nor can the builder reclaim them if they have been
subsequently severed from the soil by the building owner or anyone else. The
principle was shortly and clearly stated by Blackburn J. in Appleby v. Reyers
[1867] L.R. 2 C.P. 651 at p. 659:
Materials
worked by one into the property of another become part of that property. This
is equally true whether it be fixed or movable property. Bricks built into a
wall become part of the house, thread stitched into a coat which is under
repair, or planks and nails and pitch worked into a ship under repair, be- 353
come part of the coat or the ship." In Bmden and Watson--Building
Contracts and Practice (6th edition) (Pages 229-230) it is stated thus:
"VESTING
OF PROPERTY IN MATERIALS
1. BY
AFFIXING MATERIALS, ETC. TO THE FREEHOLD.
Vesting
of Materials when built into the work.--As soon as materials of any de- scription
are built into a building or other erection they cease to be the property of
the contractor and become that of the freeholder (a).
Illustration
A burial company, having erected a memorial stone, removed and sold it because
it was not paid for--Held: The proper remedy of the company was to sue for
payment and they had no right to remove the stone (b).
And
where the employer has only an interest less than a free hold, he has the Same
interest in the built-in materials as he has in the land. Even if the employer
detach them from the soil, the property in them does not revert to the
contractor, and he acquires no right to remove them on the analogy of the law
of landlord and tenant as to fixtures (c).
Illustration
Where the yearly tenant of a house had, at his own expense during his term,
hung bells, but quitted the premises without remov- ing them--Held: By
remaining fixed to the freehold after the expiration of the term they became
the property of the landlord (C).
Until,
however, the materials are actually built into the work in the absence of some
stipulation intended to pass the property in them when delivered on the site,
they remain the property of the contractor (d)." 354 In Benjamin's Sale of
Goods (3rd Edition) in para 43 at page 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, the contract will
ordinarily be one for work and materials, the property in the latter passing to
the employer by accession and not under any contract of sale. Sometimes, howev-
er, there may instead be a sale of an article with an additional and subsidiary
agreement to affix it. The property then passes before the article is affixed,
by virtue of the contract of sale itself or an appropriation made under
it." In view of the foregoing statements with regard to the passing of the
property in goods which are involved in works contract and the legal fiction
created by clause (29-A) of Article 366 of the Constitution it is difficult to
agree with the contention of the States that the properties that are
transferred to the owner in the execution of a works contract are not the goods
involved in the execution of the works contract, but a conglomerate, that is
the entire building that is actually constructed. After the 46th Amend- ment it
is not possible to accede to the plea of the States that what is transferred in
a works contract is the right in the immovable property.
We are
surprised at the attitude of the States which have put forward the plea that on
the passing of the 46th Amendment the Constitution had conferred on the States
a larger freedom than what they had before in regard to their power to levy
sales-tax under Entry 54 of the State List.
The
46th Amendment does no more than making it possible for the States to levy
sales tax on the price of goods and materials used in works contracts as if
there was a sale of such goods and materials. We do not accept the argument
that sub-clause (b) of Article 366(29A) should be read as being equivalent to a
separate entry in List II of the Seventh Schedule to the Constitution enabling
the States to levy tax on sales and purchases independent of Entry 54 thereof.
As the Constitution exists today the power of the States to levy taxes on sales
and purchases of goods including the "deemed" sales and purchases of
goods under clause (29A) of Article 366 is to be found only in entry 54 and not
outside it. We may recapitulate here the observations of the Consti- tution
Bench in the case of Bengal Immunity Company Ltd.
(supra)
in which this Court has held that the operative 355 provisions of the several
parts of Article 286 which imposes restrictions on the levy of sales tax by the
States are intended to deal 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.
We,
therefore, declare that sales tax laws passed by the Legislatures of States
levying taxes on the transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract are subject to the
restrictions and conditions mentioned in each clause or sub-clause of Article
286 of the Constitution. We, however, make it clear that the cases argued
before and considered by us relate to one specie of the genetic concept of 'workscon-
tracts'. The case-book is full of the illustrations of the infinite variety of
the manifestation of 'works-contracts'- Whatever might be the situational
differences of individual cases, the constitutional limitations on the
taxing-power of the state as are applicable to 'works contracts' represented by
"Building-Contracts" in the context of the expanded concept of
"tax on the sale or purchase of goods" as constitutionally defined
under Article 366(29A), would equally apply to other species of 'works-contracts'
with the requisite situational modifications.
The
Constitutional-Amendment in Article 366(29A) read with the relevant
taxation-entries has enabled the state to exert its taxing power in an
important area of social and economic life of the community. In exerting this
power particularly in relation to transfer of property in goods involved in the
execution of 'works-contracts' in building activity, in so far as it affects
the housing-projects of the underprivileged and weaker sections of society, the
state might perhaps, be pushing its taxation-power to the peripheries of the
social limits of that power and, perhaps, even of the constitutional limits of
that power in dealing with unequals. In such class of cases 'Building-Activity'
really relates to a basic subsistential necessity. It would be wise and
appropriate for the state to consider whether the requisite and appropriate
classifications should not be made of such building-activity attendant with
such social purposes for appropriate separate treatment. These of course are
matters for legislative concern and wisdom.
Having
interpreted the relevant provisions of the Constitution, as stated above, we
feel that it is unnecessary to take-up each and every writ petition referred to
above to express our opinion on the validity of 356 the statutory provisions
and rules which are questioned before us. The petitioners concerned are at
liberty to approach the authorities under the Sales Tax Act or the High Court
concerned for necessary relief. It is open to them to question the validity of
the statutory provisions and the rules made there under before the High Courts
concerned. When such petitions are filed the High Court will proceed to dispose
of the cases in the light of this judgment. With these observations all the
Writ Petitions are disposed of.
The
Civil Appeals filed against the orders of the High Courts, however, shall be
placed before the appropriate bench heating tax matters to decide the other
questions raised in them including the validity of any statutory provision or
rule in the light of this judgment.
These
cases are accordingly disposed of. There is no order as to costs.
Y. Lal
Petitions dis- posed of.
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