Composite building contracts: materials may be taxed as goods, but artificial valuation formulas exceed legislative competence.

Composite building contracts may be split for sales tax purposes so that the materials component is treated as a taxable sale of goods under Entry 54 and the Rajasthan Sales Tax Act, while the contractor remains a dealer when goods are supplied for remuneration in the course of business. The timing of tax depends on when the sale occurs, so a contract made before commencement is not exempt if the taxable sale arises after commencement. However, a valuation scheme based on an artificial deduction formula and estimated labour content was held to exceed legislative power because tax under Entry 54 must be linked to the actual sale price of goods. The impugned valuation provisions were severed as ultra vires.

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Issues: (i) Whether the materials used in a composite building contract could be treated as a sale of goods within Entry 54 of List II of the Seventh Schedule to the Constitution of India and within section 2(o) of the Rajasthan Sales Tax Act. (ii) Whether explanation (i) to section 2(t) of the Rajasthan Sales Tax Act and rule 7 of the Rajasthan Sales Tax Rules, 1955 were intra vires. (iii) Whether the contractors were dealers liable under the Act and whether tax could be levied on contracts entered into before the Act came into force.

Issue (i): Whether the materials used in a composite building contract could be treated as a sale of goods within Entry 54 of List II of the Seventh Schedule to the Constitution of India and within section 2(o) of the Rajasthan Sales Tax Act.

Analysis: A composite building contract may contain both labour and materials. The legal question was whether, for legislative competence under Entry 54, the sale element in the materials could be severed from the larger contract. The Court held that the constitutional entry was broad enough to cover a genuine transfer of property in goods occurring in the course of execution of such a contract, even though the completed work ultimately became immovable property. The definition of sale in section 2(o) was therefore treated as a permissible legislative separation of the materials component from the composite transaction.

Conclusion: Yes. The materials component of a composite building contract could validly be treated as a taxable sale of goods, and section 2(o) was intra vires.

Issue (ii): Whether explanation (i) to section 2(t) of the Rajasthan Sales Tax Act and rule 7 of the Rajasthan Sales Tax Rules, 1955 were intra vires.

Analysis: The impugned explanation and rule fixed the taxable value by an artificial deduction formula based on estimated labour content. The Court held that Entry 54 permitted tax on the actual sale price of goods, not on an assumed or artificial value that might include labour and the contractor's work. Since the formula had no certain relation to the real price of the materials sold, it exceeded legislative power. The Court further held that these provisions were severable from the rest of the Act.

Conclusion: No. Explanation (i) to section 2(t) and rule 7 were ultra vires.

Issue (iii): Whether the contractors were dealers liable under the Act and whether tax could be levied on contracts entered into before the Act came into force.

Analysis: The statutory definition of dealer was wide enough to cover persons who, in the course of their business, supplied goods for remuneration. Building contractors who supplied materials in executing contracts were therefore dealers. As to timing, the relevant date was the date on which the sale was completed or deemed to occur under the Act, not merely the date of the contract itself. A contract made before the commencement of the Act was not automatically the tax net if the sale occurred after commencement.

Conclusion: The contractors were dealers, and pre-commencement contracts were not exempt merely because the agreement was entered into earlier.

Final Conclusion: The challenge succeeded only in part: the Act was upheld in principle as applied to the sale element in composite building contracts, but the artificial valuation mechanism in explanation (i) to section 2(t) and rule 7 was struck down, with consequential relief granted in one matter and the remaining proceedings allowed to continue in accordance with the judgment.

Ratio Decidendi: In a composite building contract, the materials component may be severed and taxed as a sale of goods under the constitutional entry, but a statutory valuation scheme that artificially estimates the sale price beyond the actual value of goods exceeds legislative competence.

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