1961 (4) TMI 74 - SC - VAT and Sales Tax

Supreme Court rules no sales tax on construction materials in works contract

The Supreme Court held that the appellants were not liable to pay sales tax on the materials used in executing the works contract as the contract was for ... 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? 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? Held that:- Appeal allowed. 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. [1958 (4) TMI 42 - SUPREME COURT OF INDIA] 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. Issues Involved:1. Whether the appellants are liable to pay sales tax on the value of materials used in the execution of works under the contract.2. Whether the provisions of the Bihar Sales Tax Act, in so far as they sought to tax supply of materials in works contracts, were ultra vires.3. Whether the appellants should have pursued remedies under the Act before invoking the jurisdiction of the court under Article 226.4. Whether the contract in question is a pure works contract or a composite contract involving a sale of materials.Issue-wise Detailed Analysis:1. Liability to Pay Sales Tax on Materials Used in Execution of Works:The main contention was whether the appellants, who executed a contract for assembling and installing machinery, were liable to pay sales tax on the materials used. The appellants argued that the materials were supplied as part of the works contract and not sold separately. The Bihar Sales Tax Act defines 'sale' to include the transfer of property in goods involved in the execution of a contract. However, the Supreme Court found that the contract was for the construction of works for a lump sum and not for the sale of materials. Therefore, the materials used in the execution of the contract were not subject to sales tax.2. Ultra Vires Provisions of the Bihar Sales Tax Act:The appellants challenged the provisions of the Bihar Sales Tax Act that sought to tax the supply of materials in works contracts as ultra vires. The Supreme Court referred to the decision in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., which held that a tax on the supply of materials in a building contract, treating it as a sale, was beyond the legislative competence of the State Legislature. The Court concluded that the Bihar Sales Tax Act's provisions imposing a tax on the supply of materials in the execution of works contracts were ultra vires.3. Pursuing Remedies Under the Act Before Invoking Article 226:The respondents argued that the appellants should have pursued remedies under the Act before invoking the jurisdiction of the court under Article 226. The Supreme Court acknowledged that while it is generally true that statutory remedies should be exhausted before approaching the High Court, there are exceptions. When proceedings are taken under a provision of law that is ultra vires, it is open to the aggrieved party to move the court under Article 226 without waiting for the proceedings to run their full course. The Court found that the proceedings before the Sales Tax Officer were based on ultra vires provisions and thus quashed them.4. Nature of the Contract - Pure Works Contract or Composite Contract:The Supreme Court examined whether the contract was a pure works contract or a composite contract involving the sale of materials. The contract's preamble and clauses indicated that it was for the installation of a coke oven battery and its accessories for a lump sum. The Court found no agreement for the sale of materials as such by the appellants to the owner. The clause that materials brought to the site would become the owner's property was intended to ensure the use of the right materials and did not constitute a contract of sale. Therefore, the contract was a pure works contract, and the supply of materials under it was not subject to sales tax.Separate Judgment by SHAH, J.:SHAH, J. delivered a dissenting opinion, arguing that the High Court was correct in declining to issue the writs. He emphasized that the taxing authorities must investigate the true nature of the transaction to determine tax liability. He decried the practice of taxpayers invoking the High Court's jurisdiction without allowing the statutory authorities to ascertain the facts. He concluded that the High Court should not decide the nature of the contract without a thorough investigation by the taxing authorities.Order:In accordance with the majority opinion, the appeals were allowed, and appropriate writs as prayed for by the appellants were issued. The appellants were entitled to their costs throughout. Appeals allowed.