TaxTMI 
TaxTMI 
1989 (3) TMI 356
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.... Writ Petition (Civil) No. 195, Writ Petition (Civil) No. 196, Writ Petition (Civil) No. 201, Writ Petition (Civil) No. 212, Writ Petition (Civil) No. 319, Writ Petition (Civil) No. 336, Writ Petition (Civil) No. 109, Writ Petition (Civil) No. 414, Writ Petition (Civil) No. 68, Writ Petition (Civil) No. 208, Writ Petition (Civil) No. 401, Writ Petition (Civil) No. 203, Writ Petition (Civil) No. 214, Writ Petition (Civil) No. 345, Writ Petition (Civil) No. 474, Writ Petition (Civil) No. 446, Writ Petition (Civil) No. 485, Writ Petition (Civil) No. 545, Writ Petition (Civil) No. 488, Writ Petition (Civil) No. 233, Writ Petition (Civil) No. 303, Writ Petition (Civil) No. 470, Writ Petition (Civil) No. 547, Writ Petition (Civil) No. 145, Writ Petition (Civil) No. 148, Writ Petition (Civil) No. 259, Writ Petition (Civil) No. 261, Writ Petition (Civil) No. 262, Writ Petition (Civil) No. 608, Writ Petition (Civil) No. 609, Writ Petition (Civil) No. 116, Writ Petition (Civil) No. 617, Writ Petition (Civil) No. 12, Writ Petition (Civil) No. 13, Writ Petition (Civil) No. 67, Writ Petition (Civil) No. 80, Writ Petition (Civil) No. 81, Writ Petition (Civil) No. 82, Writ Petition (Civil) No. 86....
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..... Poti, Senior Advocates [R.N. Narasimha Murty and N.N. Gooptu (Advocates-General), R.P. Gupta, S. Krishnan, J.B. Dadachanji, D.N. Mishra, Mrs. A.K. Verma, Vijay Hansaria, Sunil K. Jain, A.T.M. Sampath P.N.Ramalingam, C. Natarajan, N. Inbarajan, M.S. Sinha, Madhu Khatri, Ms. Bina Gupta, K.M. Rai, Ms. Panaki Misra, Harish Salve, Ajay K. Jain, Pramod Dayal, K.M. Vyayar, Badar Durraj Ahmed, Ms. Parijat Sinha, J.R. Das, P.R. Seetharaman, R.P. Gupta, Ranjit Kumar. A. Sharan, J.D. Jain, C.S. Vaidyanathan, R.R. Setia, N.N. Keswani, R.N. Keswani Pramod Dayal, Dilip Tandon, R.B. Mehrotra, M.C. Dhingra, M. Qamaruddin, Ashok Kunar 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. Purnima Bhatt, Vineet Kumar, K.J. John, Ms. Naina Kapur, Ms. Hemantika Wahi, Sarva Mitter, P.K. Jain, Ms. A. Subhashini, B.V. Desai, 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. Chari, S.K. Dhingra, A.M. Khanwilkar, A.S. Bhasme, Amip Sachthey, P.N. Misra, Ajay K. Jha, K.R. Nambiar, P.R.....
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....oduction 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 created 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 Legislatures of States the Constituent Assembly enacted articles 286, 301 and 304 of the Constitution. Introducing an amendmen....
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....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. 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 provisions contained in article 264-A. They probably 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 financial difficulty or embarrassment to the different Provinces which have got such taxes and on the proceeds of which their finances to a large extent are based. It is therefore proposed as an explanation to the general provisions of the Constitution that notwithstanding the inconsistency of any....
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....ther 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 301 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 manufactured or produced; and (b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest: Provided that no Bill or amendment for the purposes 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 Constitution 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 newspapers." The power to levy tax on purchase of goods was expressly s....
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....e categories of sale exempted by article 286 of the Constitution from the imposition 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 v. United Motors (India) Ltd. [1953] 4 SIC 133 (SC); [1953] SCR 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 [1953] 4 STC 133 (SC); [1953] SCR 1069 in the Bengal Immunity Co. Ltd. v. State of Bihar [1955] 6 STC 446 (SC); [1955] 2 SCR 603. In the case of the Bengal Immunity Co. Ltd. [1955] 6 STC 446 (SC) [1955] 2 SCR 603 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 be projected 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 transactions of s....
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....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 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 amendm....
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....urchase 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 purchase 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 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 tha....
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....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 materials. The property in the materials passed to the owner of the land because they were fixed in pursuance of the contract 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 and Co., Madras (P.) Ltd....
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....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 Bhuramal v. State of Rajasthan [1957] 8 STC 463; AIR 1957 Raj 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 otherwise 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 resolv....
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.... 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 New India Sugar Mills Ltd. v. Commissioner of Sales Tax [1963] 14 STC 316; [1963] Supp 2 SCR 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 therefore there was no sale as defined in the Sale of Goods Act, 1930. However, in Oil and Natural Gas Commission v. State of War [1976] 38 STC 435; [1977] 1 SCR 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 (P.) Ltd. v. Commercial Tax Officer [1978] 42 STC 31 (SC); [1978] 2 SCR 433 the decision in New India Sugar Mills' case [1963] 14 STC 316 (SC); [1963] Supp 2 SCR 459 wa....
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....ose 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 (29-A), was introduced in article 366 of the Constitution. Clause (29-A) of article 366 of the Constitution reads thus: "366. Definitions.-In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say............ (29-A) '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 unincorporated association or body of persons to a member thereof for cash, def....
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.... 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 (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 sub-clause (d) of clause (29-A) of article 366, be subject to such restrictions and conditions 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 Governments after making necessary amendments in their laws commenced to levy sales tax on the turnover of the works contracts 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 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 turnove....
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....ingle point. Aggrieved by the levy of sales tax on the turnover relating to works contracts in the above manner, the petitioners and the appellants 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 ratified by the Legislatures of not less than one-half of the States by resolutions passed to that effect by those Legislatures before the Bill which led to the amendment in question 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 provisions of the Central Sales Tax Act, 1956, while making assessments under the sales tax laws passed by the Legislatures 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 rai....
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....anipur 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/- (SUDARSHAN 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 contention. 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 presented 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 Attorney-General wa....
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.... to levy sales tax on such transfer. The price of the 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 contracts, 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 goo....
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....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 construction 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 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 in....
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....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 Constitution 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) 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. Here again we have to read the expression "a tax on the sale or purchase of goods" found in article 286 as including 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 restrictions ....
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....) of the Constitution. We are of the view that all transfers, deliveries and supplies of goods referred to in clauses (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 286 of the Constitution and the transfers and deliveries that take place under sub-clauses (b), (c) and (d) of clause (29-A) of article 366 of the Constitution 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 General Engineering Co. v. Blackwood & Son 8 NSWSR 10, the Supreme Court of New South Wales held that the works contract entered into between the parties which came up for consideration in that case was one to do certain work and to supply certain materials 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 pu....
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....had no sale value within the meaning of the Sales Tax Assessment 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 not procurable from any third person and were not of a class of goods manufactured for sale by any person and therefore 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: "Section 3(4) of the Act, referred to in par. f 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.' 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....
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.... article 286 of the Constitution. If that was the position can the States contend 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 conditions 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 construction of a building passes to the owner of the land on which the building is constructed, when the goods or materials used are incorporated in the building. The contractor becomes liable to pay the sales tax ordinarily when the goods or materi....
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....ach 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 removing 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)." 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, however, there may instead be a sale....
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....ore, 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 generic concept of "works contracts". 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(29-A), would equally apply to other species of "works contracts" with the requisite situational modifications. The constitutional amendment in article 366(29-A) read with the relevant taxation-entries has enabled the State to exert its taxing-power in an important area of social ....