TaxTMI 
TaxTMI 
2007 (8) TMI 656
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....the Assam VAT Act"), be subject to levy of value added tax (in short, "the VAT") at 12.5 per cent, the petitioners disputed the assertion that the declared goods too, used in the execution of works contract, were subject to tax at a rate exceeding three per cent on sale or purchase price thereof. Thereafter, an order, under section 105 of the VAT Act read with rule 57 of the Assam Value Added Tax Rules, 2005 (in short, "the VAT Rules"), was made, on April 10, 2007, by the Joint Commissioner of Taxes, Assam, and Additional Commissioner of Taxes, Assam, holding that the State can levy tax on works contract by treating the same as distinct species apart from the constituent materials undergoing bodily transfer. With the clarification, so issued, the claim of the petitioners that the declared goods, used in the execution of works contract, cannot be taxed at a rate higher than three per cent has been answered in the negative. With the help of these two writ petitions, the petitioners put to challenge the order, dated April 10, 2007, aforementioned. The question, therefore, which falls for determination, in the present writ petitions, is this: whether the State has the power to levy ....
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....fer of property in goods involved in the execution of the works contract. The above conflict of judicial opinion was resolved by the apex court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353; AIR 1958 SC 560, wherein the decision of the Madras High Court was affirmed holding to the effect, inter alia, that in a building contract, which is entire and indivisible, there is no sale of goods, because, in such a contract, the agreement between the parties is that the contractor should construct the building according to the specifications contained in the agreement and, in consideration therefor, receive payment as provided by the contract agreement and that in such an agreement, there is neither contract to sell the materials used in the construction nor does the property, in the goods, used in the construction work, pass, as movables to the person, who allots the works contract. The apex court, therefore, took the view that it was not within the legislative competence of the Provincial Legislature, under entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935, to impose tax on the supply of materials used in a works contract by ....
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....Banarasi Das Bhanot [1958] 9 STC 388 (SC), it became impossible for the States to bring the works contract, involving use of materials, within the State's sales tax enactments. Hence, by the 46th Amendment of the Constitution, power was given to the State Legislature to impose sales tax on the transfer of property in goods-whether as goods or in some other form-involved in the execution of works contract. Article 366 of the Constitution, which is the definition clause, stood accordingly amended by insertion of clause (29A). This clause (29A) of article 366 reads as under: "(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 oth....
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....ransactions, which would not have, otherwise, been brought to, or fallen under the State's sales tax enactments. Article 286 of the Constitution imposes fetters on the powers of the State to impose tax on the sale and purchase of goods, where such sale or purchase of goods takes place outside the State or in course of import of the goods into, or export of the goods out of, the territory of India. By clause (2) of article 286, Parliament is authorised to formulate principles for determining as to when a sale or purchase of goods takes place in any of the ways mentioned in clause (1), namely, outside the State or in the course of import into, or export out of, the territory of India. Clause (3) of the article 286 provides, inter alia, that any law of the State, in so far as it imposes or authorises imposition of tax on the sale or purchase of goods declared by Parliament by law to be of special importance in the inter-State trade or commerce, be subject to such restrictions and conditions with regard to the system of levy or rates and other incidence of tax as the Parliament may by law specify. The object of article 286 of the Constitution is to invest the Parliament with exc....
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....se (29A) in article 366 changed the power of the State to impose sales tax, the contents of sub-clause (b) of clause (29A) needs to be, now, examined. I may point out that article 366 is the definition clause of the Constitution. In the light of the insertion of sub-clause (b) of clause (29A), when clause (29A) is considered, what becomes transparent is that according to clause (29A), "tax on the sale or purchase of goods" includes, inter alia, 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; 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. When the provisions of clause (29A) are read, in the light of sub-clause (b) thereof, it becomes clear that tax on sale or purchase of goods includes, amongst others, 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 and that such transfer of property in goods shall be deemed to be ....
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....ch 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 (29A) 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." (emphasis(1) is added) From the observations noted above, it becomes clear that even when declared goods are used in execution of a works contract and though use of such declared goods would amount to sale for the purpose of taxation, yet the tax on sale or purchase of such goods would be subject to restrictions, which section 15 of the Central Sales Tax Act, 1956, imposes on the sale or purchase of goods in general. I may, at this stage, pause and point out that before the 46th Amendment, as already discussed above, the Supreme Court's view, as propou-nded in Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353; AIR 1958 SC 560, was that when a works contract is executed, the property does not pass as a moveable property unless there is an express agreement stating that the property, in such movables, will pass to the person, who....
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.... imposed by the law, which the Parliament may make in exercise of its powers under article 286, there is no reason why the State's power to impose tax even on a transaction, which is, with the help of legal fiction, deemed to be a sale, shall not remain subject to the same restrictions. Explaining with absolute clarity, the change, which the 46th Amendment brought into the realm of the State's competence to impose sales tax, the Supreme Court observed, in Builders Association [1989] 73 STC 370; [1989] 2 SCC 645 at para 36 thus (at page 400 of STC): "36. Even after the decision of this court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353; [1959] SCR 379; AIR 1958 SC 560, 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 materials used in the construction of the building by the contractor 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 th....
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....he property in all materials and fittings, once incorporated in or affixed to a building, will pass to the freeholder-quicquid plantatur 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 right 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. Myers [1867] LR 2 CP 651 at 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 stitch....
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....id power "subject to provisions of entry 92A of List I" and the other assigned from the prohibition contained in article 286. Under clause (3) of article 286, the Parliament is competent to make a law placing restrictions and conditions on the exercise of the legislative power of the State under entry 54 of the State List with regard to the system of levy, rates and other incidents of tax. Such a restricted law may be in relation to (a) goods declared by Parliament to be of special importance in inter-State trade or commerce or (b) to taxes of the nature referred to in sub-clauses (b), (c) and (d) of clause (29A) of article 366. When such a law is enacted by the Parliament, legislative power of the States, under entry 54 in the State List, has to be exercised subject to the restrictions and conditions specified in that law. It is in exercise of the power conferred by article 286(3) that the Parliament has enacted sections 14 and 15 of the Central Sales Tax Act, 1956. No law has, however, been made by the Parliament in exercise of its power under article 269(3). Dealing with the above position of law, the apex court, in Gannon Dunkerley and Co. [1993] 88 STC 204; [1993] 1 SCC 364....
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....re to make a law imposing tax on such a deemed sale which constitutes a sale in the course of inter-State trade or commerce under section 3 of the Central Sales Tax Act or an outside sale under section 4 of the Central Sales Tax Act or sale in the course of import or export under section 5 of the Central Sales Tax Act. So also it is not permissible for the State Legislature to impose a tax on goods declared to be of special importance in inter-State trade or commerce under section 14 of the Central Sales Tax Act except in accordance with the restrictions and conditions contained in section 15 of the Central Sales Tax Act." (emphasis(1) is added) From the above observations, there remains no room for doubt that a State Legislature cannot ignore the restrictions imposed by section 15 of not imposing tax at a rate higher than three per cent (as amended) of the sale or purchase price of such goods, which are declared goods under section 14 of the Central Sales Tax Act, 1956. From a patient and careful reading of section 15, what becomes evident is that every sales tax law of a State, insofar as it relates to imposition of tax on the sale or purchase of declared goods, would be....