AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (6) TMI 181
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....he circumstances of the case and after having heard the contesting parties on merits, we find no reason to close the matter only on the ground of delay. Accordingly, delay in filing is condoned. 1.1. Leave granted. 2. This appeal by special leave is directed against the judgment and order dated 05.08.2008 as passed by the Orissa High Court at Cuttack in W.P. (C) No. 8857 of 2003, whereby the High Court accepted the claim of the respondent No. 1 of present appeal- Hereinafter also referred to as 'the writ petitioner' or 'the contractor company', for reimbursement of the amount of sales tax levied in respect of the works contracts executed by it. The High Court also directed the Opposite Parties to grant appropriate reimbursement as claimed by the writ petitioner in terms of Clause 45.2 of the General Conditions of Contract-'GCC' for short under the National Competitive Bidding Contract-'NCB' for short while quashing the clarification Circular dated 07.11.2001 issued by the Government of Orissa in its Department of Water Resources. 2.1. The appellant State of Orissa has challenged the order so passed by the High Court while essentially raising the questions concerning the na....
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....xable turnover" in respect of a works contract for the purpose of the rate of tax payable by a dealer. The rate of tax payable by a dealer on the "taxable turnover" in respect of "works contract" was fixed at 4%. 3.4. On 04.11.1986, the Government of Orissa, in its Department of Irrigation and Power, issued a Circular to the effect that in case of works contract executed on or after 07.04.1984, containing the specific clause for reimbursement of sales tax, the Department of Irrigation and Power would be liable for reimbursement of the amount of sales tax actually paid by the concerned contractor on production of necessary documentary evidence. Pursuant to these observations and directions, reimbursement of the sales tax paid by the contractor company in respect of assessment years 1995-1996 to 1997-1998 was allowed. 3.5. Later on, the State Government issued a notification under Section 5 of the Act of 1947 whereby, the rate of tax payable by a dealer on the taxable turnover in respect of the works contract was increased to 8%. Thereafter, by way of the orders of assessment for the years 1998- 1999 to 2000-2001, the Assessing Authority levied sales tax @ 8% on the taxable tur....
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....rection for recovery of the amount earlier reimbursed, vide letter dated 19.6.2002 under Annexure-3 ought not to be declared illegal, invalid and non-est in the eyes of law; And (ii) issue a further Rule Nisi Calling upon the Opp. Parties to show cause as to why the reimbursement claims made by the petitioner under Annexure-5 series may not be granted with a period stipulated by this Hon'ble Court; And (iii) in the event the Opp. Parties fail to show cause or show insufficient cause make the said Rule Nisi absolute and issue an appropriate writ of Mandamus or a writ of certiorari in line with the aforesaid Rule Nisi; And/or (iv) further be pleased to direct either of the Opp. Parties i.e., the contracting parties (Opp. Parties 6-18) or the Sales-tax Authorities (Opp. Parties 3-5) to effect reimbursement or refund along with interest from the date of deposit of tax; And (v) to pass any other writ/writs, order/orders as this Hon'ble Court may deem just and proper." 4. The High Court in its impugned order dated 05.08.2008, examined the contentions of the parties and granted the prayers of the writ petitioner while observing and holding, ....
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....cle 366 of the Constitution of India; and the principles enunciated by this Court in the cases of Builders' Association of India and Ors. v. Union of India and Ors.: (1989) 2 SCC 645 and Gannon Dunkerley and Co. and Ors. v. State of Rajasthan and Ors.: (1993) 1 SCC 364 to submit that by the forty-sixth amendment of Constitution, a fiction was created for treating the works contract as deemed sale on which, sales tax would be leviable but, only on the value of goods which went into the execution of any works contract. 5.2. Further, with reference to the definitions of "sale", "goods" and "works contract" as contained in the Act of 1947 as also Section 5(2)(AA) thereof and the relevant clauses governing the contracts in question, the learned counsel has submitted that any payment against the monthly running bill to the contractor does not constitute payment for any "completed item of work"; and the only meaning of the nomenclature "completed item of work" is the completion of the works contract as such. Learned counsel would maintain that sales tax is not leviable on the "completed item of work" in a works contract but, the contractor is bound to pay sales tax on "taxable turnover....
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....he correct position of law that the said Clause 45.2 applied only to the sales tax on "completed item of work"; and the sales tax levied in terms of Section 5(2)(AA) of the Act of 1947 was not reimbursable and had to be borne by the contractor in view of clear stipulation in Clause 45.1 of the General Conditions of Contract. According to the learned counsel, reliance on the Circular dated 04.11.1986 on behalf of the respondent No. 1 is entirely misplaced and the said Circular, by no means, could be construed as that of amending the contractual terms as also the liability of the contractor in terms of Section 5(2)(AA) of the Act of 1947. 6. Per contra, learned senior counsel for the contractor company (the respondent No. 1 herein) has duly supported the order impugned with reference to the reasonings therein. 6.1. Learned senior counsel for the contractor company has contended that the argument made on behalf of the appellant, that the deduction in the running bills had only been of the sales tax payable on various items, is contrary to the record because the deductions were made on a deemed sale on turnover basis and not item-wise and such a recovery of sales tax is squarely ....
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....ion of works contracts is subject to the restrictions and conditions contained in Article 286 of the Constitution, were considered and decided by the Constitution Bench of this Court in the case of Builders' Association (supra). Therein, while upholding the constitutional validity of the aforementioned provisions, the Constitution Bench explained the unique features of a composite contract relating to work and materials; and expounded on the meaning, effect and amplitude as also contours of the provisions pertaining to the taxing power of the States in relation to works contract in the following words: - "38. In Benjamin's Sale of Goods (3rd Edn.) in para 43 at p. 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 of an article with an additional and subsidiary agreement ....
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....upra), while dealing with the scope of the legislative power of State under Entry 54 of the State List contained in Seventh Schedule to the Constitution, particularly in the context of inter-State trade or commerce, another Constitution Bench of this Court found no reason to reopen the issues covered by the decision in Builders' Association case (supra) and held on the limitations of the powers of State legislature as under:- "31.....the legislative power conferred under Entry 54 of the State List does not extend to imposing tax on a sale or purchase of goods which takes place outside the State or which takes place in the course of import or export of goods. In view of the aforesaid limitations imposed by the Constitution on the legislative power of the States under Entry 54 of the State List, it is beyond the competence of the State Legislature to make a law imposing or authorising the imposition of a tax on transfer of property in goods involved in the execution of a works contract, with the aid of sub-clause (b) of clause (29-A) of Article 366, in respect of transactions which take place in the course of inter-State trade or commerce or transactions which constitute sal....
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....y, fuel, etc. used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and (f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services; (g) other similar expenses relatable to supply of labour and services; (h) profit earned by the contractor to the extent it is relatable to supply of labour and services. The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor." (emphasis supplied) 8.1.4. The salient features of the legal fiction introduced by sub-clause (b) of Clause (29-A) of Article 366 of the Constitution and the co-related concept of "value addition" came to be succinctly explained by this Court in the case of P.N.C. Construction Co. (supra) in the following words: - "21. "Value addition" is an important concept which has arisen after the Forty-sixth Amendment to the Constitution. Prior to the said Amendment this Court had taken the view in State of Madras v. Gannon Dunkerley & Co. (Madr....
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....r commissioning of any moveable or immoveable property. S.5(2)(AA)- Notwithstanding anything contained in subsection (2)(A), "taxable turnover" in respect of: (i) 'works contract' shall be deemed to be the gross value received or receivable by dealer for carrying out such contract, less the amount of labour charges and service charges incurred for the execution of this contract... ... ..." 8.3. As noticed, the claim for reimbursement made by the contractor company is based on Clause 45.2 of GCC whereas this claim is being resisted by the appellant State with reference to Clause 13.3 of ITB and Clause 45.1 of GCC. The referred clauses, as placed before us for consideration, read as under: - Clause 13.3 of ITB "13.3 All duties, taxes and other levies including royalty payable by the contractor under the contract or for any other cause shall be included in the rates, price and total bid price submitted by the bidder." Clauses 45.1 and 45.2 of GCC "45.1 The rates quoted by the contractor shall be deemed to be inclusive of the sales and other taxes including royalties on all materials that the contractor will have to purchase for ....
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....ealer, and not by this Department. Yet, a question arose as to whether this Department was legally liable to reimburse the amount of sale tax actually paid or payable by the Contractor/dealers in so far as the contracts relating to this Department are concerned. After due consideration of the legal aspects of the problem, the following instructions are issued for information and guidance of all concerned. (i) In case of Works- Contracts executed on or after 07.04.1984 which contained specific clauses for reimbursement of Sales Tax, this Department is liable to reimburse the amount of sale tax actually paid by the concerned contractor on production of necessary documentary evidence in token of making such payment, after obtaining an undertaking from the concerned contractor to the following effect:- If the Contractor prefers or has preferred appeal/revision before the concerned appellate authority under the Sales Tax Law for remission of the Sales Tax dues paid by him and said appeal/revision results in any reduction of such dues, the differential amount, the amount of Sales Tax reimbursed and the amount of Sales Tax reimbursed and the amount of Sales Tax payable a....
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....-Chief, Planning & Designs/ Engineer-in-Chief, Rengali Irrigation Project/ All the Chief Engineers & Basin Manages/ All the Chief Engineers/ All the Chief Construction Engineers/ Director, Ground Water Survey and Investigation Sub: Reimbursement of Sales Tax on Works contract. Sir, I am directed to say that clause 13.3 of ITB of the NCB bid document approved by World Bank stipulates that "All duties, taxes and other levies including royalty payable by the contractor under the contract or for any other cause shall be included in the rates, prices and total bid price submitted by the Bidder." The clause 45.2 at G.C.C. of the said document stipulates that "Any Central or State Sales Tax and other Taxes on completed item of work of this contract as may be levied excluding penalty levied for contractor's default and paid by the contractors shall be reimbursed by the employer to the contractor on proof of payment. During the course of contract period deduction of Sales Tax on works contract turn over at the sources shall be made from each bill at such rate and conditions as may be required under the provisio....
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.... steel, bricks, stones etc. involved in execution of the contract are subject to levy of sales tax. The completed item i.e., a bridge, a building, a road, or a canal, as the case may be, is not subjected to levy of sales tax because after construction these become immovable property not susceptible to transfer of property for the purpose of sales tax assessment. As per clause 13.3 of I.T.B. of the NCB bid document read with clause 45.1 of the general conditions of the contract the rates quoted by the contractor shall be deemed to be inclusive of sales and other taxes including royalties on all materials that the contractor will have to purchase for performance of the contract. Clause 45.2 of the G.C.C. speaks that any Central or State Sales Tax and other taxes on completed items of work of the contract as may be levied, excluding penalty levied for contractors default and paid by the contractor shall be reimbursed by the employer to the contractor on proof of payment. It is clarified that a completed item of work for which the contractor has entered into agreement with the department is either immovable property or a works contract and in either case is not exigib....
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....ctor is supposed to have provided for the same in its rates, as envisaged by Clauses 13.3 of ITB and 45.1 of GCC. 9.2. So far as the basic factual aspects are concerned, it is not in dispute that the respondent No. 1 indeed undertook execution of various works contracts with the respective offices of the appellant State of Orissa. It remains indisputable that in relation to such contracts, Clause 13.3 of ITB stipulated that all duties, taxes and other levies including royalties payable by the contractor were to be included in the bid price and Clause 45.1 of GCC specifically provided that the rates quoted by the contractor shall be deemed to be inclusive of the sales and other taxes including royalties on all materials that the contractor was to purchase for performance of the contract. However, and at the same time, it is also indisputable that as per Clause 45.2 of GCC, any Central or State Sales Tax and other taxes on "completed items of works" of the contract as might be levied upon, and paid by, the contractor (excluding penalty levied for contractor's fault) were to be reimbursed to the contractor on proof of payment and assessment. This Clause 45.2 further envisaged that ....
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....e fact that the claim for reimbursement was being made of the tax that was levied on the turnover of the works contracts and not of the tax paid by the contractor on the materials procured by it. The High Court has also found that the sales tax was levied after necessary deductions and in accordance with the decision in Gannon Dunkerley (supra) for which, the contractor was entitled to claim reimbursement under Clause 45.2 of GCC and that the clarification Circular dated 07.11.2001 cannot take away the effect of statutory provisions. 10. Having taken all the relevant aspects in comprehension and having examined the matter in its totality, we are clearly of the view that the High Court has rightly allowed the writ petition filed by the respondent No. 1 and no case for interference in this appeal is made out. 11. Before proceeding further, we may at once observe that so far as the aforesaid Circulars are concerned, neither of them could be decisive of the issues at hand. As noticed, in the Circular dated 04.11.1986, the State Government expressed the view that the reimbursement in question was required to be allowed in terms of Clause 45.2 of GCC but later on, in the Circular d....
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....tractor is deemed to have provided for the leviable amount of sales tax on goods/materials in its rates and hence, the contractor cannot claim any reimbursement thereof. The question is as to whether such contentions of the appellant against the operation of first part of Clause 45.2 of GCC could be countenanced? In our view, the answer could only be in the negative. 13. Taking up the main plank of the case of the appellant about the nature, extent and implication of the levy of sales tax in relation to a works contract, it could be usefully recapitulated that in view of the forty-sixth amendment to the Constitution of India, Clause (29-A) came to be inserted to Article 366; and, by virtue of sub-clause (b) thereof, it became permissible 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. In other words, after the forty-sixth amendment to the Constitution, the works contract is divided into two parts by a legal fiction: one for sale of goods/materials and other for supply of labour/services; and it is possible for the States to levy sales tax on the value of goods/materials involved in s....
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....ity with Section 5(2)(AA) of the Act of 1947. There had neither been any levy of the sales tax on the entire turnover of the works contracts nor any such levy could have been effected because, as noticed, the taxing event of sale in a works contract is confined to the use of the goods/materials in execution of the contract. 14. While the aforesaid legal and factual aspects remain more or less indisputable, what the appellant seeks to contend is that the reimbursement envisaged by the first part of Clause 45.2 of GCC is of the tax levied on the "completed item of work" but in a works contract, sales tax is not levied on the completed item of work because such completed item in a works contract becomes an immovable property. Such a contention of the appellant remains wholly untenable in view of the scheme of levy of sales tax in a works contract as also the scheme of reimbursement envisaged by Clause 45.2 of GCC. 14.1. Contextually read, it is but apparent that the expression "completed item of work" in Clause 45.2 ibid., signifies the intent that reimbursement would be permissible only after execution of a particular item of work has been completed and accomplished. In other w....
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.... cannot be made in relation to a particular work or item whose execution is pending or is in progress and has not been completed. So far the levy of sales tax in relation to a works contract is concerned, the same is on "taxable turnover" and not on the entire turnover. It follows necessarily that the claim for reimbursement could only be made of the amount of sales tax that had been levied; and had been paid by the contractor. Hence, the suggestion as if the expression "completed item of work" refers to the end-product of a works contract is without any substance. The contentions urged in that regard are required to be, and are, rejected. 15. We may now take up the other line of argument on behalf of the appellant that as per Clause 45.1 of GCC read with Clause 13.3 of ITB, the contractor is deemed to have provided for the leviable amount of sales tax on goods/materials in its rates and hence, the contractor cannot claim any reimbursement thereof. 15.1. It remains trite that the terms of contract bind the parties thereto and unless there be any case of ambiguity or violation of law, ordinarily, the terms of contract, revealing the intent of parties, are required to be given ....
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....s, i.e., Clause 13.3 of ITB and 45.1 of GCC, which prohibit the contractor from demanding taxes, duties, royalties etc. on the materials procured by it for performance of the contract do not, and cannot, conversely operate over the sales tax which is levied upon the contractor and which is primarily recovered with deductions from the running bill payments. In other words, in our view, on a plain reading of the aforesaid relevant terms of the contract, it is clear that while the contractor cannot claim any payment towards the taxes/duties/royalties etc. on the goods/materials purchased by it for performance of the contract but that does not disentitle the contractor from claiming reimbursement of the sales tax levied upon it by the employer, of course after proof of payment/assessment. It is also pertinent to mention that the respondent No.1 only claimed reimbursement of the sales tax paid by it on the turnover of the works contract and not of any tax or duty or royalty paid by it on the material procured for the purpose of execution of the works contract. Therefore, the contentions urged on behalf of the appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC over the cla....
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....amount of penalty, if any, levied upon the contractor; and (c) obtaining undertaking from the contractor to refund the excess amount of reimbursement, in case of reduction of its liability towards sales tax in appeal or revision [vide sub-paragraphs (i) to (iii) of paragraph 2 of the Circular dated 04.11.1986]. However, the significant feature is that in the second set of instructions in this very Circular, as contained in subparagraph (iv) of paragraph 2 thereof, the Engineers-incharge were instructed that no such clause for reimbursement of sales tax or payment of such tax by the department to the contractor be inserted in the Notice Inviting Tenders or Tender document; and no tender containing any clause or condition to that effect be accepted. The said second set of instructions in sub-paragraph (iv) of paragraph 2 of this Circular was, obviously, meant for future contracts, but, its contrast with the first set of instructions in the preceding sub-paragraphs fortifies the conclusion that the State Government was fully conscious of its obligation to make reimbursement in relation to the existing contracts which carried such reimbursement clause/s. 17.2. As to what stipulation....