TaxTMI 
TaxTMI 
1956 (10) TMI 43
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....d 5-12-1955 so far as their works contracts are concerned on the ground that the said Act is null and void as also Rule 8 of the Madhya Bharat Sales Tax Rules. The validity of the Act and particularly of Section 3 of the Act read with the definitions of 'Turnover', Taxable turn-over, 'Sale' and 'Contract' as given' in Section 2, is challenged on the ground that these provisions seek to bring under levy of sales tax transactions other than transactions of sale of goods and further on the ground that they seek to bring under levy of sales tax transactions involving inter-State trade or commerce. 2. The Petitioner Messrs. F. & C. Osler (India) Ltd., is a public limited company having its registered office at Calcutta and branch office at New-Delhi, Bombay, Madras, Kanpur, Gouhatt and Jullunder. This company carries on business of electrical engineers and undertaking electrical contracts and also sells and supplies of electrical goods and appliances. 3. The Petitioner has no branch office, Shop or godown nor has any manager or agent carrying on business on its behalf anywhere in the state of Madhya Bharat. It is however alleged that as part of inter-St....
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....fficer, Indore, however, by his order dated 30-3-1955 made assessment against the Petitioner in respect of these two contracts fixing the amount of turnover of electrical goods in question for the assessment year 1951-52 to the sum of Rs. 31,109-9-0 and determined taxable turnover at Rs. 24,888/- after making deduction of 20 per cent, in accordance with Rule 8 of Madhya Bharat Sales Tax Rules and directed the Petitioner to pay Rs. 1,660-8-0. The Petitioner lodged protest with Respondent No. 2. In reply the said Respondent asserted that the sales in respect of these goods took place at Indore as they had an agent at Indore to whom the goods were sent and further called upon the Petitioner to produce accounts for determining turnover for assessment years 1952-53, 1953-54 and 1954-55 intimating that on failure he would proceed to make best judgment assessment. By letter dated 9-7-1955 the Respondent No. 2 required the Petitioner to appear before the former on 25-1955 with books of account pertaining to assessment year 1952-53. The Petitioner had preferred appeal against the earlier order and a request was made to Respondent No. 2 to wait until the appeal was decided. This was disallow....
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....ation that Rule 8 of the Madhya Bharat Sales Tax Rules is illegal, ultra vires and inoperative, Thirdly for a declaration that the provisions of the said Act, in so far as and to the extent to which they seek, to bring under levy of sales tax transactions of, sale of goods despatched and supplied from places outside Madhya Bharat to customers in Madhya Bharat by persons belonging to other State and who do not carry on business of buying or selling goods within that State are bad in law. 12. They further pray for issue of writ of mandamus and prohibition requiring the opponent not to give effect to the provisions of the Act against them in respect of the contract in question and not to take steps coercive or otherwise pursuant to the notices dated 24-11-1955 and 5-12-1955. 13. In the return filed on behalf of the Respondent the inter-State trade character of the dealings of the Petitioners was denied. It was asserted that the Petitioner had offered tenders called for electrical installations to the buildings in question which were accepted by the Chief Engineer Madhya Bharat and Principal, Mahatma Gandhi Memorial Medical College and the con-tracts were made and executed at Ind....
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....x Rules invalid as it lays down artificial or arbitrary test for determining sales price of goods Supplied in works contracts? 18. these questions will be considered by me seriatim. 19. Before considering the actual arguments advance on either side on these questions it will be useful to refer to certain provisions of the Madhya Bharat Sales Tax Act which are material for their consideration. 20. Madhya Bharat Sales Tax Act 30 of 1956 came into force on 1-5-1950. 21. Section 3 of the Madhya Bharat Sales Tax Act is the charging section. It reads as follows: (1) Subject to the provision of this Act, every dealer his turnover in the previous year in respect (sic) sales or supplies of goods exceeds: (a) in the case a dealer who imports goods in-to Madhya Bharat, Rs. 5,000/- (Rupees five thousand); (b) In the case of a manufacture, Rs. 5,000/-(Rupees five thousand); and (c) in the case of any other, Rs. 12,000/-(Rupees twelve thousand); Shall be liable to pay tax under this Act on his taxable; turnover in respect of sales or supplies of good effected in Madhya Bharat from the 1st day of May 1950: Provided that a dealer wh....
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....ent or repair of any building, road, bridge, or other immovable Property; or (ii) the installation or repair of any machinery affixed to a building or other immovable property, or (iii) the overhaul or repair of any motor vehicle. "Taxable Turnover' for a specified period means that part of a dealer's turnover for such period which remains alter deducting therefrom: (i) the sale of goods declared tax-free under Section 4 without payment of fees; (ii) the sale of goods declared tax-free under Section 4(3) with payment of fees: (iii) turnover of goods for which no rate of tax has been notified or which have already been sub-jected to sales tax under this Act. (iv) all such other deductions as may be pre-scribed in the Rules made under this Act; (v) 2 per centum of balance remaining after making all the above deductions, 'Goods' means all kinds of movable property other than actionable claims, stocks, snares and securities, and includes electrical energy and all materials, articles and commodities, whether or not to be used in construction, fitting out, improvement or repair of immovable p....
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.... time of the Constitution ought to govern the meaning. This very taxing provision existed in Government of India Act, 1935 with the exception of the provision regarding newspapers. Therefore in order to find the meaning of this expression it is relevant to consider firstly whether the term was understood in English Law and Indian Law to include works contract. It is also relevant and material to take into account the exact scope of the expression as used in Indian Sale of Goods Act. Considering the matter thus it will be found that the term 'Sale of goods' does not include supply of material in pursuance of works contract particularly in those cases where there is no separate provision in the contract for supply of material at a stated price. 28. It will appear from the decisions of the Supreme Court in State of Bombay v United Motors Ltd. AIR 1953 SC 252(A); Poppatlul shah v. State of Madras AIR 1953 SC 274(B); Sales Tax Officer, Pillibhit v. Budh Prakash Jai Prakash AIR 1954 SC 459 (C) and Bengal Immunity Co. v. State of Bihar (S) AIR 1955 SC 661 (D) that the terms sale of goods has the same meaning for the purpose of sales tax laws as it bears in the law relating to s....
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....ning the scope of entry 54. 33. According to the Advocate General the material factors to be taken into account are: 1. Whether there exist goods to which contract relates. 2. Whether there is transfer of possession and title to the other contracting party. 3. Whether this transfer is for money consideration. 34. If all these three things are satisfied then it is immaterial whether the contract is purely for goods or is a mixed one involving supply of material and application of labour and skill or whether the consideration is distinct in respect of materials or is a composite one or whether the title passes while they are in the form of chattels or have become affixed to Immovable property. Even where the transaction is a composite one involving supply of material and application of labour and skill for money consideration" it is competent for the legislature in exercise of Its plenary power to pro-vide for a machinery by which it will be possible to determine the aloe of that part which involves essentials of sale of goods and to tax that much only. (35) The legislative practice prevailing at the time when the Constitution was framed and promulgat....
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....of title, and each one of them is essential to a transaction of sale though the sale is not completed or concluded unless the purchaser becomes the owner of the property. 41. In para 9 of the same judgment the learn-ed judge observes as follows: A contract of sale becomes a sale under the. Sale of Goods Act only when the property in the goods is transferred to the buyer under the term of the contract itself. 42. The third case of the Supreme Court is AIR 1954 SC 459 (C). In that caves the question was. whether forward contracts of sale are liable to tax under U.P Sales Tax Act: Under the statute law of India which is based on English Law on the subject, a sale of goods and an agreement for the sale of goods are treated as two distinct and separate matters. Section 4 of the Indian Sale of Goods Act (Act 111 of 1930) runs as follows: (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part owner and another. (2) A contract of sale may be absolute or conditional. (3) Where under a contract of sale....
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....e property in the goods is transferred from the seller to the buyer the contract is called a sale; but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. Section 16 enacts that: Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained. Section 18 Rule 5 provides for the passing of property in future goods after they are ascertained. X X X X X The position therefore is that a liability to be Assessed to Sales Tax can arise only if there is a completed sale under which price is paid or is payable and not when there is only an agree-ment to sell, which can only result in a claim for damages. It would be contrary to all principles to hold that damages for breach of contract are liable to be Assessed to sales tax on the ground that they are in the same po....
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....in the former case was that the supply of material in that manner did not constitute sale of goods within the meaning of that term in Entry 48 of Provincial List (which corresponds to Entry 54 of List II of the Constitution) and as such was beyond the taxing capacity of the state while in the latter case it was held that the transaction of that sort was a composite one involving work and labour of material for money consideration and had sufficient element of sale in it and that it was competent for the State Legislature in exercise of its plenary power to segregate the 'supuly of material' part and to tax that much. It is considered immaterial that the material get affixed or embedded to the Immovable property when the title passes. In the Madras case the learned Judges say: It must be remembered that the Constitution Act was enacted by the British Parliament and the draftsmen and the Parliament must have been well aware, that the expression 'sale or goods had acquired a legal import by that time, and it is legitimate therefore to presume that, the expression was used in the sense in which it was understood by the English lawyers and also in India. The drafts-....
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....es to the contract intend it to be transferred. 49. Thus after explaining how the term sale of goods' is to be construed having regard to the English and Indian Sale of Goods Act the learned Judge concluded that the legislative power of the provincial legislature to levy a tax on sale of goods is confined and restricted only to transaction of sale as understood by the Parliament of United Kingdom in the Law relating to sale of goods. 50. He then proceeded to consider whether building contracts had in them any element of sale of goods to justify the imposition of Sales Tax upon them. It was held on consideration of some of the English decisions and concluded: It therefore follows that the building contracts which the Assesses entered into during the assessment year, on which the turnover was calculated, do not involve any element of sale of the material and are not in any sense contracts for the sale of goods as understood in Law. Having regard to the terms of particular contracts, there may be an intention to pass the ownership in the materials for a price agreed upon between the parties, in which case such contracts might contain an element of sale of goods, but....
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....tax a transaction in which there was at the moment of taxation no sale for a price at all. The decision of their Lordships therefore must be related to the facts then present and cannot be invoked to limit the operation of the entry in all circumstances. While it cannot be doubted that a limited legislature which possesses a mete supremacy of enumerated entries cannot by fiction create a Power for itself which does not flow naturally from the entry. The power itself is otherwise unlimited and of the widest amplitude possible. The natural and full scope of the entry cannot be cut down by anything not found in the Constitution Act 1935. Lord Selbourn's dictum in the R. v. Burah 1878-3 AC 889 (L) has often been quoted in this connection. When Entry No. 43 was framed it conferred on the Provincial Legislature powers of the widest amplitude to tax the sale of goods in all the aspects and forms. The text being explicit, is conclusive alike in what it directs what it prohibits. The necessary conditions the impost however, were that there a sale of goods. The selection of tax-and the severance of transactions of sale from other transactions in which they might be embedded was ....
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....ar as it indicates what are the essential ingredients of sale. On this question probably there will not be any serious difference between the Madras and Nagpur decisions. 57. In AIR 1953 SC 274 (B), their Lordships indicate the essential and radical difference between a contract of sale and sale and emphasises that the sale is not complete until the purchaser become the owner of the property. 58. This case also does not bring into relief any difference in the two views. 59. The difference is apparent as regards the way in which the observations of their Lordships in Budh Prakash's case (C) were sought to be in terpreted. 60. That was a case in which the State of U.P. under its Sales Tax Law sought to imposed sales tax on forwarded contracts of sale. Venkatrama Ayyar J. who delivered the judgment began by observing that under the statute law of India which is based on English Law on the Subject of sale of goods, a sale of goods and an agreement for the sale of goods are treated as district and seperate matters. 61. To bring out this fact his Lordshp examined the definition of Sale of Goods in Section 4 of the Indian Sale of Goods Act, Section 77 of Indian Contract....
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....en to have meant that even in those cases where the essential ingredients of sale viz. transfer of. property in goods and money consideration are present, the English decisions, which emphasise the distinction between works contracts in volving supply of material for money consideration and those of sale, should be called in aid to further limit the scope of entry 43. At least, in my opinion, such a use is rather too Wide. I shall consider whether independently of the aid taken of the decision in Budn Prakash's case (C) it could be said whether basically on consideration of what may be said to be essential ingredients of sale is it or is it not correct to limit the scope Of entry 54 so as to exclude from Its operation works contracts involving supply of material by one who is engaged to do both. 66. The last case is (S) AIR 1955 SC 661 (D). In that case too Bhagwati J. referred to the legislative practice in India and in England at the time the power to tax sale was conferred and observed that the scope of the power would have been ordinarily determined by the definition of rule of goods to be found in these respective Sale of Goods Acts and that the State Legislatu....
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....ioner arguing in this connection emphasised these three factors According to his contention in the present case where t e Petitioner undertook to effect electric installation in the two Government buildings they did not agree to sell the materials. There was no agreement that the title in the goods should pass for a price. What the Petitioner has agreed to is to procure electrical goods and to affix the same" to an Immovable property and receive composite, payment for all that. Moreover according to him when the two essential ingredients of the transaction of sale take place viz. delivery or goods and passing of title they are no longer goods but have already become part and parcel of Immovable property and are therefore immovable. 72. Thus both on the aforesaid analyses of the reason given by Benjamin on Sale a d t e argument of the learned Counsel for the Petitioner three aspects distinguish the building contracts from those of sale. 73. In both cases viz. in building contracts involving supply of materials for money consideration and the contracts of sale there are contracts in respect of good in existence, there is money consideration there is delivery of property and las....
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....contract for sale of a chattel is negligible the contract in substance will not be works so contract. 83. But in those cases where the supply of materials Part for money consideration is substantial in a contract of composite nature it is difficult to say that it does not involve sale of goods. 84. In that case the four ingredients, indicated, by the Supreme Court in their decisions and as they appear in the definitions of sale of goods in English and Indian Acts, cannot be said to be absent. 85. The circumstance that the contractor is not entitled to be paid till the building contract is complete is not sufficient to lead to the conclusion that there cannot be sale of materials involved 86. As put by Hidayatullah J. "there is always a sale if goods are transferred to another and paid for by him." 87. Even assuming that in some of the contracts, where there is affixing of what at one time were chattels the element of sale of chattel may be less predominant than the element of bringing into existence an Immovable property and that for that reason they may not be said to involve sale, yet in the contracts of the nature under consideration such as electric installations....
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....he language of these Entries must be given the widest scope of which their meaning is fairly capable because they set up a machinery of Government and are not mere Acts of a Legislature subordinate to the constitution. 89. Thus reading the Entry in its widest amplitude I have no hesitation in holding in this case that the transactions such as are in question do involve sale of goods and are to that extent liable to sales tax. 90. As I have dealt with the principal points culled from English decision in Benjamin on Sale of Goods I have not referred to the English cases in detail referred to in the Madras division. 91. Therefore the provisions in the Madhya Bharat Sales Tax Act, in so far as they seek to tax transactions of the nature in question, are not beyond the legislative competence of the state Legislature under Entry 54 of the State List. 92. This brings us to the second question. 93. The facts pertaining to this are that the Petitioner has a branch office at Delhi from where the electric goods needed for installation in the two Government buildings were sent by rail. They were taken delivery of by the workman of the Petitioner and affixed to the building. 9....
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....relevant definitions cannot operate to tax inter-State sales or purchases and it must be held that the Parliament has-not otherwise provided, the Act, in so far as it purports to tax sales or purchases that take place In the course of inter-State trade or commerce is unconstitutional, illegal and void. He then says: Therefore what was declared to be unconstitutional, illegal and void were the charging Sections of the Act read with the relevant definitions, and as the Bihar Government purported to tax under the charging Section the Supreme Court held that the charging Section was illegal and inoperative to the extent that it was contended that by that charging Section inter-State sales could be taxed. In other words, the view of the Supreme Court was that the charging Section of the Act could not operate to tax inter-State sales and therefore the relevant Section was invalid. And when we turn to the final order, which is at p. 849 (of SCR) at p. 75G (of AIR), the Supreme Courts makes it clear by directing that, Until Parliament by law provides otherwise, the State of Bihar do forbear and abstain from imposing sales tax on out-of-State dealers in respect....
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....tract. 111. This Rule is as follows: In calculating the sale price for the purpose of calculating the sale price for the purpose of contracts, the dealer may be permitted to deduct from the amount payable to him as valuable consideration for carrying out a contract, a sum not exceeding such percentage as may be fixed by the Commissioner for different areas subject to the following maximum percentage, namely: 112. The argument of the learned Advocate General is that the validity of this Rule cannot be challenged in the abstract. The Petitioner, according to him has not come forward with a case that in the case of contracts with which he is concerned work and labour part exceeds 20% of the total value. In the absence of such a position the Petitioner cannot obtain a declaratory opinion about the invalidity the Rule. 113. I DO not however feel that the challenge in this case is abstract in the sense that impugning the validity of the provision will confer no benefit upon him or will not affect the question of levy and collection. 114. Similar provision existed in the Madhya Pradesh Sales Tax Rules in Rule No. 4. 115. Hidayatullah J. observed in Paras 31 and 32 ....
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....om the total consideration, the consideration for the execution of the contract as opposed to cost of materials which the Commissioner thinks suitable in any area, subject to an upward limit fixed by the Rules. If there had been provision for agreements on the basis of 'cost-plus-a-fee' the matter might have been simple but since the contract is for a finished work and payment is in a lump sum on the basis of quantity and quality, rather than the cost of labour plus the cost of the materials sup-plied, it is impossible on the rules as they exist to determine the correct price of the goods on which the tax can legitimately be demanded. There is a distinct probability that the tax falls on services by inclusion into the price of materials deter-mined in the artificial manner. 116. I fully agree with the reasoning of the learned Judge and hold that the artificial test laid down in the Act to determine sale price of goods in respect of 'Contracts' as defined in the Act and the Rule 8 prescribing the proportion between the value of materials and value of works and labour part are clearly not within the power granted to the Legislature of the State of Madhya B....