1.0 INTRODUCTION.-
1.1 M/s. K. Raheja Development Corporation, which carried on the business of real estate development and allied contracts, entered into development of agreements of buildings/flats with owners of land. The Corporation constructed residential apartments and / or commercial complexes. In most cases before construction it entered into agreements of sale with the intending purchasers. The question was whether the Corporation was a dealer and liable to pay turnover tax under the Karnataka Sales Tax Act, 1957, in relation to the construction contracts with the purchasers as "works contracts".
1.2 The matter was, after having been exhausted all legal remedies by the parties brought before the Hon'ble Supreme Court. The Hon'ble Supreme Court held that if the agreement of sale / purchase was entered into after the flat or unit was already constructed, then there would be no works contract. But, if the agreement of sale / purchase of a flat or unit was entered into before the construction was complete it would be a works contract. This judgement is reported in (2005) 141 STC 298 (SC) K. Raheja Development Corporation Vs. State of Karnataka.
1.3 Later on, another Division Bench of the Hon'ble Supreme Court referred the matter to the Larger Bench for consideration as to whether the judgement given in the case of K. Raheja Development Corporation had laid down the correct legal position on the issue involved in the litigation.
1.4 The Larger Bench of the Hon'ble Supreme Court held that the law laid down in the case of K. Raheja Development Corporation was correct. But, in this judgment, the Larger Bench, some such observations have been made particularly with regard to the scope of works contract vis-a-vis sale and the extent of the definition of "goods", which appear debatable. This judgement has been reported in (2013)65 VST 1(SC)/(2013) 37 Tax update 79(SC). Therefore, before coming to the debatable issues straightway, it would be proper to discuss the scope of a "works contract" and the extent of the definition of "goods".
2.0 SCOPE OF "WORKS - CONTRACT" AND "SALE".-
2.1.0 Definition of works contract in the Rajasthan Value Added Tax Act, 2003 (VAT Act) and the Central Sales Tax Act, 1956 (CST Act).-
Sec. 2(44) of the VAT Act. "works contract" means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, errection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property." The same definition of works contract stands there in the CST Act.
The basis and the structure in the above definition is "a contract for carrying out any work." The expression "for carrying out any work" depicts that something is required to be created or completed, involving service or labour with or without incorporation of material. If the desired object is already in existence, there is no question of "carrying out". The expression "carrying out" for example, covers construction of a building but does not include an already constructed building. In other words, expression "carrying out" connotes that some activity is required to be done and if something to be completed is already existed, "carrying out" has no meaning. The different works referred to in the definition of "works contract" after the expression "which includes" are the result of the "carrying out" and without carrying out they remain non-existent and cannot see the light of the day.
2.1.1 The definition of "work contract" given in The VAT Act or CST Act does not appear ambiguous. Therefore, it has got to be accepted as it stands in the said Acts.
2.1.2 The Hon'ble Rajasthan High Court has, in the cases - (i) AIR 1957 Raj. 19, 21: Rambul Singh Vs. Board of Revenue and (ii) AIR 1978 Raj. 1: Magi Bai V. Sitaram, held that when the language of the law admits no ambiguity and it is clear, it is not open to the Courts to put their own glasses in order to squeeze out some meaning which is not borne out by the language of law.
2.1.3 The Hon'ble Supreme Court has, in the cases - (i) AIR 1959 S.C. 459: Shri Ram Ram Narain Vs. State of Bombay, (ii) AIR 1970 SC. 735. Hansraj Gordhandas Vs. Asst. Collector Central Excise & Customs, (iii) AIR 1973 SC 1034: Hiralal Ratan Lal Vs. Sales Tax Officer, (iv) (1981) 47 STC 124 (SC): Chowgule & Co. Pvt. Ltd. Vs. Union of India and Others, (v) AIR 1990 SC 781: M/s. Good Year India Ltd. Vs. State of Haryana and (vi) (2006) 148 STC 199 (SC) Jate Cumnins Ltd. Vs. State of Jharkhand and Others, held that the intention of the legislature is to be gathered from the words used by it and no such liberties can be taken by the Courts for effectuating a supposed intention of the legislature.
Under the CST Act, section 2(ja) defines a "works contract" with the same terminology as referred to under the VAT Act and therefore, above discussions apply also to the definition of a "works contract" under the CST Act.
2.3.0 The definitions of sale.-
Under the VAT Act, "sale" is defined as under:-
Sec. 2(35) "sale" with all its grammatical variations and cognate expressions means every transfer of property in goods by one person to another for cash, deferred payment or other valuable consideration and includes -
(i) a transfer, otherwise than in pursuance of a contract, of property in goods for cash, deferred payment or other valuable consideration;
(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(iii) any delivery of goods on hire purchase or other system of payment by instalments;
(iv) a transfer of the right to use goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(v) a supply of goods by an unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; and
(vi) a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consummation or any drink (whether or not intoxicating), where such supply is for cash, deferred payment or other valuable consideration; and such transfer, delivery or supply shall be deemed to be a sale and the word "purchase" or "buy" shall be construed accordingly.
Explanation: Notwithstanding anything contained in this Act, where any goods are sold in packing, the packing material in such case shall be deemed to have been sold with the goods.
2.3.1 "Sale" and "Deemed Sale" .-
2.3.1. A "Sale": The Hon'ble Supreme Court has, in the cases of - (i) Enfield India Ltd. (1968: 21 STC 138 and (ii) Karam Chand Thapar & Brothers Ltd. (1969: 23 STC 210) held that to constitute a "sale" the presence of the following factors is inevitable:
(i) Two competent parties (Buger & Seller);
(ii) Mutual assent or agreement;
(iii) Money consideration paid or promised; and
(iv) Transfer of property in goods.
2.3.1. B "Deemed Sale":
In case of a "deemed sale", one or more factors as mentioned in the preceding para (2.3.1.A) may be absent in transaction but by legal fiction such transaction shall be a deemed "sale" on account of forty sixth amendment in the Constitution by inserting a new clause (29A) in article 336. Clause (29A) provides that six types of transactions mentioned therein shall be "deemed sale". Those six types of transactions have been inserted in sec. 2(35) of the VAT Act after the expression "and includes".-
The Hon'ble Supreme Court has, in the cases - (i) AIR 1965 SC 661: Bengal Immunity Co. and (ii) AIR 1981 SC 1: Union Medical Agency, held that the legal fiction can be used only for the purpose for which it is made and not for any other purpose.
The Hon'ble Supreme Court has, in the case of State of U.P. Vs. Hariram, reported in AIR 2013 SC 1793, held that the impact of a fiction is that the courts have to assume all those facts and consequences which are incidental or inevitable. The fiction cannot be made to travel beyond the purpose for which it has been created.
2.3.2 "Goods" - Sub-clause (b) to clause (29A) is article 366 of the Constitution uses the expression "transfer of property "in good", and in view of this expression, "goods" become the pivot of the taxability. Article 366(12) of the Constitution defines "goods" as it includes all materials, commodities and articles. Section 2(15) of the VAT Act provides that "goods" means all kinds of movable property, whether tangible or intangible, other than newspapers, money, actanble claims, stocks, shares and securities, and includes materials, articles and commodities used in any form in the execution of works contract, live stock and all other things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. In view of the said definition, "goods" include only "movable properties" and not "immovable properties".
2.3.3 "Whether as goods or in some other form" in sub-clause (b) to clause (29A) in article 366 of the Constitution. -
2.3.3A. The "expression in other form" has not to be seen in isolation, but it has to be seen in the context of the expression "property in goods". If both the expressions are read together and with the scheme of the VAT Act, the expression "in other form" does not include the immovable property as such in the execution of a works contract and before the work is completed. The context is "sale" which is for the purpose of leving tax on sale or purchase of goods under entry 54 in List II of the Seventh Schedule of the Constitution. Therefore, before completion of a works contract, the expression "in other form" does not include immovable property, but it becomes part of the immovable property by its incorporation in the works.
2.3.3B Some relevant Judicial Pronouncements.-
(i) The Hon'ble Supreme Court has, in the case of of the Balasinor Nagrik Co-operative Bank Ltd. Vs. Babubhai Shankarlal Pandya, reported in AIR 1987 SC 849, held that the principle that the statute must be read as a whole is equally applicable to different parts of the same section.
(ii) The Hon'ble Supreme Court has, in the case of East India Hotel Ltd. And Another Vs. Union of India and Another, reported in (2011) 121 STC 46, held that an Act has a to be read as a whole, the different provisions have to be harmonized and effect has to be given to all of them.
(iii) The Hon'ble Supreme Court has, in the case of Grasim Industries Ltd. Vs. Collector of Customs of Bombay, reported in (2002) 128 STC 349, held that in matters of interpretation one should not concentrate too much on one word and pay too little attention to other worlds. No provision in the statue and no word in any section can be construed in isolation. Every provision and every word must be looked at generally and in the context in which it is used.
(iv) The Hon'ble Supreme Court has, in the cases - (i) Easland Combines V/s. Collector of Central Excise (2000) 3 SCC 410, (ii) Commissioner of Police Vs. Suresh Shon Singh (2006 5 SCC 745) and (iii) Deewan Singh Vs. Rajendra Prasad Ardevi (2007: 10 SCC 528), held that no part in a provision of an act should be read in isolation.
(v) The Hon'ble Supreme Court has, in the cases - (i) Ram Narayan Vs. State of U.P., reported in AIR 1957 SC 13, 23, (ii) Regional Provident Fund Commissioner, Bombay Vs. Shree Krishna Metal Manufacturing Co., reported in AIR 1962 SC 1636, 1540, and (iii) Commissioner of Sales Tax Gujarat Vs. Union Medical Agency, reported in (1981) 47 STC 170, 177 (SC), held that the words are to be interpreted in the context in which they have been used.
2.4.0 "CONTRACT OF WORKS" AND "CONTRACT OF SALE".-
2.4.1A contract of sale of goods is distinguished from a contract for work and labour. The distinction is often a fine one. A contract of sale is a contract whose main object is the transfer of property in, and delivery of the possession of, a chattel as a chattel to the buyer for consideration. On the other hand, the main object of a works contract is not the transfer of a chattel qua chattel, but the contract is one for work and labour or service against an agreed amount.
2.4.2 The Hon'ble Supreme Court has, in the case of Govt. of Andhra Pradesh Vs. Guntur Tobacco Ltd., reported in (1965) 16 STC 240, held that a contract of work in the execution of which goods are used may take one of three forms:-
(a) the contract may be for work to be done for remuneration and for supplying of materials used in the execution of the work for a price;
(b) it may be a contract for work in which the use of materials is accessory or incidental to the execution of work;
(c) it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous.
In the last class there is no sale because though property passes, it does not pass for a price. Whether a contract is of the first or second class must depend upon the circumstances; if it is of the first, it is a composite contract for work and sale of goods; when it is of the second category, it is a contract for execution of work not involving sale of goods.
2.4.3 The Hon'ble Supreme Court has, in the case of Commissioner of Sales Tax, Madhya Pradesh Vs. Purshottamji Premji, reported in (1970) 26 STC 38, held that the primary difference between a contract for work or service and a contract of sale of goods is that in the former there is in the person performing work or rendering service no property in the thing produced as a whole notwithstanding that a part or even the whole of the materials used by him may have been his property. In the case of a contract for sale, the thing produced as a whole has individual existence as the sole property of the party who produced it, at some time before delivery, and the property therein passes only under the contract relating thereto to the other party for price.
2.4.4 The Hon'ble Supreme Court has, in the case of Union of India Vs. The Central India Machinery Manufacturing Co. Ltd., reported in (1977) 40 STC 246, held that the question whether a contract is one for sale of goods or for executing works as rendering services, is largely one of fact depending upon the terms of the contract, including the nature of the obligations to be discharged thereunder and the surrounding circumstances. Although neither the ownership of the materials nor the value of the skill and labour as compared with the value of the materials is conclusive in deciding the question whether a contract is in substance one for work and labour or one for sale of a chattel. If the bulk of the material used in the construction belonged to the manufacturer who sold the end product for a price that would be a strong pointer to the conclusion that the contract is in substance one for sale of goods and not one for work and labour.
2.4.5 In the case of Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. Vs. The Commissioner of Sales Tax, decided by the Hon'ble Supreme Court and reported in (1978) 42 STC 409, it has been held that the tests indicated in the several decisions of this Court to distinguish between a contract for sale and a contract for work and labour are not exhaustive and do not lay down any rigid or inflexible rule applicable alike to all transactions. They do not give any magic formula by the application of which one can say in every case whether a contract is a contract for sale or a contract for work and labour. They merely focus on one or the other aspect of the transaction and afford some guidance in determining the question, but basically and primarily, whether a particular contract is one for sale of goods or for works and labour depends upon the main object of the parties gathered from the terms of the contract, the circumstances of the transaction and the custom of the trade.
2.4.6 In the case of Hindustan Aeronautics Ltd. Vs. State of Karnataka, decided by the Hon'ble Supreme Court and reported in (1984) 55 STC 314, it has been held that mere passing of property in an article or commodity during the course of performance of the transaction in question does not render the transaction to be a transaction of sale. Even in a contract purely of work or service, it is possible that article may have to be used by the person executing the work, and property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of these articles. In every case, the court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it.
2.4.7 The Hon'ble Supreme Court has, in the case of State of Andhra Pradesh Vs. Cone Elevators, reported in (2005) 140 STC 22, held that there is no standard formula by which one can distinguish a "contract for sale" from a "works contract." In a "contract for sale" the main object is the transfer of property and delivery of possession of the property, whereas the main object in case of a "contract for work" is not the transfer of the property but it is one for work and labour. In judging whether the contract is for a "sale" or for "work and labour", the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. It is settled law that the substance and not the form of the contract is material in determining the nature of the transaction.
2.4.8 The Division Bench of the Hon'ble Supreme Court has, in the case of K. Raheja Development Corporation Vs. State of Karnataka, reported in (2005) 141 STC 298, held that in the case of construction of flats by a developer of property, if the agreement for sale of flat was entered into before the construction was complete, it would be works contract; however, if the agreement was entered into after the flat was constructed, there would be no works contract and it would be a contract of sale.
Note. As this issue had been referred to the Larger Bench by the Division Bench of the Hon'ble Supreme Court in another case, the decision given above was confirmed by the Larger Bench of three Judges of the Hon'ble Supreme Court in the case of Larsen And Tubro Limited and Another Vs. State of Karnatak and Another, reported in (2013) 65 VST 1 (SC).
3 SOME ARGUABLE OBSERVATIONS IN THE JUDGMENT OF THE LARGER BENCH OF THE HON'BLE SUPREME IN THE CASE OF LARSEN AND TUBRO LTD.-
3.3 In Para No. 101 of the judgment of the Larger Bench of the Hon'ble Supreme Court has summarised the legal position as follows:-
(i) For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled: (one) there must be a works contract, (two) the goods should have been involved in the execution of a works contract and (three) the property in those goods must be transferred to a third party either as goods or in some other form.
(ii) For the purposes of Article 366 (29-A)(b), in a building contract or any contract to do construction, if the developer has received or is entitled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods.
(iii) Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term "works contract" in Article 366 (29-A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366 (29-A(b) limits the term "works contract".
(iv) Building contracts are species of the works contract.
(v) A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished.
(vi) The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative.
(vii) A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made.
(viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services. In other words, the single and indivisible contract, now by Forty-sixty Amendment has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material used in the execution of works contract.
(ix) The expression "tax on the sale or purchase of goods" in Entry 54 in List II of Seventh Schedule when read with the definition clause 29-A of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract.
(x) Article 366 (29-A)(b) serves to bring transactions where essential ingredients of "sale" defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be sale within the meaning of the Sale of Goods Act.
(xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods.
4.0 ARGUABLE OBSERVATIONS RELATING TO EXTENT OF THE DEFINITION OF "GOODS" AND "SURFACE OF WORKS CONTRACT" IN THE JUDGEMENT OF THE LARGER BENCH OF THE HON'BLE SUPREME COURT IN THE CASE OF LARSEN AND TUBRO LTD.-
4.1 Extracts referred to from para 60 of the judgement of the Larger Bench:-
4.1.0 "The definition of "goods" in clause 12 (to article 366 of the Constitution) is inclusive. It includes all materials, commodities and articles. The expression "goods" has a broader meaning than mercandise. Chattles or moveables are goods within the meaning of clause 12(of article 366). Sub-clause (b) (under clause 29A of article 366) refers to transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. The expression "in some other form" in the brackets is of utmost significance as by this expression the ordinary understanding of the term of "goods" has been enlarged by bringing within its fold goods in a form other than goods. Goods in some other form would thus mean goods which have ceased to be chattels or movables or merchandise and become attached or embedded to earth. In other words, goods which have by incorporation become part of immovable property are deemed as goods. The definition of tax on the sale of purchase of goods includes a tax on the transfer of property in the goods as goods or which have lost its form as goods and have acquired some other form involved in the execution of a works contract."
4.1.1 With due respect, I humbly submit that there is no doubt that the word "includes" is extensive but this extension does not cross the limits of definition of "goods" given in article 366(12) of the Constitution because the expression "all materials, commodities and articles" with reference to goods are indispensably "moveable property". There may be many other things which may also be moveable property and such moveable property has not been enumerated in article 366(12), get support from the word "includes", to be goods. The word "includes" does not permit that moveable property would include also the immovable property because their genesis, use, performance and end result are different.
4.1.2 The Hon'ble Supreme Court has, in the case of Godfrey Philips India Ltd. Vs. State of U.P., reported in (2005) 139 STC 537, held that the word "including", in ordinary parlance, indicates what follows the word "including" comprises or is contained in or is a part of the whole of the word preceding.
4.1.3 The Hon'ble Supreme Court has, in the case of Bharat Co-Operative Bank (Mumbai) Ltd. Vs. Co-Operative Bank Employees Union, reported in AIR 2007 SC 232, held that the word "includes" is used in the definition, the legislature does not intend to restrict the definition but to make the definition enumerative but not exhaustive.
4.2 Reference of para 62 in the judgement of the Larger Bench .-
4.2.0 The para 62 in the judgement of the Largence Bench reads as - "The States have now been conferred with the power to tax indivisible contracts of works. This has been done by enlarging the scope of tax on sale or purchase of goods wherever it occurs in the Constitution. Accordingly. the expression "tax on the sale or purchase of goods" in Entry 54 of List II of Seventh Schedule when read with the definition of clause 29-A, includes a tax on the transfer of the property in goods whether as goods in the form other than goods involved in the execution of works contract. The taxable event in deemed sale."
4.2.1 With due respect, I humbly submit that by inserting clause 29-A in article 366 of the constitution, six types of transactions have been brought into ambit of the deemed sales. This amendment in the Constitution does not confer the power on the State legislatures to change the definion of goods or to assume the power to treat any transaction devoid of necessary ingredients other than the six deemed sales, as a sale. This clause 29-A under article 366 has been inserted to get over the hurdle of law which was coming in the way of supply of goods in the execution of a works contract of indivisible nature. This hurdle of law was the result of the judgement of the Hon'ble Supreme Court given in the case of Gannon Dunkerley & Co. reported in (1958) 9 STC 353 The present amendment by way of insertion of clause 29-A in article 366 of the Constitution cannot be read in isolation and without context of the issue involved. The said six types of deemed sales have borne by legal fiction and they have to remain appended to the purpose for which the legal fiction has been created.
4.3.0 The extracts referred to from para 64 of the judgment of the Larger Bench.-
4.3.1 "Whether contract involved a dominant intention to transfer the property in goods, in our view, is not at all material. It is not necessary to ascertain what is the dominant intention of the contract. Even it the dominant intention of the contract is not to transfer the property in goods and rather it is the rendering of service or the ultimate transaction is transfer of immovable property, thus also it is open to the States to levy sales tax on the materials used in such contract if it otherwise has elements of works contract."
4.3.2 With due respect, it is humbly submitted that as soon as, in a works contract for construction of a building, cement, bajari, bricks, stones, iron, wood etc. are incorporated, the transfer of materials is complete by theory of accretion. Till the building is completed all the materials are transferred and sale is complete. The formal transfer of possession of the building from the contractor to the contracted does not amount to sale. Then, how the immovable property becomes open for being exposed to sales tax. If a building is constructed by a developer on his own, that building being immovable property cannot be taxed under the umbrella of sub-clause (b) of clause (29A) to section 366 of the Constitution.
4.4.0 Reference to para 94 in the judgement of the Larger Bench.-
4.4.1 "Para 94: For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract in our opinion, three conditions must be fulfilled: (i) there must be a work contract, (ii) the goods should have been involved in the execution of a works contract and (iii) the property in those goods must be transferred to a third party either as goods or in some other form. In a building contract or any contract to do construction, the above three things are fully met. In a contract to build a flat there will necessarily be a sale of goods element. Works contracts also include building contracts and therefore without any fear of contradiction it can be stated that building contracts are species of the work contract".
4.4.2 With due respect it may be humbly submitted that all cases of building contracts may not be species of the works contracts. It there is a contract for sale of a completed building / flat, the transaction would be a contract of sale of immovable property. In the case of a works contract the property passes to the owner of the land on which the building is contracted as soon as the goods or materials are incorporated in the building. Secondly, the tax leviable by virtue of sub-clause (b) of clause (29-A) of article, 366 of the Constitution, is subject to the same discipline to which any levy under entry 54 of the State List is made subject to under the Constitution. In view of this position sale of immovable property cannot be taxed.
5.0 JUDGEMENT OF THE LARGER BENCH OF THREE JUDGES OF THE HON'BLE SUPREME COURT, IN THE CASE OF BHARAT SANCHAR LTD. VS. UNION OF INDIA, REPORTED IN (2006) 145 STC 91.-
This judgement is also relevant in the present case of "works contract" and "sale". Three paras 44, 45, 46 in this judgement appear to lay down the law relating to "works contract" and "sale".
5.1 Paras 44.-
"Gannon Dunkerley (1958) 9 STC 353 (SC) survied the 46th Constitutional Amendment in two respects. First with regard to the definition of "sale" for the purposes of the Constitution in general and for the purposes of entry 54 of List II in particular except to the extent that the clauses in article 366(29A) operate. By introducing separate categories of "deemed sales", the meaning of the word "goods" was not altered. Thus the definition of the composite elements of a sale such as intention of the parties, goods, delivery, etc. would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. Courts must move the times. (Attorney General Vs. Edition Telephone Company of London (1880) 6 Q BD 244) But the 46th Amendment does not give a licence for example to assume that a transaction is a sale and then to look around for what could be the goods. The word "goods" has not been altered by the 46th Amendment. That ingredient of sale continues to have the same definition. The second respect in which Gannon Dunkerby (1958) 9 STC 353 (SC) has survived in with reference to the dominant nature text to be applied to a composite transaction not covered by article 366(29A). Transactions which are mutant Sales are limited to the clauses of article 366(29A). All other transactions would have to qualify within the meaning of the sale of Goods Act, 1930 for the purpose of levy of sales tax".
Para 45:
"Of all the different kinds of composite Transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these constitutionally two cases where splitting of the service and supply has be permitted in clauses (b) and (f) of clause (29A) of article 366, there is no other service which has been permitted to be so split. For example the clauses of article 366(29A) do not cover hospital services. Therefore, in during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals, render service in the course of which can it be said that there in a sale of goods, when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his / her client? Strictly speaking with the payment of fees, consideration does not pass from the patient or client to the doctor or lawyer for the documents in both cases."
Para 46:
"The reason why these services do not involve a sale for the purposes of entry 54 of list II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley's case (1958) 9 STC 353 (SC), namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in article 366(29A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in article 366(29A) continues to be-did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is as to what is "substance of the contract". We will, for the want of better phrase, call this the dominant nature test".
5.2.0 Comparative legal position between the judgement given by the Larger Bench of the Hon'ble Supreme Court in the case of Larsen And Tubro Ltd. (2013: 65 VST 1:SC) and the judgment given by the Larger Bench of the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. (2006: 145 STC 91: SC) .-
5.2.1 The Division Bench of the Hon'ble Supreme Court, in the case of K. Raheja Development Corporation, reported in (2005) 141 STC 298, held that where a flat is purchased during the period of construction thereof, it would be a works contract and the materials incorporated by the developer in this work would be taxable. But in case of sale of completed flat, it would be a sale of immovable property. The Larger Bench of the Hon'ble Supreme Court has, in the case of Larsen And Tubro Ltd. (2013: 65 VST 1), held in para 118 - "We are clearly of the view that Raheja Development lays down the correct legal position and the approve the same."
5.2.2 To this extent there appears no conflict between the law laid down by the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ld. (2006: 145 STC 91 SC) and in the case of Larsen and Tubro Ltd. (2013: 65 VST 1: SC). But in the case of Larsen And Tubro Ltd. there are some observations of the Larger Bench of the Hon'ble Supreme Court which extend the definition of "goods" and in a sense, it appears in the observations that tax can be levied on the materials used in the construction of a building which is sold after it is completed. There possibly appears a legal conflict between the law laid down by two different Larger Benches of the Hon'ble Supreme Court. It may lead to litigation, particularly between the Tax Departments and the dealer-contractors.
5.2.3 Now question arises before us is that which law, as laidown in the earlier case of Bharat Sanchar Nigam Ltd. by a Larger Bench of three Judges of the Hon'ble Supreme Court, or law laid down in the later case of Larsen And Tubro Ltd. by another Larger Bench of the Hon'ble Supreme Court. If I understand the law correctly, I may humbly submit that it has been generally held that the judgement given on a point by the earlier Bench of the same strength of Hon'ble Judges vis-a-vis the judgment given on the same point by later Bench of the same strength of Hon'ble Judges, should be followed. In other words, later judgement on a point does not supersede earlier judgement on the same point.
5.2.3A The Hon'ble Supreme Court has, in the cases - (i) Mahadeolal Kawdia Vs. Administrator General of West Bengal (AIR 1960 SC 936) and (ii) Shridhar Vs. Nagar Palika (1999: Supp. SCC 157), held that Bench of co-ordinate jurisdiction should not disregard the decision of a Bench of same strength on its own on an identical question. The rationale of this rule is the need for consistency, certainty and predictability in the administration of justice.
5.2.3B The Hon'ble Supreme Court has, in the case of Govt. of A.P. Vs. Satyanarayan Rao (dead by LRs) reported in (2000)4 SCC 262, held that laws is well settled that a decision by two judges has a binding effect on another co-ordinate Bench of two judges, unless it is demonstrated that the said decision by any subsequent changed law or decision ceases to be laying down a correct law.
5.2.3C The Hon'ble Supreme Court has, in the case of Bharat Sanchar Nigam Ltd. Vs. Union of India, reported in (2006) 145 STC 91, held that the Courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position.
5.2.3D The Hon'ble Supreme Court has, in the cases - (i) AIR 1962 SC 83 (Jaishri Sahu), (ii) 1971 (2) SCC 650 (Sri Venkateswara Rice Ginning and Groundnut Oil Contractors Company) (iii) AIR 1977 S.C. 1177 (Eknath Shankarrao Mukkawar), (iv) AIR 1972 SC 51 (U.R.G. & G.O.M. Company), (v) AIR 1990 SC 261 (S.K. Bhattija) and (vi) (1990) 77 STC 347 (Sundarjas Kanhyalal Bhatija), held that generally one Co-ordinate Bench cannot disagree with the decision of the another Co-ordinate Bench.
5.2.3E In view of the above judgments referred to in paras 5.2.3A, 5.2.3B, 5.2.3C and 5.2.3D, it is advisable to follow the law laid down by the Larger Bench of the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. Vs. Union of India, reported in (2006) 145 STC 91(SC).
6.0 REFERENCE TO JUDGEMENTS OF TWO CONSTITUTION BENCHES OF THE HON'BLE SUPREME COURT.-
Two Constitution Benches of the Hon'ble Supreme Court have, in the cases of Builders Association of India & others and Gannon Dunkerley & Co. & others (Second Case), laid down general principles relating to works contracts. These principles inter alia do not say that the Forty Six Amendment in the Constitution has enlarged the definition of "goods" and tax may be levied on the sale of immovable property.
6.1 The Constitution Bench of the Hon'ble Supreme Court has, in the case of Builders Association of India And Others Vs. Union of India And Others, reported in (1989) 73 STC 370 laid down certain basic principles with regard to taxability in case of works contracts.-
(i) Forty-sixth amendment in the Constitution was in order to overcome the effect of the decision of the Supreme Court in State of Madras Vs. Gannon Dunkerley & Co. Ltd. (1958: 9 STC 353) wherein it was held that a works contract was an indivisible contract and the turnover of the goods used in execution of the works contract could not, therefore, become eligible to sales tax. Sub-clause (b) of clause (29 A) of article 366 states that "tax on the sale or purchase of goods" includes among other things a tax on the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract. It does not say that a tax on the sale or purchase of goods included a tax on the amount paid for the execution of a works contract.
(ii) The expression "tax on the sale or purchase of goods" in entry 54 of the State List 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 (29A) 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.
(iii) All transfers, deliveries and supplies of goods referred to in clauses (a) to (f) of clause (29A) 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 transfer and deliveries that take place under sub-clauses (b), (c), and (d) of clause (29A) of articles 366 of the Constitution are subject to an additional restriction in sub clause (b) of article 286 (3) of the Constitution.
(iv) According to article 286 (1), no law of State shall impose tax on the sale or purchase of goods which takes place outside the State, or in the course of the import of the goods into or export of the goods out of the territory of India.
(v) 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 (29A) of the Constitution should also be subject to the same restrictions and conditions.
(vi) 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.
6.2 Another Constitution Bench of the Hon'ble Supreme Court has, in the case of Gannon Dunkerley & Co. And others Vs. State of Rajasthan And Others, reported in (1993) 88 STC 204, laid down the following general principles with regard to levying tax on works contract .-
(i) In exercise of its legislative power to impose tax on sale or purchase of goods, the State Legislature, while imposing 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 is not competent to impose a tax on such a transfer which constitutes a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import or export.
(ii) The Legislative power of the State Legislatures under entry 54 of the State List is subject to two limitations - one flowing from the entry itself which makes the said power "subject to the provisions of entry 92-A of the List I" and the other flowing from the prohibition contained in article 286.
(iii) As a result of the Forty-sixth Amendment, the contract which was single and indivisible has been altered by a legal fiction into a contract which is divisible into one for sale of goods and other for supply of labour and services.
(iv) Even in the absence of any amendment having been made in the Central Sales Tax Act, 1956 (after the Forty-sixth amendment) expressly including transfers of property in goods involved in execution of a works contract, the provisions contained in sections 3, 4, 5, 14 and 15 of the Central Sales Tax Act, 1956 would also be applicable to such transfers.
Note. By Finance Act, 2002, w.e.f. 11.05.2002, the definition of sale in the Central Sales Tax Act, 1956 has been substituted in consonance with the 46th Amendment in the Constitution.
(v) The question whether a deemed sale resulting from transfer of property in goods involved in the execution of a particular works contract amounts to a sale in the course of inter-State trade or commerce, or an outside sale or a sale in the course of import has to be decided in the light of the particular terms of the works contract.
(vi) So far as sales in the course of inter-State trade or commerce are concerned, the position is well-settled that the situs of the sale or purchase is wholly irrelevant as regards its inter-State character.
(vii) Since the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works.
(viii) The value of the goods involved in the execution of a works contract will have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services.
(ix) In cases where the contractor does not maintain proper accounts or the accounts maintained by him are not found worthy of credence it would be permissible for the State Legislature to prescribe a formula for determining the charges for labour and services by fixing a particular percentage of the value of the works contract.
(x) It would be permissible for the State Legislature to tax all the goods involved in the execution of a works contract at a uniform rate which may be different from the rates applicable to individual goods.
7.0 CONCLUSION. -
With the proviso that I am open to conviction and subject to correction, in view of -
(i) the definition of goods in article 366(12) of the Constitution ;
(ii) the confirmation by the Larger Bench of the Hon'ble Supreme Court in the case of Larsen And Tubro Ltd. (65 VST 1 SC) of the judgement of the Division Bench of the same Court in the case of K. Raheja Development Corporation (2005: 141 STC 298: SC) that during the construction of building / flats, if a flat was contracted to be sold by a developer to the purchaser before the completion of the works, it would be a works contract, but if. It such contract was made after the completion of the flat, it would be was a case of sale of flat (Immovable property);
(iii) the law laid down by the Larger Bench of the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd., reported in (2006) 145 STC 91(SC), and
(iv) the general principles relating to works contracts laid down by the two constitutional Benches of the Hon'ble Supreme Court in the cases of -
(a) Builders Association of India And others Vs. Union of India and Others, reported in (1989) 73 STC 370 (SC), and
(b) Gannon Dunkerley & Co. And Others Vs. State of Rajasthan And Others, reported in (1993) 88 STC 204 (SC),
I humbly submit that -
(i) Where during the construction of buildings or flats if a building or a flat is sold, it would be a works contract and the developer would be liable to pay tax / VAT on the materials incorporated in the works;
(ii) Where a completed building or a completed flat is sold after completion of the works, it would be a sale of immovable property, which in no circumstances would be taxed;
(iii) as the definition of "goods" given in article 366(12) of the Constitution includes all materials, commodities and articles, which are movable property. The word "includes" used therein, though extensive in nature, it cannot be extended to a different and distinct generic property i.e. immovable property; and
(iv) entry 54 in the State list of the Seventh Schedule to the Constitution does not permit the levy of tax on any kind of property which falls into the nature or character of immovable property.