M/S. LARSEN & TOUBRO LIMITED & ANR. v. STATE OF KARNATAKA & ANR.

The Judgment of the Court was delivered by ,B R.M. LODHA, J. 1. Leave granted in all these special leave petitions.

2. Does the two-Judge Bench decision of this Court in Raheja Development' lay down the correct legal position? It is c to consider this question that in Larsen and Toubro 2 a two- Judge lilench of this Court has referred the matter for. consideration by the larger Bench. In the referral order dated 19.8.2008, the two-Judge Bench after noticing the relevant provisions of the Karnataka Sales Tax Act, 195,Z: and the distinction between a contract of sale and a works'contract made the reference to the larger Bench by observing as follows:

"We have prima facie some difficulty in accepting the proposition laid down in Para 20 quoted above. Firstly, in our view, ·prima facie, M/s Larsen & Toubro - petitioner herein, being a developer had undertaken the contract to develop the property of Dinesh Ranka. Secondly, the ' Show Cause Notice proceeds only on the basis that , Tripartite Agreement is the works contract. Thirdly, in the : Show. Cause Notice there is no allegation made by the F Department that there is monetary consideration involved in the first contract which is the Development Agreement.

Be that as it may, apart from the disputes in hand, the point which we have to examine is whether the ratio of the G judgment of the Division Bench in the case of Raheja Development Corporation (supra) as enunciated in Para

1Copy pinpoint1. K. Raheja Development CorporatioR v. State of Karnataka; (2005) 5 SCC 162.

2Copy pinpoint2. Mis. Larsen & Toubro Limited & Anr. v. State of Karnataka & Anr.; SLP(C) H No. 17741 of 2007.

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 695 KARNATAKA [R.M. LODHA, ·J.] 20, is correct. If the Development Agreement is not a works contract could the Department rely upon the second contract, which is the Tripartite Agreement and interpret it · to be a works contract, as defined under the 1957 Act. The Department has relied upon only the judgment of this Court in Raheja Developmerit Corporation(supra) case because para 20 does assist th-e Department. However, we are of the view that if the ratio of Raheja Development case is to be accepted then there would be no difference between . works contract and a contract for sale of chattel as a chattel. Lastly, could it be said that petitioner - Company C was the contractor for prospective flat purchaser. Under the definition of the term "works contract" as quoted above the contractor must have undertaken the work of construction for and on behalf of the contractor (sic.) for cash, deferred or any other valuable consideration. According to the D Department, Development Agreement is not works contract but the Tripartite Agreement is works contract which, prima facie, appears to be fallacious. There is no allegation that the Tripartite Agreement is sham or .bogus.

For the aforestated reasons, we direct the Office to place E this matter before the Hon'ble Chief Justice for appropriate directions in this regard, as we are of the view thatJhe judgment of Division Bench in the case of Raheja Development (supra) needs re-consideration by the larger ~~-" F •

3Copy pinpoint3. Of the 26 appeals under consideration before us, 14 are from Karnataka and 12 from Maharashtra. Insofar as Karnataka appeals are concerned, it is appropriate that we take the facts from the leading case being Larsen and Toubro2. The ECC division of Larsen and Toubro (for short, "L&T") is engaged in G property development along with the owners of vacant sites. On 19.10.1995, L&T entered into a development agreement with Dinesh Ranka, owner of the land bearing survey numbers 90/ 1, 91, 92 (Part), 94, 95 and 96/1 (Part) together measuring 34 H

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A acres all situated at Kothanur Village, Segur Hobli, Bangalore South Taluk, Bangalore, for construction of a multi-storeyed apartment complex. The owner was to contribute his land and L& T was to coristruct the apartment complex. After development, 25% of the total space was to belong to the 8 owner and 75% to L&T. A power of attorney was executed by the owner of the land in favour of L&T to enable it to negotiate and book orders from the prospective purchasers for allotment of built up area. Accordingly, L&T entered into agreements of sale with intended purchasers. The agreements provided that on completion of the construction, the apartments would be handed over to the purchasers who will get an undivided interest .in the land also. Sale deeds, thus, were executed in favour of the intended purchasers by L&T and the owner.

4Copy pinpoint4. On 12.07.2005, the business premises of L&T were inspected by the Deputy Commissioner of Commercial Taxes {lntelligence-1) South Zone, Koramangala, Bangalore (hereinafter referred to as the 'Deputy Commissioner') and a detailed statement of the Finance Manager was recorded.

5Copy pinpoint5. On 21.12.2005, the Deputy Commissioner called upon L&T to furnish the details of development project. L&T furnished details on 24.07.2005 and 26.09.2005.

6Copy pinpoint6. On 04.10.2005, the Deputy Commissioner served a show cause notice on L&T stating that it was liable to tax as F per th!! decision of this Court in Raheja Development1. L&T responded to the show cause notice and submitted preliminary objections on 10.10.2005. By a further communication dated 10.11.2005, L& T objected to the assessment of tax for development of projects by it. The L&T inter alia submitted that G. the development agreement was not a works contract per se on account of the reasons: {a) the agreement was to develop and market flats to customers; {b) the intent and purpose of the agreement was to develop property by the petitioners on the one hand and the land owner on the other; {c) the construction and development of the said land involved no monetary

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 697 KARNATAKA [R.M. LODHA, J.] consideration; and (d) the only consideration was that upon the completion of the entire project, L&T would be entitled to 75 per cent of the same.

7Copy pinpoint7. Again on 04.01.2006, the business premises of L&T were inspected and certain documents like agreement copies 8 and other documents relating to the transactions of the sale of flats were seized for the purposes of further investigation and verification.

8Copy pinpoint8. On 02.02.2006, the Deputy Commissioner served upon L&T a further notice proposing to tax the sale of materials used in the construction of flats on the ground that it was entitled to 75 per cent of the share of the projects. L&T filed detailed objections to this notice as well.

9Copy pinpoint9. On 03.07.2006, the Deputy Commissioner issued provisional assessment orders under Section 28(6) of the Karnataka Sales Tax Act, 1957 (for short, 'KST Act') for the years 2000-01 to 2004-05. Along with the provisional orders, the Deputy Commissioner also issued demand notices raising a total demand of Rs. 3,99,28,636/-. E

10Copy pinpoint10. Initially, L&T preferred a writ petition before this Court challenging the above demands but that writ petition was withdrawn and a writ petition under Art'icle 226 of the Constitution of India was filed before the Karnataka High Court. F

11Copy pinpoint11. The Single Judge of the Karnataka High Court noted that the controversy raised by the L&T was covered by the decision of this Court in Raheja Development1 and, accordingly, dismissed the writ petition on 10.07.2007 by observing as follows: G

"From the aforesaid observations of the Apex CourtJt is very much clear that as the petitioner No. 1 had entered · into an agreement to carry out constn,J.ction activity on behalf of someone else for cash or for deferred payment or for any other valuable construction, it would be carrying H

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A out works contract and therefore would become liable to pay turnover tax on the transfer involved in such work contracts. It is also not in dispute in this matter that the agreement of sale is entered into between the first petitioner and the buyers of the flat even prior to completion B of the construction of the building. Under such circumstances, as has been held by the Apex Court in the RAHEJA DEVELOPMENT CORPORATION's Case, the petitioners are liable to pay the turnover tax on the transfer of goods involved in such 'works contract'. In view of the c dictum laid down by thEj recent judgment cited supra, this Court does not find any merit in this writ petition."

12Copy pinpoint12. L&T preferred an intra-court appeal. The Division Bench of that Court concurred with the Single Judge and dismissed the writ appeal by expressing its opinion as follows: D "In our view, so far as the definition of 'work contract' in almost similar situation as in the present case has been well considered by the Hon'ble Supreme Court in the case of K. RAHEJA DEVELOPMENT CORPORATION (supra). E The question as to whether that judgment as per Article 141 of the Constitution of India is the law of the land binding on all the Courts in the Count!)'. Prima facie, we find that the facts and circumstances in that case are almost similar to the present case and as such, the ratio laid down in the F RAHEJA's Case and relied upon by the learned Single Judge is, in our view, just and proper. So far as the other pronouncements are concerned, if the appellant feels that it is necessary to get the pronouncement in RAHEJA's Case reviewed, it is open for him to approach the Apex Court and this Court cannot substitute its own findings on G the questions since the same has already been decided by the Apex Court in RAHEJA's case."

13Copy pinpoint13. Insofar as appeals from Maharashtra are concerned, they arise from the judgment of the Bombay High Court. The H Bombay High Court was concerned with the group of matters

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 699 KARNATAKA [R.M. LODHA, J.] wherein challenge was laid to the constitutional validity of A Section 2(24) of the Maharashtra Value Added Tax Act, 2002 (for short, "MVAT Act") as amended initially by Maharashtra Act XXXll of 2006 and thereafter by Maharashtra Act XXV of 2007 and Rule 58(1A) of the Maharashtra Value Added Tax 'Rules, 2005 (for short, "MVAT Rules"). B

14Copy pinpoint14. The Division Bench of the Bombay High Court on examination of rival contentions has, inter alia, ~eld; (a) works contract have numerous variations and it is not possible to accept the contention either as a matter of principle or as a matter of interpretation that a contract for works in the course C of which title is transferred to the flat purchaser would cease to be works contract; (b) the provisions of MOFA recognise an interest of the purchaser of the apartment, not only in respect of the apartment which forms the subject matter of the purchase, but also an undivided interest, described as a D percentage in the common areas and facilities; (c) the amendment to Section 2(24) clarifies the legislative intent that ·a transfer of property in goods involved in the execution of works contract including an agreement for building and . construction of immovable property would fall within the description of a sale of goods within the meaning of that provision and it brings within the ambit of that expression "transactions of that nature" which are referable to' Article 366 (29-A)(b); (d) by amended definition of the expression "sale" in clause (b)(ii) of the explanation to Section 2(24), the transactions which involve works contract have been covered; (e) the amendment in Section 2(24) does not transgress the boundary set out in Article 366(29-A); (f) Rule 58(1A) of the MVAT Rules provides that in the case of construction contracts where the immovable property, land or as the case may be, interest therein is to be conveyed and the property involved in the execution of the construction contract is also transferred, it is the latter component which is-brought to tax; the value of the goods at the time of transfer is to be calculated after making the deductions which are specified under sub-rule ..(1 ); and (g) H

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A Rule 58(1A) provides for a measure for the tax by excluding the cost of the land.

15Copy pinpoint15. The Division Bench of the Bombay High Court, thus, found no merit in the challenge to the constitutional validity of Section 2(24) of the MVAT Act and Rule 58(1A) of the MVAT B Rules. The trade circulars and the notifications were also found to be legal and consequently writ petitions were dismissed.

16Copy pinpoint16. We have heard learned senior counsel and counsel for the appellants and learned senior counsel for Karnataka and C learned Advocate-General and learned senior counsel for Maharashtra at quite some length.

17Copy pinpoint17. Mr. Rohinton F. Nariman, learned senior counsel for L& T led the arguments on behalf of the appellants. His D submission is that Raheja Development' does not lay down correct law. He submits that insertion of clause 29-A (b) in Article 366 following the 61st Law Commission Report is intended to separate the goods component from the labour and services component of a composite works contract. The amendment does not in any manner undo Gannon Dunkerfey- E /3 insofar as that decision defines what a works contract is. In thi~ regard, learned senior counsel extensively referred to the decisions of this Court in Builders' Association• and Bharat Sanchar° .It is argued by him that in Raheja Development1 it was incorrectly assumed that the definition of works contract F was wide although the definition of works contract in KST Act and Madras General Sales Tax Act which was under consideration in Gannon Dunkerley-13 was identical.

18Copy pinpoint18. Alternatively, it is argued by Mr. Rohinton F. Nariman G that if ii is accepted that the definition of 'works contract' in KST

3. State of Madras v. Gannon Dunkerley and Co.; (1959) SCR 379. 4 Builders' Association of India and others v. Union of India and others; (1989) 2 sec 645.

5. Bharat Sanchar Nigam Limited and another v. Union of India and others; H (2006) 3 sec 1.

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 701 KARNATAKA [R.M. LODHA, J.] Act is wide which takes within its fold the contracts that are not commonly und~rstood as works contract then this would be outside Entry 54 List II of the Seventh Schedule of the Constitution for the reason that "works contract" as understood in Gannon Dunkerley-13 has not in any manner been upset by the constitutional amendment and would have to mean "works contract" as commonly understood.

19Copy pinpoint19. Criticizing the conclusions drawn in paragraph 20 of the judgment in Raheja Development1, it is argued by Mr. Rohinton F. Nariman that these conclusions are incorrect for, C (a) the well known tests to determine as to whether a particular contract is a "works contract" or "contract of sale" have not been adverted to; (b) the contract is not read as a whole. Its substance and the main object has not been looked at and one phrase is torn out of context without adverting to any other part of the contract and based on this reasoning the contract is said to be a works contract; (c) though it is noticed that construction/ development is to be on payment of a price in various installments but does not draw any conclusion from it; (d) it is noticed that developer has a lien on the property but incorrectly states that the lien is because they are not owners. The lien is obviously so that if monies are not recovered from the prospective flat purchasers, the lien can be exercised, showing thereby that the contract is a contract of an agreement to sell immovable property; (e) after noticing that developer can terminate the agreement if any one installment is not paid and can forfeit 10% of the amount that has been paid and can ultimately resell the flat, it is held that the presence of such a clause does not mean that the agreement ceases to be a "works contract" without appreciating that such a clause would have no place in a works contract and can only be consistent with the contract for the sale of immovable property inasmuch as termination can take place if the entire consideration for the immovable property is not paid; (f) it is stated that if there is termination but there is no re-sale, there would be no works contract only to that extent which is again wholly incorrect H

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A because post termination what happens to a particular flat is of no relevance inasmuch as the prospective flat purchaser goes out of the picture; and (g) the distinction between a flat being constructed and a flat under construction is a distinction without a difference for the reason that the judgment notices that B if the a{lreement is entered into after the flat is already constructed, there would be no 'sale' and no 'works contract'. This is obviously for the reason that the flat.has already been developed by the developer using his material and his plan and is sold as such to a purchaser. c 20. Mr. Rohinton F. Nariman extensively referred to the decisions of this Court in 8. C. Kame• and Hindustan Shipyard' . With reference to paragraphs 7 to 16, 22 and 24 to 26 in Hindustan Shipyard', it is submitted that in a somewhat similar fact situation, this Court came to conclusion that construction of various ships .for and on behalf of the customer would amount to a 'sale' and not to a 'works contract'.

21Copy pinpoint21. Based on the various clauses of the tripartite agreement, it is argued that the main object of the agreement read as a whole and the substance of the agreement is to sell and convey fraction of the land together with a fully constructed flat only when all installments have been fully paid. The work undertaken is for the joint development of the project as a whole, i.e., work is undertaken by the developer for himself and for the owner. The construction is not carried out for and on behalf of the purchaser, but it is carried out entirely by the owner/ developer in order to exploit or get the best price for the land and the structure built thereon from various flat purchasers. The flat is to be sold as a flat and not an aggregate of its component. G parts. No work is carried out for the purchaser who gets title to the property only after" all work is complete. Learned senior counsel argued that the ultimate test would be: if a suit for

6. The Assistant Sales Tax Officer and Others v. B.C. Kame, Proprietor Kame Photo Studio; [(1977) 1 SCC 634].

H 7. Hindustan Shipyard Lid. v. State of A.P.; [(2000) 6 SCC 579].

/ I M/S. LARSEN & TOUBRO LIMITED v. STATE OF 703 KARNATAKA [R.M. LODHA, J.] specific performance is filed by the flat purchaser against the owner/developer, such suit would invariably be for the conveyance of title and not for the construction of a building. Conversely a suit by an owner/developer against the flat purchaser would be for payment of consideration of a flat/ fractional interest in the lan.d. Such suit would never be for payment of work done at the behest of the flat purchaser and payment of consideration therefor. It is, thus, submitted that the judgment in Raheja Development1 does not lay down good law and deserves to be overruled.

22Copy pinpoint22. Mr. K.V. Vishwanathan, learned senior counsel for C Maharashtra Chamber of Housiog Industries elaborately argued based on the following contentions. First, that to attract Article 366(29-Aj(b) there has to be a "works contract" and in the process ~f executing the works contract if certain transfer of property 1occ1.1rs, such transfer would be deemed to be sale. If D there is/ no works contract, the question of applying Article 366(29-!A)(b) would not arise. A distinction is drawn between "works'; and "works contract". It is contended that an agreement for sale is an agreement to transfer immovable property as an indivisible whole which will result in the execution of a E conveyance. There is no element of works contract involved. Even if for the purpose of complying with the obligations of an agreement for sale, a vendor carries out some works, it is not on account of any works contract. Even if there are some "works" involved, there is no "works contract" between the promoter and purchaser.

23Copy pinpoint23. Secondly, that the applicability of Article 366(29-A) read with Entry 54 of List II will arise only in matters which are otherwise not covered under the ambit of sale and cannot apply to an agreement for sale of immovable property resulting in a conveyance. He pressed into service (i) test of enforceability (ii) common parlance test (view of the reasonable man) (iii) test of substance of the contract and (iv) assignment test. Insofar as common parlance test and test of substance of the contract H

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A are concerned, Mr. K.V. Vishwanathan placed reliance upon Bharat Sanchar6. As regards assignment test, paragraph 36 of the judgment in Builders' Association4 was referred to by the learned senior counsel.

24Copy pinpoint24. Thirdly, that amended definition under Article 366(29- 8 A) has not conferred on the States a larger freedom than what they had before the amendment in regard to their power to levy sales tax under Entry 54 of the State List. Paragraph 40 of the Builders' Association• is relied upon. It is contended that an agreement to sell entered into between the promoter and C purchaser continues to remain an agreement to sell and the provisions of MOFA does not change the nature of such agreement. Reference is made to the decision of this Court in Nahalchan'd Laloochand8.

25Copy pinpoint25. And fourthly, that if State's submissions are accepted, Article 366 (29-A)(b) has to be read as "a tax on the transfer of property (whether as goods or in some other form) involving works" which will not only distort the amendment but will render the words "in goods" redundant. Article 366 (29-A)(b) does not E provide for such an interpretation. The phrase "in some other form" takes its colour from the preceding words namely, "transfer of property in goods" and "whether as goods". The said phrase "in some other form" cannot and would not mean the transfer of an indivisible immovable property as a whole. F Reliance is placed on the decision of this Court in Purshottam Premji5 to differentiate between a sale and works contract. It is contended that the distinguishing factors that have been laid down in Purshottam Premji9 which were relied on by the Law Commission should be considered as the only tests to differentiate a works contract and a contract for sale. G

8. Nahalchand Laloochand Private Limited v. Panchali Cooperative Housing Society Limited; (2010) 9 SCC 536.

9. Commissioner of Sales Tax, M.P. v. Purshottam Premji; [1970] 26 S.T.C. H 38.

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 705 KARNATAKA [R.M. LODHA, J.]

26Copy pinpoint26. Dr. Abhishek Manu Singhvi, learned senior counsel appearing for Promoters and Builders Association made brief oral submissions which were followed by detailed written submissions. The principal issue, according to him, is, wl:Jether the agreement entered into between a promoter/developer and a flat purchaser, pursuant to the provisions of Section 4 read with Rule 5 and Form V of MOFA can be divided into two parts, {i) an agreement between the promoter/developer and the flat purchaser to construct a flat; and (ii) an agreement between the promoter/developer and the flat purchaser to eventually sell the flat so constructed and whether the first part of the said c agreement can be treated as a works contract whereby the flat purchaser is accorded the status of a principal employer and the promoter/developer acts as a mere contractor for him and constructs the flat for and on behalf of the flat purchaser. While conceding that an integral part of the transaction of sale of a D flat is the activity of construction of the said flat but the moot question in his view is whether such activity of construction has the characteristics or elements of works contract. Learned senior counsel highlighted the distinguishing features between "works contract" and "contract for sale of goods" and having regard to that it is submitted that the activity of construction undertaken by the promoter/developer cannot be said to be works contract for the reasons, (i) that developer does not construct at the behest of the flat purchaser as on various occasions the flat is constructed without there being any booking for the said flat; (ii) the main intention of the agreement between the promoter/developer and the flat purchaser is the sale of flat and not to appoint the developer as the contractor of the flat purchaser for the purposes of carrying out the construction of the flat for and on behalf of the flat purchaser; (iii) the flat purchaser does not have any role in conceptualizing the project of construction nor does he have any say in the designing and lay-out of the building to be constructed. The flat purchaser does not have any control over the type and standard of the material to be used in the construction of the building. He does not get any right to- monitor or supervise the H

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A construction activity; (iv) the ownership in the material used in the construction remains with the promoter/developer and the said ownership passes to the flat purchaser only on the eventual conveyance of the flat; (v) the accretion to the goods happens in the hands of the promoter/developer and not when the flat is conveyed to the flat purchaser; and (vi) the construction linked payment schedule is nothing but a method of payment in installments.

27Copy pinpoint27. It is the submission of Dr. Abhishek Manu Singhvi that Article 366(29-A)(b) by a deeming fiction only deems the transfer of property in goods in execution of a works contract as a sale but the said amendment does not contemplate a deemed transfer of goods which actually does not happen at the time of execution of the contract. The provisions of MOFA do not change the character of the transaction entered into between the promoter/developer and the flat purchaser from that of a pure sale of immovable property to a works contract. Even in the absence of a statute like MOFA, the obligations and restrictions prescribed ~herein would still be present as part of obligations under the Indian Contract Act/Transfer of Property E Act and its penalties for breaching the same would still be applicable under the penal statutes.

28Copy pinpoint28. While referring to Section 2(24) MVAT Act, it is submitted by the learned senior counsel that a plain reading of amended explanation b(ii) to Section 2(24) of that Act will show r.tat the said provision has not brought within its scope transactions which are not in their substance works contract. The amendment brought in explanation b(ii) to Section 2(24) is merely explanatory in nature. Even after the amendment the transaction in which there is transfer of property in goods has to be works contract. The amendment cannot be interpreted to mean that transfer of property in goods in execution of any agreement even if it is not a works contract has now been included in the definition of sale. Such interpretation will render the provision unconstitutional. Learned senior counsel submits H

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 707 KARNATAKA [R.M. LODHA, J.] that the manner in which the State Government is expanding A scope of Section 2(24) on the basis of the decision of this Court in Raheja Development1. it has rendered the said provision unconstitutional. According to Dr. Abhishek Manu Singhvi, Raheja Development' therefore needs to be reconsidered and overruled. B

29Copy pinpoint29. As regards constitutional validity of the provisions of Rule 58(1) and 58(1A) of MVAT Rules, it is submitted' that these Rules and Rule 58(1-A) of the 2005 Rules include an element of profit eamed by a promoter/developer on the sale C of a flat. There are no provisions to take the profit element from arriving at the value of goods. As a result income earned by the promoter/developer from the profit on sale of the flat also gets included in the value of goods and eventually the said income gets taxed. Imposition of such tax on the income of the promoter/developer is beyond the legislative competence of the D State Government.

30Copy pinpoint30. Without prejudice to the above arguments, it is firstly submitted that assuming that the activity of construction · undertaken by the developer is a works contract then the same would be a works contract only from the stage when the developer enters into a contract with the flat purchaser. Only the value addition made to the goods transferred after the agreement is entered into with the flat purchaser can be made chargeable under MVAT Act. VAT cannot be charged on the entire sale price as described in the agreement entered into between developer and flat purchaser as sought to be done under the composition scheme. Secondly, it is submitted that assuming that the agreement entered into between the developer and the flat purchaser has two components. namely, G a works contract and sale of proportionate share in the land then the stamp duty on such transaction should be levied under Article 25 (stamp duty for conveyance) only on the component sale of proportionate share in the land and the stamp duty on the value of construction carried out ought to be charged under H · Article 63 (stamp duty for works contract).

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31Copy pinpoint31. Mr. N. Venkatraman, learned senior counsel for Builders Association while highlighting the background in which clause (29-A) came to be inserted in Article 366 and drawing distinction between a conventional sale and a works contract submits that 'transfer' is imminent and indispensable B requirement in both but in the case of a conventional sale, property in goods gets transferred as intended by the parties while in a works contract, property in goods get transferred through accretion. Few illustrations have been referred to by him and it is submitted that 'test of accretion' which is sine qua non c for works contract is not satisfied in the agreements under consideration. L&T 11 10 is referred which says, "once the work is assigned by L&T to its sub-contractor, L&T ceases to execute the works contract in the sense contemplated by Article 366 (29-A)(b) because property passes by accretion and there is no property in goods with the contractor which is capable of 0 a re-transfer whether as goods or in some other form".

32Copy pinpoint32. Learned senior counsel contends that when ultimately the constructed flat is transferred or sold, it becomes a sale of : an immovable property at which point of time the question of transfer on accretion does not arise. The transfer of goods has to take place in the course of the construction of a building before becoming an immovable property though the contract may be indivisible contract for construction of a building in the form of an immovable property. Once it becomes an immovable property, Article 366(29-A)(b) cannot be pressed into service to such a transaction. He submits that an agreement to sell is not a sale in its conventional sense and, therefore, cannot be a deemed sale also.

33Copy pinpoint33. It is submitted by Mr. N. Venkatraman that Section 2(24) of MVAT Act and Rules 58 and 58(1A) of MVAT Rules seek to redefine the taxable event by moving away from theory

10. State of Andhra Pradesh & Ors. v. Larsen & Toubro Ltd. & Ors.; [(2008) 9 H sec 1e11.

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 709 KARNATAKA [R.M. LODHA, J.]

of accretion to transfer of immovable property by way of conveyance and that renders these provisions unconstitutional.

34Copy pinpoint34. Mr. Vinod Bobde, learned senior counsel appearing on behalf of Promoters and Builders Association, Nasik argues that after insertion of clause 29-A in Article 366, the works contract which was an indivisible one has by a legal fiction altered into a contract which is divisible into one for sale of goods. and the other for supply of labour. Thus, the goods component is exigible to sales tax. However, the amendment has not enlarged the meaning of "works contract" as commonly understood. With reference to Section 2(24) explanation (b)(ii) C of the MVAT Act, learned senior counsel submits that this provision aims at taxing the sale of goods involved in the execution of a works contract. In the case of a building contract on land, the contractor must be carrying out the building activity for consideration which obviously means that he should be receiving consideration from the person who has engaged him as contractor. The provision does not cover an owner or developer of land who is constructing a building for the purpose of ultimately selling the flats therein to purchasers. Such owner or developer does not receive any consideration from anyone for carrying out of the building activity; what he receives is simply the sale price of the flats from the purchasers. According to Mr. Vinod Bobde, the provisions so read would not transgress Article 366 (29-A) but if it is read as was done in Raheja Development1, it would be unconstitutional. F

35Copy pinpoint35. It is argued by Mr. Vinod Bobde that an agreement of sale whether simplicitor or in Form V under the MOFA is not a "works contract". It only settles terms for the sale of property and the sale ultimately takes place in pursuance thereof unless G the contract is terminated. The ''works" component and "goods" component are totally absent in the agreement. There is no question of taxing sale of goods in an agreement of sale. The buyer does pay the sales tax on the purchase of goods/material used in construction of the building. Such goods/materials are H

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A purchased from the dealers registered under the Act. What the taxing authorities seek to do by treating an agreement for sale of immovable property, namely, flat to be a "works contract" within the meaning of Section 2(24), explanation (b)(ii) is to again tax the goods used in the construction of the building. B This cannot be done because the builder is not building as the contractor for the flat purchaser but for himself, and he cannot possibly transfer such goods to himself.

36Copy pinpoint36. Mr. Vinod Bobde submits that the High Court's view C that the. element of sale of immovable property can be there in a works contract is clearly erroneous. The agreement of sale in Form V under the MOFA is not an agreement simpliciter and the aspect that MOFA creates the right and interest in the flat as a measure for protecting prospective flat purchasers is irrelevant. With reference to Entries 25, 5 and 63 of the Bombay D Stamp Act, 1958 which provide for stamp duty on conveyance including an agreement for sale of property, agreement or its record or memorandum of agreement and works contract respectively, _it is submitted that State has been levying stamp duty on agreement of sale under E.ntry 25 and not under Entry E 63 and hence the State does not consider an agreement for sale to be a works contract.

37Copy pinpoint37. Mr. Shivaji M. Jadhav learned counsel appearing for: one of the appellants has broadly followed the above submissions. He submits that expression "in so'me other form" in Article 366(29-A)(b) does not mean immovable property but. some other form of goods being movable property. According t6 him, artificial rules or other enactments like MOFA, Bombay Stamp Act would not be relevant at all in ascertaining whether transfer of property in goods has taken place in the execution of works contract. Model agreement Form V in MOFA does not indicate that construction of a flat by the developer/promoter is being carried on for and on behalf of the purchaser of the flat. Rather it supports the view that buyer is interested in what is constructed as a flat and not the building material. MOFA H

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 711 KARNATAKA [R.M. LODHA, J'.] ;

ensures that the theory of accretion is not applicable and the flat purchaser is not left at the mercy of the builder.

38Copy pinpoint38. Learned counsel also submits that if Section 2(24) explanation b(ii) of the MVAT Act is read in the manner suggested by this Court in Raheja Development1, such provision is rendered unconstitutional. As regards Rule 58(1) and Rule 58 (1-A), the submission of the learned counsel is that these Rules suffer from various infirmities and· are unable to carry out the objectives of MVAT Act.

39Copy pinpoint39. In the counter arguments advanced on behalf of the two . C · States - Karnataka and Maharashtra - Raheja Development1 has been stoutly pefended. Mr. K.N, Bhat, learned senior counsel for Karnataka submits that view taken in Raheja Development1 is correct and needs no reconsideration - both on merits as well as on the basis of binding precedents on the principles governing reconsideration of an earlier decision. He submits that Article 366(29-A) uses the phraseology employed in Entry 54 of List II that reads, "taxes on sale or purchase of goods .... " For the purpose of Entry 54 List II, ·~axes on the sale or purchase of goods" includes "tax on the transfer of property in goods (whether as goods or in some otf:ler form) involved in the execution of works contract". Transfer of property in goods is the essence of definition of 'sale' in Section 4 of the Sale of Goods Act. Article 366(29-A)(b) can be rephrased as "a tax on the sale of goods involved in the execution of a works contract" and in any case by the deeming fiction incorporated 'in the above provision, it shall be deemed to be a sale of those goods by the person making the transfer and a purchase by a person to whom such transfer is made. The taxable event is the deemed sale of goods involved in the execution of works G. contract. Article 366 (29-A) has been inserted to remedy the situation arising from the decision in the Gannon Dunkerley-13 where attempt to levy sales tax on the sale of goods involved in the execution of works contract wa·s held to be unconstitutional. This was on the basis that a works contract H

712 SUPREME COURT REPORTS [2013) 17 S.C.R.

A could not be dissected into contract for "works and services" and contract for "sale of goods". Mr. K.N. Bhat submits, relying upon para 41 in Builders' Association4, that definition of 'works contract' KST Act does not go beyond what is contemplated in the Constitution. B 4.9. Mr. K.N. Bhat's submission is that in order to sustain levy of sales tax on the goods deemed to have been sold in the execution of works contract the following conditions are to be met, (a) there must be works contract, i.e., any contract to do construction, fabrication and the like; (b) the goods deemed to have been sold should have been involved in the execution of a works contract; and (c) the property in those goods must be transferred to a third party either as goods or in some other form. The taxable event is deemed sale. It is irrelevant whether transferee was a party to the works contract. All that is required to be enquired into is as to whether the goods were involved in the execution of the works. By Forty-sixth Constitutional Amendment, the effect of Gannon Dunkerley-13 has been . neutralized. Now that the works contract which was indivisible according to Gannon Dunkerley-13 are divisible and the goods involved in the execution of works contract that were then not. taxable' are now taxable. ' '

41Copy pinpoint41. The whole idea by insertion of clause 29-A(b) in Article· 366, Mr. K.N .. Bhat submits, is to make the materials used in' F the buitding activity liable to sales tax. Any other interpretation will be contrary to the two decisions of the Constitution Benches in Builders' Association4 and Gannon Dunkerley-11 11 • So construed works contract simply means a construction activity. If the building is retained by the builder himself, there is no G deemed sale.

42Copy pinpoint42. Mr.K.N. Bhat, however, submits that the statement of law in Raheja Development1 that when a completed building

11. M/s. Gannon Dunkerley & Co. and others v. State of Rajasthan and Others; H [(1993) 1sec 364].

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 713 KARNATAKA [R.M. LODHA, J.] is sold, there is no works contract and, therefore, no liability to A tax, may not be correct statement of law. If the building was intended for sale and is in fact sold, tax is attracted to the deemed sale. Even in such cases, goods used in the construction are deemed to have been sold by the builder (dealer) to the purchaser. B

43Copy pinpoint43. It also urged by Mr. K.N. Bhat that in the referral order, the Bench has entertained certain doubts in respect of th!f. decision of this Court in Raheja Development1 . However, suci1 doubts that a better view was possible is not good enough to reconsider the decision. Relying upon decisions of this Court c in Gannon Dunkerley-II" and the-earlier decision in Keshav Mills 12 , he submits that while recommending reconsideration of an earlier decision, the Bench must first come to the conclusion that the earlier decision was· clearly wrong for the reasons stated. According to him,)vithin the settled standards, D recommendation to consider Raheja Development1 does not fall. Moreover, since Raheja Development1 in May, 2005 almost all States have modified their laws in line with Raheja Development1 and the need for change in a settled' practice is not made out. · E

44Copy pinpoint44. Mr. Darius Khambata, learned Advocate General and Mr. Shekhar Naphade, learned senior counsel advanced arguments on behalf of Maharashtra. It is argued that after insertion of Article 366 (29-A)(b) in the Constitution, the transfer of movable property in a works contract is deemed to be sale even though it is not a sale as per the Sale of Goods Act. The works contract is now divisible. Article 366(29-A)(b) clarifies that the transfer of the goods may be as goods or in some other form. Therefore, the goods may remain as goods or cease to be goods, i.e., they may merge into immovable property. In this regard, extensive reference has been made to Builders' Association4 and it is submitted that the same submissions

12. Keshav Mills Co. Ltd. v. Commissioner of Income Tax, Bombay North, Ahmedabad; [AIR 1965 SC 1636]. H

714 SUPREME COURT REPORTS [2013] 17 S.C.R.

A made by the States which were rejected by this Court in .. Builders' Association4 are now sought to be raised almost on similar lines by the appellants which have been rightly rejected by the High Court. . ' ..... '

45Copy pinpoint45. Learned Advocate General and learned senior counsel 8 for Maharashtra submit that the term ''works contract" is nothing but a contract in which one of the parties is obliged to undertake or to execute works. The expression "works" is extremely wide and can either mean the act of bestowing labour or that on C which the labour is bestowed. In this regard, the two decisions of this Court (i) Dewan Joynal Abedin' 3 and (ii) Kartar Singh 14 have been referred. It is submitted that the term "works" would include the final product and, therefore, a works contract cannot be confined to a contract to provide labour and services but is a contract for undertaking or for bringing into existence some D "works". Nothing in Article 366(29-A)(b) limits the term "works contract". Although, works contract usually have only two elements, i.e., labour and services as well as sale of goods but the addition of few other elements does not denude such contract being works contract. It is possible that there could be E a works contract coupled with the sale of immovable property. The transaction does not cease to be a works contract merely because it may include other obligations.

46Copy pinpoint46. Learned Advocate General argues that even in the case of a works contract, the ownership of the goods need not pass only by way of accretion or accession to the owner of the immovable property to which they are affixed or upon which the · building is built; property can pass under the terms of a contract or' by statute. He submits that the tests laid down in judgments prior to Forty-sixth Constitutional Amendment for determining whe\her· a contract is a works contract or a sale of goods are no longer applicable. There is no question of ascertaining the dominant intention of the contract now since the sale of goods

13. Dewan Joynal Abedin v. Abdul Wazed; [(1988) Supp SCC 580]. ·H 14. Kartar Singh Bhadana v. Hari Singh Nalwa & Ors.; [(2001) 4 SCC 661].

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 715 KARNATAKA [R.M. LODHA, J.] element is a deemed sale under Article 366(29-A)(b) and can A be taxed separately. Hindustan Shipyard' was distinguished and it was submitted that in Associated Cement15 a three-Judge Bench of this Court has overruled the decision in Rainbow Colour Lab 16 and it has been expressly noted that cases such as Hindustan Shipyard' relate to the situation prior to Forty- B sixth Amendment where the court had no jurisdiction to bifurcate a works contract and impose sales tax on the transfer of property in goods involved in the execution of the contract. Reference was also made to a decision of this Court in P.N. C. Construction 17 . According to learned Advocate General, it has c now become possible for the States to levy sales tax on the value of the goods involved in the works contract in the same way in which the sales tax was leviable on the price of the goods supplied in a buil~ng contract. This is where the concept of "value addition" comes in. It is on account of Forty-sixth D Amendment to the Constitution that the State Government is empowered to levy sales tax on the contract value which earlier was not possible.

47Copy pinpoint47. Mr. Darius Khambata submits that a composite contract comprising both a works contract and a transfer of E immovable property does not denude it of its character as a works contract. According to him, Article 366(29-A)(b) provides for a situation where the goods are transferred in the form of immovable property. He referred to an Australian case, M.R. Hornibrook18 in this regard which has been approved by this F Court in Builders' Association 4 .

48Copy pinpoint48. Learned Advocate General has also pressed into

15. Associated Cement Companies Ltd. v. Commissioner of Customs; [(2001) G 4 sec 593].

16. Rainbow Colour Lab & Anr. v. State of M.P. & Ors.; [(2000) 2 SCC 385].

17. State of U.P. & Ors. v. P.N.C. Constn,ction Co. Ltd. & Ors.; [(2007) 7 SCC 320]

18. M.R. Hornibrook (Ply.) Ltd. v. The Federal Commissioner ofTaxation; [(1939) 62 C.L.R. 272. H

716 SUPREME COURT REPORTS [2013] 17 S.C.R.

A service the aspect theory of legislation. His submission is that different aspects of the same transaction can involve more than one taxable event. There is nothing to prevent the taxation of different aspects of the same transaction as separate taxable events. This would not constitute a splitting of an indivisible B contract. Reference is made to a decision of this Court in Federation of Hotel & Restaurant'•. The submission. of the learned Advocate General is that transfer of immovable property cannot be taxed as a sale of goods but there is no constitutional bar to tax only the sale of goods element and c separately tax the transfer of immovable property. Taxing the sale of goods element in a works contract under Article 366 (29-A)(b) read with Entry 54 List II is permissible, provided the tax is directed to the value of the goods and does not purport to tax the transfer of immovable property.

49Copy pinpoint49. Stoutly defending the impugned judgment of the Bombay High Court, learned Advocate General submits that Section 2(24) explanation b(ii) of MVAT Act has been rightly held to be constitutional as the provisions in the MVAT Act offer diverse options for valuation of the sale of goods element in a E works contract. Each of these options is consistent with the methods approved of by this Court in Gannon Dunkerley-II''.

50Copy pinpoint50. As regards challenge to the constitutional validity of Rule 58A and Rule 58(1A), it is submitted by learned Advocate F General that these provisions are consistent with the principles laid down in Gannon Dunkerley-II". The measure of tax is not determinative of its essential character or of the competence of the legislature. He sought to dispel the impression that Rule 58(1A) may result in double taxation. Distinguishing the G decision of this Court in Larsen & Toubro-112°, learned Advocate General submits that the observations made in para

19. Federation of Hotel & Restaurant Association of India, etc. v. Union of India & Ors.; [(1989) 3 sec 634].

20. State of Andhra Pradesh & Ors.v. Larsen & Toubro Ltd. & Ors.; [(2008) 9 H sec 191].

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 717 KARNATAKA [R.M. ·LODHA, J.] 19 does not apply to Maharashtra inasmuch as Section 45(4) A of the MVAT Act ensures that it is either the builder or the sub- contractor who pays the tax (being treated as one and jointly/ severally liable). In any case all claims of alleged double taxation will be determined in the process of assessment of each individual case. B

51Copy pinpoint51. Highlighting the MOFA agreement in prescribed Form V, learned Advocate General argues that the clauses therein indicate that it comprises of a works contract along with the agreement for sale. There is no reason to deny the applicability of Article 366(29-A) to such a works contract. His argument is that sale of goods element in the works contract contained in a MOFA agreement is taxable under Section 2(24) explanation b(ii) of the MVAT Act. As long as there is an obligation to construct under the agreement between the promoter and the flat purchaser (in the case of Maharashtra being an agreement under the MOFA) the deemed sale of goods involved in the execution of such a works contract can be taxed even after incorporation of the goods in the works and when the property passes as between the promoter and the flat purchaser. It is submitted that what is at issue before this Court is not the determination of when the taxable event takes place but the exigibility to tax of a deemed sale of goods in a composite contract.

52Copy pinpoint52. Prior to Forty-sixth Amendment in the Constitution, levy of sales tax on the sale of goods involved in the execution of the works contract was held to be unconstitutional in Gannon Dunkerley-13. That was a case where the assessee (Gannon Dunkerley) was carrying on business as engineers and contractors. Its business consisted mainly of execution of contracts for construction of buildings, bridges, dams, roads and structural contracts of all kinds. During the assessment year under consideration, the return filed by the assessee showed as many as 47 contracts most of which were building contracts which were executed by it. From the total of the amount which H

718 SUPREME COURT REPORTS (2013] 17 S.C.R.

A the assessee received in respect of sanitary contracts and other contracts 20 per cent and 30 per cent respectively were deducted for labour and the balance was taken as the turnover of the assessee for the assessment year in question: Sales tax was levied on the said balance treating it as taxable turnover B under the Madras General Sales Tax Act, 1939. Assessee questioned the levy of sales tax on the ground that there was no sale of goods as understood in India and, therefore, no sales tax could be levied on any portion of the amount which was received by the assessee from the persons for whose benefit c it had constructed buildings. The Madras High Court concluded that the transactions in question were not contracts for sale of goods as defined under the provisions of the Sale of Goods Act, 1930 which was in force on the date on which the Constitution came into force and, therefore, the assessee was not liable to pay sales tax on the amounts received by it from 0 the persons for whom it had constructed buildings during the year of assessment. It is from this judgment that the matter reached this Court. The Constitution Bench of this Court held that in a building contract where the agreement between the parties was that the contractor should construct the building according to the specifications contained in the agreement and in consideration received payment as provided therein, there was neither a contract to sell the materials used in the construction nor the property passed therein as movables. It was held that in a building contract which was one (entire and indivisible) there was no sale of goods and it was not within the competence of the Provincial State Legislature to impose tax on the supply of the materials used in such a contract treating it as a sale. The Constitution Bench said," ........when the work to be executed is, as in the present case, a house, the construction imbedded on the land becomes an accretion to it on the principle quicquid plantatur solo, solo cedit, and it vests in the other party not as a result of the contract but as the owner of the land: Vide Hudson on Building Contracts, 7th Edn., p. 386 ......... " It was further stated, " ..... that exception does not apply to buildings which are constructed in execution of a works

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 719 KARNATAKA [R.M. LODHA, J.] contract,, and the law with reference to them is that the title to the same passes to the owner of the land as an accretion thereto. Accordingly, there can be no question of title to the materials passing as movables in favour of the other party to the contract.. ..... " B

53Copy pinpoint53. In Gannon Ounkerley-13, this Court held that in a building contract which was one, entirely indivisible, there was no sale of goods and it was not within the competence of the provincial State legislature to impose tax on the supply of materials used in such a contract treating it as a sale. The C above statement was founded on the premise that the works contract was a composite contract which is inseparable and indivisible. Entry 48 of List II of Schedule Seven of the Government of India Act, 1935 was under consideration before tl:lis Court in Gannon Dl!nkerley-13. It is observed that the ,expression "sale of goods" in that entry has the same meaning D as the said expression had in the Sale of Goods Act, 1930. In other words, the essential ingredients of sale of goods are (i) an agreement to sell movables for a price and (ii) property passing therein pursuant to that agreement. E

54Copy pinpoint54. The problems connected with powers of States to levy tax, inter alia, on goods involved in execution of works contract following Gannon Ounkerley-13 was elaborately examined by the Law Commission of India. In its 61st Report, Chapter 1A, the Law Commission specifically examined the taxability of F works contract. The Law Commission noted the essential nature and features of the building contracts and the difference between contract of works and contract for sale. It examined the question whether the power to tax indivisible contracts of works should be conferred on the States. The Law Commission G suggested three alternatives (a) amendment in the State List, Entry 54, or (b) adding a fresh entry in the State List, or (c) insertion in Article 366 a wide definition of "sale" so as to include works contract. It· preferred the last one, as, in its opinion, this would avoid multiple amendments. J H

720 SUPREME COURT REPORTS (2013] 17 S.C.R.

55Copy pinpoint55. Having regard to the above recommendation of the Law Commission, the Constitution Bill No.52 of 1981 was introduced in the Parliament.* *The relevant portion of statement of objects and reasons reads : "STATEMENT OF OBJECTS AND REASONS B Sales tax laws enacted in pursuance of the Government of India Act, 1935 as also the laws relating to sales tax passed after the coming into force of the Constitution proceeded on the footing that the expression "sate of goods", having regard to the rule as to broad interpretation of entries in the legislative lists, would be given a wider connotation. However, in Gannon Dunkerley's case (A.l.R. 1958 S.C. 560), the Supreme Court held c that the expression "sale of goods" as used in the entries in the Seventh Schedule to the Constitution has the same meaning as in the Sale of Goods Act, 1930. This decision related to works contracts.

2. By a series of subsequent decisions, the Supreme Court has, on the basis of the decision in Gannon Dunkerley's case, held various other transactions which resemble, in substance, transactions by way of sales, to be not liable to sales tax. As a result of these decisions, a D transaction, in order to be subject to the levy of sales tax under entry 92A of the Union List or entry 54 of the State List, should have the following ingredients, namely, parties competent to contract, mutual assent and transfer of property in goods from one of the parties to the contract to the other party thereto for a price.

5. The various problems connected with the power of the States to levy a E tax on the sale of goods and with the Central Sales Tax Act, 1956 were referred to the Law Commission of India. The Commission considered these matters in their Sixty-first Report and, recommended, inter alia, certain amendments in the Constitution if as a matter of administrative policy it is decided to levy tax on transactions of the nature mentioned in the preceding paragraphs.

F 9. It is, therefore, proposed to suitably amend the Constitution to include in article 366 a definition of "tax on the sale or purchase of goods" by inserting a new clause (29A). The definition would specifically include within the scope of that expression tax on--- (i) transfer for consideration of controlled commodities; (ii) the transfer of property in goods involved in the execution of a works contract; G (iii) delivery of goods on hire-purchase or any system of payment by instalments; (iv) transfer of the right to use any goods for any purpose for cash, deferred payment or other valuable consideration; (v) the supply of goods by an unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable H consideration;

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 721 KARNATAKA [R.M. LODHA, J.]

56Copy pinpoint56. The Parliament then enacted the Constitution (Forty- A sixth Amendment) Act, 1982 which receiy~d the assent of the President on 02.02.1983. Accordingly, clause 29-A was inserted in Article 366 of the Constitution which is set out as below.** B (vi) the supply, by way of or as part of any service, of food or any drink for cash, deferred payment or other valuable consideration.

12. Clause (3) of article 286 is proposed to be amended to enable Pa~iament to specify, by law, restrictions and conditions in regard to the system of levy, rates and other incidents of the tax on the transfer of goods involved in the execution of a works contract, on the delivery of goods on hire- C purchase or any system of payment by instalments and on the right to use any goods.

13. The proposed amendments would help in the augmentation of the State revenues to a considerable extent. Clause 6 of the Bill seeks to validate laws levying tax on the supply of food or drink for consideration and also the collection or recoveries made by way of tax under any such D law. However, no sales tax will be payable on food or drink supplied by a hotelier to a person lodged in the hotel during the period from the date of the judgment in the Associated Hotels of India case and the commencement of the present Amendment Act if the conditions mentioned in sub-clause (2) of clause 6 of the Bill are satisfied. In the case of food or drink supplied by restaurants this relief will be available only in respect of the period after the date of judgment in the Northern India Caterers E (India) Limited case and the commencement of the present Amendment Ad." -(29-A) "tax on the sale or purchase of goods" includes- (a) a tax on the transfer, otheiwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (b) a tax on the transfer of property in goods (whether as goods or in some F other form) involved in the execution of a works contract; (c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; G (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the 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 H

722 SUPREME COURT REPORTS (2013) 17 S.C.R.

57Copy pinpoint57. Following the above amendment in the Constitution, the sales tax legislations in various States were amended and provisions were made for imposition of sales tax in relation to works contract. The constitutional validity of the Forty-sixth Amendment by which the legislatures of the States were empowered to levy sales tax on certain transactions described in clauses (a) to (f) of clause 29-A of Article 366 of the Constitution as well as the amendments made in the State legislations were challenged in Builders' Association•. The Constitution Bench of this Court upheld the constitutionality of the Forty-sixth Amendment. The Court observed that the object of the new definition introduced in clause 29-A of Article 366 of the Constitution was to enlarge the scope of the expression "tax of sale or purchase of goods" wherever it occurs in the Constitution so that it may include within its scope any transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub-clauses (a) to (f). The Constitution Bench*** explained that clause 29-A refers to a tax

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;' . ... 36 ......... After the 46th Amendment the works contract which was an indivisible one is by a legal fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labour and services. After the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into in two distinct and separate parts as stated above ...... .

39. In view of the foregoing statements with regard to the passing of the property in goods which are involved in works contract and the legal fiction created by clause (29-A) of Article 366 of the Constitution it is difficult to agree with the contention of the States that the properties that are transferred to the owner in the execution of a works contract are not the goods involved in the execution of the works contract, but a conglomerate, that is the entire building that is actually constructed. Alter the 46th Amendment it is not possible to accede to the plea of the States that what is transferred in a works contract is the right in the immovable property. 40 .......... The 46th Amendment does no more than making it possible for the

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 723 KARNATAKA [R.M. LODHA, J.] on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. The emphasis is on the.transfer of property in goods - whether as goods or in some other form. A transfer of property in goods under sub-clause (b) of clause 29-A is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and a purchase of those goods by a person to whom such transfer was made.

58Copy pinpoint58. Article 286 puts certain restrictions upon the power of the State to enact laws concerning imposition of sales tax. It lays down that no law of a State shall impose or authorise the c imposition of a tax on the sale or purchase of goods where such sale or purchase takes place (a) outside the State, or (b) in the course of import of the goods into, or export of the goods out of the territory of India. Sub-clause (2) of Article 286 enables the Parliament to enact law formulating principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1 ). As regards inter-state trade and commerce, clause (3) puts two restrictions. It provides

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. We do not accept the argument that sub-clause (b) of Article 366(29-A) should be read as being equivalent to a separate entry in List II of the Seventh Schedule to the Constitution enabling the States to levy tax on sales and purchases independent of Entry 54 thereof. As the Constitution exists today the power of the States to levy taxes on sales and purchases of goods induding the "deemed" sales and purchases of goods under clause (29-A) of Article F 366 is to be found only in Entry 54 and not outside it... .. 41 .......... The case-book is full of the illustrations of the infinite variety of the manifestation of 'works contracts'. Whatever might be the situational differences of individual cases, the constitutional limitations on the taxing power of the State as are applicable to 'works contracts' represented by "building contracts" in the context of the expanded concept of "tax on the G sale or purchase of goods" as con.stitutionally defined under Article 366(29- A), would equally apply to other species of 'works contracts' with the requisite situational modifications.

42. The constitutional amendment in Article 366(29-A) read with the relevant taxation entries has enabled the State to exert its taxing power in an important area of social and economic life of the community .......... H

724 SUPREME COURT REPORTS [2013) 17 S.C.R.

A that any law of a State shall, insofar as it imposes, or authorises the imposition of (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-state trade or commerce; (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause B (b), sub-clause (c) and sub-clause (d) of clause 29-A of Article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of tax as the Parliament may by law specify. Clause (3) was substituted by Constitution Forty-sixth Amendment Act, 1982 with effect from c 02.02.1983.

59Copy pinpoint59. Clause 29-A was inserted in Article 366 by the Forty- sixth Amendment with effect from 02.02.1983. Entry 54 of List II (State List) enables the State to make laws relating to taxes on the sale or purchase of goods other than the newspapers, subject to the provisions of Entry 92-A of List I. Entry 63 of List II enables the States to provide rates of stamp duty in respect of documents other than those specified in provisions of List I with regard to the rates of stamp duty. Entry 92-A of List I deals with taxes on the sale or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter-state trade or commerce. Entry 6 of List Ill deals with the subjects, "transfer of property other than the agricultural land; registration of deeds and documents".

60Copy pinpoint60. It is important to ascertain the meaning of sub-clause 'F (b) of clause 29-A of Article 366 of the Constitution. As the very title of Article 366 shows, it is the definition clause. It starts by saying that in the Constitution unless the context otherwise requires the expressions defined in that article shall have the meanings respectively assigned to them in the article. The G definition of expression "tax on sale or purchase of the goods" is contained in clause (29-A). If the first part of clause 29-A is read with sub-clause (b) along with latter part of this clause, it reads like this: tax on the sale or purchaser of the goods" includes a tax on the transfer of property in goods (whether as H

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 725 KARNATAKA [R.M. LODHA, J.] goods or in l!ome other form) involved in the execution of a A works contract and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. The definition of "goods" in clause 12 is B inclusive. It includes all materials, commodities and articles. The expression, 'goods' has a broader meaning than merchandise. Chattels or movables are goods within the meaning of clause

12. Sub-clause (b) refers to transfer of property in goods (whether as goods or in some other form) involved in the c execution of a works contract. The expression "in some other . form" in the bracket is of utmost significance as by this expression the ordinary understanding of the term '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 0 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 or purchase of goods' includes a tax on the transfer or 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:

61Copy pinpoint61. Viewed thus, 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 pers.on to whom such transfer is made.