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

62Copy pinpoint62. The States have now been conferred with the power G 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 H

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

A clause 29-A, 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. The taxable event is deemed sale.

63Copy pinpoint63. Gannon Dunkerley-13 and few other decisions following Gannon Dunkerley-/3wherein the expression "sale" was given restricted meaning by adopting the definition of the word "sale" contained in the Sale of Goods Act has been undone by the Forty-sixth Constitutional Amendment so as to include works contract. The meaning of sub-clause (b) of clause 29-A of C Article 366 of the Constitution also stands settled by the Constitution Bench of this Court in Builders' Association4. As • a result of clause 29-A of Article 366, tax oi1 the sale or purchase of goods may include a tax on the transfer in goods as goods or in a form other than goods involved in the execution of the works contract. It is open to the States to divide the works . contract into two separate contracts by legal fiction: (i) contract for sale of goods involved in the·works contract and (ii) for supply of labour and service. By the Forty-sixth Amendment, States have been empowered to bifurcate the contract and to levy sales tax on the value of the material in the execution of · the works contract.

64Copy pinpoint64. Whether contract involved a dominant intention to transfer the property in goods, in our view, is not at all material. F It is not necessary to ascertain what is the dominant intention of the contract. Even if the dominant intention of the contract is not to transfer the property in goods an&rather it is the 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 it otherwise has elements of works contract. The view taken by a two-Judge Bench of this Court in Rainbow Colour Lab 16 that the division of the contract after Forty-sixth Amendment can be made only if the works contract involved a dominant intention to transfer the property in goods and not in contracts where the transfe~ of property

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 727 KARNATAKA [R.M. LODHA, J.] takes place as an incident of contract of service is no longer good law, Rainbow Colour Lab16 has been expressly overruled by a three-Judge Bench in Associated Cement15.

65Copy pinpoint65. Although, in Bharat Sanchar5; the Court was concerned with sub-clause (d) of clause 29-A of Article 366 but while dealing with the question as tci whether the nature of transaction by which mobile phone connections are enjoyed is a sale or service or both, the three-Judge Bench did consider the scope of definition ill clause 29-A of Article 366. With reference to sub-clause (b) it said:" ....... sub-clause (b) covers cases relating to works contract. This was the particular fact situation which the Court was faced with in Gannon Dunkertey- 13 and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decl'Sion in Gannon Dunkerley-13was D directly overcome". It then went on to say that all the sub- '. clauses of Article 366(29-A) serve to bring transactions where essential ingredients of~ 'sale' as defined in the Sale of Goods Act, 1930 are absent, within the ambit of purchase or sale for the purposes of levy of sales tax. E

66Copy pinpoint66. It then clarified that Gannon Dunkerley-13survive.d the Fo·rty-sixth 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 F II in particular except to the extent that the cla.uses in Article 366(29-A) operate and second, the dominant nature test would be confined to a CO(Tlposite transaction not covered by Article 366 (29-A). In other words, in Bharat Sanchar5, this Court reiterated what was stated by this Court in Associated Cement15 that dominant nature test h.as no application to .a . G · composite transaction covered by the clauses of Article 366(29-A). Leaving no ambiguity, it said that after the Forty- sixth Amendment, the sale element of those contracts which are covered by six sub-clauses of clause 29-A of Article 366 are H

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

A separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying.

67Copy pinpoint67. In view of the statement of law in Associated Cement1 5 B and Bharat Sanchal°, the argument advanced on behalf of the appellants that dominant nature test must be applied to find out the true nature of transaction as to whether there is a contract for sale of goods or the contract of service in a composite transaction covered by the clauses of Article 366 (29-A) has no merit and the same is rejected. c

68Copy pinpoint68. IA Gannon Dunkerley-11 11 , this Court, inter alia, established the five following propositions : (i) as a result of 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 the other for supply of labour and service and as a result of such contract which was single and indivisible has been brought on par with a contract containing two separate agreements; (ii) if the legal fiction introduced by Article 366 (29-A)(b) is carried to its logical end, it follows that even in a single and indivisible works contract there is a deemed sale of the goods which are involved in the execution of a 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 sale of goods and the other for supply of labour and services; (iii) in view of sub-clause (b) of clause 29-A of Article 366, the State legislatures are competent to impose tax on the transfer of property in goods involved in the execution of works contract. Under Article 286(3)(b), Parliament has been empowered to make a law specifying restrictions and conditions in regard to the system of levy, rates or incidents of such tax. This does not mean that the legislative power of the State cannot be exercised till the enactment of the law under Article 286(3)(b) by the Parliament. It only means that in the event of law having been made by Parliament under Article 286(3)(b), the exercise of the H

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 729 KARNATAKA [R.M. LODHA, J.]

legislative power of the State under Entry 54 in List II to impose A tax of the nature referred to in sub-clauses (b), (c) and (d) of clause· (29~A) of Article 366 would be subject to restrictions and conditions. in regard to the system of levy, rates and other incidents of tax contained in the said law; (iv) while enacting law imposing a tax on sale pr purchase of goods under Eritry B 54 of the State List read with Article 366 (29-A)(b), it is permissible for the State legislature to make a law imposing tax on such a deemed sale which constitutes a sale in the course of the inter-state trade or commerce under Section 3 of the Central Sales Tax Act or outside under Section 4 of the c Central Sales Tax Act or sale in the course of import or export under Section 5 of the Central Sales Tax Act; and (v) measure for the levy of tax contemplated by Article 366 (29-A)(b) is the value of the goods involved in the execution of a works contract. Though the tax is imposed on the transfer of property in goods 0 involved in the execution of a works contract, the measure for levy of such imposition is the value of the goods involved in the execution of a works contract. Since, the taxable event is the transfer of property in goods involved in the execution of a works contrac;t and the said transfer of property in such goods takes E 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 works and not the cost of acquisition of the goods by the contractor. F

69Copy pinpoint69. In Gannon Dunker/ey-1/ , sub-section (3) of Section 11

5 of the Rajasthan Sales Tax Act and Rule 29(2)(1) of the Rajasthan Sales Tax Rules were declared as unconstitutional and void. It was so declared because the Court found that Section 5(3) transgressed the limits of 'the legislative power G conferred on the State legislature under Entry 54 of the State List. However, insofar as legal position after Forty-si_xth Amendment is concerned, Gannon Dunkerley-1111 hofos unambiguously that the States have now legislative power to impose tax on transfer of property in goods as goods or in H

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

A some other .form in the execution of works contract.

70Copy pinpoint70. The Forty-sixth Amendment leaves no manner of doubt that the States have power to bifurcate the contract and levy: sales tax on Jhe value of the material involved in the execution; B of the works contract. The States are now empowered to levy' sales tax on the material used in such contract. In other-words,' clause 29-A of Article 366 empowers the States to levy tax on the deemed sale.

71Copy pinpoint71. Now, if by legal fiction provided in clause (29-A)(b) of C Article 366, the works contract becomes separable and divisible, one for the materials and the other for services and for the work done, whatever has been said by·this Court in Gannon Dunkerley-13 with regard to the definition of works contract in Section 2(i) of the Madras General Sales Tax Act D pales into insignificance insofar as ambit and scope of the term "works contract" within the meaning of Article 366(29-A) is concerned. To say that insertion of clause (29-A) in Article 366 has not undone Gannon Dunkerley-13 in .any manner, in our view, is not correct. The narrow meaning given to the term E ''works contract" in Gannon Dunkerley-13 now no longer sur.iives.

72Copy pinpoint72. There is no doubt that to attract Article 366(29-A)(b) there has to be a works contract but then what is its meaning. The term ''works contract" needs to be understood in a manner that the Parliament had in its view at the time of Forty-sixth .. F Amendment and which is more appropriate to Article 366(29- A)(b).

73Copy pinpoint73. The. ordinary dictionary meaning of the word "work" means a structure or apparatus of some kind; architecture or ' G engineering structure, a building edifice. When it is used in the plural, i.e., as works, it means architectural or engineering operations, a fortified building, a defensive structure, fortification or any of the several parts of such structures. In Webster Comprehensive Dictionary, International Edition the term ''work" H is stated to be, ......... (2) that upon which labor is expended;

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 731 KARNATAKA [R.M. LODHA, J.] an undertaking task. (3) that which is produced by or as by A labor, specifically, an engineering structure; ............ In the same dictionary, the term "works" is stated as a manufacturing establishrr:ient including buildings and equipment. '

74Copy pinpoint74. In Radha Raman 21 , Allahabad High Court stated B (although in the context of Section 40 of the' tand Acquisition Act, 1894) that the "work" has a very wide meaning. It is really used in ti.vo·senses of bestowing labour and that upon which labour has been bestowed. 'When used in plural the word certainly mearis some outstanding or important result of the labour that has been bestowed and large industrial and scientific establishments are called "works".

75Copy pinpoint75. Hudson's 'Building En9'neering.:.Contracts', Eleventh edition, Volume 1', for the purposes of that book, starts by saying that a building or engiraeering contract may be defined as an agreement under which a person (called builder or contractor) undertakes for reward to carry out for another (building owner or employer), works of building or civil engineering character. It continues to say that in the typical case, the work will be carried out upon the land of the employer or building owner, though in some special cases obligations to build may arise by contract where this is not so, for example, under building leases and contracts for the sale of land with a house in the course of erection upon it. The above statement by Hudson indicates that in a typical case work (structure, building etc.) will be carried out upon the land of the employer or building owner though in some special cases an obligation to build may arise by contract where this is not so. Hudson gives an example of building leases and contracts for the sale of land with a house in the course of erection upon it. G

76Copy pinpoint76. In our opinion, the term 'works contract' in Article 366(29-A)(b) is amply wide and cannot be confined to a particular understanding of the term or to a particular form. The

21. Radha Ri!man v. State of Uttar Pradesh & Ors.; [AIR (1954) Allahabad 700]. H

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'. A term encompasses a wide range and many varieties of contract. The Parliament had such wide meaning of "works contract" in its view at the time of Forty-sixth Amendment. The object of insertion of claui;;e 29-A in Article 366 was to enlarge the scope of the expresi;ion "tax of sale or purchase of goods" and B overcome Gannon Dunkerley-13 • Seen thus, even if in a contract, besides the obligations of supply of goods and materials and performance of labour and services, some additional obligations are imposed, such contract does not cease to be works contract. The additional obligations in the c contract would not alter the nature of contract so long as the contract provides for a contract for works and satisfies the primary description bf works contract. Once the characteristics or elements of works contract are satisfied in a contract then irrespective of additional obligations, such contract would be covered by the term 'works contract'. Nothing in Article 366(29- 0 A)(b) limits the term "works contract" to contract for labour and service only. Learned Advocate General for Maharashtra was right in his submission that the term "works contract" cannot be confined to a contract to provide labour and services but is a contract for undertaking or bringing into existence some E "works". We are also in agreement with the submission of Mr. K.N. Bhat that 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 above. The Parliament had all genre of works contract in view when clause 29-A was inserted in Article 366.

77Copy pinpoint77. The difference between a contract for work (or service) and a contract for sale (of goods) has come up for consideration before this Court on more than one occasion. Before we consider some of the decisions of this Court in this regard, it is of interest to refer to two old decisions of English courts. In Lee22 , it was laid down that if a contract would result in the transaction of property in goods from one party to another then it must be a contract of sale.

H 22. Lee v. Griffin; [(1861) 1 B. & S. 272].

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 733 KARNATAKA [R.M. LODHA, J.]

78Copy pinpoint78. However, the statement of law in Lee 21 did not find A favour in Robinson 23 where it was held that if the substance of the contract required skill and labour for the producti9n of the articles then it would not make any difference that there would pass some materials in addition-to the skill. B

79Copy pinpoint79. In Chandra Bhan Gosain 24 , this Court exposited that for finding out whether a contract is one of work done and materials found or one for sal~ of goods depends on its essence. If not of its essence that a chattel should be produced and transferred as a chattel, then it may be a contract for work done and materials found and not a contract for sale of goods.

80Copy pinpoint80. In Purshottam Premji 9 , the difference between a contract for work and a contract for sale was explained like this: The primary difference between a contract for work or service and a contract for 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 its property. In a case of 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 other party for price. Mere transfer of property in goods used in the performance of the contract is not sufficient; to constitute a sale there must be an agreement.express or implied relating to the sale of goods and completion of the agreement by passing of title in the very goods contracted to be sold. Ultimately the true effect of an accretion made pursuant to a contract has to be judged, not by an artificial rule that the accretion may be presumed to have become by virtue of affixing to a chattel of part of that chattel but from the intention of the parties to the contract.

22. Robinson v. Graves; [(1935) 1 KB 579]

23. Chandra Bhan Gosain v. State of Orissa and Others; [(1964) 2 SCR 879 H

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

81Copy pinpoint81. The factors highlighted in Purshottam Premji9 which distinguish a contract for work from a contract for sale are relevant but not exhaustive. It is not correct to say that these factors should be considered as the only factors to differentiate a works contract and a contract for sale. In our view, there are s not and there cannot be absolute tests to distinguish a sale and works contract.

82Copy pinpoint82. This Court in Associated Hotels 25 , stated that the determination as to whether the contract involved in a transaction constitutes a contract of sale or a contract of work or service depends in each case upon its facts and circumstances. Mere passing of property in article or commodity during the course of the performance of the transaction does not render it a transaction of sale. For even in a contract purely of work or service, it is possible that articles may have to be used by the person executiRg the work and property in such cases articles or materials where passed to the other party. That would not necessarily convert the contract into one of sale of those materials. It is stated in Associated Hotels25 that in every case the Court will have to find out what is the primary object of the transaction and the intention of the parties while entering upon it. It has been clarified that in some cases it may be that even while entering into a contract of work or even service, parties might enter into separate agreements, one of work and service and the other of sale and purchase of materials to be used in the course of executing the work or performing the service. But, then in such cases the transaction will not be one and indivisible but will fall into the two separate agreements one of work or service and the other of sale.

83Copy pinpoint83. Halsbury's Laws of England, Third Edition, Vol. 41, para 603, while distinguishing a contract of sale from a contract for work and labour, has highlighted the test thus: whether or not the work and labour bestowed end in anything that can

25. The State of Punjab v. Mis. Associated Hotels of India Ltd.; [(1972) 1 SCC H 472].

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 735 KARNATAKA [R.M. LODHA, J.] properly become the subject of sale; neither the ownership of A materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a part_icular case, whether the contract is in substance one for work and labour or one for the sale of a B chattel.

84Copy pinpoint84. In B.C. Kame6 , the Court following Associated Hotels24 observed that determination of the question whether a contract is a contract for 'work and labour' or a contract for 'sale' was not free from difficulty, particularly, when the contract is a C composite one. Having said that the Court applied the test stated in Halsbury's Laws of England.

85Copy pinpoint85. In Hindustan Aeronautics 26 , the Court noted the difference between contract for service and contract for sale of goods in these words:

"13. It is well settled that the difference between contract of service and contract for sale of goods, is, that in the . former, there is in the person performing work or rendering service no property in the things produced as a whole notwithstanding that a part or even the whole of materials used by him had 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 some time before delivery and the property therein passed only under the contract relating thereto to the other party for price. It is necessary, therefore, in every case for the courts to find out whether in essence there was any agreement to work for a stipulated consideration ............ " G

86Copy pinpoint86. The Court went on to say further in Hindustan

26. Hindustan Aeronautics Lid. v. State of Kamataka; [(1984) 1 sec 706J. H

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

A Aeronautics25 as follows;

"18. It cannot be said as a general proposition that in every case of works contract, there is necessarily implied the sale of the component parts which go to make up the repair. That question would naturally depend upon the facts B and circumstances of each case. 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 transaction of sale. Even in a contract purely of works or service, it is possible that articles may c 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 those materials ...... "

87Copy pinpoint87. In Kone Elevators 27 , the Court again highlighted the tests to distinguish a works contract and a contract for sale of goods. The Court said;

"5. It can be treated as well settled that there is no standard formula by which one can distinguish a "contract for sale" E from a "works contract". The question 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. If the intention is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a "contract of sale'', the main object is the transfer of property and delivery of possession of the property, whereas the main object in a "contract for work" is not the transfer of the property but it is one for work and labour. Another test often to be applied is: when and how the property of the dealer in such a

H 27. State of A.P. v. Kone Elevators (India) Ltd.; [(2005) 3 SCC 389]

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 737 KARNATAKA [R.M. LODHA, J.] transaction passes to the customer: is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a "sale"; if it is the latter, it is a "works contract''. Therefore, 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. The predominant object of the contract, the circumstances of the case and the custom of the trade provide a guide in deciding whether transaction is a "sale" c or a "works contract''. Essentially, the question is of interpretation of the "contract". It is settled law that the substance and not the form of the contract is material in determining the nature of transaction. No definite rule can be formulated to determine the question as to whether a 0 particular given contract is a contract for sale of goods or is a works contract. Ultimately, the terms of a given contract would be determinative of the nature of the transaction, whether it is a "sale" or a "works contracf'. Therefore, this question has to be ascertained on facts of each case, on proper construction of terms and conditions · of the contract between the parties."

88Copy pinpoint88. In Hindustan Shipyard7, this Court stated that it was difficult to lay down an absolute rule to distinguish a contract for sale and a contract for labour. The question under consideration in that case was whether the transactions involved in manufacture and supply of ships by Hindustan Shipyard to its customers are "sale" as defined in clause (n) of Section 2 of Andhra Pradesh General Sales Tax Act, 1957 or a works, contract as defined in clause (t) of Section 2 of that Act. While G dealing with the above question, the Court in para 6 stated, "the distinction between a contract of sale and works contract is not free from difficulty and has been the subject matter of several judicial decisions. No straitjacket formula can be made available nor can such quick-witted tests be devised as would H

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

\ A be infallible. It is all ~ question of determining the intention of the parties by culling out the same on an overall reading of the several terms and conditions of a contract. ...... " The Court did note the observations made in Variety Body Builders28, that there is no standard formula by which one can distinguish a B contract of sale from a contract for work and labour. There may be many common features in both the contracts, some neutral in a particular contract, and yet certain clinching in a given case may fortify conclusion one way or the other.

89Copy pinpoint89. The Court then analysed the recitals and terms and C conditions of the contract and also took into consideration para 603 of Halsbury's Laws of England, Fourth Edition, Volume 41, Benjamin's Sale of Goods, Fourth Edition, Para 1.042 and Pollock and Mulla on Sale of Goods (1990, Fifth Edition, P~ge 53] and summed up the legal position in sub-para 2 and slib- 0 para 3 of para 14 (pgs. 591-592) a::; under : "(2) Transfer of property of goods for a price is the linchpin of the definition of sale. Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. It is the substance of the contract document/s, and not merely the form, which has to be looked into. The court may form an opinion that the contract is one whose main object is transfer of property in a. chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a. sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour. I (3) If the thing to be delivered has any individu:=tl existence

28. State of Gujarat (Commissioner of Sales Tax, Ahmedabad} v. Mis.Variety' H Body Builders; [(1976) 3 SCC 500] ·

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 739 KARNATAKA [R.M. LODHA, J.] before the delivery as the sole property of the party who is to deliver it, then it is a sale. If 'A' may transfer property for a price in a thing in which 'B' had no previous property then the contract is a contract for sale. On the other hand where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour."

90Copy pinpoint90. The Court in HindZlstan Shipyard7 also set out three categories: (a) the contract may be for work to be done, for remuneration and for supply of materials used in the ~ecution of work for a price, (b) contract for work in which the use of the materials is accessory or incidental to the execution of the work and (c) contract for supply of goods where some work is required to be done as inciden,tal to the sale. Having regard to the recitals of the contract, the Court then concluded that the contracts in question involved sale of respective vessels within the meaning of clause (m) of the Andhra Pradesh General Sales Tax Act and were not merely the works contract as defined in clause (t) thereof.

91Copy pinpoint91. In our opinion, the tests laid down in Hindustan E Shipyard7 after Forty-sixth Amendment are not of much help in determining whether a contract is a works contract or sale of goods. In any case, Hindustan Shipyard? also says that there is no absolute rule for distinguishing a contract for sale (of goods} and a contract for labour (or services). F

92Copy pinpoint92. It seems to us (and that is the view taken in some of · the decisions) that a contract may involve both a contract of work and labour and a contract of sale of goods. In our opinion, the distinction between contract for sale of goods and contract· for work (or service) has almost dimil'lished in the matters of G composite .contract involving both (a contract of work/labour and a contract for sale for the purposes of Article 366 (29-A}(b). Now by legal fiction under Article 366(29-A)(b), it is permissible to make such contract divisible by separating the transfer of property in goods as goods or in some other form from the H

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

A contract of work and labour. A transfer of property in goods under clause 29(A)(b) of Article 366 is deemed to be a sale of 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. For this reason, B lhe traditional decisions which hold that the substance of the contract must be seen have lost their significance. What was viewed traditionally has to be now understood in light of the philosophy of Article 366(29-A).

93Copy pinpoint93. The question is: Whether taxing sale of goods in an agreement for sale of flat which is to be constructed by the developer/promoter is permissible under the Constitution? When the agreement between the promoter/developer and the flat purchaser is to construct a flat and eventually sell the flat with the fraction of land, it is obvious that such transaction involves the activity of construction inasmuch as it is only when the flat is constructed then it can be conveyed. We, therefore, think that there is no reason why such activity of construction is not covered by the term "works contract". After all, the term "works contract" is nothing but a contract in which one of the parties is obliged to undertake or to execute works. Such activity of construction has all the characteristics or elements of works contract. The ultimate transaction between the parties may be sale of flat but it cannot be said that the characteristics of works contract are not involved in that transaction. When the transaction involves the activity of construction, the factors such as, the flat purchaser has no control over the type and standard of the material to be used in the construction of building or he does not get any right to monitor or supervise the construction activity or he has no say in the designing or lay-out of the building, in our view, are not of much significance and in any case these factors do n"ot detract the contract being works contract insofar as construction part is concerned.

94Copy pinpoint94. For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, in our opinion, H

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 741 KARNATAKA [R.M. LODHA, J.] three conditions must be fulfilled: (i) there must be a works · A 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 B 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 works contract.

95Copy pinpoint95. Ordinarily in the case of a works contract the property c in the goods used in the construction of the building passes to the owner of the land on which the building is constructed when the goods and materials used are incorporated in the building. But there may be contract to the contrary or a statute may provide otherwise. Therefore, it cannot be said to be an D absolute proposition in law that the ownership of the goods must pass by way of accretion or exertion to the owner of the immovable property to which they are affixed or upon which the building is built. E

96Copy pinpoint96. Value addition as a concept after Forty-sixth Amendment to the Constitution has been accepted by this Court in P.N.C. Construction17. While dealing with this concept, the Court said that value addition was important concept which had arisen after the Forty-sixth Amendment by insertion of sub- F clause (b) of clause (29-A) in Article 366. It has now become possible for the States to levy sales tax on the value of the goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods in a building contract. On account of the Forty-sixth Amendment in the G Constitution the State Governments are empowered to levy sale,s tax on the contract value which earlier was not possible.

97Copy pinpoint97. Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not H

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

A denude it of its character as works contract. Article ::166(29- A)(b) does contemplate a situation where the goods may not be transferred in the form of goods but m~y be transferred in some other form which may even be in the form of immovable property. The decision of the Australian High Court in. M.R. B Hornibrook18 is worth noticing in this regard. Section 3(4) of the Australian Sales Tax Assessment Act, 1930 was brought in by way of amendment by the Legislature in 1932 which reads, "For the purposes of this Act, a person shall be deemed to have sold goods if, in the performance of any contract under c which he has received, or is entitled to receive, valuable consideration, he supplies goods the property in which whether as goods (or in some other form) passes, under the terms of the contract, to some other person". The question for consideration before the Australian High Court in light of the above provision was whether the contractor was liable to pay 0 sales tax on the transfer of goods involved in a works contract. The majority judgment held as follows:

"In my opinion the commissioner is right in his contention that this provision applies to the present case. The E appellant company, in the performance of a contract for building a bridge under which contract it was entitled to receive and doubtless has received valuable consideration, has supplied goods, namely, reinforced concrete piles. Such piles are plainly manufactured articles. F They are chattels. They were intended to be incorporated in a structure and were so incorporated. They lost their identity as goods in that structure. But this fact does not prevent the piles from being goods any more than it prevents bricks or stones or nuts and bolts from being G goods. The fact that the goods were specially manufactured and designed for a particular purpose cannot be held to deprive them of the character of goods." (Emphasis supplied)

98Copy pinpoint98. M.R. Homibrook 18 has been followed by this Court in H

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 743 KARNATAKA [R.M. LODHA, J.) Builders' Association4. This Court said that sub-clause (b) of A clause (29-A) of Article 366 of the Constitution of India had more or less adopted the language used in Section 3(4) of the Australian Act.

99Copy pinpoint99. Learned Advocate General. for Maharashtra B vehemently argued that there was noihing to prevent the taxation of different aspects· of the same transaction as separate taxable events. Pressing into service the aspects theory, he argued that a contract for carrying out works coupled with the sale of immovable property may be taxed by both, the State legislatures and the Parliament within their respective spheres of legislative competence as there is deemed sale of goods involved in works contracts. The works contract aspect can be taxed by the State legislatures under Entry 54 of List II of Seventh Schedule read with Article 366 (29-A)(b) of the Constitution. The transfer of immovable property can be taxed by the Parliament under Entry 97 of List I. Mr. K.V. Vishwanathan, however, argued that the aspect theory has no application as the State legislatures inherently lack ·the legislative competence to tax the transfer of an immovable property. According to him, the aspect theory would apply when E a tax is sought to be imposed on more than one distinct;.field of legislation in relation to the same matter provided that there exists in the States/Union legislative competence/legislative power to levy a tax under each distinct head. F

100Copy pinpoint100. We have no doubt that the State legislatures lack legislative power to levy tax on the transfer of immovable property under Entry 54 of List 11 of the Seventh Schedule. However, the States do have competence to levy sales tax on the sale of goods in an agreement of sale of fl!it which also has a component of a deemed sale of goods. Aspects theory though G does not allow the State legislature to entrench upon the Union List and tax services by including the cost of such service in the value of goods but that does not detract the State to tax the sale of goods element involved in the execution of works H

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

A . contract in a composite contract like contract for construction of building and sale of a flat therein. In para 88 of Bharat SancharS, the Court stated: "the aspects theory does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax''. Having said that, the Court also stated that the States were not competent to include the cost of service in the value of the goods sold (i.e. the sim card) nor the Parliament could include the value of the sim card in the cost of services. But the statement in para 92(C) of the Report is clear that it is upto the States to tax the sale of goods element in a composite contract of sale and service. Bharat SancharS thus supports the view that taxation of different aspects of the same transaction as separate taxable events is permissible.

101Copy pinpoint101. In light of the above discussion. we may summarise the legal position, as follows: E (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 fulfilted: (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 H

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 745 KARNATAKA [R.M. LODHA, J.] their identity as goods but this factor does not prevent them from being goods.

a (iii) Where a contract comprises of both works contract and a transfer of immovable property; such contract does not den.ude 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. C

(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. o (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 H

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

A 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- B sixth 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 in the execution of works contract.

(ix) The expression "tax on the sale or purchase of goods" C 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.

D (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. T.he value of the goods which can constitute the measure for the levy of the tax has to be the val~e 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. · G

102Copy pinpoint102. The crucial question would now remain: whether the view taken in Raheja Development1 with reference to definition of "works contract". in KST Act is legally unjustified? The following definition of "works contract" was under consideration before this Court in Raheja Development1: "works contract"

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 747 . KARNATAKA [R.M. LODHA, J.] includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufactur.e, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property". B

103Copy pinpoint103. The Court also noticed the definition of "dealer" and "taxable turn over ".

104Copy pinpoint104. The broad facts in Raheja Development1 were these:

" Raheja Development carried on the business of c real estate development and allied contracts;

" Raheja Development entered into development agreements with the owners of land;

" Raheja Development entered into agreements of D sale with intended purchasers. The agreements provided that on completion of the construction, the residential apartments or the commercial complexes would be handed over to the purchasers who would get an undivided interest in the land also; E

" The owners of the land would then transfer the ownership directly to the society formed under the Karnataka Ownership Flat (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1972 (for short, 'KOF~'). F

105Copy pinpoint105. In light of the above facts and the definition of ''works contract", the question before this Court was whether Raheja Development were liable to pay turnover tax on the value of goods involved in the execution of the works contract. G

106Copy pinpoint106. Section 5-B of the KST Act provides for levy of tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract.

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

107Copy pinpoint107. On consideration of the arguments that were put forth by the parties, the Court in Raheja Development1 held as under:

(i) The definition of the term "works contract" in the Act is an inclusive definition.

B (ii) It is a wide definition_which includes "any agreement" for carrying out building o.r constructiGn activity for cash, deferred payment or other valuable consideration.

{iii) The definition of works contract does not make a c distinction based on who carries on the construction activity. Even an owner of the property may be said to be carrying on a works contract if he enters into an agreement to construct for ca~h. deferred payment or other valuable consideration.

(iv) The developers had undertaken to build for the D prospective purchaser.·

(v) Such, constructio,n/development was to be on payment of a price in various installments set out in the agreement.

E (vi) The developers were not the owners. They claimed lien , on the property. They had right to terminate the agreement and dispose bf the unit if a breach was committed by the purchaser. A clause like this does not mean that the agreement ceases to be "works contract". So long as there is no termination, the construction is for and on behalf of the purchaser and it remains F a "works contract".

(vii) If there is. a termination and a particular unit is not resold but retained by the developer, there would be no works contract to that extent. G (viii) If the agreement is entered into after the flat or unit is already constructed then there would be no works contract. But, so long as the agreement is entered into before the construction is complete it would be works contract.

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 749 KARNATAKA [R.M. LODHA, J.]

108Copy pinpoint108. The correctness of the view taken in Raheja A Development1 has been doubted in the referral order principally for the reasons: (a) the developer had undertaken the contract to develop the property of the owner. It is not alleged by the department that there is monetary consideration involved in the development agreement. If the development agreement B 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; (b} if the ratio in Raheja Development1 is to be accepted then there would be no difference between works contract and a contract for sale of c chattel as a chattel and (c) from the definition of works contract, the contractor must have undertaken the work of construction for and on behalf of the flat purchaser for cash, deferred or any other valuable consideration but could it be said that developer was contractor for the prospective flat purchaser. 0

109Copy pinpoint109. In Raheja Development', the Court on consideration of the clauses (q} and (r) of the recitals and clauses (1), 5(c) and (vii) of the agreement between the flat purchaser, developer and owner of the land observed that the agreement had an element for carrying out building and construction activity for cash, deferred payment or other valuable consideration. The developer had undertaken to build for the prospective purchaser. Having regard to the various clauses of the recitals and also the clauses of the agreement, the Court was of the view that such agreement was a .typical agreement and so long as there was no termination of the contract, the construction is for and on behalf of the purchaser and it remains a "works contract".

110Copy pinpoint110. The argument on behalf of the developers that the flat purchaser is entitled to transfer of flat and conveyance of fraction of land only when all installments have been fully paid and that shows that the agreement between the 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 H

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

A purposes of carrying out the construction of the flat for and on behalf of the flat purchaser has no merit. The submission overlooks the typical nature of the development agreement which is followed by a tripartite agreement between the owner of the land, the developer and the flat purchaser. Effectively and B de facto it is the developer who constructs the building for the flat purchaser. The developer does so for monetary consideration. The label of payment is not decisive but the factum of the payment is. The construction is done on payment of price as agreed upon between the developer and the flat c ·purchaser. It is not necessary to recapitulate all clauses of the agreement under KOFA or for that matter under MOFA. Raheja Development1 takes note of relevant clauses of the recitals and the agreement under KOFA. We need not repeat them. Similarly, Form V of the Maharashtra Ownership Flat Rules contains recital such as, 'as a result of the Development 0 agreernent the promoters are entitled and enjoined upon to construct buildings on the said land'. One of the relevant clauses (omitting unnecessary portion) in Form V reads, "the promo•"'r· shall construct the said building/s .... in accordance with the E plans, designs, specifications ..... which have been seen and approved by the flat purchaser with the owner, such variations and modifications as the promoter may consider necessary or as may be required by the concerned local authority/the government. .... provided that the promoter shall have to obtain prior consent in writing to the flat purchaser in respect o1 F variations or modifications which may adversely affect .the flat of the purchaser". It is, thus, not correct to say that the work is undertaken by the developer for himself and for the owner and the construction is not carried for and on behalf of the purchaser. G

111Copy pinpoint111. In the development agreement between the owner of the land and the developer, direct monetary consideration may not be involved but such agreement cannot be seen in isolation to the terms contained therein and following development agreement, the agreement in the nature of tbe tripartite

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 751 KARNATAKA [R.M. LODHA, J.) agreement between the owner of the land, the developer and the flat purchaser whereunder the developer has undertaken to construct for the flat purchaser for monetary consideration. Seen thus, there is nothing wrong if the transaction is treated as a composite contract comprising of both a works. contract and a transfer of immovable property and levy sales tax on the value of the material involved in execution of the works contract. The observation in the referral order that if the ratio in Raheja Development1 is to be accepted then there would be no difference between works contract and a contract far sale of chattel as chattel overlooks the legal position which we have c summarized above.

112Copy pinpoint112. The argument that flat is to be sold as a flat and not an aggregate of its ~omponent parts is already negated by the Constitution Bench in the case of Builders' Association4. As a matter of fact, in Builders' Association•, this argument was advanced on behalf of the States. Repelling the argument, the Constitution Bench observed that it was 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 works contract, but a conglomerate, that is the entire building which is actually constructed.

113Copy pinpoint113. Yet another argument advanced on behalf of the · appellants is that in Raheja Deve/opment1, it is _noticed that the builder has .a lien on the property but incorrectly states that lien is because they are not owners. It is argued that lien is because if the monies are not recovered from the prospective ·flat purchasers, the lien can be exercised and this would show that the contract is a contract of an agreement to sell immovable property. The argument is insignificant because if the developer has undertaken to build for the prospective purchaser for cash or deferred payment or a valuable consideration pursuant tci a contract then to that extent, the contract is works contract and there is deemed sale of material (goods) used in the construction of building and merely H

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

A because the builder has a right of lien in the event due monies are not paid does not alter the character of contract being works contract.

114Copy pinpoint114. In Article· 366(29-A)(b), the term 'works contract' B covers all genre of works contract and it is not limited to one specie of the contract. In Raheja Development', the definition of ''works contract" in KST Act was under consideration. That definition of "works contract" is inclusive and refers to building contracts and diverse construction activities for monetary consideration viz; for cash, deferred payment or other valuable C consideration as works contract. Having regard to the factual · position, inter alia, Raheja Development' entered into development agreements with the owners of the land and ii also entered into agreements for sale with the flat purchasers, the consideration being payment in installments and also the· D clauses of the agreement the Court held that developer had undertaken to build for the flat purchaser and so long as there was no termination of the contract, the construction is for and on behalf of the purchaser and it remains a "works contract". The legal position summarized by us and the foregoing discussion would justify the view taken by the two Judge Bench in Raheja Development'.

115Copy pinpoint115. It may, however, be clarified that activity of. construction undertaken by the developer would be works: contract only from the stage the developer enters into a contract\ with the flat purchaser. The value addition made to the goods I transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government.

116Copy pinpoint116. The reasons stated in the referral order for reconsideration of Raheja Development' do not make out any good ground for taking a view different from what has been taken by this Court in Raheja Development'. We are in agreement with the submission of Mr. K.N. Bhat that since H Raheja Development' in May, 2005 almost all States have

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 753 KARNATAKA [R.M. LODHA, J.] modified their laws in line with Raheja Development' and there is no justification for change in the position settled after the decision of this Court in Raheja Development'.

117Copy pinpoint117. The submission of Mr. K.N. Bhat that the view in Raheja Development1 that whf!n a completed building is sold, there is no work contract and, therefore, no liability to tax is not correct statement of Jaw, does not appeal to us. If at the time of construction and until the construction was completed, there was no contract for constructiol) of the building with the flat purchaser, the goods used in the construction cannot be deemed to have been sold by the builder since at that time there is no purchaser. That the building is intended for sale ultimately after construction does not make any difference.

118Copy pinpoint118. We are clearly of the view that Raheja Development' lays down the correct legal position and we approve the same. D

119Copy pinpoint119. There is challenge to the constitutional validity of explanation (b)(ii) to Section 2(24) which was brought by amendment with effect from 20.06.2006 in MVAT Act and sub- rule (1A) which was inserted into Rule 58 of the MVAT Rules E by a notification ·dated 01.06.2009.

120Copy pinpoint120. Clause (24)*** of Section 2 defines sale to mean a sale of goods made Within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge of pledge; and the words F "sell", "buy" and."purchase", with all their grammatical variations and cognate expressions. An explanation is appended to this clause. Clause· (b)**** of the explanation to Section 2(24)

·- "2(24) "sale" means a sale of goods made within the State for cash or G deferred payment or other valuabftn:onsideration bui does not include a mortgage,,hypothecation, charge or pledge; and the words "sell", "buy" and "purchase", with all their grammatical variations and cognate expressions, shall be construed accordingly." 0 ••• "(b)(i) the transfer of property in any goods. otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration; H.

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A defines what would be a sale for the purpose of the clause and brought in its ambit the transactions mentioned therein. Explanation (b)(ii) was amended with effect from 20.06.2006 by inserting the following words after the words "works contract": "including, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property".

121Copy pinpoint121. There is no doubt in our mind that the amendment in explanation b(ii) to Section 2(24) was brought because of the judgment of this Court in Raheja Development'. We have already held that Raheja Development' lays down the correct legal position. Thus, in our view, there is no merit in the challenge to the constitutional validity to the provisions of explanation (b)(ii) to Section 2(24) of MVAT which were amended with effect from 20.06.2006. The Division Bench of the Bombay High Court took the view that the provision under challenge was not in breach of any constitutional boundaries. This is what it said: E "34. The amended definition of the expression sale in

(ii) the transfer of property in goods (whether as goods or in some other form), involved in the execution of a works contract..... ; F (iii) a delivery of goods on hire-purchase or any system of payment by instalments; (iv) the transfer of the right to use any goods for any propose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (v) the supply of goods by any association or body of persons incorporated or not, to a member thereof tor cash, deferred payment or other valuable consideration; (vi) 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 consumption or any drink (whether or not intoxicating), where such supply or service is made or given for cash, deferred payment or other valuable consideration;"

MIS. LARSEN & TOUBRO LIMITED v. STATE OF 755 KARNATAKA [R.M. LODHA, J.] clause b(ii) of the Explanation to Section 2(24) brings within the ambit of that expression transactions of that nature which are referable to Article 366(29A)(b). The transactibns which the legislature had in mind involve works contracts. What the state ·legislatures can tax under the expanded definition contained in clause b of Article 366 B (29A) must meet the governing requirements of that clause. There must be a transfer of property in goods a involved in the execution of works contract. The relevant clause in Section 2(24) is valid because i.t does not transgress the boundaries set out in Article 366(29A). c Indeed, after the 46th Amendment, State legislation must confine itself to.; the limits set out even in the expanded concept of what- constitutes a sale or purchase of goods in Article 366(29A). State legislation cannot expand. the ambit of what constitutes a tax on the sale or purchase of 0 goods beyond the constitutional frontiers. In order that Section 2(24) remains within constitutional boundaries, in the context of works contracts, it must be read to cover those cases which fall within the expanded definition as elaborated after the 46th Amendment. Whether there is a works contract in a given case is for assessing authorities E to determine. As noted earlier, it is not possible to provide a comprehensive or all encompassing list of what contracts constitute works contracts. Section 2(24) properly construed, even after its amendment, reaches out to tho.se cases which fall within the ambit of Article 366(29A). F Explanation b(ii) to Section 2(24) in other words covers those transactions where there is a transfer of property in goods, whether as goods or in any other form, involved in the execution of a works contract. Once those parameters are met, the amended definition in the State legislation in G the present case provides a clarification or cla rificatory instances. When constitutional norms govern state legislation such as those provided in Article 366(29A) in this case, the legislatio.n must be co.nstrued in the context of tho.se norms which it cannot transgress. The law is valid H

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

A because it does not breach those boundaries. There is no breach of constitutional boundaries."

122Copy pinpoint122. We are in agreement with the above view and reject challenge to amendment to the provisions of explanation (b)(ii) B to Section 2(24) of MVAT Act.

123Copy pinpoint123. Sub-rule (1A)***** was inserted into Rule 58 by a notification dated 01.06.2009. As a matter of fact, Rule 58(1) of the MVAT Rules provides that the value of the goods at the time of the transfer of the property in goods involved in the C execution of a works contract may be determined by effecting certain deductions from the value of the entire contract insofar as the amounts rela~ing to deductions pertain to the said works contract. The challenge was laid to Rule 58(1A) of the MVAT Rules before the Bombay High Court. The Division Bench of o the Bombay High Court found that there was nothing to show that the proviso to the said provision was arbitrary. It held that the Legislature was acting within the field of the legislative powers in devising a measure for the tax by excluding the cost of the land. The Division Bench recorded the following reasons in repelling the challenge to Rule 58(1A).

"35. The challenge to Rule 58(1A), may now be

....."(1A) In case of a construction contract, where along with the immovable property, the land or, as the case may be, interest in the land, underlying the immovable property is to be conveyed, and the property in the goods (whether as goods or in some other form) involved in the execution of the construction contract is also transferred to the purchaser such transfer is liable to tax under this rule. The value of the said goods at the lime of the transfer shall be calculated after making the deductions under sub-rule (1) and the cost of the land from the total agreement value. G The cost of the land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995, as applicable on the 1st January of the year in which the agreement to sell the property is registered: Provided that, deduction towards cost of land under this sub-rule shall not H exceed 70% of the agreement value."

M/S. LARSEN & TOUBRO LIMITED v. STATE OF 757 · KARNATAKA; [~.M, LODHA, .J.] considered. The Rule has provided that in the case of. A construction contracts where the immovable property, land or as the case may be, interest therein is to be conveye\:\ . 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 B at the time of transfer is to be calculated after making the deductions which are specified under sub-rule (1 ). The judgment in the second Gannon Dunkerley specifies the nature of such deductions which can be made from the . entire value of the works contracts. This was permitted to c the States as a convenient mode for determining the value 01 the goods in the~executiori of the works contract. . · ' Similarly, the cost ofthe land is required .to be exciuded. from the total agreement value. Sub-rule (1A) stipulates that the cost shall 6e 'determined in accordance with the D guidelines iippeli'ded to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 as applicable on 1 January of the year in which the agreement to sell the property is registered. The Proviso E stipulates that deduction towards the cost of land under the sub-rule shall not exceed 70% of the agreement value. The petitioners have not brought on the record any material to indicate that the proviso to sub-rule (1A) of Rule 58 is arbitrary. Rule 58(1A) provides for the measure of the tax. The measure of the tax, as held by the Supreme Court in F its decision in Union of India v. Bombay Tyre International Ltd. [(1984) 1 sec 467], must be distinguished from the charge of tax and the incidence of tax. The Legislature was acting within the filed of its legislative powers in devising a measure for the tax by excluding the cost of the land." G

124Copy pinpoint124. The value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later. Taxing the sale of goods H.

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

A element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporl!tion and does not purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria and we read down Rule 58(1-A) accordingly. The Maharashtra Government has to bring clarity in Rule 58 (1-A) as indicated above. Subject to this, validity of Rule 58(1-A)1 of MVAT Rules is SL!Stained.

125~ Once we have held that Raheja Development1 lays down the correct law, in our opinion~ nothing turns on the circular dated 07.02.2007 and the notification dated 09.07.2010. The circular is a trade circular y.ihich is clarificatory in nature only. The notification enables the registered dealer to opt for a composition scheme. The High Court has dealt with the circular and notification. We do not find any error in the view of the High Court in this regard. Moreover, "the Advocate General for Maharashtra clearly stated before us that implementation of Rule 58(1-A) shall not result in double taxation and in any case all claims of alleged double taxation will be determined in the process of assessment of each individual case.

126Copy pinpoint126. After having given answer to the reference, we send the matters back to the Regular Bench for final disposal.- Bibhuti Bhushan Bose Reference answered & matter referred to Regular Bench.