GANNON DUNKERLEY AND CO. A.ND ORS. ETC. ETC. v. STATE OF RAJASTHAN AND ORS. ETC. ETC.

The Judgment of the Court was delivered by F S.C. AGRAWAL, J. Having heard learned counsel in SLP(C) Nos. 3365-68 of 1992 we hereby grant special leave to appeal and proceecl to · dispose of the appeals.

These appeals arising from the Judgment of the Rajasthan High G Court dated September 3,· 1991, and the connected writ petition filed under A~ticle 32 of the Constitution raise questions relating to imposition of tax on the transfer of property in goods involved in the execution of works contracts. The power to.· impose this tax became available to the State legislatures as a result of the amendments introduced in the Constitution H by the Constitution (Forty Sixth Amendment) Act 1982, hereinafter

GANNON DUNKERLEY CO. v. STATEOFRAJASTIIAN(AGRAWAL,J.) 117

referred to as the Forty Sixth Amendment. The validity of the said amend- A ment has been upheld by this Court in Builders Associatiqn of India & ors. v. Union of India, [1989] 2 SCR 320 wherein this Court has also considered the scope and ambit of the legislative power to unpose the s~d.tax.

The relevant historical background leading to the enactment of the B Forty Sixth Amendment has been set out in detail in the Builders Associa- tion case (supra) we would therefore only make a brief reference to the circumstances which led to the said amendment

Under Entry 48 in List II ofSeventh,Schedule to the Gov~rnment of India Act 1985. The legislative power t-0 impose "truces on sale of goods and on advertisements" was conferred on .the Provincial Legislattires under the Constitution as adopted the said taxing power wa~ di'1ided between Parlia- ment and the State Legislature. Under Entry 92 in List I of the Seventh Schedule to the Constitution Parliament was empowered. to impose "taxes on the sale or purchase of newspap_ers and on advertisements .published therein" and under Entry 54 in List II the State Legislatures were em- powered to impose "taxes on the sale or purchase of goods other than newspapers". With regard to imposition of sales tax on goods involved in execution of works contracts where the contract was single and indivisible the question arose whetherthere. is a 'sale' of those materials within the meaning of that word in Entry 48 in List II of the Seventh Schedule to the Government of India Act 1935 and Entry 54 in List II of the Seventh Schedule to the Constitution. There was sharp cleavage of opinion ·among the High Courts on. that question. The High Court of Madras in Gannon Dunkerley & Co. (Madras) Ltd. v.State of Madras, AIR 1954 Mad. 1130, took the view that the e~pression 'sale of goods' in Entry 48 in I,..ist II of the Governme~t of India Act 1935 and Entry 54 in List II ofthe Constitu- tion had the same meaning as it has in the Sale of Goods Act, 1930 and that construction works contracts were not contracts for sale of the materials used therein and that the contract, being entire and indivisible, could not be broken into a contract for sale of materials and a contract for payment for work done. On that view it was held that the provisions of the amendments introduced by the Amendment Act of 1947 in Madras General Sales Tax Act 1939 whereby the definition of 'sale' was enlarged to include 'a transfer of property in goods involved in the execution of a works contract' and thereby impose sales tax on such transfers, were declared as ultra Vires the powers of the Provincial Legislature. The same H

p. 118

A view was taken by the Hyderabad High Court in Jubilee Engineering Co. Ltd. v. Sales Tax Officer, Hyderabad City & Ors., AIR 1956 Hyd 79. The Kerala High Court in Gannon Dunkerley & Co. Madras (Pvt.) 'Ltd. v. Sales Tax Officer, Mattancheri, AIR 1957 Kerala 146 and the Mysore High Court in Mohamed Khasim v. State of Mysore, (1955] VI STC 211, took the contrary view and upheld the power of the State to impose sales tax on the B turnover relating to construction works. The Nagpur High Court in Pandit Banarsi Das v. State of Madhya Pradesh & Ors., (1955) VI STC 93, while declining to follow the decision of the Madras High Court expressed the view that the State Legislature could pick out a sale from the composite transaction of a building contract which included transfer of property in c materials and could make the portion attributable to the cost of such materials subject to payment of sales tax in exercise of its undoubted and plenary powers. The Rajasthan High Court in Bhuramal & Ors. v. State of Rajasthan, AIR 1957 ~aj. 104, took a sim~lar view.

D , . This conflict was resolved by this Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., [1959) SCR 379 wherein the decision of the Madras High Court was affirmed and it was held that the exr.ression . sale of goods in Entry 48 in List II of Seventh Schedule to the Government of India Act, 1935 had the same meaning as the said expression had in the Sale of Goods Act, 1930, its ess.ential ingredients being an agreement to sell movables for a price and property passing therein pursuant to .that agreement. It was further held that in a building contract, which is entire and indivisible, there is no sale of goods because in such a contract the agreement between the parties is that the contractor should construct the building according to the specifications cqntained in the agreement and in consideration therefore receive payment as provided therein and in such an agreement, there was neither a contract to sell the materials used in the construction nor does the•property pass therein as movables. This Court therefore, laid down that it was not within the competence of the Provincial Legislature under Entry 48 in List II of Seventh Schedule to the Govern- ( ment of India Act, 1935, to impose a tax on the supply of materials used in such a contract treating it as a sale. The said decision, though rendered L in the context of Entry 48 in List ·II· of the Seventh Schedule to the Government of India Act, 1935, :was equally applicable to the provisions found in Entry 54 in List II of the Seventh Schedule to the Constitution. In the Gannon Dunkerlay case (supra) it was made clear that the abovementioned conclusions had reference to works contracts which were c

GANNON DUNKERLEY CO. v. srATE OF RAJASTHAN (AGRAWAL, J.) 119

entire and indivisible and the Court has observed : A "It is possible that the parties might enter into distinct and separate contracts one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such a case, there are really two agreements though there is a B single instrument embodying them, and the power of the State to separate the agreement to sell, from the agree- ment to do work and render service, and to impose a tax thereon could not be questioned and will stand untouched by the present judgment." (p.427) c It may also be mentioned that in Mithan Lal v. The State of Delhi & Anr., [1959] SCR 445 this Court, in the context of a law made by Parliament in relation to Part C States under Article 246(4) of the Constitution, had held that Parliament could impose a tax on the supply of materials in building contracts and to impose it under the name of sales tax because D the said power of Parliament was plenary and absolute and was untram- melled by the limitations prescribed by Article 246 clauses (2) and (3) and Entry 54 in List II and that the decision in Gannon Dunkerley case (supra) which was given on a statute passed by the Provincial legislature under the Government of India Act, 1935, had no application to such a case. (p.451) E After the decision in Gannon Dunkerley case (supra) the matter with regard to taxability of goods involved in execution of works contracts was examined by the Law Commission. In its 61st Report the Law Commission after considering the 'legal position, including the decision in Gannon Dunkerley case (supra), expressed the view. F "Before the judgments of the Supreme Court, however, sale was usually regarded as including a works contract. The question is ultimately one of policy, but the Commis- sion would prefer restoration of the power to the States. G Narrow interpretation of the expression 'sale' was not the practice before the Supreme Court judgments. Entries in the legislative list, should receive a broad interpretation. Fine nuances need not be material. The transactions resemble sale in substance. Hence, the power should be H

p. 120

A given to the States.

If this alternative is adopted, there are several drafting deVices open, e.g. :

(a) amending State List, entry 54, or B (b) adding a fresh entry in the State List, or

( c) inserting in Article 366 a wide definition of 'sale' so as to include works contracts.

c The Commissioner prefers the last one. It would avoid multiple amendment."

· Ke~ping in View the said recomin-endation of the Law Co~ission, the Constitution was amended by the Forty-Sixth Amendment by the said amendment clause (29A) was inserted in Article 366 and clause (3) of D Article 286 was substituted. The ·other amendments· introduced by it are not relevant for this. case. Clause (29-A) of Article 366 is in the following ·terms:

.. "(29A) "tax on the sale or purchase of go9ds" includes-

E · (a) a tax on the transfer, otherwise than in pursuance of a contract, of property .in any goods for cash, deferred paym1:nt or. other valuable consideration;

(b) a tax on the transfer of property in goods (whether . ( '

as goods or in some other form) involved in the execution F of a.works contrad;

. ( c) a tax on the delivery of goods on hire- purchase or ( any system of payment by installments; ( ( d) a tax on the transfer of the right to use any goods G r for fl.DY purpose (whether or not for a specified period) '-. for cash, deferred payment or other valuable considera- . tion;

( e) a tax on. the supply of goods by any unincorporated H association or. body of persons to a member thereof for I \.

GANNONDUNKERLEYC:O. v. STATEOFRAJASTHAN[AGRAWALJ] 121

cash,. deferred payment or other valuable consideration; A (t) .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 consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable B consideration;

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 c supply is made;"

Clause (3) of Article 286 provides as µnder:

"(3) Any law of a State shall, in so far as it imposes, or D authoris~ 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; or E (b) a tax on the sale or purchase of goods, being a tax ofthe nature referred to in sub-clause (b), sub-clause (c) or subcclause (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 the tax as F Parliament may by law specify."

After the Forty-sixth Amendment, various State Legislature& amended their sales tax legislation to make provision for imposition of sales tax in relation to works contracts. The constitutional validity of the Forty- sixth Amendment as well as the amendments made inthe State legislations G on that basis were challenged before this Court in appeals as well as writ petitions filed under Article 32 of the Constitution. The said matters were disposed of by this Court by its judgment in Builders' Association case (supra). In that case, two points were raised before this Court: (i) the Forty Sixth Amendment was unconstitutional for the reason that it had not been H

p. 122

A ratified. by the legislatures of not less than one-half of the States by Resolutions passed to that effect by those legislatures before the Bill which led to the amendment in question was· presented to the President for assent; and (ii) it was not open to the States to ignore the provisions contained in Article 286 of the Constitution and the provisions of .the Central Sales Tax Act, 1956 while making assessment under the Sales Tax . B laws passed by the legislatures of the States.

Rejecting the first contention this court upheld the validity of the Forty-sixth Amendment in view of the Memorandum dated January 31, 1982 signed by the Secretary-General, Rajya Sabha which showed that the c Bill before it was presented to the President for his assent had been ratified by the legislatures o: twelve States and it showed that there was due compliance of the provisions contained in the proviso to Article 368(2) of the Constitution. As regards the secdnd contention, this Court, on a consideration of the contentions raised on behalf of the petitioners and the appellants and the submissions urged by the States to meet those conten- ·D tions, has declared that "sales tax laws passed by the legislatures of States levying taxes on the transfer of property in goods (whether as goods or in some other forms) involved in the execution of a works contract are subject to the restrictions and conditions mentioned in each clause or sub-clause of Article 286 of the Constitution." (p.355) E This Court has observed that Parliament amended Article 366 by introducing sub-clause (b) of clause (29-A) in order to overcome the effect of the decision in Gannon Dunkerley case (supra). Construing the provisions of sub-clause (b) of clause (29-A) of Article 366, this Court has laid down: ,F ., "Sub-clause (b) of clause (29-A) states that 'tax ori the sale or purchase of goods, includes among other things a tax on the transfer of property in the goods (whether as goods or in some other form) involved in the executi9n of a ,- G works contract. It does not say that a tax on the sale or purchase of goods included a tax on the amount paid for .the execution of a works contract. It refers to a tax on the transfer of property in goods (whether as goods or in some , other fom1) involved in the execution of a works contract. The emphasis is .on the transfer of property in goods ··H I'. .(whether as goods qr in some other. form). The latter part

GANNON DUNKERLEY CO. v. STATEOFRAJASTIIAN(AGRAWAL,J.) 123

of clause (29-A) of Article 366 of the Constitution makes A the position very clear. While referring to the transfer, delivery or supply of any goods that takes place as per sub-clauses (a) to (t) of clause (29-A), the latter part of clause (29-A) says that 'such tran~fer, 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 B a purchase of those goods by the person to whom such transfer, delivery or supply is made. Hence, 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 the person to whom such transfer is made. The object of the new defini- tion introduced in clause (29-A) of Article 366 of the · Constitution is, therefore, to enlarge the scope of 'tax on sale or purchase of goods' wherever if occures in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub clause (a) to (t) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression 'tax on the sale or purchase of goods' in Entry 54 of the State List I, therefore, includes a tax on the transfer of property in goods (whether as goods' or in some other form) involved in the execution of a works contract also. The tax leviable by virtue of sub clause (b) of clause (29-A) of Article 366 of the Constitution thus becomes subject to the same discipline to which any levy under F Entry 54 of the State List is made subject to under the Constitution." (pp.347-348) ·

Explaining the effect of the Forty-Sixth Amendment on the powers of the State to levy sales tax, this Court has held : G Even after the decision of this Court in the State of Madras v. Ga1111011 Dunkerley & Co. (Madras) Ltd. (supra) it was quite possible that where a contract entered into in con- nection with the construction of a building consisted of two parts, namely, one part relating to sale of materials used in the construction of the Building by the contractor H

p. 124

A to the person who had assigned the contract and another part dealing with the supply of labour and services, sales tax was leviable on the goods which were agreed to be sold under the first part. But sales tax could not be levied when the contract in question was a single and indivisible works contract. After the 46th Amendment the works B . contract which was an indivisible one is by a legal fiction altered into ~ 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 tolevy sales tax on the value of goods involved in c 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. It could not have been the contention of the revenue prior to the 46th Amendment that when the goods and materials D had been supplied under a distinct and separate contract by the contractor for the purpose of construction of a building the assessment of sales tax cou.ld be made ignor- ing the restrictions and conditions incorporated in Article 286 of the Constitution. If that was the position can the E States contend( ed) after the 46th Amendment under which by a legal fiction the transfer of property in goods involved in a works contract was made liable to payment of S!J.les tax that they are not governed by Article 286 while · levying sales tax on sale of goods involved in a works contract? ·They cannot do so. When the law creates a leg~I F fiction such fiction should be carried to its logical end. There should not be any hesitation in giving full effect to . it. If the power to tax a sale in any ordinary sense is subject .· t~ certain conditions and restrictions imposed by the Con- stitution, the power to tax a transaction which is deemed •G to be a sale under Article 366(29-A) orthe Constitution should also be subject to the same restrictions and condi- tions. (pp.351-352)

After referring to the provision.s of clause (1) of Article 286 where the expression· "a tax· on the sale or purchase of goods" is used this Court l has observed :

GANNON DUNKERLEY CO. v. SfATE OF RAJASTIIAN (AGRAWAL, J.) 125

"Here again we have to read the expression 'a tax on the A sale or purchase of goods' found in Article 286 as includ- ing the transfer of goods referred to in sub-clause (b) of clause (29-A) of Article 366 which is deemed to be a sale of goods and the tax leviable thereon would be subject to the terms of clause (1) of Article 286." (p.348) B Similarly, with reference to clauses (2) and (3) of Article 286, this Court has observed :

"Similarly, the restrictions mentioned in clause (2) of Ar- ticle 286 of the Constitution which says that Parliament c may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1) of Article 286 would also. be attracted to a transfer of goods contemplated under Ar- ticle 366(29-A)(b). Similarly, clause (3) of Article 286 is also applicable to a tax on a transfer of property referred to in sub-clause (b) of clause (29-A) of Article 366. Clause (3) of Article 286 consists of two parts. Sub-clause (a) of clause (3) of Article 286 deals with a tax on the sale or purchase of goods declared by ParHament by law to be of special importance in inter-State or commerce, which is generally applicable to all sales including the transfer, supply or delivery of goods which are deemed to be sales under clause (29-A) of Article 366 of the Constitution. If any declared goods whic1t are referred to in section 14 of the Central Sales Tax Act, 1956 are involved in such transfer, supply or delivery, which is referred to in clause F (29-A) of Article 366 the sales tax law of a State which provides for levy of sales tax thereon will have to comply with the restrictions mentioned in section 15 of the Central Sales Tax Act, 1956. Clause (b) is an additional provision which empowers Parliament to impose any additional G restrictions or conditions in regard to the levy of sales tax on transactions which will be deemed to be sales under sub-clause (b) or sub-clause (c) or sub-clause (d) of clause (29-A) of Article 366 of the Constitution." (p.348)

Rejecting the contention urged on behalf of the States that since H

p. 126

A sub-clause (b) .of clause (3) of Article 286 of the Constitution refers only to the transactions referred to in sub-clauses (b) (c) and (d) of clause (29-A) of Article 386, the transactions referred to under those three sub-clauses would not be subjected to any other restrictions s'et out in clause (1) or clause (2) or sub-clause (a) of clause (3) of Article 286 of the Constitution, this Court has observed : B "It In;ay be that by virtue of sub-clause (b) of clause (3) of Article 286 it is open to Parliament to impose some other restrictions or c0nditions which are not generally ap- plicable to all kinds of sales. That however cannot make c the other parts to Article 286 inapplicable to the transac- tions which are deemed to be sales under Article 366(29- A) of the Constitution. We are of the. view that all transfers, deliveries and supplies of goods referred to. in . sub-clauses (a) to (f) of clause (29-A) of Article 366 of. the Constitution are subject to the restrictions and condi- D tions mentioned in clause (1), clause (2) and sub-clause (a) of clause (3) of Article 286 of the Constitution and the transfers and deliveries that take place under sub-clauses (b), (c) and (d) of clause (29-A) of Article 366 of the Constitution are subject to an additi?nal restriction men- E tioned in sub-clause (b) of Article 286(3) of the Constitu- tion. (p.349)

The contention urged on behalf of the States that the properties that are transferred to the owner in the execution ofa works contract are not F the goods involved in the execution of the works contract, but a con- glomerate, that is the entire building that is actually constructed, was rejected by the Court. and it was observed that after the Forty Sixth 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 (p.354). This Court also rejected the plea put forward on behalf of the G States that the Forty Sixth Amendment had conferred on the States a larger freedom than what . they had before in regard to their power to ·levy sales-tax under Entry 54 of the State List. It was held that the Forty-Sixth Amendment does no more than making it possible for the States to levy sales tax on .the price of goods and materials used in works contracts as if H there was a sale of such goods and materials. (p.354} . ·-1..

GANNOND~NKERLEYCO. v. STATEOPRAJASTHAN[AGRAWAL,J.] 127

Since it had interpreted the relevant -provisions of the Constitution, A this Court did not consider it necessary to take up each and every writ petition to express its opinion on the validity of the statutory provisions and rules which were questioned before the Court and the petitioners con- cerned were given the liberty to approach the authorities under the Sales Tax Act or the High Court concerned for necessary relief and further made .it clear that it would be open to them to question the validity of the statutory provisions and the rules made thereunder before the High Court concerned.

In pursuance of the decision of this Court in Builders' Association case (s.upra), fresh writ petitions were filed by the appellants in the appeals challengiilg the validity of the provisions of the Rajasthan Sales Tax Act, 1954 and the Rajasthan Sales Tax Rules, 1955 relating to imposition of tax on transfer of property in goods involved in. the execution of a works contract. The said writ petitions were dismissed by a division bench of the Rajasthan High Court by judgment dated September 3, 1991. The appeals are directed against the said judgment of the High Court.

Writ Petition (Civil) No. 197/91 has been filed under Article 32 of the Constitution by Larsen & Toubro Ltd., a company incorporated under • the Companies Act, 1956, which undertakes contracts for executing turn- key projects involving building ·construction, erection and installation of equipment., etc. In the writ petition, the validity of the provisions relating to imposition of tax on the transfer of property in goods involved in the execution of a works contract contained in the Sales Tax Laws of the States of Tamilnadu, Andhra Pradesh and Rajasthan have been challenged. The reason for approaching this Court under Article 32 of the Constitution, as stated in the writ petition, is that in spite of the decision of this Court in Builders' Association case (supra), the petitioner is being subjected to demands for tax in relation to works contracts by the various States and each State is wanting to tax the some transaction on the basis that it constitutes a sale under its sales tax law. In the said writ petition, the petitioner has impleaded all the States as respondents. We propose to consider this writ petition with reference to the provisions contained in the Rajasthan Sales Tax Act, 1954 and the Rajasthan Sales Tax Rules, 1955.

During the course of arguments, Shri F.S. Nariman and Shri Harish Salve, learned counsel appearing for the appellants in the appeals, and Shri H

J.

128 , SUPREME COURT REPORTS [1992] SUPP. 3 S.C.R.

A K. Parasaran, learned counsel appearing for the petitioner in the writ petition, raised questions having a bearing on the exercise of the legislative power of the States to impose the tax on transter of property in goods involved in the execution of a works contract, the applicability of the · provisions of the Central Sales Tax Act to such a transfer, the fixation of the situs of such a transfer for the purpose of ascertaining whether ·it B constitutes a sale outs~de the State, the measure for levy and fixing the rates for imposition of such tax and other matters incidental thereto. Since other writ petitions and· appeals involving similar questions were listed for hear- ing along with these matters we have heard· Shri K.M. Vijayan, Shri A.K. Ganguli, Shri B.R.L. Iyengar, Shri Sankar Ghosh, Shri B. Datta and Shri c G.S. Jetly, learned counsel appearing for the contractors in those cases.. On behalf of .the States, who are parties in the appeals and the writ petition, we have heard Shri T.S. Krishnamoorthy Iyer, Shri R.N. Narasimhamoor- · thy, Shri C. Sitaramiah, Shri S.K. Dholakia, Shri T.A. Ramachandran, Shri R.N. Sachthey and Shri N.M. Ghatate. Shri Ahuja, learned counsel appear- D ing for the Union of India, did not choose to make any submission for the reason that the matter appertains to the legislative powers of the State Legislatures:

On behalf of the contractors, it has bee1,1 urged that in view of the declaration of the law made lJy this Court in Builders Association case E (supra), the State Legislature, in exercise of its legislative power to impose a t.ax on the transfer of property in goods involved in the execution of a - works contract under Entry-54-of the-State-Listread with Article 366(29-A) (b), cannot levy such a tax in respect of transactions which are in the nature of saies in the course of inter-state trade and commerce or are sales outside the State levying such tax or are sales in the course of import inasmuch as it is beyond the legislative competence of the State Legislature to impose a sales taX on inter-state sales as well as sales outside the State and sales in the course of import or export. It has also been urged that the existence of u law made by Parliament under Article 269(3)(b) Article 286(2) and Article 286(3){b) is a condition precedent for the exercise of the legislative power by the State to impose a tax on transfer of property in goods involved in the execution of a works contract and since no law has been enacted by ) Parliament under Articles 269(3), 286(2) and 286(3)(b) in ·relation to imposition o( tax on transfer of property in goods involved in the execution. of a works contract, it was not open to the State Legislatures to exercise • H the power to impose such tax. In this regard, it was contended that the

GANNON DUNKERLEY CO. v. STATEOFRAJASillAN(AGRAWAL,J.) 129

Central Sales Tax Act, 1956, having not been amended after the Forty-Sixth A Amendment .to include within its ambit a transfer of property in goods involved in the execution of a work contract, is not applicable to such a transfer and it cannot be treated to be a law made under Appeal 269(3) and Articie 286(2} in relation to sales arising out of such transfers. It was further submitted that it is not permissible for the State Legislature to define the expression 'sale' in a manner as to incl~de within its ambit an inter-state sale as well as sale outside the State or sale in the course of import and thereby assume power to impose tax on the same. It has been contended that since the tax leviable by virtue of sub-clause (b) of clause (29-A) of Article 366 is on goods which are involved in execution of a works contract, the measure for such an imposition can only be the value of such goods and the value of the works contract cannot be made the measure for such an imposition and for the same reason, the rate of imposition cannot also be fixed on the basis of the value of the works contract and it has to be fixed in relation to the goods which are .involved in the execution of a works contract. D In reply to these contentions, it has been urged on behalf of the States that in the absence of the applicability of the provisions of the Central Sales Tax Act, 1956 to transfer of property in g~ods involved in the execution of a works contract and Parliament having not enacted any law under Articles 269(3) and Article 286(2), there is no limitation what- E soever on the legislative power of the States to impose tax on such a transfer. It has also been submitted that the nature of a works contract is such that there can never be any sale in the course of inter-state trade or commerce or an outside sale or a sale in. the course of import in respect of goods which are involved in the execution of such a contract since the F transfer of property in such goods takes place only when the good~ are incorporated in the works and this can only be in the State in which the works is to be executed. It has been further urged that there is a distinction between the nature o~ the tax and the measure of the tax and that though a tax on transfer of property in goods involved in the execution of a works contract is imposed on the goods which are involved in th~ execution of a G works contract, the value of the work contract can be made the measure for levy of such a tax as for prescribing the rate for imposition of such tax.

Before we proceed to consider these submissions, it is necessary to deal with the contention urged by Shri Narasimhamoorthy learned counsel H

p. 130

A appearing for the State of Karnataka with regard to the location of the legislative power to· •impose the tax on transfer of property in goods involved in the execution of a works contract Shri Narasimhamoorthy has urged that as a result of the Forty-Sixth Amendment a new field of taxation in respect ofthe works contracts has been made available to the States ~d that the said power is independent of the legislative power conferred.under B Entry 54 in. List II of the Seventh Schedule to the Constitution and it is not subject to the constitutional limitations contained in Article 286 of the Constitution. In this regard Shri Narasimamoorthy has urged that this question did not directly arise for consideration in Builders' Association case (supra) and the observations with regard to location· of the power to c impose this tax in the said judgment are in the nature of incidental or casual coservations only and they do not preclude .this Bench from considering this question.

We find it difficult t.o accept this contention. The question whether D as a result of the Forty-Sixth Amendment, an independent taxing power has been conferred on the States had arisen for consideration before this Court in Builders' Association case (supra) since it was specifically raised in the contentions urged on behalf of the States. While summarising the said contentionsthis Court has thus mentioned this contention: "Sub-cl.(b) of clause 29-A of Article 366 of the Constitution has conferred on the E Legislatures of States the power to levy tax on works contract which is independent of the power conferred on the Legislatures of the States under Entry 54 -of the State List." : (p.346). The said contention was rejected with these observations.:

F "The object of the new definition introduced in clause (29-A) of Article 366 of the Constitution is, therefore, to enlarge the scope of 'tax on sale or purchase of goods' wherever it occurs in the Constitution so that it may .inciude within its scope the transfer delivery or .supply of goods that may take place under any of the transactions G referred to in sub-clauses (a) to (f) ·thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression 'tax on the sale or pur- chase of goods' in Entry 54 of the State List, therefore, includes a tax on the transfer of property in goods H (whether as goods ·or in some other form) involved in the

GANNON DUNKERLEY CO. 1•. STATEOFRAJASTHAN(AGRAWAL,J.) 131

execution of a works contract also, The tax leviable by A virtue of sub-clause (b) of clause (29-A) of Article 366 of the Constitution thus becomes subject to the same dis- cipline to which any levy und~r Entry 54 of the State List is made subject to under the Constitution," (pp.347-48)

The Court has further observed- B

. "We are surprised at the attitude of the States which have put forward the plea that on the passing of the· 46th Amendment the Constitution had conferred on the States a larger freedom than what they had before in regard to c their power to levy sales-tax under Entry 54 of the State List. The 46th Amendment does no more than making it possible for the States to levy sales tax on the price of goods and materials used· in works contracts as if there was a sale of such goods and materials. We do not accept the argument that sub-clause (b) of Article 366(29A) should be read as being equivalent to a separate entry in List II of the Seventh Schedule to the Constitution ena- bling the States to levy tax on sales and purchases inde- pendent of Entry 54 thereof. As the Constitution exists today the power of the States to levy taxes on sales and purchases of goods including the "deemed" sales 'and pur- chases of goods under clause (29A) of Article '366 is to be found only in entry 54 and not outside it. We may recapitulate here the observations of the Constitution Bench in the case or Bengal Immunity Conipany Ltd. F (supra) in which this Court has held' that the operative provisions of the several parts of Article 286 which i,m- poses restrictions on the levy of sales tax by the States are . intended to deal with different topics and one could not be projected or read into another and each one of them has to be obeyed while any sale or purchase is taxed under G Entry 54 of the State List." (p.354)

These observations clearly indicate that the question whether the power to impose tax on the transfer of property in goods involved in the execution of a works contract is to be found in Entry 54 in List II or is an H

p. 132

A ind~pendent trucing power squarely arose for consideration in Builders# Association case (supra) and has been answered categorically. It cannot, therefore, be said that the said question did not arise for consideration in that case and the observations of ·this court in that regard are incidental or casual in. natur~ only which. do not preclude us from going into this .J--- question. B Shri Narasimhamoortliy has then contended that the view of this Court in Builders' Association case (supra) that power conferred on the State Legislatures to impose tax. on the transfer of property in goods involved in the execution of a works contract is subject to the restrictions c and conditions mentioned in each clause or sub-clause of Article 286 of the Constitution, does not lay down the correct law and needs to be reconsidered. We are not inclined to agree. The principles governing reconsideration of an earlier decision are settled by the various decisions of this Court. It has been laid down : "This Court should not, except when D it is demonstrated beyond all reasonable doubt that its previous ·ruling given after due deliberation and full hearing was erroneous, go back upon its previous ruling, particularly on a constitutional issue" See : . Lt. Col. Khajoor Singh v. 17ie Union of India & Anr., [1961] 2 SCR 828 at p. 845. In Keshav Mills Co. Ltd. v. Commissioner of Income-tax, Bombay North, : [1965] 2 SCR 908, it has been observed- E "When this Court decides questions of law, its decisions are, under Art. 141, binding on all courts within the · territory of India, and so, it must be the constant en- deavour and concern of this Court to introduce and main- F tain an element. of certainty and continuity in the interpretation of law in· the country. Frequent exercise by this Court of its power to review its earlier decisions on r\ the ground that the view pressed before it later appears to the Court to be more reasonable, may incidentally tend to make law uncertain and introduce confusion which G must be consistently avoided. That is not to say that if on ·a subsequent occa:sion the Court is satisfied that its earlier decisionwas clearly erroneous, it should hesitate to correct the error; but. before a previous decision is pronounced to be plainly erroneous, the Court must be satisfied with H a fair amount of unanimity amongst its members that a

. GANNONDUNKF'lLEYCO. v. SfATEOFRAJASTHAN[AGRAWAL,J.) 133

revisiqn of the said view is fully justified." (pp. 921-22) A In Ganga Sugar· Co. Ltd. etc. v. State of U~P. & Others etc., [1980) 1 SCR 769, it has been laid down -

"Pronouncements by .Constitution Benches should not be treated so cavalierly as to be revised frequently. We can- B not devalue the decisions of this Court to brief ephemerality which recalls the opinion expressed by Jus- tice Roberts of the U.S~ Supreme Court in Smith v. Al/wright, 321 U.S. 649 at 669 (1944), that adjudications of · the Court were rapidly gravitating 'into the same class as C a restricted railroad ticket, good· for this day and train only"'. (p.782)

Having regard to the observations referred to above ~d the stand of the parties during the course of arguments before us, we do not consider it appropriate to reopen the issues which are covered by the decision in D Builders' Association case (supra) and we will, therefore, deal with the matter in accordan.ce with ·the law as laid down in that case that th~ expression "tax on the sale or purchase of goods" in Entry 54 of the State List includes a tax on the transfer of property in good~ (whether as good~ or in some other form) involved in the execution of a works contract also and the tax leviable by virtue of sub-clause (b) of clause (29-A) of Article E 366 of the Constitution is subject to the discipline to which any levy under Entry 54 of the State List is made subject to under the Constitution.

The legislative power of the States under Entry 54 of the State List is subject to two limitations - one flowing from the entry itself which make~ F the said power "subject to the provisions of Entry 92-A of List I" and the other flowing from the prohibition contained in Article 286. Under Entry 92-A of List I Parliament has the power to make a law in respect of taxes on sale or purchase of goods other than newspapers where such sale ot purchase takes place in the course of inter-State trade or commerce. The levy and collection of such tax is governed by Article 269. This shows that G the legislative power under Entry 54 of the State List is not available in respect of transactions of sale or purchase which take place in the course of inter-State trade or commerce. Similarly clause (1) of Article 286 prohibits the State from making a law imposing or authorising the imposi- tion of a tax on the sale or purchase of goods where such sale or purchase H

SUPREME COURT REPORTS (1992) SUPP. 3 S.C.R.

A takes place (a) outside the State or (b) in the course of the import of goods into or export of the goods out of the territory of India. As a result of the said provision, the legislative power conferred under Entry 54 of the State List does not extend to imposing tax on a sale or purchase of goods which takes place _outside the State or which takes place in the cour~e of import or export of goods. In view of the aforesaid. limitations imposed by the B Coruititution on the legislative power of the States µnder Entry 54 of the State List, it is beyond the competence of the State Legislattlre _to make a law imposing or authorising the imposition of a tax on transfer of property iii goods involvecl ~ the execution of a works c.ontrnct 'Y.ith _the aid of sub-cl.(b) of cl.(29-A) of Article 366, in respect of transactions which take C place in the course of inter-State trade or commerce or transactions which constitute sales outside the State or sales in the course of import or export. Consequently, it is not permissible for a State to frame the legislative enactment in exercise of the legislative power conferred by Entry 54 in State List in a manner as to assume the power to impose tax on such D transactions_and thereby transgress ·these constitutional limitations. Apart from the limitations referred to above -which curtail the ambit of the legislative competence of the State le~slatures, therf is clause (3) of Ar:ticle 286 which enables Parliament to- make a. law placing restrictions and conditions on the exercise of the legislative power of the State under Entry 54 in State . List in regard to the system of levy rates and other incidents of tax. Such a law may be in relation to (a) goods declared by Parliament by law to be of special importance in inter-State trade or commerce, or (b) to taxes of the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366. When such a law is enacted by Parliament.the legislative power of.the States under Entry 54 in State List has to be exercised subject to the restrictions and conditions specified in that law in dercise of the power conferred by Article 286(3)(a) Parliament has enacted sections 14 and 15 of the Central Sales Tax Act, 1956. No law has; :however, been made by Parliament in exercise of its power under ArticJe-286(3)(b). ( G On behalf of the contractors, it has been contended that the legisla- tive power conferred on the States under Enti:y 54 of the State List can be exercised only after Parlianienl has enacted -a law under .Article 269(3) formulating principles for determining when a sale or purchase· of goods tak~s place in the course of inter-State trade or commerce and a law under H Artide 286(2) formulating principles for determining when a sale or pur-

GANNON DUNKERLEY CO. v. SfATEOFRAJASfHAN(AGRAWAL,J.j 135

chase of goods takes place in any of the ways mentioned in cl.(1) of Article A

286. The submission is that no law as envisaged by Articles 269(3) and 286(2) has been enacted in respect of imposition of tax on transfer of property in goods involved in the execution of a works contract. It has been urged that Central Sales Tax Act. 1956 which formulates the principles under Article 269(3) and 286(2) is not applicable because after the Forty- B Sixth Amendment ~he Central Sales Tax Act has not been ~mended so as to make it applicable to transfer of property in goods involved in the execution of a works contract. On behalf of the States, it is submitted that since the Central Sales Tax Act has not been. made applicable and no law as envisaged under Articles 269(3) and 286(2) has been enacted, limitation on the legislative power conferred on the States undei: :Entry 54 in State C List on the basis of Articles 269 and 286 cannot be invoked. We are unable to accept either of these contentions. With regard to imposition of tax on sale or purchase of goods, after the Forty-Sixth Amendment, legislation by Parliament in respect of following matters is envisaged :

(i) formulation of principles for determining when a sale or purchase D of consignment of goods takes place in the course of inter-State trade or commerce [Article 269(3)];

(ii) formulation of principles for determining when a sale or purchase of goods takes place in any of the ways men~ioned in cl.(1) of Article 286 E [Article 286(2)}; and

(iii) declaration of goods to be of special importance in inter-State trade or commerce and specification of restrictions and conditions in regard to system of levy rates and other incidence of tax in respect of a tax on the sale or purchase of such goods [Article 286(3)(a); and F (iv) specification of restrictions and conditions in regard to system of levy, rates and other incidents of tax in respect of a tax on the sale or purchase of goods being tax of the nature referred to in sub-cl.(b), sub- cl.(c) and sub-d.(d) of cl.(29-A) of Article 366. [Article 286(3)(b)]. G The Central Sales Tax Act is a law in respect of matters (i), (ii) and (iii) referred to above. It is a composite law which has been enacted under Entry 92-A of List I read with clause (1) of Article 269 as well as under cl.(3) of Article 269, cl.(2) of Article 286 and sub-cl.(a) of cl.(3) of Article

286. Chapter II (Sections 3, 4 and 5) bears the heading 'formulation of H

136 SUPREMECOURTREPORTS (1992)SUPP.3S.C.R.

A ' principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce or outside a State or in the course Qf import or export'. Section 3 lays down the conditions when a sale or purchase of goods can be said to take place in the course of inter-State trade or commerce and it is referable to cl.(3) of Article 269. Section 4 - prescribes the conditions when a sale or purchase of goods is said to take B place outside a State and Section 5 pres~ribes the condition when a sale or purchase of goods is said to take place in the course of import or export. Sections 4 and 5 are thus referable to cl.(i) of Article 286. Chapter III (Sections· 6 to 13) bears the heading 'inter-State sales tax' and the said provisions are referable to Entry 92-A of List I and sub-clause (g) of clause C (1) of Article 269. Chapter IV (Sections 14 and 15) bears the heading 'goocts of special importance in inter-State trade or commerce' and the said provisfons are referable to sub-cl.(a) of cl.(3) of Article 286.

The question is whether in the absence of an amendment in the D Central Sales Tax Act specifically applying its provisions to a transfer of property· in· goods involved in the execution of a works contract, the provisions of Sections 3, 4 and 5 contained in Chapter II can be held applicable to such a transfer. In this context, it may be mentioned that prior to the Forty-Sixth Amendment, a distinction was being made between a 'works contract' which was entire and indivisible and a workS contract composed' of two ·distinct and separate contracts - one, for transfer of materials and other, for payment of remuneration for services and for work done. The non-availability of the legislative power of the States under Entry 54 of the State List, as construed by this Court in the Gannon ·Dunkerley case (supra); was confined, in its application, to works contracts falling in the first Category; i.e.; contracts which were entire and indivisible and it was per~issible for the States to impo~e tax on sale or purchase of goods \; where the parties had entered into distinct and separate contracts one for the tr~nsfer of materials and .other for payment of service and for work done. 1:he_ pr<?visions of Sectio~s 3, 4 and 5 of the Central Sal~s T~ Act .were applicable_ where there were two separate contracts. In Builders' G Asso~iation case (supra), it has been observed - _ ~:

"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 H . '. the other for supply of labour and services. After the 46th

GANNON DUNKERLEY CO. v. SfATE OF RAJASTIIAN [AGRAWAL, J.) p7 Amendment, it has become possible for the States to levy A 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." (p.351 F-G) B This would mean that as a result of the Forty-Sixth Amendment,. the contract which was single and indivisible has been altered by a legal fiction into a contract which is divisible into one for sale of goods and other for supply of labour and services ;md as a result such a contract which was si~gle and indivisible has been brought at par with a contract containing tvlro separate agreements. Since the provisions of Sections 3, 4 and 5 were applicable to such contracts containing two separate agreements, there is no reason why the sai°d provisions should not apply to a contract which, though single and indivisible, by legal ·fiction. introduced by the Forty-Sixth Amendment, has been altered into a cont~act which is divisible into one for sale of goods and other for labour and services. Reference may be made in this context to the oft-quoted observations of Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council, (1952) A.C. 109:

"If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it ..... The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs."

I.f 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 G a works contract. Such a deemed sale has all the incidents of a 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.

For the reasons aforesaid, we are of the view that even in the absence H

p. 138

A of any amendment having been made in the Central Sales Tax Act (after the Forty-Sixth Amendment) expressly including transfers of property in goods involved in execution of a works contract, the provisions contained in Sections 3, 4 and 5 would be applicable to s~ch transfers and the legislative power of the State to impose tax on such transfers under Entry 54 of the State List will have to be exercised keeping in view the provisions contained in Sections 3, 4 and.5 of the Central Sales Tax Act. For the same reasons sections 14 and 15 of the Central Sales Tax Act would also be applicable to the deemed sales resulting from transfer of property in goods involved in the execution of a works contract and the legislative ·power under Entry 54 ·in State List will have to be exercised subject to the restrictions and conditions prescribed in the said provisions in respect of goods that have been declared to be of special importance in inter- State trade or commerce.

Since the question of levy of inter-State sales tax under Section 6 of the Central Sales Tax Act is not in issue· in these cases which only relate to impositiOJ? of sales tax by the States, we do ~ot propose to go int~ the question, whether such a tax ·can be levied on deemed sales resulting from transfer of property in goods involved in the execution of a works contract without amending the definition of 'sale' in section 2(g) of the Central Sales Tax Act, so as to include such transfers within its ambit. It is, however, made clear that .the absence of any amendment in the definition of sale contained in Section 2(g) of the Central Sales Tax Act, 1956 so as to include transfer of ·property in goods involved in execution of a works contract does not in any way affect the. applicability of the Sections 3, 4 and 5 and Sections 14 and 15 of the Central Sales Tax Act to such transfers.

F On the basis of Article 286(3)(b) which has been introduced by the Forty-Sixth Amendment, it has been urged on behalf of the contractors that till Parliament make~ a law specifying the restrictions and conditions in regard to the system of levy, rates and other incidents of the tax· referred to in Article 366(29-A)(b), it is not open to the State Legislatures to impose G a tax on- the transfers referred to in sub-cl.(b) of cl.(29-A) of Article 366. In support of this submission, reliance has been placed on the decision of this Court in The Bengal Immunity Co. Ltd. v. The State of Bihar 01td others, ' (1955] 2 SCR 603, wherein it was held that until Parliament by law made ' in exercise of the powers vested in it by clause (2) provides, no State could impose or authorise the imposition of any tax on sales or purchase of goods

GANNON DUNKERLEY CO. v. SfATEOFRAJASfHAN[AGRAWAL,J.] 139

when suc,h sales or purchases take place in the course of inter-State trade or commerce. The aforesaid observations made in the context of cl.(2) of Article 286, as it stood at that time, can have no bearing on sub-cl.(b) of cl.(3) of Article 286. Under cl.(2) of Article 286, as it stood at the time when Bengal Immunity case (supra) was decided, the States were precluded from imposing or authorising imposition of tax on the sale or purchase of any goods or sale or purchase of any goods in the course of inter-State trade or commerce except in so far as Parliament may by law or otherwise provide. In the absence of a law by Parliament so providing it was not permissible for the State Legislatures to impose such a tax. The scheme of sub-cl.(b) of cl.(3) of Article 286 is, however, different. In view of sub-cl.(b) of cl.(29-A) of Article 366, the State Legislatures are com- petent to impose tax on transfer of property in goods involved in the execution of a works contract and under sub-cl.(b) of cl.(3) of Article 286 Parliament has been empowered to make a .law specifying restrictions and conditions in regard to the system of levy, rates or incidence of such tax. D This does not mean that the legislative power of the State cannot be exercised till the enactment of a law under sub-cl.(b) of cl.(3) of Article 286 by Parliament. It only means that ·in the event of a law having been made by Parliament under Article 286(3)(b) the exercise of the legislative power. of the State under Entry 54 in List II to impose a tax of the nature E 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. The existence of a law enacted under Article 286(3)(b) cannot, therefore, be regarded as a condition precedent for the exercise of the taxing power of the State F 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. This doe~ ndt, however, absolve Parliament from enacting a law as envisaged by Article 286(3)(b). Keeping in view the grievance of the contractors that there is wide disparity in the sales tax legislation of the various States in the matter of imposition, mode of assessment, rates etc., of the tax on deemed sales G resulting from transfer of property in goods involved in the execution of a works contract referred to in sub-cl.(b) of cl.(29-A) of Article 366, the need for the law envisaged by Article 286(3)(b) cannot be minimised.

On behalf of the States it has been seriously contended that a H

p. 140

A deemed sale resulting from transfer of property in goods involved in the execution of a works contract can never be a sale in the course of inter- State trade or commerce and it cannot be an outside sale or a sale in the course of import since the transfer of property in the goods takes place only at the stage when the goods are incorporated into the works and that can take place only in the State where the works is required to be executed. On behalf of the contractors, on the other hand, it has been urged that a works contract <;an involve transactions constituting a sale in the course of int.er~State trade al!~ commerce as well_ as an outside sale or a sale in the course of import and that is a matter which will liave to be considered in accordance with the principles contained in Sections 3, 4 and 5 of the Central Sales Tax Act keeping in view the terms and conditions of the particular contract. In this regard, the learned counsel have placed relianq:: on a number of decisions of this Court wherein the provisions of Sections 3 and 4 of the Central Sales Tax Act, 1956 have been considered. We do not propose to go into this controversy because the question whether a deemed sale resulting from transfer of property in goods involved in the execution oLa particular. works contract amounts to a sale in the course of -inter-State trade or commerce under Section 3 of the Central Sales Tax Act or an outside sale under Section 4 of the Central Sales Tax Act or a sale in the course of import under section 5 of the Central Sales Tax Act E has to be decided in the light of the particular terms of the works contract and it cannot be decided in the abstract. As at present advised, we are not in a position to say that in no case, can there be a sale in the course of inter-State trade or commerce. or an outside sale or- a sale in the course of l= import in respect of a deemed-sale resulting from transfer of property in goods involved in the execution I of a works contract falling within the ambit of sub-cl.(b) of cl.(29-A) of Article 366 of the Constitution.

It must, therefore, .be h~ld-that while enacting a law imposing_ a tax· on sale or purchase of goods u~der Entry 54 of the State List read with sub-cl.(b) of cl.(29-A) of Article 366 of the Constitutioµ, it is not permis- sible forthe State Legislature to make a law imposing tax on such a dee~ed sale which constitutes a sale in the course of inter-State trade or commerce under section 3 of the Central Sales Tax Act or an outside sale under Section 4 of the Central Sales Tax Act or sale in the course of import or export _under section 5 of the Central Sales Tax Act. So also it is not

GANNON DUNKERLEY CO. v. SfATEOFRAJASTI:lAN(AGRAWAL,J.J 141

permissible for the State Legislature to impose a tax on goods declared to be of special importance in inter-State trade or commerce under section 14 of the Central Sales Tax Act except in accordance with the restrictions and conditions contained in Section 15 of the Central Sales Trot Act.

Having thus defined the ambit of the field available to the Slate l~gislature for enacting a law imposing a tax o~ transfer of property in goods involved in the execution of a works contract we may now examine some aspects of such a law to which reference has been made during the course of arguments by the learned counsel for the contractors. We propose to deal with these aspects separately. c DEFINITION OF SALE

It has been contended on behalf of the contractors that while it is permissible for the State Legislature to define the expression 'sale' in the sales tax legislation to include transfer of property in goods involv~d in the execution of a works contract it is not permissible for the State Legislature D to locate the situs of such sale in a manner as to treat a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import and export, as a sale inside the State and thereby assume the power to impose a tax on sales which are actually sales in the course of inter-State trade of commerce or outside sales or sales in the E course of import and export. In this regard, it may be stated that so far as sales in the course o~ inter-State trade or commerce are concerned the position is well settled that the situs of the sale or purchase is wholly irrelevant as regards its inter-State character (See : Bengal Immunity Co. Ltd. v. State of Bihar & Ors., (1955) 2 SCR 605, at 650). In Onkar Lal Nand F Lal v. State of Rajastlta11 & Anr., (1985) Suppl 3 SCR 1075 it has been observed:

"There is, in our opinion, no antithesis between a sale in · the course of inter-State trade or commerce and a sale inside the State. Even an inter-State sale must have a situs G and the situs may be in one State or another. It does not . involve any contradiction in saying that an inter-State sale' or purchase is inside a State or outside it." (p.1086)

The location of the situs of the sale in sales tax legislation of the State H

p. 142

A would therefore, have no bearing on the chargeability of tax on sales in the course of inter-State trade or commerce since they fall outside the field of legislative competence of the State legislatures and will have to be excluded while assessing the tax liability under the State legislation. The same is true of sales which. are outside the State and sales in the course of import and export. The State Legislature cannot so frame its law as to convert an outside .sale or a sale in the· course of import and export into a sale inside the State. The question whether a sale is an outside sale or a sale inside the State or whether it is a sale in the c:Ourse of import or export will have to be determined in accordance with the principles contained in sections 4 and 5 of the Central Sales Tax Act and the State Legislature while enacting the sale tax legislation for the State cannot mak.e a departure from those principles. '·

MEASURE OF TAX

D On behalf of the contractors, it has been urged that ·under a ,(aw imposing a tax on the transfer of property in goods involved in the execu- tion of a works contract under entry 54 of the State List read with Article 366(29-A)(b), the tax is imposed on th~ goods which are involved in the execution of a works contra,ct and the measure for levying such a tax can only be the value of the goods so involved and the value of the works contract cannot be made the measure for levying the tax. The submission is further that the value of such goods would be the rost of acquisition of the goods by the contractor and, therefore, the measure for levy of. tax can only be the cost at which the goods involved in the execution of a works contract were obtained by the contractor. On behalf of the States, it has been submitted that since th.e property in goods which are involved in the execution of a works contract passes only when the goods are incorporated in the works, the measure for the levy of the tax would be the value of the goods at the time of their incorporation in the works as well as the cost of incorporation of the goods in the works. We are in agreement with the .G submission that measure for the levy of the tax contemplated by Article 366(29-A)(b) is the value of the goods involved in the execution of a works contract. In Builders' Association case (supra) it has been pointed out that in Article 366(29-A)(b), "the emphasis is on the transfer of property in goods (whether as goods or in some other form)" (p.347). This indicates H that though the tax is imposed on the transfer of property in goods involved

GANNON DUNKERLEY CO."· SfATEOFRAJASTHAN(AGRAWAL,J.] 143

in the execution of a works contract, the measure for levy of such imposi- A tion is the value of the goods involved in the execution of a works c0ntract. We are, however, unable to agree with the contention urged on behlillf of the contractors that the value of such goods for levying the tax can be assessed only on the basis. of the cost of acquisition of the goods by the contractor. Since the taxable event is the transfer of property in goods involved in the execution of a work~ contract and the said transfor of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works and not the cost of acquisition of the goods by the contractor. We are also unable to accept the contention urged on behalf of the States that in addition to the value of the goods involved in the execution of the works contract the cost of incorporation of the goods in the works can be included in the measure for levy of tax. Incorporation of the goods in the works forms part of the contract relating to work and labour which is distinct from the contract for transfer of property in goods and, therefore the cost of incorporation of the goods in the works cannot be made a part of the measure for levy of tax contemplated by Article 366(29-A)(b). .

With regard to the determination of the value of the goods which are involved in the execution of a works contract the submission of the learned counsel appearing for the States is that a more convenient mode for such determiriation is to take the value of the works contract as a whole and deduct therefrom the cost of labour and services rendered by the contrac- tor during the co1use of execution of the works contract. The submission of the learned counsel is that this mode would prevent evasion of tax. The learned counsel for the contractors have submitted that in that event. the following deductions should be made from the value of the entire contract · in order to arrive at the value of the goods involved in the execution of a works contract : ' (i) labour charges for execution of the works; G

- (ii) amounts paid to a sub-contractor for labour and services;

(iii).charges for planning, designing and architect's fees;

.. (iv) charges for obtaining on hire the machinery and tools H

p. 144