Orissa High Court
Bharat Heavy Electricals Ltd. And Ors. vs Union Of India (Uoi) And Ors. on 12 May, 1988
Equivalent citations: [1988]71STC25(ORISSA)
Author: R.C. Patnaik
Bench: R.C. Patnaik
JUDGMENT S.C. Mohapatra, J.
1. In these writ applications under Article 226 of the Constitution of India levy of tax under the Orissa Sales Tax Act (for short "the Act") amended in the year 1986, pursuant to the 46th Amendment of the Constitution is assailed by various petitioners from whom the assessing authorities claimed "tax in respect of their business of works contract. As common questions of law are involved in all these writ applications, they were heard together and are disposed of by this common judgment.
2. Since we are considering the question whether the goods transferred to the contractee by each of the petitioners would be in course of execution of the works contract, we are not going into the merit of the case whether the goods have been actually transferred. In case we come to the conclusion that tax is exigible in respect of the goods involved in such of the works contract, we shall give opportunity to the petitioners to approach the statutory authorities who shall find facts to determine whether the transactions are exigible to tax.
3. Under Article 265 of the Constitution, no tax shall be levied or collected without authority of law. Prior to the Constitution, provisions of the Government of India Act, 1935, were regulating the levy and collection of taxes. Under the said Act provincial legislatures were authorised to make law for levy and collection of tax on sale and purchase of goods. Pursuant to such authority various provincial legislatures including Orissa made law and the Act was enacted in the year 1947. Under the scheme of the Act a person, who carries on the business of sale of goods was made liable to pay tax under Section 4 of the Act. "Sale" was defined to mean "any transfer of property in goods for consideration including the transfer of property in such goods involved in the execution of contract". "Goods" was defined to mean "all kinds of movable property which includes all materials, articles and commodities whether or not to be used in construction, fitting out, improvement and repair of immovable property" and "contract" was defined to mean "any agreement for carrying out for consideration the construction, fitting out, improvement or allotment of any building, road, bridge or other immovable property". During continuance of the Act in force, Constitution of India was made and a similar provision as in the Government of India Act was incorporated in entry 54 of List II of the Seventh Schedule authorising the legislative authorities of the States to make laws to levy and collect tax on sale and purchase of goods. The Act became an existing law. By Act 37 of 1951 definition of "contract" was amended to mean "any agreement for carrying out for cash or deferred payment or other valuable consideration the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property ; the installation or repair of any machinery affixed to any building or other immovable property or the overhaul or repair of any motor vehicle or other machinery". Similar provisions for levy and collection of tax on goods involved in works contracts were made by other provincial laws and the State laws. The purpose of the levy was to augment revenue. Challenges were made to the power of the State Legislatures to make laws to levy and collect tax on goods involved in construction of buildings and other immovable properties on the ground that there was no sale of goods as such. The Supreme Court in the decision reported in [1958] 9 STC 353 [State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.] settled the law by deciding that the transfer of goods involved in any works contract is not sale exigible to tax under the sales tax laws made either under the Government of India Act or under the Constitution by the State Legislatures. On account of the decision of the Supreme Court, Orissa Act 18 of 1959 was enacted amending the Act and all provisions in the Act authorising levy and collection of tax on goods involved in works contracts were omitted. Since then various States lost the scope of augmenting their revenue from that source and accordingly, after deep deliberation Constitution was amended by the 46th Constitution (Amendment) Act on 2nd February, 1983. Without making any change to the definition of "goods" in Article 366(12) and the power of the State Legislatures to make laws for levy and collection of tax on sale and purchase of goods in entry 64, a new clause was added to Article 366 as Clause (29A) defining tax on the sale or purchase of goods. It reads as follows :
(29A) 'tax on the sale or purchase of goods' includes--
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration ;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration ;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable 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 supply is made.
Pursuant to such amendment of the Constitution, State Legislature substituted the definition of "sale" in Section 2(g) of the Act. It reads as follows :
2. Definition-
(a) to (f)...
(g) 'sale' means with all its grammatical variations and cognate expression, any transfer of property in goods for cash or deferred payment or other valuable consideration and includes,--
(i) ...
(ii) transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract ;
(iii) to (vi) ...
This became the subject-matter of challenge in various writ applications in this Court. During the hearing of the writ applications, the Act was amended by Ordinance No. 2 of 1985 and a new definition clause was added as 2(jj) to define "works contract". It reads as follows :
(jj) 'Works contract' includes any agreement for carrying out for cash or 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.
As a consequence Section 5 was also amended which provided for determination of taxable turnover. In Clause (AA) of Sub-section (2), Sub-clause (i) was inserted. It reads as follows :
5. Rate of tax--
(1)...
(2)(A)...
(AA) In this Act, the expression 'taxable turnover', in respect of,--
(i) 'Works contract' shall mean the gross value of the works contract received or receivable by the dealer for carrying out such contract less the amount of labour charges incurred for the execution of the contract; and
(ii)...
Under Section 6(1) the rate of tax was notified in respect of such goods to be 4 per cent of the taxable turnover with effect from 17th May, 1985. The Ordinance, however, spent its force before a Bill was introduced in the State Legislature. Thereafter, Ordinance No. 2 of 1986 was promulgated on 2nd July, 1986, giving it retrospective effect from the 7th April, 1984. The definitions of "dealer" and "goods" were substituted and Clause (AA) was amended. This Ordinance also could not be substituted by an Act of the Legislature. Accordingly, Orissa Ordinance No. 4 of 1986 was promulgated on 7th October, 1986 which is the subject-matter of consideration in these writ applications. In the said Ordinance relevant portions of the definitions of "dealer" and "goods" read as follows :
2. Definition--
(a) ...
(b) ...
(c) 'Dealer' means any person who carries on the business of purchasing, selling, supplying or distributing goods (including goods used or involved in the execution of works contract, whether as goods or in some other form), directly or otherwise, whether for cash or for deferred payment or for commission, remuneration or other valuable consideration and includes,--
(i) to (v)...
(vi) a person who transfers property in goods (whether as goods or in some other form) involved in the execution of a works contract ;
(vii) to (ix)...
(d) 'Goods' means all kinds of movable property other than actionable claims, stock, share or securities, and includes goods used or involved in the execution of works contract whether as goods or in some other form, all growing crops, grass and things attached to or forming part of the land which are agreed before sale or under contract of sale to be severed.
The relevant portion of Section 5(2)(AA) as amended reads as follows :
5. Rate of tax--
(1) ...
(2)(A) ...
(AA) Notwithstanding anything contained in Sub-section (2)(A),--'Taxable turnover' in respect of,--
(i) 'works contract' shall be deemed to be the gross value received or receivable by a dealer for carrying out such contract, less the amount of labour charges and service charges incurred for the execution of this contract;
(ii) ...
4. The levy of sales tax under the Act in respect of works contract by the amendment is assailed by the various petitioners on the following grounds:
(i) Forty-sixth Amendment to the Constitution has transgressed the powers of amendment of the Constitution by the Parliament and the basis of the levy being ultra vires the Ordinance has no force ;
(ii) without amendment of the definition of "goods" in Article 366(12) of the Constitution and entry 64 of List II of the Seventh Schedule, there is no scope for amending the Act to bring within its sweep the transaction in works contracts ;
(iii) "taxable turnover" in Section 5(2)(AA)(i) in respect of works contract is an arbitrary provision having no relationship with sale and purchase of goods which alone is liable to tax and has also no guideline for determination of the same ;
(iv) it leaves scope for levy of tax under the State Act on inter-State sale and declared goods leviable to tax under the Central Sales Tax Act, or goods which have already suffered taxation under the State Act once ; and
(v) there is no machinery for taxation under the amended provision.
5. Mr. S. N. Banerjee, the learned Counsel for some of the petitioners, submitted that the 46th Amendment to the Constitution is ultra vires the Constitution itself inasmuch as the Parliament intended to nullify the effect of the decision of the Supreme Court reported in [1958] 9 STC 353 [State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.], He relied upon the decisions reported in AIR 1965 SC 745 (In re, Under Article 143, Constitution of India), in AIR 1970 SC 192 (Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality), in AIR 1971 SC 231 [State of Tamil Nadu (in both appeals) v. M. Rayappa Gounder (in C.A. No. 2462 of 1969), R. Narayanaswami Naidu (in C. A. No. 2463 of 1969)], in AIR 1968 SC 1138 (Udai Ram Sharma v. Union of India) and in [1970] 3 SCR 745 (Janapada Sabha, Chhindwara v. . Central Provinces Syndicate Ltd.) in support of the submission. We fail to appreciate the submission of Mr. Banerjee. In [1958] 9 STC 353 (SC) [State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.] question for consideration was the taxability of the goods involved in an indivisible works contract. In the said decision, the Supreme Court made it clear that so far as divisible works contract is concerned, there would be no difficulty in levying tax on the sale of goods. In respect of indivisible works contract, it was held that in the absence of definition of "sale", the meaning as is understood under the Sale of Goods Act would govern the field and at no point of time goods as such having been transferred for consideration, the State Legislature has no power for levy of tax under the law enacted for the purpose under entry 54 of List II of the Seventh Schedule of the Constitution. From that time onwards goods involved in works contract were not exigible to tax under the Act. Deficiency in the power to make laws for levy of tax on sale of goods involved in works contract was sought to be eradicated by the 46th Amendment to the Constitution. The 46th Amendment is also not retrospective. Parliament has always the power to amend the Constitution so long as the basic structure of the Constitution is not changed. Power to make law to levy tax on sale of goods is vested in the State Legislature in the federal character of the Constitution. In the absence of the meaning of sale of goods the Supreme Court held in [1958] 9 STC 353 [State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.] that the State Legislature has no such power to make law. Parliament has the power to remove the deficiency pointed out by the courts. In that view of the matter, no further deliberation is necessary on this point on the contention of Mr. Banerjee and other learned Counsel that the 46th Amendment is ultra vires.
6. The next contention of Mr. Banerjee is that the 46th Amendment has destroyed the federal structure of the Constitution inasmuch as the law under Article 141 of the Constitution, as laid down by the Supreme Court prevailing in the field for about 29 years is being set at naught although the same has been followed by a series of subsequent decisions of the Supreme Court as well as of the other High Courts. In fact on account of the decision of the Supreme Court rendered in [1958] 9 STC 353 [State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.] the Orissa Sales Tax Act was amended and the power of levy of tax on goods involved in works contract was taken away. Amendment to a law becomes necessary to remove the lacuna as well as to fit in with a progressive society. Those State Legislatures which enacted laws for taxation of sales on goods involved in works contract were directly affected by the decision of the Supreme Court reported in [1958] 9 STC 353 [State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.]. This deficiency was eradicated so that the States desiring to tax the sale of goods involved in works contract would be able to make laws for levy of the same. Merely because a decision was governing the field for 29 years, it would not be a ground to hold that the amendment to the Constitution would destroy the federal structure. We are not impressed with the submission of Mr. Banerjee.
7. Relying upon a decision reported in AIR 1965 SC 745 (In re, Under Article 143, Constitution of India), Mr. Banerjee submitted that the 46th Amendment to the Constitution is a Central Act and such a Central Act is not competent to tamper with List II of the Seventh Schedule of the Constitution. He relies upon articles 245 and 246 of the Constitution in support of his submission. It is now well-settled that the Constitution can be amended by the Parliament by enactment so long as it does not destroy the basic structure of the same. In that view of the matter, Mr. Banerjee's submission has no force.
8. Mr. Banerjee submitted that the same procedure as followed while incorporating entry 92A in List I of the Constitution after the decision of the Supreme Court in AIR 1955 SC 661 (Bengal Immunity Co. Ltd. v. State of Bihar) should have been followed and unless List II was amended, the 46th Amendment would not be valid by addition of a definition as in Clause (29A) to Article 366. In Clause (29A) the term "tax on sale and purchase of goods" has been defined. Wherever such term is used, the meaning as in Clause (29A) would be attracted. Therefore, entry 54 of List II of the Seventh Schedule was not required to be amended. The submission of Mr. Banerjee, therefore, has no force. In fact, in the absence of such a definition, the Supreme Court rendered the decision reported in [1958] 9 STC 353 [State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.]. This defect pointed out by the Supreme Court was eradicated.
9. Counsel after counsel went on assailing the definition of "taxable turnover" provided in Section 5(2)(AA)(i). It was contended that the State Legislature though incompetent to levy sales tax on certain transactions, exceeded its competence by rendering such transactions exigible through back door by providing that the entire gross value of a works contract minus the labour and service charges was the taxable turnover. Goods involved in a works contract might partake of the character of inter-State trade. Goods may be declared goods. Similarly goods involved may be tax-free pursuant to notification issued under Section 6 of the Orissa Sales Tax Act. So also goods involved might have passed through a series of sales. But the scheme under the Orissa Sales Tax Act being single point taxation, such goods for which tax would have been paid at the first point would be exigible to second point tax by virtue of the deeming provision contained in the definition. Arguments were advanced with reference to the various provisions of the Central Sales Tax and Orissa Sales Tax Acts and the Rules framed thereunder and with reference to a large number of decisions which we consider it unnecessary to refer to having regard to the answer we propose to give.
10. The legislature must be presumed to know the law. Therefore, it could not have intended to infract the law which it could not alter or override. Nor could it intend to render certain provisions of the Orissa Sales Tax Act nugatory by introducing amendment which would run in the face of the existing provision. Though, no doubt, the definition of "taxable turnover" has an extensive sweep, the same has to be harmoniously read with the existing provisions and other laws which it could not detract from. Though the whole exercise of the constitutional amendment and the State amendment has been to bring within the tax net indivisible works contracts which could not earlier be touched because of Gannon Dunkerley's case [1958] 9 STC 353 (SC): the object has been to render the transfer of property in goods involved in the execution of a works contract, a sale and thus render such goods as far as permissible under the law exigible to sales tax. If that be so, the legislature while providing the definition of "taxable turnover" in Section 5(2)(AA)(i) intended that the taxable turnover in a works contract is the value of the goods exigible to tax under the Orissa Sales Tax Act involved in a works contract. In large number of cases, taxable turnover would be the gross value received or receivable for the contract less the amount of labour charges and service charges incurred for the execution of the contract. No doubt, the definition was provided as an easy and convenient mode of determining the taxable turnover but in cases where the goods involved in a works contract are not exigible to tax, the value thereof has to be excluded. The legislature by providing the deeming provision by way of a definition of "taxable turnover", therefore, intended that where the dealer fails to satisfy the assessing authority or where there are no materials before as to the value of the goods involved in works contract which are exigible to Orissa sales tax, the deeming provision should be resorted to with a view to determining the taxable turnover. So understood, the expression "taxable turnover" in respect of works contract should be read as :
'Taxable turnover' in respect of--
(i) 'Works contract', where the dealer does not or fails to satisfy the assessing authority or where there are no materials before as to the value of the goods involved in the works contract and exigible to tax under the Orissa Sales Tax Act, shall be deemed to be the gross value received or receivable by a dealer for carrying out such a contract less the amount of labour charges and service charges incurred for the execution of the contract.
11. Examining some aspect of the attack as illustrative, turnover in respect of inter-State sales which are not exigible to tax under the State Act may be taken which would come within the taxable turnover as provided under Section 5(2)(AA)(i). Reading the same disjointed from all other provisions, there is no doubt that the same would be the effect. However, under the scheme of the Act the dealer gets opportunity to file a return. In the statutory form as is existing now, the inter-State sales are to be specifically mentioned. Provision of the Act is to be construed in a manner in which it becomes workable and is not to be struck down merely because apparently it reads otherwise. In AIR 1985 SC 1698 (Commissioner of Income-tax, Bangalore v. J.H. Gotla) the Supreme Court has laid down that courts can add to the plain language those words which would clarify the intention of the legislature. In view of the clear provision in Article 286 of the Constitution there is no scope for taxation of inter-State sales which are excluded. When in the return, the dealer points out the same, the taxing authority is to examine the correctness of the statement. On its finding that the goods involved in the works contract are in course of inter-State sale, the turnover has to be excluded even though the meaning of "taxable turnover" in Section 5(2)(AA)(i) does not specifically provide for the same. The simple reason is that such transactions are beyond the jurisdiction of the authority under the Act to be levied.
12. The source of taxation is entry 64 in List II which is to be read with Clause (29A) of Article 366. All sales tax laws made by the State Legislature are to be interpreted to bring them within the said scope. Unless there is a transfer of goods as defined in Clause (29A) there is no scope to levy tax. Section 5(2)(AA)(i) includes the said transactions only. Transfer of goods which did not come within the meaning of sale under the Sale of Goods Act was intended by the Parliament to be declared as sale and purchase of goods. Thus, the value of the work is to be determined by excluding those goods which are not involved in the execution of contract when brought to the notice of the taxing authority. Before every assessment, the principle of natural justice is followed. Therefore, on the off-chance of a taxing authority not applying its mind to the claim of the dealer, the law cannot be held to be bad. If the assessee does not bring any material to the notice of the assessing authority, best judgment assessment is to be made keeping Section 5(2)(AA)(i) as the guideline for assessment of the taxable turnover.
13. It is submitted that goods which have suffered taxation in a series of sales are excluded from further taxation and the plain meaning of Section 5(2)(AA)(i) does not envisage such exclusion. Section 6(2)(AA)(i) is also subject to Section 8. When claimed before the assessing authority, it is to determine if the goods involved in works contract were subject to taxation in a series of sales. If it is so held, the same would be excluded. Section 8 and Section 5(2)(AA)(i) are to be read together.
14. The rate of tax of declared goods is also challenged. In view of the rate fixed at 4 per cent there is no scope to challenge the same.
15. During assessment many questions peculiar to the facts and circumstances may arise which cannot be envisaged at this stage. Such questions are to be determined by the assessing authorities on the facts and the circumstances on the basis of materials on record. Assessing authorities, who are to deal with those questions are to remember that their power is not enlarged by the amendment of the Constitution. They can assess transfer of those goods involved in works contract which they could have assessed under the Orissa Sales Tax Act.
16. It is lastly submitted that the value of a works contract involves many other transactions besides goods involved therein, service charges and labour charges. Service charges and labour charges have not been defined. Tax can be levied only in respect of value of goods transferred which are involved in the works contract. All other charges may or may not come within labour and service charges.
17. In view of the aforesaid discussion, we are satisfied that the 46th Amendment is not ultra vires and Section 5(2)(AA)(i) is to be read as stated in paragraph 10 earlier and other discussions. The real difficulty can be determined in individual cases while assessments are made for each individual period depending upon the questions agitated and materials brought to record. The impugned orders of assessment have not been passed keeping the aforesaid position of law in mind and facts have not been brought to the records of assessments. We, therefore, set aside the orders of assessment in each case and direct the assessing officer to reassess by giving specific finding supported by reasons. It is not open to the statutory authorities not to entertain the objection relating to jurisdiction like inter-State sale, absence of transfer of goods involved in works contract, double taxation or the like, merely on the ground that the deeming provision contained in Section 5(2)(AA)(i) does not authorise such enquiry. The assessing officers shall do well in completing the assessments by the 31st of December, 1988. Question of refund would depend upon the circumstances indicated in Section 14 of the Act.
18. In the result, the writ applications are allowed to the extent indicated above. No costs.
R.C. Patnaik, J.
I agree.