Bombay High Court
Builders Association Of India And Ors. vs State Of Maharashtra And Ors. on 25 August, 1994
Equivalent citations: [1994]95STC516(BOM)
JUDGMENT M.L. Pendse, J.
1. Petitioner No. 1 is an association of civil contractors, having a membership of 1,357 and whose members are engaged in executing works contracts in the State of Maharashtra. The works contracts consist of constructing buildings, bungalows, canals, culverts, bridges, etc. The petitioner Nos. 2 to 4 are partnership firms and are members of the association. Under entry 54 of List II of the Seventh Schedule to the Constitution of India, the State Government is entitled to legislate in respect of "taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92-A of List I". The Supreme Court examined the ambit of entry 48 of List II of the Seventh Schedule to the Government of India Act, 1935 in the decision [Stale of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.] and laid down that the expression "sale of goods" connotes essential ingredients being an agreement to sell moveables for a price and property passing therein pursuant to that agreement. The Supreme Court further held that in a works contract which is entire and indivisible, there is no sale of goods and no tax could be imposed on the supply of the materials used in such a contract treating it as a sale. The Supreme Court observed that the expression "sale of goods" has the same meaning as the expression "sale of goods" in the Sale of Goods Act, 1930.
2. After the decision of the Supreme Court, with regard to the taxability of the goods involved in the execution of the works contract, the Law Commission in its 61st report made suggestion to insert in Article 466 a wide definition of "sale" so as to include works contracts. Keeping in view the recommendation of the Law Commission, the Constitution was amended by 46th amendment by inserting Clause (29-A) in Article 466 and Clause (3) of Article 286 was substituted. The relevant portion of Clause (29-A) of Article 466 reads as follows :
"(29-A) Tax on the sale or purchase of goods includes--
(a)................
(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) ................
(d) ................
(e) ................
(f) ................
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."
Clause (3) of Article 286 as amended, inter alia, provides that any law of the State shall in so far as it imposes or authorises the imposition of a tax on the sale or purchase of goods being a tax of the nature referred to in Sub-clause (b), Sub-clause (c) or Sub-clause (d) of Clause (29-A) of Article 466 be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify.
3. The Maharashtra Legislature passed Maharashtra Act No, 19 of 1985 known as the "Maharashtra Sales Tax on the Transfer of property in goods involved in the execution of Works Contracts Act, 1985". The Act came into force with effect from October 1, 1986. The expression "works contract" is defined under Section 2(16) and means a contract for carrying out any works specified in the Schedule and includes a contract or sub-contract whether executed fully or partly or abandoned or terminated before completion and also includes a sub-contract for any such works. The expressions "goods" and "sale" are defined under Section 2(5) and 2(10) respectively. Section 3 deals with incidence of tax and, inter alia, provides that a tax shall be leviable on the turnover of sales in respect of works contract. Section 4 provides that a tax shall be levied on the turnover of sales in respect of the transfer of property in goods involved in execution of works contract.
The Builders Association of India approached the Supreme Court by filing writ petition to challenge the validity of the 46th amendment which made it possible for the State to levy sales tax on the price of the goods and materials used in the works contract. It was claimed that the 46th amendment was unconstitutional as the same was not ratified by the Legislatures of not less than one half of the States before the Bill which led to the amendment in question was presented to the President for assent. The Supreme Court upheld the validity of the 46th amendment in the judgment Builders Association of India v. Union of India. The Builders Association also claimed before the Supreme Court that it was not open to the State 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 laws passed by the Legislatures of the States. The Supreme Court held that it was essential for the State Legislature to comply with the requirement of Clause (3) of Article 286. The Supreme Court did not accept the claim that the 46th amendment has conferred on the States a larger freedom than what they had before in regard to the power to levy sales tax under entry 54 of the State List.
4. The Maharashtra Legislature, consequent to the decision of the Supreme Court in Builders Association of India's case felt that it was necessary to bring the Works Contract Act, 1985 in conformity with the decision. The State Legislature realised that it was expedient to maintain continuity and for that purpose to enact a new Act in place of 1985 Act, but by giving retrospective effect from October 1, 1986, being a date on which the 1985 Act was brought into force. Accordingly, the Legislature passed the "Maharashtra Sales Tax on the Transfer of property in goods involved in the execution of Works Contracts (Re-enacted) Act, 1989". The Act is deemed to have come into force on October 1, 1986. Section 3 of 1989 Act, infer alia, provides that every dealer whose turnover either of all purchases or of all sales, made during the year ending on March 31, 1986 or the year commencing on April 1, 1986 has exceeded or exceeds the limits of Rs. 2,00,000 shall be. liable to pay tax under this Act on his turnover of sales made on or after the appointed day. Section 6, inter alia, provides that there shall be a levy of tax on the turnover of sales at the rate specified in Sub-section (2) after deducting from such turnover the turnover of sales in respect of declared goods purchased from a dealer registered under the Bombay Sales Tax Act and sold in the same form in which they were purchased or without doing anything to them which amounts to or results in any manufacture. The expression "turnover of sales" is defined under Section 2(p) and means the aggregate of the amount of sale price received or receivable by a dealer in respect of any transfer of property in goods involved in the execution of any works contract whether executed fully, or partly during any period. Section 2(1)(i), (m) and (o) defines the expressions "purchase price", "sale price" and "turnover of purchases" respectively. The expression "purchase price" as defined under Section 2(1)(i) is as follows :
"2(1)(i). 'purchase price' means the amount of valuable consideration paid or payable by a person for purchase of any goods in relation to execution of works contract, effected in the State or in the course of inter-State trade or commerce or in the course of import including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof and will also include the cost of freight, transit or insurance and any taxes, duties, cesses and fees paid or payable in respect of such goods, whether charged separately or not."
The petitioners preferred the present petition on February 12, 1990, to challenge the constitutional validity of the, 1989 Act. The petitioners challenge the constitutional validity of the 46th amendment as well as levy of taxes under the 1989 Act. The validity of the Act was challenged on the ground of legislative incompetency and violation of fundamental rights conferred-under Articles 14 and 19 of the Constitution.
5. During the pendency of this petition, the Supreme Court in the decision : Gannon Dunkerley & Co. v.State of Rajasthan examined the ambit and scope of Article 466(29-A), as well as the legislative power of the. States under entry 54 of the State List. The Supreme Court reiterated the view taken, earlier in the Builders Association of India's case and pointed out that the tax leviable by virtue of Clause (29-A) of Article 466 is subject to the discipline to which any levy under entry 54 of the State List is made. The Supreme Court further held that 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 makes 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. The Supreme Court observed that the measure for levy or imposition of tax in the execution of works contract is the value of the goods involved. It was observed that in order to determine the value of goods which are involved in the execution of works contract for the purpose of levying the tax referred to in Article 466(29-A)(b), it is permissible to take the value of the works contract as the basis and the value of the goods involved in the execution of the works contract can be arrived at by deducting expenses incurred by the contractor providing labour and other services from the value of the works contract. The charges for labour and services which are required to be deducted from the value of works contract are also set out in the judgment. The Supreme Court then observed that the amounts deductible under these heads will have to be determined in the light of a particular case on the basis of the material produced by the contractor.
After the decision of the Supreme Court, the Maharashtra Legislature amended the Works Contract (Re-enacted) Act, 1989 and the amended Act came into force with effect from January 1, 1992.
The relevant amendment to Section 6 of the Principal Act is by substitution of Sub-sections (1) and (2) with the following sub-sections :
"(1)(A) There shall be levied a tax on the turnover of sales in respect of goods other than those covered by the Schedule at the rates specified in Clause (B), after deducting from such turnover--
(a) the turnover of sales in respect of declared goods purchased from a dealer registered under the Bombay Sales Tax Act, and sold in the same form in which they were purchased or without doing anything to them which amounts to or results in any manufacture,
(b) the turnover of sales in respect of the goods covered by Schedule A to the Bombay Sales Tax Act,
(c) the turnover of sales in respect of the goods which are exempt from payment of the whole of tax unconditionally under any notification issued under Section 41 of the Bombay Sales Tax Act,
(d) the turnover of purchases of goods other than declared goods in which transfer of property takes place, in the same form in which such goods were purchased, in the execution of the works contract provided such purchases are effected from,--
(i) a dealer registered under the Bombay Sales Tax Act and whose registration certificate is in force on the date of such purchase ;
(ii) a person not registered under the Bombay Sales Tax Act and tax under the said Act has been paid on the goods so purchased.
(B) The tax shall be levied at the following rates, namely :--
(i) in respect of declared goods, the rate of tax shall be four paise in a rupee on the turnover of sales of such goods ;
(ii) in respect of goods other than declared goods, the rate of tax shall be ten paise in a rupee on the turnover of sales of such goods.
(2)(A) There shall be levied a tax on the turnover of sales in respect of goods covered by the Schedule at the rates specified in Clause (B), after deducting from such turnover--
(a) the turnover of sales in respect of declared goods purchased from a dealer registered under the Bombay Sales Tax Act, and sold in the same form in which they were purchased or without doing anything to them which amounts to, or results in, any manufacture ;"
In addition to what is set out hereinabove, the Sub-section (2)(B) provides for the rates at which the taxes shall be levied. The Statement of Objects and Reasons for amendment of Section 6 of the Principal Act was appended to the Bill and Clause 4 therein, inter alia, provides that "Government has noticed that in respect of certain items the sales tax on the transfer of property in goods involved in the execution of works contracts levied under the Maharashtra Sales Tax on the Transfer of property in goods involved in the execution of Works Contracts (Re-enacted) Act, 1989, results into double taxation. The double taxation is because at the time of purchase of goods, sales tax or as the case may be, purchase tax, is already levied and paid under the General Sales Tax Act, viz., the Bombay Sales Tax Act, 1959. When the property in such goods in the same form in which they were purchased is transferred in the execution of works contracts, tax is levied also under the Maharashtra Sales Tax on the Transfer of property in goods involved in the Execution of Works Contracts (Re-enacted) Act, 1989. With a view to avoid such levy of tax second time on such goods under the aforesaid Act, Government has decided to give relief and discontinue such levy". The 1991 Amended Act came into force on January 1, 1992. The petitioners thereafter amended the present petition by taking out Chamber Summons No. 65 of 1993.
6. Shri Chandrachud, learned counsel appearing on behalf of the petitioners, raised two or three contentions to challenge the validity of Works Contract Act, 1989 as amended from time to time. The learned counsel made it clear at the outset that the petitioners are not challenging constitutional validity of the 46th amendment in view of decision of the Supreme Court in Builders Association of India's case , The learned counsel submitted that the challenge to the validity of 1989 Act is restricted to Section 6 read with Clauses 2(i), 2(m), 2(o) and 2(p) which, inter alia, define expressions "purchase price", "sale price", "turnover of purchases" and "turnover of sales" respectively. The learned counsel further submitted that the amending Act of 1991 is made applicable from January 1, 1992, onwards and the vice of double taxation for the earlier period is not removed. The learned counsel also made submission as regards the measure for imposition of tax claiming that the taxable event occurs not on the date when the goods are purchased by the contractor but only when such goods are incorporated in the building to be constructed under the works contract. Smt. Anklesaria, the learned Government Pleader, on the other hand urged that the challenge to the validity of 1989 Act no longer survives in view of the decisions of the Supreme Court in Builders Association of India's case and Gannon Dunkerley's case .
7. In view of the rival submission, the first question which requires determination is whether the State Legislature was competent to enact the provisions of 1989 Act. Shri Chandrachud did not dispute that as the consequence of the 46th amendment, the State Legislature had ample powers to enact the legislation. It was submitted that the decision in Builders Association of India's case creates a legal fiction by dividing the total consideration of the works contract into cost or value of the goods and the labour charges. Shri Chandrachud did not dispute that State Legislature is competent to enact legislation to levy tax on the value of goods involved in works contract. It was urged that while enacting 1989 Act, the Legislature has ignored constitutional restraints prescribed under Article 286(3) of the Constitution and consequently the legislation suffers from legislative incompetency. The grievance of the learned counsel is of no merit. Article 286 provides for restrictions in regard to imposition of tax on the sale or purchase of goods and, inter alia, provides that no law of a State shall impose or authorise the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place outside the State or in the course of the import of the goods into or export of the goods out of the territory of India. Clause (3) of Article 286 provides that any law of the State shall in so far as it imposes a tax on the sale or purchase of goods declared by Parliament to be of special importance in inter-State trade or commerce or a tax on the sale or purchase of goods being a tax of the nature referred to in Sub-clauses (b), (c) or (d) of Clause (29-A) of Article 466, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify. The submission of the learned counsel that the restraints of Article 286 were overruled by the legislation, is devoid of any substance in view of provisions of Section 10 of 1989 Act. Section 10, inter alia, provides that nothing in the Act shall be deemed to impose or authorise the imposition of a tax on any sale of any goods, where such sale takes place (i) outside the State or (ii) in the course of import of the goods or export of the goods out of such State and (iii) in the course of inter-State trade or commerce. In view of the specific provisions of Section 10 of the 1989 Act, the contention that the constitutional restraints under Article 286 were by-passed cannot be accepted.
8. The principal contention advanced by the learned counsel was with reference to the observations made by the Supreme Court in paragraph 45 (at page 232 of STC) of the judgment in Gannon Dunkerley's case . While dealing with the topic of measure of tax, the Supreme Court observed that the value of goods for levying a tax cannot be assessed on the basis of the cost of acquisition of the goods by the contractor. The Supreme Court then observed that :
".........Since the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works 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 466(29-A)(b)."
Relying on the ratio laid down by the Supreme Court, Shri Chandrachud submitted that the provisions of Section 6 of the Act are required to be struck down. It was urged that the tax is levied on the turnover of sales and the expression "turnover of sales" as defined under Section 2(p) means the aggregate of the amount of sale price received or receivable by a dealer in respect of any transfer of property in goods involved in execution of any works contract. Shri Chandrachud submitted that the expression "purchase price" as defined under Section 2(i) of the Act means the amount of valuable consideration paid or payable by a person for purchase of any goods in relation to execution of works contract. The expression "turnover of purchases" as defined under Section 2(o) means the aggregate of the amounts of purchase price paid or payable by a dealer in respect of purchase of any goods in relation to the execution of works contract. Shri Chandrachud submitted that while determining the turnover of sales, what the Legislature contemplates is taking into consideration the value of the goods at the time of purchase by the contractor and the ratio laid down by the Supreme Court that the value of the goods, at the time of incorporation of the same in the building project, should be considered is given go-bye. The learned counsel further urged that the measure of tax is the value to be determined on the date of purchase in accordance with the legislation under challenge and which is in conflict with the view taken by the Supreme Court. It is not possible to accede to the submission of the learned counsel. The test laid down by the Supreme Court is that the tax is levied on the value of the goods and Shri Chandrachud could not dispute that the impugned legislation has provided only for levy of tax on the value of the goods. The value of the goods will have to be determined with reference to the date on which such goods are incorporated in the building to be constructed. It hardly requires to be stated that the value of the goods cannot be determined with reference to the cost of acquisition of the goods by the contractor and while completing the assessment, the authorities under the Act will determine the turnover of sales on that basis. We are unable to appreciate how the test of measure of tax can reflect upon the validity of the provisions of Section 6 or any of the definitions to which the learned counsel made reference. In our judgment, the Act clearly provides for levying tax on value of the goods after exclusion of items which are set out in paragraph 46 (page 233 of STC) of the Supreme Court judgment in Cannon Dunkerley's case . The method of determining value of the goods can have no bearing on the validity of the legislation.
Shri Chandrachud also submitted that the main Act permits deduction from the taxable turnover provided sales tax has been paid on the goods at earlier stage and the goods are sold by the contractor in the same form in which they have been purchased. It was contended that the condition imposed that the goods must be sold in the same form is illegal. It was urged that the Supreme Court had held that the measure of tax in works contract cannot be the cost of acquisition of goods and consequently the requirement that the goods shall be in the same form should be held illegal. It was further urged that the condition has no rational nexus to the object of the deduction granted from the taxable turnover and therefore the condition is arbitrary, discriminatory and unreasonable. It is not possible to accede to the submission. The turnover of the sales in respect of declared goods purchased from a registered dealer under the Bombay Sales Tax Act are required to be sold in the same form in which they were purchased and without doing anything which amounts to manufacture. The object of the Legislature in putting such condition is that the contractor who had purchased the goods in pursuance of the works contract will not be entitled to convert into different form with different identity in case the deduction is sought for. We are unable to appreciate how the provisions can be said to be arbitrary and discriminatory. We are also unable to appreciate how the observations of the Supreme Court in regard to the measure of tax can lead to the conclusion that the condition is bad and consequently Section 6 suffers from vice of legislative incompetency.
9. Shri Chandrachud then submitted that the Legislature realised that Section 6, as originally enacted by 1989 Act, leads to double taxation. The Legislature amended the Act in the year 1991 and removed the levy of tax on second time. Shri Chandrachud submitted that the amending Act of 1991 came into force only with effect from January 1, 1992 and there is no rational why the vice of double taxation was not avoided from October 1, 1986, when 1985 legislation came into force. The learned counsel urged that the Legislature is silent as to why the levy of double taxation was not avoided from ah earlier date. The learned Government Pleader submitted that levy of double taxation is not by itself sufficient to invalidate the legislation. It was also contended that there are reasons why the 1991 Act was brought into effect only from January 1, 1992 and not from the earlier date. The learned Government Pleader referred to the affidavit sworn by Prakash Rambhau Gangamwar, Assistant Commissioner of Sales Tax on June 29, 1993 in notice of Motion 239 of 1993 taken out by the petitioners for diverse reliefs. The affidavit sets out that the petitioners do not bear the burden of double taxation. The Bombay sales tax is borne by the contractor/builder in the first instance in respect of purchase of goods involved in the execution of works contract but the same is subsequently passed on to the consumer. The learned Government Pleader also submitted that the Legislature felt it wise to avoid double taxation from January 1, 1992, because in respect of earlier period, the tax returns were already filed in large number of cases, the assessments were completed and tax recovered. It was claimed that the doctrine of prospective invalidation of legislation is now well-settled and accepted by the Supreme Court in view of the decisions India Cement Ltd. v. State of Tamil Nadu and Orissa Cement Ltd. v. State of Orissa. It was claimed that the tax recovered has already been used for public purpose and in case the Legislature felt that the double taxation should be avoided with effect from the date of amendment of the Act, then the validity of the legislation cannot be questioned. We find considerable merit in the submission urged on behalf of the learned Government Pleader. In the Supreme Court's decision Avinder Singh v. State of Punjab, it was observed that merely because tax is levied on the same article on more than one occasion that would not result in the levy being illegal. The Legislature was conscious that it is desirable to avoid double taxation and consequently amendment was carried out in the year 1991. The mere fact that the double taxation was not removed from the earlier date cannot lead to the conclusion that the amending clause is invalid. The Legislature has to take into consideration a large number of circumstances while determining from what date the double taxation should be avoided. The claim of the petitioners that the amendment should have been made effective from October 1, 1986, cannot be accepted because the Legislature must have taken into consideration that returns must have been filed on the basis of the provisions existing prior to amendment, assessment proceedings must have been completed and tax must have been recovered. The Legislature felt it proper not to give retrospective effect and open the proceedings which are concluded. In the field of taxation, many complex factors are involved and it is necessary for the Legislature to make a reasonably good job. It would not be appropriate to condemn the amendment which gives relief from double taxation only because it is available from the date the amending Act came into force and not from earlier date. In our judgment, challenge to the legislation is without any merit and the petition deserves to be dismissed.
10. Accordingly, petition fails and rule is discharged with costs.