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In List II existing Entry 54 was substituted by the following entry:-

"54. Taxes on the sale or purchase of goods other than newspaper subject to the provisions of Entry 92- A of List I."

21. The question whether the cost of the goods supplied by a building contractor in the course of the construction of building could be subjected to payment of sales tax was resolved by the Apex Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. 1955 SCR 379 which was an appeal filed against the decision of the High Court of Madras in Gannon Dunkerley & Co. (Madras) Ltd. v. The State of Madras. In this case the Apex Court held that on a true interpretation of the expression "sale of goods" meant an agreement between the parties for the sale of the very goods in which eventually property passed. In a building contract where the agreement between the parties was that the contractor should construct the building according to the specifications contained in the agreement and in consideration therefor received payment as provided therein, there was neither a contract to sell the materials used in the construction nor the property passed therein as movables. The Supreme Court further held that the expression "sale of goods" was at the time when the Government of India Act, 1935 was enacted, a term of well- recognised legal import in the general law relating to sale of goods and in the legislative practice relating to that topic and should be interpreted in Entry 48 in List II in Schedule VII of the Government of India Act, 1935 as having the same meaning as in the Sale of Goods Act, 1930. It was concluded that in a building contract which was one, entire and indivisible, there was no sale of goods and it was not within the competence of the Provincial Legislature under Entry 48 in List II in Schedule VII of the Government of India Act, 1935, to impose a tax on the supply of the materials used in such a contract treating it as a sale. The Supreme Court had noted in subsequent decisions that the said decision though was rendered on the basis of the provisions in the Government of India Act, 1935 was equally applicable to the provisions found in Entry 54 of List II of Schedule VII of the Constitution. By virtue of this decision, no sales tax could be levied on the amounts received under a works contract by a building contractor even though he had supplied goods for the construction of the buildings.

represented by "building-contracts" in the context of the expanded concept of "tax on the sale or purchase of goods" as constitutionally defined under Article 366 (29A), would equally apply to other species of "works contracts" with the requisite situational modifications.

42. The Constitutional-Amendment in Article 366 (29A) read with the relevant taxation entries has enabled the State to exert its taxing power in an important area of social and economic life of the community. In exerting this power particularly in relation to transfer of property in goods involved in the execution of "works-contracts" in building activity, in so far as it affects the housing projects of the underprivileged and weaker sections of society, the State might perhaps, be pushing its taxation power to the peripheries of the social limits of that power and, perhaps, even of the constitutional limits of that power in dealing with unequals. In such class of cases 'building activity' really relates to a basic subsistential necessity. It would be wise and appropriate for the State to consider whether the requisite and appropriate classifications should not be made of such building activity attendant with such social purposes for appropriate separate treatment. These of course are matters for legislative concern and wisdom."

(iii) the property in those goods must be transferred to a third party either as goods or in some other form.

These conditions are fulfilled in a building contract or any contract to do construction. In a contract to build a flat, necessarily there will be an element of sale of goods included therein and therefore, building contracts are species of the works contract. Still further, a contract comprising of both a works contract and a transfer of immovable property, such contract is not denuded of its character of being a works contract. Article 366 (29A)(b) of the Constitution of India does contemplate a situation where the goods may not be transferred in the form of goods but may be transferred in some other form which may even be in the form of immovable property. No doubt, there is no legislative competence in the State legislature to levy tax on the transfer of immovable property under Entry 54 of List II of the Seventh Schedule. However, the States are empowered to levy sales tax on the sale of goods in an agreement of sale of flat which also has a component of a deemed sale of goods.

XX XX XX."

43. Under sub-rule (1) to Rule 58 of the MVAT Rules, 2005, the State Government has prescribed the deductive method of taxing the works contract relating to building contracts. It broadly specifies the deduction which are admissible from the entire contract, inter alia, on account of labour, service charges, charges for planning, designing, architect fees and similar other expenses specified therein. The rates for deductions are specified in the table where the contractor has not maintained proper accounts which enables proper evaluation of the different deductions noted hereinbefore. However, sub rule (1A) in Rule 58 of the MVAT Rules, 2005 was inserted therein by a notification dated 01.06.2009. The rule has provided that in the case of construction contracts where the immovable property, land or as the case may be, interest therein is to be conveyed and the property in the goods involved in the execution of the construction contract is also transferred, then it is such transfer of goods alone which is liable to tax. The value of the goods at the time of transfer is to be calculated after making the deduction of the cost of the land from the total agreement value. The method for determining the cost of the land has also been specified thereunder. It stipulates that the cost of the land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 on Ist January of the year in which the agreement to sell the property is registered. The rule provides for measure of determination of the tax. It does not create any liability to tax as a charging provision. The Supreme Court in Larsen & Toburo's case (supra) specifically read down Rule 58 which were computational provision whereby exclusion of value of land on the basis of circle rates and ceiling on such deduction had been provided. The Apex Court noticed as follows:-