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3. Under entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935 (for short "the GI Act"), the legislative power to impose taxes on sale of goods and on advertisements was conferred on the Provincial Legislatures. Under the Constitution, as adopted, the said power was divided between Parliament and State Legislature, under entry 92 in List I and entry 54 of List II of the Seventh Schedule to the Constitution of India (for short "the Constitution").

4. Parliament was empowered to impose taxes on the sale or purchase of newspapers and on advertisements published therein and under entry 54 in List, II, the State Legislatures were empowered to impose taxes on the sale or purchase of goods, other than newspapers.

5. With regard to imposition of sales tax on goods involved in the execution of works contracts, where the contract was single and indivisible, the question arose whether there was a "sale" of those materials within the meaning of that word in entry 48 in List II of the Seventh Schedule to the GI Act and entry 54 in List II of the Seventh Schedule to the Constitution.

6. There was a sharp cleavage of opinion among the High Courts on that question. This Court, in Gannon Dunkerley & Co. (Madras) Ltd. v. State of Madras [1954] 5 STC 216; AIR 1954 Mad. 1130 took the view that the expression "sale of goods" in entry 48 in List II of the GI Act and entry 54 in List II of the Constitution 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 there in 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 the 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 ultra vires the powers of the Provincial Legislature.

10. This sort of a conflict was resolved by the apex Court of this country in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353; [1959] SCR 379, where in the decision of this Court was affirmed and it was held that the expression "sale of goods" in entry 48 in List II of the Seventh Schedule to the GI Act, had the same meaning as the said expression had in the Sale of Goods Act, 1930, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. It was further held that in 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 contained in the agreement and in consideration therefor 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. The apex Court therefore laid down that it was not within the competence of the Provincial Legislature under entry 48 in List II of the Seventh Schedule to the GI Act, to impose a tax on the supply of materials used in such a contract treating it as a sale. The said decision, though rendered in the context of entry 48 in List II of the Seventh Schedule to the GI Act, was equally applicable to the provisions found in entry 54 in List II of the Seventh Schedule to the Constitution.