TMI Blog1955 (10) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act as to be taxed on the materials used in the works contract - direct the issue of a writ of mandamus prohibiting respondents 1 and 3 from collecting sales tax. - - - - - Dated:- 21-10-1955 - Judges, MOHAMMED AHMED ANSARI AND JAGANMOHAN REDDY This is a petition for a writ of mandamus or any other appropriate writ under Article 226 of the Constitution for restraining respondents 1 and 3, the Sales Tax Officer and Com- missioner of Sales Tax, from demanding sales tax and prohibiting them from collection on the turnover of works contract undertaken by the petitioner in completing maternity hospital at Mahboobabad and for the repair of a large tank at Rudrur. The petitioner is registered as a dealer under the Hyderabad General Sales Tax Act, 1950 (hereinafter called the Act ) and is a limited com- pany incorporated under the Indian Companies Act. It carries on business as building and construction contractors and has been re- cognised as such by the Public Works Department of the Government of Hyderabad. During the year 1951-52 this company had obtained from the P.W.D. two contracts, one for building the maternity hospital at Mahboobabad for Rs. 52,290 and the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructions as from time to time be furnished while the work is in progress. The mate- rials have to be the best and the Government reserved to itself the right to reject any of it, if it is defective and has even got the liberty to supply both the material and labour if the work is unsatisfactorily done. The risk of damage etc. is upon the contractor who under the agreement undertakes to satisfactorily execute and complete the work in strict accordance with plans, estimates and specifications and is sub- ject to a penalty if he delays the completion of the work. The con- tractor is further prohibited from letting out the work on sub-contracts unless permitted in writing by the Engineer in charge. The sample agreement further deals with various matters which are not relevant for our purpose except clause 47 which is as under: 47. The Department is not responsible for the supply of any material except cement and steel for which permits will be arranged on receipt of requisition from the party. From the above contract and the sample of the schedule of rates attached to it with respect to a building contract, it is clear that the materials such as bricks, lime, stone, cement, tiles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g materials, articles and commodities designed to be used in the construction, fitting out, im- provement or repair of movable or immovable property. (k) 'Sale' with all its grammatical variations and cognate expres- sions means every transfer of property in goods by one person to an- other in the course of trade or business for cash or for deferred pay- ment or other valuable consideration and includes also a transfer of property in goods involved in the execution of a works contract, but does not include a mortgage, hypothecation, charge or pledge. In the definition of turnover in clause (m), explanation (i) relat- ing to works contract is as under: Subject to such conditions and restrictions, if any, as may be prescribed in this behalf- (i) the amount for which goods are sold shall, in relation to a works contract, be deemed to be the amount payable to the dealer for carrying out such contract, less such portion as may be prescribed of such amount representing the usual proportion of the cost of labour to the cost of materials used in carrying out such contract. Again works contract has been defined in clause (n) as meaning any agreement for carrying out for cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he works contract as if it is a turnover and at any rate rule 5(3) of the Hyderabad General Sales Tax Rules prescribing the ratio between the material used and the labour spent in the construction for different contracts is arbitrary and illegal. Taking the last point first, as far as the contract for repair of Rudrur tank is concerned, it is clear that no material has been used which can by any criterion be considered as goods. The whole of this contract, therefore, involves labour and cannot be the subject-matter of the levy of sales tax. The Sales Tax Officer rejected the contention of the assessee that the repairs to the Rudrur tank did not involve any material but constituted mainly earth work, on the ground that no evi- dence has been produced by the firm to the effect that repairs consti- tuted pure and simple labour charges. Ordinarily repairs cannot be made without utilising any material whatsoever. In the revision the Commissioner did not deal with this aspect of the case. In our view the very nature of the contract was such that under the law the Sales Tax Officer could only levy sales tax on the turn- over of the materials used in the works contract as we will presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the learned Advocate for the petitioner that the legislative power under Item 54 extends only to enact a law taxing transactions of sale or purchase of goods and cannot bring within the net of taxation such transactions as are not strictly sale or purchase of goods. Consequently the inclusion by the Legislature in the Act of works contracts within the definition of turnover and all materials used in the construction, fitting out or improvement or repair of movable or im- movable property within the term goods is outside the scope and ambit of the legislative power conferred by Entry 54. This sub- mission involves the question whether the sale and purchase of goods specified in Entry 54 should be construed in the sense in which these words were understood under law prior to the framing of the Constitu- tion. There have been two direct decisions on this question, whether the inclusion by the Legislature in the net of taxation under the Sales Tax Act of a works contract is ultra vires of the State Legislature; one by the Madras High Court in Gannon Dunkerley y. The State of Madras(1), and the other by the Nagpur High Court in Pandit Banarsi Das v. State of Madhya Pradesh and Anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Parliament and the draftsmen and the Parliament must have been well aware that the expression 'sale of goods' had acquired a legal import by that time, and it is legitimate therefore to presume that the expression was used in the sense in which it was understood by English lawyers and also in India. The draftsmen must have intended to define the power of the Legislature to tax only the transaction of sale of goods, which was understood in law as meaning and as consti- tuting those composite series of acts beginning with an agreement of sale and ending with transfer of property for a price, which constitute sale of goods. That the expression sale of goods acquired a definite meaning in England under the Sale of Goods Act, 1893, and in India under the Sale of Goods Act, 1930, which was modelled on the English Act, does not admit of serious doubt. In this view of the matter having regard to the presumption that the draftsmen must have been well aware that the expression sale of (1) [1939] 1 S.T.C. 1; A.I.R. 1939 F.C. 1. goods had acquired a definite meaning both in England and in India under the respective Sale of Goods Act, Satyanarayana Rao, J., went on to consider the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in legislation both in England and India and to hold that it authorises the imposition of a tax only when there is a completed sale involving transfer of title..............The substance of the matter is that (1) [1954] 5 S.T.C. 193; A.I.R. 1954 S.C. 459. the sales tax is a levy on the price of the goods, and the reason of the thing requires that such a levy should not be made, unless the stage has been reached when the seller can recover the price under the contract. After this decision, in November, 1954, the Nagpur High Court in Pandit Banarsi Das v. State of Madhya Pradesh(1), having considered Gannon Dunkerley's case(2) and the observations of their Lordships of the Supreme Court in the case of Budh Prakash Jai Prakash(3), expressed the view that the Government of India Act, 1935, conferred on the Provin- cial Legislature powers of the widest amplitude to tax the sale of goods in all its aspects and forms. The necessary condition for the impost, however, was that there should be a sale of goods. The selection of the taxable event and the severance of transactions of sale from other trans- actions in which they might be embedded was a necessary part of the power. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould select out of a composite transaction the actual sale of materials and tax such sale in the exercise of undoubted plenary powers. The word 'supply' used in the defini- tions has not any sinister purpose and, read in the context of other definitions, is apt to describe the sale of building materials not directly but as part of a building contract. In our view the true test must always be the actual language used, and though legislative practice is not conclusive, yet if it is helpful in determining the intention of the framers of the Constitution as to the scope and ambit of the power intended to be conferred on the Legislature, whether of the State or of the Centre, assistance can be taken from it. Where certain expressions have had a certain meaning given to them by a series of authoritative judicial pronouncements as to virtually make them terms of art or in the currency of legal language attach to them a special meaning when used in a legal instrument, then it would be difficult to assume, unless the context or other circumstances indicate otherwise, that the draftsmen did not use them in the sense in which those expressions have been understood in legal parlanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the plain meaning of the present Act of the Parliament we must look at the ground or the principle of the decisions, because I agree, if the Legislature has, in pari materia, passed an Act in the same words and a construction has been put by the Courts of justice on those particular words, the Court, in construing the section must have regard to those decisions. In that case though the construction placed by Jessel, M.R., upon the words in the corresponding provisions in Middlesex Registry Act for purposes of interpreting section 12 of the Act 18 19 Vict. c. 15 was dissented from by the Court of Appeal, it is clear that the rule of construction there involved was that relating to statutes in pari materia. Where, however, the words or expressions used in a legislative list have to be construed, in our view, the rule of construction of pari materia statutes is not strictly applicable nor is it a conclusive or infallible test. We must in such circumstances try to ascertain the scope and ambit of the power intended to be conferred by the entry and consequently, though we may resort to judicial pronouncements and legislative practice prevailing at the time when the Constitution was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they were when the instrument was framed and adopted. The statesmen and lawyers of the convention who submitted it to ratification of the conventions of the I3 States were born and brought up in the atmosphere of the common law and thought and spoke in its vocabulary. While this is so we admit that in interpreting an instrument like the Constitution as Lord Wright has observed in James v. Common- wealth of Australia No. (2)(1): The words used are necessarily general and their full import and true meaning can often only be appreciated when considered, as the years go on, in relation to the vicissitudes of fact which from time to time (1) [1936] A.C. 578, at page 614. emerge. It is not that the meaning of the words changes, but the changing circumstances illustrate and illuminate the full import of that meaning. The Privy Council in the above case were dealing with the inter- pretation of section 92 by which a declaration of guarantee was given that trade, commerce and intercourse among the States shall be absolutely free. The language of the section which is quite general and was not in terms subject to any exception or limitation had necessarily to be considered on a generic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vy should not be made, unless the stage has been reached when the seller can recover the price under the contract , and that the power conferred under Entry 48 to impose a tax on the sale of goods can therefore be exercised only when there is a sale under which there is a transfer of property in the goods. These two cases of the Supreme Court as well as the observation of Bose, J., in the case of State of Bombay v. United Motors (India) Ltd.(1) and Bhagwati, J., in the recent case of Bengal Immunity Co., Ltd. v. State of Bihar(2) clearly indicate that all things being equal, it is permis- sible to have recourse to the state of law as it existed at the time of the Constitution for purposes of determining the meaning of any expression used in any of the entries of the legislative list. In these circumstances, with great respect, we are unable to see how the approach indicated by the Supreme Court in the above cases is inappli- cable to the present case or could justifiably be distinguished by only limiting it to sale as opposed to agreement to sell. Bearing the various aspects of the interpretation of the Constitution in mind, what we have to determine is whether in a works co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive list. In these circumstances, with great respect, we are unable to see how the approach indicated by the Supreme Court in the above cases is inappli- cable to the present case or could justifiably be distinguished by only limiting it to sale as opposed to agreement to sell. Bearing the various aspects of the interpretation of the Constitution in mind, what we have to determine is whether in a works contract which has as its object the construction of a building as such, the contractor could be said to have sold any goods or materials used in the building in order to bring them within the power of taxation conferred on a State by Entry 54 of List II of Schedule VII of the Constitution. The Nagpur High Court, as we have already seen, took the view that the selection of the taxable event and the severance of transactions of sale from other transactions in which they might be embedded was a necessary power and that there is always a sale if goods are transferred to another and paid for by him and that it cannot be gainsaid that there is a payment for materials though the payment is not made separately but as a part of a larger amount. The question is to what extent the expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded over at a price which is arrived at after deducting there- from the cost of the labour expended thereon, is to make a new agree- ment for the parties which was not in their contemplation. In our view if in the discharge of a contract of service ownership of goods passes which is inseparably integrated with the contract of service, the trans- action is not a sale, though the finished product may be the subject matter of a sale, for, from the time of the Romans up to the present date, sale and contract of service have always been classified as distinct classes of contract, such as locatio conductio and emptio venditio. To be more accurate the product of the work and material is locatio operis which is different from putting out off a place a work on contract, in that it is for a completed piece of work which practically has always a physical subject matter, such as a house built, a slave to be trained, a coat to be dyed and so forth. Further under the Roman law where a man makes a thing out of his own materials the contract was sale but there was an exception, that is, where one contracted to build a house finding the materials, he was a conductio operis perhaps because as Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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