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TMI Blog2020 (6) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... ving heard the contesting parties on merits, we find no reason to close the matter only on the ground of delay. Accordingly, delay in filing is condoned. 1.1. Leave granted. 2. This appeal by special leave is directed against the judgment and order dated 05.08.2008 as passed by the Orissa High Court at Cuttack in W.P. (C) No. 8857 of 2003, whereby the High Court accepted the claim of the respondent No. 1 of present appeal- Hereinafter also referred to as 'the writ petitioner' or 'the contractor company', for reimbursement of the amount of sales tax levied in respect of the works contracts executed by it. The High Court also directed the Opposite Parties to grant appropriate reimbursement as claimed by the writ petitioner in terms of Clause 45.2 of the General Conditions of Contract-'GCC' for short under the National Competitive Bidding Contract-'NCB' for short while quashing the clarification Circular dated 07.11.2001 issued by the Government of Orissa in its Department of Water Resources. 2.1. The appellant State of Orissa has challenged the order so passed by the High Court while essentially raising the questions concerning the nature and implication of the sales tax, levied i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of the rate of tax payable by a dealer. The rate of tax payable by a dealer on the "taxable turnover" in respect of "works contract" was fixed at 4%. 3.4. On 04.11.1986, the Government of Orissa, in its Department of Irrigation and Power, issued a Circular to the effect that in case of works contract executed on or after 07.04.1984, containing the specific clause for reimbursement of sales tax, the Department of Irrigation and Power would be liable for reimbursement of the amount of sales tax actually paid by the concerned contractor on production of necessary documentary evidence. Pursuant to these observations and directions, reimbursement of the sales tax paid by the contractor company in respect of assessment years 1995-1996 to 1997-1998 was allowed. 3.5. Later on, the State Government issued a notification under Section 5 of the Act of 1947 whereby, the rate of tax payable by a dealer on the taxable turnover in respect of the works contract was increased to 8%. Thereafter, by way of the orders of assessment for the years 1998- 1999 to 2000-2001, the Assessing Authority levied sales tax @ 8% on the taxable turnover in respect of the works contracts executed by the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19.6.2002 under Annexure-3 ought not to be declared illegal, invalid and non-est in the eyes of law; And (ii) issue a further Rule Nisi Calling upon the Opp. Parties to show cause as to why the reimbursement claims made by the petitioner under Annexure-5 series may not be granted with a period stipulated by this Hon'ble Court; And (iii) in the event the Opp. Parties fail to show cause or show insufficient cause make the said Rule Nisi absolute and issue an appropriate writ of Mandamus or a writ of certiorari in line with the aforesaid Rule Nisi; And/or (iv) further be pleased to direct either of the Opp. Parties i.e., the contracting parties (Opp. Parties 6-18) or the Sales-tax Authorities (Opp. Parties 3-5) to effect reimbursement or refund along with interest from the date of deposit of tax; And (v) to pass any other writ/writs, order/orders as this Hon'ble Court may deem just and proper." 4. The High Court in its impugned order dated 05.08.2008, examined the contentions of the parties and granted the prayers of the writ petitioner while observing and holding, inter alia, as under:- "8...... The petitioner now claims reimbursement of tax paid by it on actual t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Ors. v. Union of India and Ors.: (1989) 2 SCC 645 and Gannon Dunkerley and Co. and Ors. v. State of Rajasthan and Ors.: (1993) 1 SCC 364 to submit that by the forty-sixth amendment of Constitution, a fiction was created for treating the works contract as deemed sale on which, sales tax would be leviable but, only on the value of goods which went into the execution of any works contract. 5.2. Further, with reference to the definitions of "sale", "goods" and "works contract" as contained in the Act of 1947 as also Section 5(2)(AA) thereof and the relevant clauses governing the contracts in question, the learned counsel has submitted that any payment against the monthly running bill to the contractor does not constitute payment for any "completed item of work"; and the only meaning of the nomenclature "completed item of work" is the completion of the works contract as such. Learned counsel would maintain that sales tax is not leviable on the "completed item of work" in a works contract but, the contractor is bound to pay sales tax on "taxable turnover" which, for the purpose of sales tax, could only be on the value of goods utilised in completion of the works contract. 5.3. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of Section 5(2)(AA) of the Act of 1947 was not reimbursable and had to be borne by the contractor in view of clear stipulation in Clause 45.1 of the General Conditions of Contract. According to the learned counsel, reliance on the Circular dated 04.11.1986 on behalf of the respondent No. 1 is entirely misplaced and the said Circular, by no means, could be construed as that of amending the contractual terms as also the liability of the contractor in terms of Section 5(2)(AA) of the Act of 1947. 6. Per contra, learned senior counsel for the contractor company (the respondent No. 1 herein) has duly supported the order impugned with reference to the reasonings therein. 6.1. Learned senior counsel for the contractor company has contended that the argument made on behalf of the appellant, that the deduction in the running bills had only been of the sales tax payable on various items, is contrary to the record because the deductions were made on a deemed sale on turnover basis and not item-wise and such a recovery of sales tax is squarely covered by Clause 45.2 of GCC whereunder, the contractor company is entitled to the claimed reimbursement. 6.2. The learned senior counsel has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court in the case of Builders' Association (supra). Therein, while upholding the constitutional validity of the aforementioned provisions, the Constitution Bench explained the unique features of a composite contract relating to work and materials; and expounded on the meaning, effect and amplitude as also contours of the provisions pertaining to the taxing power of the States in relation to works contract in the following words: - "38. In Benjamin's Sale of Goods (3rd Edn.) in para 43 at p. 36 it is stated thus: "Chattel to be affixed to land or another chattel.- Where work is to be done on the land of the employer or on a chattel belonging to him, which involves the use or affixing of materials belonging to the person employed, the contract will ordinarily be one for work and materials, the property in the latter passing to the employer by accession and not under any contract of sale. Sometimes, however, there may instead be a sale of an article with an additional and subsidiary agreement to affix it. The property then passes before the article is affixed, by virtue of the contract of sale itself or an appropriation made under it." 39. In view of the foregoing statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or commerce, another Constitution Bench of this Court found no reason to reopen the issues covered by the decision in Builders' Association case (supra) and held on the limitations of the powers of State legislature as under:- "31.....the legislative power conferred under Entry 54 of the State List does not extend to imposing tax on a sale or purchase of goods which takes place outside the State or which takes place in the course of import or export of goods. In view of the aforesaid limitations imposed by the Constitution on the legislative power of the States under Entry 54 of the State List, it is beyond the competence of the State Legislature to make a law imposing or authorising the imposition of a tax on transfer of property in goods involved in the execution of a works contract, with the aid of sub-clause (b) of clause (29-A) of Article 366, in respect of transactions which take place in the course of inter-State trade or commerce or transactions which constitute sales outside the State or sales in the course of import or export. **** **** **** 41. It must, therefore, be held that while enacting a law imposing a tax on sale or purchase of goods under Entry 54 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er similar expenses relatable to supply of labour and services; (h) profit earned by the contractor to the extent it is relatable to supply of labour and services. The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor." (emphasis supplied) 8.1.4. The salient features of the legal fiction introduced by sub-clause (b) of Clause (29-A) of Article 366 of the Constitution and the co-related concept of "value addition" came to be succinctly explained by this Court in the case of P.N.C. Construction Co. (supra) in the following words: - "21. "Value addition" is an important concept which has arisen after the Forty-sixth Amendment to the Constitution. Prior to the said Amendment this Court had taken the view in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd [AIR 1958 SC 560] that "works contract" was an indivisible contract and the turnover of the goods used in the execution of the works contract could not, therefore, become exigible to sales tax. To overcome the effect of the said decision, the concept of "deemed sale" was introduced by Parliament by in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red for the execution of this contract... ... ..." 8.3. As noticed, the claim for reimbursement made by the contractor company is based on Clause 45.2 of GCC whereas this claim is being resisted by the appellant State with reference to Clause 13.3 of ITB and Clause 45.1 of GCC. The referred clauses, as placed before us for consideration, read as under: - Clause 13.3 of ITB "13.3 All duties, taxes and other levies including royalty payable by the contractor under the contract or for any other cause shall be included in the rates, price and total bid price submitted by the bidder." Clauses 45.1 and 45.2 of GCC "45.1 The rates quoted by the contractor shall be deemed to be inclusive of the sales and other taxes including royalties on all materials that the contractor will have to purchase for performance of this contract. 45.2 Any Central or State Sales Tax and other taxes on completed items of works of this contract as may be levied excluding penalty levied for Contractor's fault and paid by the Contractor shall be reimbursed by the Employer to the Contractor on proof of payment on production of assessment certificate on every financial year. During the course of cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1984 which contained specific clauses for reimbursement of Sales Tax, this Department is liable to reimburse the amount of sale tax actually paid by the concerned contractor on production of necessary documentary evidence in token of making such payment, after obtaining an undertaking from the concerned contractor to the following effect:- If the Contractor prefers or has preferred appeal/revision before the concerned appellate authority under the Sales Tax Law for remission of the Sales Tax dues paid by him and said appeal/revision results in any reduction of such dues, the differential amount, the amount of Sales Tax reimbursed and the amount of Sales Tax reimbursed and the amount of Sales Tax payable as decided on appeal/revision will be refunded back to Government by the Contractor. (ii) Similar reimbursement will also be permissible and in the same manner as indicated in Sl. (i) above in case of contracts executed prior to 07.04.1984 where the work was in progress beyond that date, which contained specific clause for such reimbursement. (iii) The amount of penalty levied if any, under the Sales Tax Law on any count and paid by the Contractordealer shall not be reimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice submitted by the Bidder." The clause 45.2 at G.C.C. of the said document stipulates that "Any Central or State Sales Tax and other Taxes on completed item of work of this contract as may be levied excluding penalty levied for contractor's default and paid by the contractors shall be reimbursed by the employer to the contractor on proof of payment. During the course of contract period deduction of Sales Tax on works contract turn over at the sources shall be made from each bill at such rate and conditions as may be required under the provision of Orissa Sales Tax Act and Rules." Some Chief Engineers have sought for clarification as to whether Sales Tax deducted from the bills of the contractor and paid to the sales tax officer will be again reimbursed to the contractor whose quoted price is inclusive of all taxes as per clause 13.3 of ITB. In some cases, A. G. Audit has raised objection against such reimbursement. This is under active consideration of govt. for issuing necessary clarification. Therefore, you are hereby instructed that no reimbursement of sales tax should be made under clause 45.2 of G. C. C. of NCB agreements for World Bank works and works covered under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales Tax and other taxes on completed items of work of the contract as may be levied, excluding penalty levied for contractors default and paid by the contractor shall be reimbursed by the employer to the contractor on proof of payment. It is clarified that a completed item of work for which the contractor has entered into agreement with the department is either immovable property or a works contract and in either case is not exigible to sales tax. Therefore, the question of payment of sales tax on such immovable property and consequential reimbursement of the sales tax by the department as per clause 45.2 of the G.C.C. or similar provision existing in other contracts does not arise. A contractor may, however, have to pay sales tax as assessed by the sales tax officer on items which go into construction of the work. This tax is not reimbursable since the contractor is expected to have built it into his rates. In view of the above, you are hereby instructed not to reimburse sales tax levied on cement, steel etc., misinterpreting clause 45.2 of the G.C.C. of N.C.B. agreement for World Bank assisted works and the works covered under other agreement containing similar clause. Besi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. However, and at the same time, it is also indisputable that as per Clause 45.2 of GCC, any Central or State Sales Tax and other taxes on "completed items of works" of the contract as might be levied upon, and paid by, the contractor (excluding penalty levied for contractor's fault) were to be reimbursed to the contractor on proof of payment and assessment. This Clause 45.2 further envisaged that during the course of contract period, deductions of sales tax on "works contract turnover" was to be made at the source, from each bill as per the rate and conditions prescribed under the provisions of Act of 1947. It is also not in dispute that in the course of execution of such contracts, various running bill payments were made to the respondent No. 1 and while making such payments, deductions were indeed made towards the amount of sales tax; and such deducted amount of sales tax was deposited with the Sales Tax Department of the Government of Orissa. Further, it is also borne out that reimbursement of the sales tax so levied upon, and paid by, the respondent No. 1 in respect of the assessments for the years 1995-1996 to 1997-1998 was allowed; but such claim for reimbursement by the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal is made out. 11. Before proceeding further, we may at once observe that so far as the aforesaid Circulars are concerned, neither of them could be decisive of the issues at hand. As noticed, in the Circular dated 04.11.1986, the State Government expressed the view that the reimbursement in question was required to be allowed in terms of Clause 45.2 of GCC but later on, in the Circular dated 07.11.2001, the State Government took a diametrically opposite view to say that such reimbursement was not to be allowed in relation to the works contract. Obviously, the said Circulars had been based on the given day understanding of the State Government on the operation of the relevant provisions of law and the terms of contract. Such vacillating understanding on the part of the State Government cannot be determinative of the contractual obligations of the parties, which are required to be decided with reference to the principles of law applicable and on true construction of the terms of contract. Therefore, we would ignore the said Circulars while dealing with the principal issues involved in this matter but shall refer to them at a later and appropriate stage. 12. Reverting to the cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materials used in works contracts as if there was a sale of such goods and materials. In other words, after the forty-sixth amendment to the Constitution, the works contract is divided into two parts by a legal fiction: one for sale of goods/materials and other for supply of labour/services; and it is possible for the States to levy sales tax on the value of goods/materials involved in such works contract. These features have been expounded and explained by this Court in the referred cases of Builders' Association, Gannon Dunkerley and P.N.C. Construction Co. (supra) and need no further enlargement. 13.1. As regards the relevant provisions of the State enactment, it is at once clear that after the aforesaid forty-sixth amendment to the Constitution, the State of Orissa also proceeded to carry out the necessary amendment to the Act of 1947 and provided for levy of sales tax in relation to a works contract, inter alia, by expanding the definition of "Sale" so as to include therein the transfer of property in goods involved in the execution of a works contract; and by specifying that "taxable turnover" in respect of works contract shall be deemed to be the gross value received or re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of levy of sales tax in a works contract as also the scheme of reimbursement envisaged by Clause 45.2 of GCC. 14.1. Contextually read, it is but apparent that the expression "completed item of work" in Clause 45.2 ibid., signifies the intent that reimbursement would be permissible only after execution of a particular item of work has been completed and accomplished. In other words, this expression is clearly intended to contradistinguish the cases where any item of work remains incomplete and yet any claim for reimbursement of the sales tax levied is sought for. This expression cannot be read to mean as if signifying the levy of sales tax itself on the completed item of work because such reading of this expression would be totally disjunct from the context and would be entirely detached from the real intent. 14.2. Viewed from another angle, it would appear that if the contention on the part of the appellant as regards interpretation of the first part of Clause 45.2 is accepted, it would practically result in holding that the said Clause 45.2 is not at all applicable to a works contract. Such a result cannot be countenanced for two major reasons: First, that if such a clause wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided for the leviable amount of sales tax on goods/materials in its rates and hence, the contractor cannot claim any reimbursement thereof. 15.1. It remains trite that the terms of contract bind the parties thereto and unless there be any case of ambiguity or violation of law, ordinarily, the terms of contract, revealing the intent of parties, are required to be given effect to. The submission on the part of the appellant, that first part of Clause 45.2 of GCC would not operate because of Clause 45.1 of GCC read with Clause 13.3 of ITB, remains entirely baseless and appears to be of a desperate attempt to wriggle out of the contractual obligations. Even when the contractors were given instructions in the said Clause 13.3 of ITB to include all duties taxes and other levies in the bid price and even when the said Clause 45.1 of GCC provided that the rates quoted by the contractor shall be deemed to be inclusive of the taxes and royalties on all the materials which were to be procured for performance of the contract, it was yet provided in the first part of Clause 45.2 of GCC that the sales tax and other taxes on completed items of work, as may be levied upon, and paid by, the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the respondent No.1 only claimed reimbursement of the sales tax paid by it on the turnover of the works contract and not of any tax or duty or royalty paid by it on the material procured for the purpose of execution of the works contract. Therefore, the contentions urged on behalf of the appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC over the claim of the contractor also deserve to be, and are, rejected. 16. To summarise the discussion in the preceding paragraphs, we are clearly of the view that by virtue of Clause 45.2 of GCC, the contractor company is rightfully entitled to claim reimbursement of the amount of sales tax levied on the taxable turnover of the works contracts executed by it. A fortiori, the grounds on which the appellant seeks to resist the claim of the contractor company for such reimbursement, i.e., with reference to the expression "completed item of work" in the said Clause 45.2 and with reference to the stipulations contained in Clauses 13.3 of ITB and 45.1 of GCC, are wholly untenable and the appellant and its contracting offices are under obligation to honour the claim so made by the contractor company. 17. Before finally concluding on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Circular was, obviously, meant for future contracts, but, its contrast with the first set of instructions in the preceding sub-paragraphs fortifies the conclusion that the State Government was fully conscious of its obligation to make reimbursement in relation to the existing contracts which carried such reimbursement clause/s. 17.2. As to what stipulations, terms and conditions are to form the part of contract remains a matter essentially in the domain of the contracting parties (of course, subject to the applicable requirements of law) and no comments as regards future contracts are requisite herein but, on a comprehensive reading of the Circular dated 04.11.1986, it is evident that the State Government was fully conscious of its obligation towards reimbursement under the existing terms of contracts and hence, issued directions for due discharge of such obligation with necessary safeguards and, at the same time, provided that henceforth, neither such a clause be inserted in the contract documents nor any tender containing such a clause or condition be accepted. 17.3. Evidently, the doubts at the later stage, as indicated in the Circular dated 27.01.2000, and converse decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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