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Thursday, September 26, 2013

Whether the development agreement is work contract liable for sale taxes under Karnataka sale Tax and also the materials used in the building are liable for sale tax ; Like wise those works are liable under VAT MVAT under Maharashtra laws Sale Tax on development agreement and sale tax on the goods used while constructing building under Karnataka sale tax and also value added tax under Maharashtra = value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later. Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria and we read down Rule 58(1-A) accordingly. The Maharashtra Government has to bring clarity in Rule 58 (1-A) as indicated above. Subject to this, validity of Rule 58(1-A) of MVAT Rules is sustained. Once we have held that Raheja Development1 lays down the correct law, in our opinion, nothing turns on the circular dated 07.02.2007 and the notification dated 09.07.2010. The circular is a trade circular which is clarificatory in nature only. The notification enables the registered dealer to opt for a composition scheme. The High Court has dealt with the circular and notification. We do not find any error in the view of the High Court in this regard. Moreover, the Advocate General for Maharashtra clearly stated before us that implementation of Rule 58(1-A) shall not result in double taxation and in any case all claims of alleged double taxation will be determined in the process of assessment of each individual case. 126. After having given answer to the reference, we send the matters back to the Regular Bench for final disposal.

  published in http://judis.nic.in/supremecourt/imgst.aspx?filename=40833
                                                                REPORTABLE
                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION
                      CIVIL  APPEAL NO. 8672    OF 2013
                  (Arising out of SLP(C) No.17741 of 2007)




M/s. Larsen & Toubro Limited & Anr.                          ……  Appellants

                   Versus

State of Karnataka & Anr.                                 ……Respondents

                                    WITH

                CIVIL  APPEAL NOS.      8673-8684    OF 2013
              (Arising out of SLP(C) Nos. 30581-30592 of 2009)


                               WITH


                    CIVIL  APPEAL NO.   8685      OF 2013
                  (Arising out of SLP(C) No.17709 of 2012)


                                    WITH


                    CIVIL  APPEAL NO.  8686       OF 2013
                  (Arising out of SLP(C) No.17738 of 2012)


                                    WITH


                    CIVIL  APPEAL NO.  8687       OF 2013
                  (Arising out of SLP(C) No.21052 of 2012)


                                    WITH


                    CIVIL  APPEAL NO.   8688      OF 2013
                  (Arising out of SLP(C) No.21863 of 2012)


                                    WITH


                    CIVIL  APPEAL NO.   8690      OF 2013
                  (Arising out of SLP(C) No.26226 of 2012)






                                    WITH


                    CIVIL  APPEAL NO.  8691       OF 2013
                   (Arising out of SLP(C) No.476 of 2012)


                                    WITH


                    CIVIL  APPEAL NO.   8692      OF 2013
                  (Arising out of SLP(C) No.29143 of 2012)


                                    WITH


                    CIVIL  APPEAL NO.   8693      OF 2013
                  (Arising out of SLP(C) No.29145 of 2012)


                                    WITH


                    CIVIL  APPEAL NO.   8695     OF 2013
                  (Arising out of SLP(C) No.29146 of 2012)


                                    WITH


                      CIVIL  APPEAL NO.    8696 OF 2013
                  (Arising out of SLP(C) No.29147 of 2012)


                                    WITH


                      CIVIL  APPEAL NO. 8697    OF 2013
                  (Arising out of SLP(C) No.29148 of 2012)


                                    WITH


                    CIVIL  APPEAL NO.    8698    OF 2013
                  (Arising out of SLP(C) No.29149 of 2012)


                                     AND


                    CIVIL  APPEAL NO.   8699     OF 2013
                  (Arising out of SLP(C) No.29151 of 2012)




                                  JUDGMENT

R.M. LODHA, J.


           Leave granted in all these special leave petitions.
2.          Does the two-Judge  Bench  decision  of  this  Court  in  Raheja
Development[1] lay down the correct legal position?
It is to  consider  this
question that in Larsen and Toubro[2] a two-Judge Bench of  this  Court  has
referred the matter for consideration by the larger Bench.
In the  referral
order dated 19.8.2008, the  two-Judge  Bench  after  noticing  the  relevant
provisions of the Karnataka Sales Tax Act, 1957 and the distinction  between
a contract of sale and a works contract  made the reference  to  the  larger
Bench by observing as follows :
          “We have prima facie some difficulty in accepting the proposition
          laid down in Para 20 quoted above.
 Firstly, in  our  view,  prima
          facie, M/s Larsen & Toubro - petitioner herein, being a developer
          had undertaken the contract to develop  the  property  of  Dinesh
          Ranka.
Secondly, the Show Cause Notice proceeds only on the basis
          that Tripartite Agreement is the works contract.
Thirdly, in  the
          Show Cause Notice there is no allegation made by  the  Department
          that there  is  monetary  consideration  involved  in  the  first
          contract which is the Development Agreement.


          Be that as it may, apart from the disputes  in  hand,  the  point
          which we have to examine is
whether the ratio of the judgment  of
          the Division Bench in the case of Raheja Development  Corporation
          (supra) as enunciated in Para 20, is correct. If the  Development
          Agreement is not a works contract could the Department rely  upon
          the second  contract,  which  is  the  Tripartite  Agreement  and
          interpret it to be a works contract, as defined  under  the  1957
          Act.   
The Department has relied upon only the judgment  of  this
          Court in Raheja Development Corporation(supra) case because  para
          20 does assist the Department.
However, we are of the  view  that
          if the ratio of Raheja Development case is to  be  accepted  then
          there would  be  no  difference  between  works  contract  and  a
          contract for sale of chattel as a chattel.
 Lastly, could it  be
          said that petitioner - Company was the contractor for prospective
          flat purchaser.  
 Under  the  definition  of  the  term  "works
          contract" as quoted above the contractor must have undertaken the
          work of construction for and on behalf of the  contractor  (sic.)
          for  cash,  deferred  or  any   other   valuable   consideration.
       
According to the Department, Development Agreement is  not  works
          contract but the Tripartite Agreement is  works  contract  which,
          prima facie, appears to be fallacious.    There is no  allegation
          that the Tripartite Agreement is sham or bogus.


          For the aforestated reasons, we direct the Office to  place  this
          matter  before  the  Hon'ble  Chief   Justice   for   appropriate
          directions in this regard,  as  we  are  of  the  view  that  the
          judgment of Division Bench in  the  case  of  Raheja  Development
          (supra) needs re-consideration by the larger Bench.”

3.          Of the 26 appeals under consideration before  us,  14  are  from
Karnataka  and  12  from  Maharashtra.
Insofar  as  Karnataka  appeals  are
concerned, it is appropriate that we take the facts from  the  leading  case
being Larsen and Toubro2.
The  ECC  division  of  Larsen  and  Toubro  (for
short, “L&T”) is engaged in property development along with  the  owners  of
vacant sites. 
On 19.10.1995, L&T entered into a development  agreement  with
Dinesh Ranka, owner of the land bearing survey numbers 90/1, 91, 92  (Part),
94, 95 and 96/1 (Part) together measuring 34 acres all situated at  Kothanur
Village, Begur Hobli, Bangalore South Taluk, Bangalore, for construction  of
a multi-storeyed apartment complex. 
The owner was  to  contribute  his  land
and L&T was to construct the apartment complex. 
After  development,  25%  of
the total space  was to belong to the owner and  75%  to  L&T.  
A  power  of
attorney was executed by the owner of the land in favour of  L&T  to  enable
it to  negotiate  and  book  orders  from  the  prospective  purchasers  for
allotment of built up area. 
Accordingly,  L&T  entered  into  agreements  of
sale with intended purchasers. The agreements provided  that  on  completion
of the construction, the apartments would be handed over to  the  purchasers
who will  get an undivided interest in the  land  also.  
Sale  deeds,  thus,
were executed in favour of the intended purchasers by L&T and the owner.
4.          On 12.07.2005, the business premises of L&T were   inspected  by
the Deputy Commissioner of Commercial  Taxes  (Intelligence-1)  South  Zone,
Koramangala,   Bangalore   (hereinafter   referred   to   as   the   ‘Deputy
Commissioner’)  and  a  detailed  statement  of  the  Finance  Manager   was
recorded.
5.          On 21.12.2005,  the  Deputy  Commissioner  called  upon  L&T  to
furnish the details  of  development  project.   L&T  furnished  details  on
24.07.2005 and 26.09.2005.
6.          On 04.10.2005, the  Deputy  Commissioner  served  a  show  cause
notice on L&T stating that it was liable to tax as per the decision of  this
Court in Raheja Development1.
L&T responded to the show  cause  notice  and
submitted preliminary objections on 10.10.2005. By a  further  communication
dated 10.11.2005, L&T objected to the assessment of tax for  development  of
projects by it.
The   L&T  inter  alia   submitted  that  the  development
agreement was not a works contract per se on account  of  the  reasons:  
(a) the agreement was to develop and market flats to customers; (b)  the  intent and purpose of the agreement was to develop property by the  petitioners  on the one hand and the land owner on  the  other;  
(c)  the  construction  and development of the said  land involved no monetary  consideration;  and  
(d) the only consideration was that upon the completion of the  entire  project, L&T would be entitled to 75 per cent of the same.
7.    Again on 04.01.2006, the business premises of L&T were  inspected  and
certain documents like agreement copies and other documents relating to  the
transactions of the sale of flats were seized for the  purposes  of  further
investigation and verification.
8.          On  02.02.2006,  the  Deputy  Commissioner  served  upon  L&T  a
further  notice  proposing  to  tax  the  sale  of  materials  used  in  the
construction of flats on the ground that it was entitled to 75 per  cent  of
the share of the projects. L&T filed detailed objections to this  notice  as
well.
9.           On  03.07.2006,  the  Deputy  Commissioner  issued  provisional assessment orders under Section 28(6) of the Karnataka Sales Tax  Act,  1957
(for short, ‘KST Act’) for the years 2000-01 to  2004-05.  
Along   with  the
provisional orders, the Deputy  Commissioner   also  issued  demand  notices raising a total   demand of  Rs. 3,99,28,636/-.
10.         Initially, L&T preferred  a  writ  petition  before  this  Court
challenging the above demands but that writ petition  was  withdrawn  and  a
writ petition under Article 226 of  the  Constitution  of  India  was  filed
before the Karnataka High Court.
11.         The Single Judge of the Karnataka  High  Court  noted  that  the
controversy raised by the L&T was covered by the decision of this  Court  in
Raheja  Development1  and,  accordingly,  dismissed  the  writ  petition  on
10.07.2007 by observing as follows:
           “From the aforesaid observations of the Apex Court  it  is  very much clear that as the petitioner No.  1  had  entered  into  an     agreement to  carry  out  construction  activity  on  behalf  of   someone else for cash or for deferred payment or for  any  other   valuable construction,  it would be carrying out works  contract   and therefore would become liable to pay  turnover  tax  on  the    transfer involved in such work contracts.  It  is  also  not  in  dispute in this matter that the agreement  of  sale  is  entered
           into between the first petitioner and the  buyers  of  the  flat
           even prior to completion of the construction  of  the  building.
           Under such circumstances, as has been held by the Apex Court  in
           the RAHEJA DEVELOPMENT CORPORATION’s Case, the  petitioners  are
           liable to pay the turnover tax on the transfer of goods involved
           in such ‘works contract’.  In view of the dictum  laid  down  by
           the recent judgment cited supra, this Court does  not  find  any
           merit in this writ petition.”

12.         L&T preferred an intra-court  appeal.   The  Division  Bench  of
that Court concurred with the Single Judge and dismissed the writ appeal  by
expressing its opinion as follows:
           “In our view, so far as the definition  of  ‘work  contract’  in
           almost similar situation as in the present case has  been   well
           considered by the Hon’ble Supreme Court in the case of K. RAHEJA
           DEVELOPMENT CORPORATION (supra).  The  question  as  to  whether
           that judgment as per Article 141 of the Constitution of India is
           the law of the land binding on all the Courts  in  the  Country.
           Prima facie, we find that the facts and   circumstances in  that
           case are almost similar to the present case  and  as  such,  the
           ratio laid down in the RAHEJA’s Case  and  relied  upon  by  the
           learned Single Judge is, in our view, just and proper. So far as
           the other pronouncements are concerned, if the  appellant  feels
           that it is necessary to get the pronouncement in  RAHEJA’s  Case
           reviewed, it is open for him to approach the Apex Court and this
           Court cannot substitute its own findings on the questions  since
           the same has already been decided by the Apex Court in  RAHEJA’s
           case.”


13.         Insofar as appeals from Maharashtra are  concerned,  they  arise
from the judgment of the Bombay  High  Court.  The  Bombay  High  Court  was
concerned with the  group of matters  wherein  challenge  was  laid  to  the
constitutional validity of  Section 2(24) of  the  Maharashtra  Value  Added
Tax Act, 2002 (for short, “MVAT Act”) as amended  initially  by  Maharashtra
Act XXXII of 2006 and thereafter by Maharashtra Act XXV  of  2007  and  Rule
58(1A) of the Maharashtra Value Added Tax  Rules,  2005  (for  short,  “MVAT
Rules”).
14.         The Division Bench of the Bombay High Court  on  examination  of
rival contentions has, inter alia, held; (a) works  contract  have  numerous
variations and it is not possible to  accept  the  contention  either  as  a
matter of principle or as a matter of interpretation  that  a  contract  for
works in the course of which title  is transferred  to  the  flat  purchaser
would cease to be works contract;  (b) the provisions of MOFA  recognise  an
interest of the  purchaser of the apartment, not  only  in  respect  of  the
apartment which forms the subject  matter  of  the  purchase,  but  also  an
undivided interest, described as  a  percentage  in  the  common  areas  and
facilities; (c) the amendment to Section 2(24)   clarifies  the  legislative
intent that a transfer of property in goods involved  in  the  execution  of
works contract including an  agreement  for  building  and  construction  of
immovable property would fall within the description  of  a  sale  of  goods
within the meaning of that provision and it brings within the ambit of  that
expression “transactions of that nature” which are referable to Article  366
(29-A)(b); (d) by amended definition of  the  expression  “sale”  in  clause
(b)(ii) of  the  explanation  to  Section  2(24),   the  transactions  which
involve works contract have been  covered;  (e)  the  amendment  in  Section
2(24) does not transgress the boundary set out  in  Article  366(29-A);  (f)
Rule 58(1A) of the MVAT Rules provides 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  involved  in  the
execution of the construction  contract  is  also  transferred,  it  is  the
latter component which is brought to tax; the value  of  the  goods  at  the
time of transfer is to be calculated after making the deductions  which  are
specified under sub-rule (1);  and (g)  Rule

58(1A) provides for  a measure for the tax by  excluding  the  cost  of  the
land.
15.         The Division Bench of the Bombay  High  Court,  thus,  found  no
merit in the challenge to the constitutional validity of  Section  2(24)  of
the MVAT Act and Rule 58(1A) of the MVAT Rules. The trade circulars and  the
notifications were also found to be legal and  consequently  writ  petitions
were dismissed.
16.         We have  heard  learned  senior  counsel  and  counsel  for  the
appellants and learned senior counsel for Karnataka  and  learned  Advocate-
General and learned senior counsel for Maharashtra at quite some length.
17.         Mr. Rohinton F. Nariman, learned senior counsel for L&T led  the
arguments on behalf  of  the  appellants.  His  submission  is  that  Raheja
Development1 does not lay down correct law.  He submits  that  insertion  of
clause 29-A (b) in Article 366 following the 61st Law Commission  Report  is
intended to separate the  goods  component  from  the  labour  and  services
component of a composite works contract.  The  amendment  does  not  in  any
manner undo Gannon Dunkerley-I[3] insofar as that decision  defines  what  a
works contract is.  In  this  regard,  learned  senior  counsel  extensively
referred to the decisions of this  Court  in  Builders’  Association[4]  and
Bharat Sanchar[5].  It is argued by him that in Raheja Development1  it  was
incorrectly assumed that the definition of works contract was wide  although
the definition of works contract in KST Act and  Madras  General  Sales  Tax
Act which was under consideration in Gannon Dunkerley-I3  was identical.
18.         Alternatively, it is argued by Mr. Rohinton F. Nariman  that  if
it is accepted that the definition of ‘works contract’ in KST  Act  is  wide
which takes within its fold the contracts that are not  commonly  understood
as works contract then this would  be  outside  Entry  54  List  II  of  the
Seventh Schedule of the Constitution for the reason  that  “works  contract”
as understood in Gannon Dunkerley-I3 has not in any  manner  been  upset  by
the constitutional amendment and would have  to  mean  “works  contract”  as
commonly understood.
19.         Criticizing  the  conclusions  drawn  in  paragraph  20  of  the
judgment in Raheja Development1, it is argued by  Mr.  Rohinton  F.  Nariman
that these conclusions are incorrect  for,  (a)  the  well  known  tests  to
determine as to whether a particular  contract  is  a  “works  contract”  or
“contract of sale” have not been adverted to;  (b) the contract is not  read
as a whole. Its substance and the main object has not  been  looked  at  and
one phrase is torn out of context without adverting to  any  other  part  of
the contract and based on this reasoning the contract is said to be a  works
contract;  (c) though it is  noticed that construction/development is to  be
on payment of a  price  in  various  installments  but  does  not  draw  any
conclusion from it; (d) it is noticed that  developer  has  a  lien  on  the
property but incorrectly states that  the  lien  is  because  they  are  not
owners. The lien is obviously so that if monies are not recovered  from  the
prospective flat purchasers, the lien  can  be  exercised,  showing  thereby
that the contract is a contract of an agreement to sell immovable  property;
(e) after noticing that developer can terminate the  agreement  if  any  one
installment is not paid and can forfeit 10% of  the  amount  that  has  been
paid and can ultimately resell the flat, it is held  that  the  presence  of
such a clause does not mean  that  the  agreement  ceases  to  be  a  “works
contract” without appreciating that such a clause would have no place  in  a
works contract and can only be consistent with the contract for the sale  of
immovable property inasmuch as termination can  take  place  if  the  entire
consideration for the immovable property is not paid; (f) it is stated  that
if there is termination but there is no re-sale, there  would  be  no  works
contract only to that extent which is again wholly  incorrect  because  post
termination what happens to a particular flat is of  no  relevance  inasmuch
as the prospective flat purchaser goes out of  the  picture;   and  (g)  the
distinction between a flat being constructed and a flat  under  construction
is a distinction without a difference  for  the  reason  that  the  judgment
notices that if the agreement is entered into  after  the  flat  is  already
constructed, there would be no ‘sale’  and  no  ‘works  contract’.  This  is
obviously for the reason that the flat has already  been  developed  by  the
developer using his material  and  his  plan  and  is  sold  as  such  to  a
purchaser.

20.         Mr. Rohinton F. Nariman extensively referred  to  the  decisions
of this Court in B.C. Kame[6] and Hindustan Shipyard[7]. With  reference  to
paragraphs 7 to 16, 22 and 24 to 26 in Hindustan Shipyard7, it is  submitted
that in a somewhat similar fact situation, this  Court  came  to  conclusion
that construction of various ships for and on behalf of the  customer  would
amount to a ‘sale’ and not to a ‘works contract’.
21.         Based on the various clauses of the tripartite agreement, it  is
argued that the main object of  the  agreement  read  as  a  whole  and  the
substance of the agreement is to  sell  and  convey  fraction  of  the  land
together with a fully constructed flat only when all installments have  been
fully paid. The work undertaken is for the joint development of the  project
as a whole, i.e., work is undertaken by the developer for  himself  and  for
the owner. The construction is not carried out for  and  on  behalf  of  the
purchaser, but it is carried out entirely by the  owner/developer  in  order
to exploit or get the best price  for  the  land  and  the  structure  built
thereon from various flat purchasers. The flat is to be sold as a  flat  and
not an aggregate of its component parts. No work  is  carried  out  for  the
purchaser who gets title to the property only after all  work  is  complete.
Learned senior counsel argued that the ultimate test would  be:  if  a  suit
for specific  performance  is  filed  by  the  flat  purchaser  against  the
owner/developer, such suit would invariably be for the conveyance  of  title
and not for the  construction  of  a  building.  Conversely  a  suit  by  an
owner/developer  against  the  flat  purchaser  would  be  for  payment   of
consideration of a flat/fractional interest in the  land.  Such  suit  would
never be for payment of work done at the behest of the  flat  purchaser  and
payment of consideration therefor. It is, thus, submitted that the  judgment
in Raheja Development1 does not  lay  down  good  law  and  deserves  to  be
overruled.

22.         Mr. K.V. Vishwanathan, learned senior  counsel  for  Maharashtra
Chamber of Housing  Industries  elaborately  argued  based          on   the
following contentions. First, that to  attract  Article  366(29-A)(b)  there
has to be a “works contract” and in  the  process  of  executing  the  works
contract if certain transfer of property  occurs,  such  transfer  would  be
deemed to be sale.  If there is no works contract, the question of  applying
Article 366(29-A)(b)  would  not  arise.  A  distinction  is  drawn  between
“works” and “works contract”.  It is contended that an  agreement  for  sale
is an  agreement to  transfer  immovable  property  as an indivisible  whole
which will result in the execution of a conveyance.  There is no element  of
works contract involved. Even if for  the  purpose  of  complying  with  the
obligations of an agreement for sale, a vendor carries out  some  works,  it
is not on account of any works contract. Even  if  there  are  some  “works”
involved, there is no “works contract” between the promoter and purchaser.
23.         Secondly, that the applicability of Article 366(29-A) read  with
Entry 54 of List II will  arise only in  matters  which  are  otherwise  not
covered under the ambit of sale and cannot apply to an  agreement  for  sale
of immovable property resulting in a conveyance.  He  pressed  into  service
(i)  test  of  enforceability  (ii)  common  parlance  test  (view  of   the
reasonable  man)  (iii)  test  of  substance  of  the  contract  and    (iv)
assignment test. Insofar as common parlance test and test  of  substance  of
the contract are concerned,  Mr.  K.V.  Vishwanathan  placed  reliance  upon
Bharat Sanchar5. As regards assignment test, paragraph 36  of  the  judgment
in Builders’ Association4 was referred to by the learned senior counsel.
24.         Thirdly, that amended definition  under  Article  366(29-A)  has
not conferred on the States a larger freedom than what they had  before  the
amendment in regard to their power to levy sales tax under Entry 54  of  the
State List. Paragraph 40 of the Builders’ Association4 is relied  upon.   It
is contended that an agreement to sell entered  into  between  the  promoter
and purchaser continues to remain an agreement to sell  and  the  provisions
of MOFA does not change the nature of such agreement. Reference is  made  to
the  decision of this Court in Nahalchand Laloochand[8].
25.         And fourthly, that if State’s submissions are accepted,  Article
366 (29-A)(b) has to be read as “a tax on the transfer of property  (whether
as goods or in some other  form)  involving  works”  which   will  not  only
distort the amendment but  will  render  the  words  “in  goods”  redundant.
Article 366 (29-A)(b) does not  provide  for  such  an  interpretation.  The
phrase “in some other form”  takes  its  colour  from  the  preceding  words
namely, “transfer of property in goods” and “whether  as  goods”.  The  said
phrase “in some other form” cannot and would not mean  the  transfer  of  an
indivisible immovable property as  a  whole.   Reliance  is  placed  on  the
decision of this Court in Purshottam Premji[9] to  differentiate  between  a
sale and works contract. It is contended  that  the  distinguishing  factors
that have been laid down in Purshottam Premji9 which were relied on  by  the
Law Commission should be considered as the only  tests  to  differentiate  a
works contract and a contract for sale.
26.         Dr. Abhishek Manu Singhvi, learned senior counsel appearing  for
Promoters and Builders Association made brief oral  submissions  which  were
followed by detailed written submissions.  The  principal  issue,  according
to   him,   is,     whether   the   agreement   entered   into   between   a
promoter/developer and a flat  purchaser,  pursuant  to  the  provisions  of
Section 4 read with Rule 5 and Form V  of  MOFA  can  be  divided  into  two
parts,  (i)  an  agreement  between  the  promoter/developer  and  the  flat
purchaser  to  construct  a  flat;  and  (ii)  an  agreement   between   the
promoter/developer and the flat purchaser to eventually  sell  the  flat  so
constructed and whether the first part of the said agreement can be  treated
as a works contract whereby the flat purchaser is accorded the status  of  a
principal employer and the promoter/developer acts as a mere contractor  for
him and constructs the flat for and on behalf of the flat  purchaser.  While
conceding that an integral part of the transaction of sale of a flat is  the
activity of construction of the said flat but the moot question in his  view
is  whether  such  activity  of  construction  has  the  characteristics  or
elements  of  works  contract.  Learned  senior  counsel   highlighted   the
distinguishing features between “works contract” and “contract for  sale  of
goods” and having regard to that  it  is  submitted  that  the  activity  of
construction undertaken by the  promoter/developer  cannot  be  said  to  be
works contract for the reasons,  (i) that developer does  not  construct  at
the behest of the flat  purchaser  as  on  various  occasions  the  flat  is
constructed without there being any booking for  the  said  flat;  (ii)  the
main intention of the agreement between the promoter/developer and the  flat
purchaser is the sale of flat and  not  to  appoint  the  developer  as  the
contractor of the flat purchaser  for  the  purposes  of  carrying  out  the
construction of the flat for and on behalf of  the  flat  purchaser;   (iii)
the flat purchaser does not have any role in conceptualizing the project  of
construction nor does he have any say in the designing and  lay-out  of  the
building to be constructed. The flat purchaser does  not  have  any  control
over the type and standard of the material to be used  in  the  construction
of the building.  He does not get any right  to  monitor  or  supervise  the
construction activity; (iv) the  ownership  in  the  material  used  in  the
construction remains with the  promoter/developer  and  the  said  ownership
passes to the flat purchaser only on the eventual conveyance  of  the  flat;
(v)  the  accretion  to  the   goods   happens   in   the   hands   of   the
promoter/developer   and  not  when  the  flat  is  conveyed  to  the   flat
purchaser;  and (vi) the construction linked  payment  schedule  is  nothing
but a method of payment in installments.
27.         It is the submission of Dr. Abhishek Manu Singhvi  that  Article
366(29-A)(b) by a  deeming fiction only deems the transfer  of  property  in
goods in execution of a works contract as a  sale  but  the  said  amendment
does not contemplate a deemed  transfer of goods  which  actually  does  not
happen at the time of execution of the contract.  The provisions of MOFA  do
not change the  character  of  the  transaction  entered  into  between  the
promoter/developer and the flat purchaser  from  that  of  a  pure  sale  of
immovable property to a works contract. Even in the  absence  of  a  statute
like MOFA, the obligations and restrictions prescribed therein  would  still
be present as part of obligations under the Indian Contract Act/Transfer  of
Property Act and its  penalties  for  breaching  the  same  would  still  be
applicable under the penal statutes.
28.         While referring to Section 2(24) MVAT Act, it  is  submitted  by
the learned senior counsel that  a  plain  reading  of  amended  explanation
b(ii) to Section 2(24) of that Act will show that the  said  provision   has
not brought within its scope transactions which are not in  their  substance
works contract. The amendment brought in explanation b(ii) to Section  2(24)
is merely explanatory in nature. Even after the  amendment  the  transaction
in which there is transfer of property in goods has to  be  works  contract.
The amendment cannot be interpreted to mean that  transfer  of  property  in
goods in execution of any agreement even if it is not  a works contract  has
now been included in  the  definition  of  sale.  Such  interpretation  will
render the provision unconstitutional. Learned senior counsel  submits  that
the manner in which the State  Government  is  expanding  scope  of  Section
2(24) on the basis of the decision of this Court in Raheja Development1,  it
has rendered the said provision unconstitutional. According to Dr.  Abhishek
Manu Singhvi, Raheja Development1  therefore needs to  be  reconsidered  and
overruled.
29.         As regards constitutional validity of  the  provisions  of  Rule
58(1) and 58(1A) of  MVAT Rules, it is submitted that these Rules and   Rule
58(1-A) of the  2005  Rules  include  an  element  of  profit  earned  by  a
promoter/developer on the sale of a flat. There are no  provisions  to  take
the profit element from arriving at the value of goods. As a  result  income
earned by the promoter/developer from the profit on sale of  the  flat  also
gets included in the value of goods and  eventually  the  said  income  gets
taxed. Imposition of such tax on the income  of  the  promoter/developer  is
beyond the legislative competence of the State Government.
30.          Without  prejudice  to  the  above  arguments,  it  is  firstly
submitted that assuming that the activity of construction undertaken by  the
developer is a works contract then the same would be a works  contract  only
from the stage when the developer enters  into  a  contract  with  the  flat
purchaser. Only the value addition made to the goods transferred  after  the
agreement is entered into with the flat purchaser  can  be  made  chargeable
under MVAT Act. VAT cannot be charged on the entire sale price as  described
in the agreement entered  into  between  developer  and  flat  purchaser  as
sought to be done under the composition scheme.  Secondly, it  is  submitted
that  assuming that the agreement entered into  between  the  developer  and
the flat purchaser has two components, namely, a works contract and sale  of
proportionate share in the land then the  stamp  duty  on  such  transaction
should be levied under Article 25 (stamp duty for conveyance)  only  on  the
component sale of proportionate share in the land and the stamp duty on  the
value of construction carried out ought  to  be  charged  under  Article  63
(stamp duty for works contract).

31.          Mr.  N.  Venkatraman,  learned  senior  counsel  for   Builders
Association while highlighting the background in which  clause  (29-A)  came
to  be  inserted  in  Article  366  and  drawing  distinction   between    a
conventional sale and a works contract submits that ‘transfer’  is  imminent
and indispensable requirement in both but in  the  case  of  a  conventional
sale, property in goods gets transferred as intended by  the  parties  while
in a works contract, property in goods get  transferred  through  accretion.
Few illustrations have been referred to by him  and  it  is  submitted  that
‘test of accretion’ which  is  sine  qua  non  for  works  contract  is  not
satisfied in the agreements under consideration.   L&T  II[10]  is  referred
which says, “once the work is assigned by L&T  to  its  sub-contractor,  L&T
ceases to execute the works contract in the sense  contemplated  by  Article
366 (29-A)(b) because property passes by accretion and there is no  property
in goods with the contractor which is capable of a  re-transfer  whether  as
goods or in some other form”.
32.          Learned  senior  counsel  contends  that  when  ultimately  the
constructed flat is transferred or sold,  it becomes a sale of an  immovable
property at which point of time the question of transfer on accretion   does
not arise.  The transfer of goods has to take place in  the  course  of  the
construction of a building before becoming an immovable property though  the
contract may be indivisible contract for construction of a building  in  the
form of an immovable property.   Once  it  becomes  an  immovable  property,
Article 366(29-A)(b) cannot be pressed into service to such  a  transaction.
He submits that an agreement to sell is  not  a  sale  in  its  conventional
sense and, therefore, cannot be a deemed sale also.
33.         It is submitted by Mr. N.  Venkatraman  that  Section  2(24)  of
MVAT Act  and Rules 58 and  58(1A)  of  MVAT  Rules  seek  to  redefine  the
taxable event  by moving away  from  theory  of  accretion  to  transfer  of
immovable property by way of conveyance and that  renders  these  provisions
unconstitutional.
34.         Mr. Vinod Bobde, learned senior counsel appearing on  behalf  of
Promoters and Builders Association, Nasik argues  that  after  insertion  of
clause 29-A in Article 366, the works contract which was an indivisible  one
has by a legal fiction altered into a contract which is divisible  into  one
for sale of goods and the other  for  supply  of  labour.  Thus,  the  goods
component is exigible to sales tax. However, the amendment has not  enlarged
the meaning of “works contract” as commonly understood.  With  reference  to
Section 2(24) explanation (b)(ii) of the MVAT Act,  learned  senior  counsel
submits that this provision aims at taxing the sale  of  goods  involved  in
the execution of a works contract. In the case of  a  building  contract  on
land, the  contractor  must  be  carrying  out  the  building  activity  for
consideration  which  obviously  means   that   he   should   be   receiving
consideration from the  person  who  has  engaged  him  as  contractor.  The
provision does not cover an owner or developer of land who  is  constructing
a building for the purpose  of  ultimately  selling  the  flats  therein  to
purchasers. Such owner or developer does not receive any consideration  from
anyone for carrying out of  the  building  activity;  what  he  receives  is
simply the sale price  of  the  flats  from  the  purchasers.  According  to
             Mr. Vinod Bobde, the provisions so read  would  not  transgress
Article 366 (29-A) but if it is read as was done in Raheja Development1,  it
would be unconstitutional.
35.         It is argued by Mr.  Vinod  Bobde  that  an  agreement  of  sale
whether simplicitor or in Form V under the MOFA is not a  “works  contract”.
It only settles terms for the sale  of  property  and  the  sale  ultimately
takes place in pursuance thereof unless the  contract  is  terminated.   The
“works”  component  and  “goods”  component  are  totally  absent   in   the
agreement. There is no question of taxing sale of goods in an  agreement  of
sale. The buyer does pay the sales tax on  the  purchase  of  goods/material
used in construction of the building.  Such  goods/materials  are  purchased
from the dealers registered under the Act. What the taxing authorities  seek
to do by treating an agreement for sale of immovable property, namely,  flat
to be a “works contract” within the meaning of  Section  2(24),  explanation
(b)(ii) is to again tax the goods used in the construction of the  building.
This cannot be done because the builder is not building  as  the  contractor
for the flat purchaser but for himself,  and  he  cannot  possibly  transfer
such goods to himself.
36.         Mr. Vinod Bobde submits that the  High  Court’s  view  that  the
element of sale of immovable property can be there in a  works  contract  is
clearly erroneous. The agreement of sale in Form V under the MOFA is not  an
agreement simpliciter and the aspect  that    MOFA  creates  the  right  and
interest  in  the  flat  as  a  measure  for  protecting  prospective   flat
purchasers is irrelevant. With reference to Entries 25,  5  and  63  of  the
Bombay Stamp Act, 1958 which provide for stamp duty on conveyance  including
an agreement for sale of property, agreement or its record or memorandum  of
agreement and works contract respectively, it is submitted  that  State  has
been levying stamp duty on agreement of sale under Entry 25  and  not  under
Entry 63 and hence the State does not consider an agreement for  sale to  be
a works contract.
37.         Mr. Shivaji M. Jadhav learned counsel appearing for one  of  the
appellants has broadly followed the above  submissions.    He  submits  that
expression “in some other form”  in  Article  366(29-A)(b)  does  not   mean
immovable property but some other form  of  goods  being  movable  property.
According to him,  artificial rules or other enactments  like  MOFA,  Bombay
Stamp Act would not be relevant at all in ascertaining whether  transfer  of
property in goods has taken place in the execution of works contract.  Model
agreement Form V in MOFA does not indicate that construction of  a  flat  by
the developer/promoter is  being  carried  on  for  and  on  behalf  of  the
purchaser of the flat. Rather it supports the view that buyer is  interested
in what is constructed as  a  flat  and  not  the  building  material.  MOFA
ensures that the  theory  of  accretion  is  not  applicable  and  the  flat
purchaser is not left at the mercy of the builder.
38.         Learned counsel also submits that if Section  2(24)  explanation
b(ii) of the MVAT Act is read in the  manner  suggested  by  this  Court  in
Raheja  Development1,  such  provision  is  rendered  unconstitutional.   As
regards Rule 58(1) and Rule 58 (1-A), the submission of the learned  counsel
is that these Rules  suffer from  various  infirmities  and  are  unable  to
carry out the objectives of MVAT Act.
39.         In the counter arguments advanced on behalf of the two States  –
Karnataka and Maharashtra - Raheja Development1 has been  stoutly  defended.
Mr. K.N. Bhat, learned senior counsel for Karnataka submits that view  taken
in Raheja Development1 is correct and needs no  reconsideration  –  both  on
merits as well as on the basis  of  binding  precedents  on  the  principles
governing reconsideration of an earlier decision. He  submits  that  Article
366(29-A) uses the phraseology employed in Entry 54 of List II  that  reads,
“taxes on sale or purchase of goods ….” For the purpose  of  Entry  54  List
II, “taxes on the sale or purchase of goods” includes “tax on  the  transfer
of property in goods (whether as goods or in some other  form)  involved  in
the execution of works contract”. Transfer  of  property  in  goods  is  the
essence of definition of ‘sale’  in Section 4 of  the  Sale  of  Goods  Act.
Article 366(29-A)(b) can be rephrased  as  “a  tax  on  the  sale  of  goods
involved in the execution of a works  contract”  and  in  any  case  by  the
deeming fiction incorporated in the above provision, it shall be  deemed  to
be a sale of those goods by the person making the transfer  and  a  purchase
by a person to whom such transfer is made. The taxable event is  the  deemed
sale of goods involved in the execution of works contract. Article 366  (29-
A) has been inserted to remedy the situation arising from  the  decision  in
the Gannon Dunkerley-I3 where attempt to levy  sales  tax  on  the  sale  of
goods  involved  in  the  execution  of  works  contract  was  held  to   be
unconstitutional. This was on the basis that a works contract could  not  be
dissected into contract for “works and services” and contract for  “sale  of
goods”.   Mr.  K.N.  Bhat  submits,  relying  upon  para  41  in   Builders’
Association4, that definition of ‘works  contract’   KST  Act  does  not  go
beyond what is contemplated in the Constitution.
40.         Mr. K.N. Bhat’s submission is that in order to sustain  levy  of
sales tax on the goods deemed to have been sold in the execution  of   works
contract the following conditions are to be met,  (a) there  must  be  works
contract, i.e., any contract to do construction, fabrication  and the  like;
(b) the goods deemed to have been sold should  have  been  involved  in  the
execution of a works contract; and (c) the property in those goods  must  be
transferred  to a third party either as goods or in some  other  form.   The
taxable event is deemed sale.  It is irrelevant whether  transferee  was   a
party to the works contract. All that is required to be enquired into is  as
to whether the goods were involved in the execution of the works. By  Forty-
sixth Constitutional Amendment, the effect of Gannon Dunkerley-I3  has  been
neutralized.  Now that the works contract which  was  indivisible  according
to Gannon  Dunkerley-I3  are   divisible  and  the  goods  involved  in  the
execution of works contract that were then not taxable are now taxable.
41.         The whole idea by insertion of clause 29-A(b)  in  Article  366,
Mr. K.N. Bhat submits, is  to  make  the  materials  used  in  the  building
activity liable to sales tax. Any other interpretation will be  contrary  to
the two decisions of the Constitution Benches in Builders’ Association4  and
Gannon  Dunkerley-II[11].   So  construed  works  contract  simply  means  a
construction activity. If the building is retained by the  builder  himself,
there is no deemed sale.
42.         Mr.K.N. Bhat, however, submits that  the  statement  of  law  in
Raheja Development1  that when a completed building is  sold,  there  is  no
works contract and, therefore, no liability  to  tax,  may  not  be  correct
statement of law.  If the building was intended for  sale  and  is  in  fact
sold,  tax is attracted to the deemed sale. Even in such cases,  goods  used
in the construction are deemed to have been sold  by  the  builder  (dealer)
to the purchaser.
43.         It  also urged by Mr. K.N. Bhat that  in   the  referral  order,
the Bench has entertained  certain doubts in  respect  of  the  decision  of
this Court in Raheja Development1 . However, such doubts that a better  view
was possible is not good enough to reconsider the  decision.   Relying  upon
decisions of this Court in Gannon Dunkerley-II11 and  the  earlier  decision
in Keshav Mills[12], he submits  that while recommending reconsideration  of
an earlier decision,  the Bench must first come to the conclusion  that  the
earlier decision was clearly wrong for  the  reasons  stated.  According  to
him,  within  the  settled  standards,  recommendation  to  consider  Raheja
Development1 does not fall. Moreover, since  Raheja  Development1   in  May,
2005 almost all  States  have  modified  their  laws  in  line  with  Raheja
Development1  and the need for change in a  settled  practice  is  not  made
out.
44.           Mr.   Darius   Khambata,   learned   Advocate   General    and
   Mr. Shekhar Naphade, learned senior counsel advanced arguments on  behalf
of Maharashtra.  It is argued that after  insertion  of   Article  366  (29-
A)(b) in  the Constitution, the transfer of  movable  property  in  a  works
contract is deemed to be sale even though it is not a sale as per  the  Sale
of Goods Act. The works contract  is  now  divisible.  Article  366(29-A)(b)
clarifies that the transfer of the goods may be as goods or  in  some  other
form. Therefore, the goods may remain as goods or cease to be  goods,  i.e.,
they may merge into immovable property. In this regard, extensive  reference
has been made to Builders’ Association4 and it is submitted  that  the  same
submissions made by  the  States  which  were  rejected  by  this  Court  in
Builders’ Association4 are now sought to be raised almost on  similar  lines
by the appellants which have been rightly rejected by the High Court.
45.          Learned  Advocate  General  and  learned  senior  counsel   for
Maharashtra submit that the term “works contract” is nothing but a  contract
in which one of the parties is obliged to undertake  or  to  execute  works.
The expression “works” is extremely wide and can  either  mean  the  act  of
bestowing labour or that on which the labour is bestowed.  In  this  regard,
the  two decisions of this  Court  (i)  Dewan  Joynal  Abedin[13]  and  (ii)
Kartar Singh[14] have been referred. It is submitted that the  term  “works”
would include the final product and, therefore, a works contract  cannot  be
confined to a contract to provide labour and services but is a contract  for
undertaking or for bringing into existence some “works”. Nothing in  Article
366(29-A)(b) limits the term “works  contract”.   Although,  works  contract
usually have only two elements, i.e., labour and services as  well  as  sale
of goods but the addition  of  few  other  elements  does  not  denude  such
contract being  works contract. It is possible that there could be  a  works
contract coupled with the sale of immovable property. The  transaction  does
not cease to be a  works  contract  merely  because  it  may  include  other
obligations.

46.         Learned Advocate General argues that  even  in  the  case  of  a
works contract,  the ownership of the goods need not pass  only  by  way  of
accretion or accession to the owner of the immovable property to which  they
are affixed or upon which the building is built;  property  can  pass  under
the terms of a contract or by statute.  He submits that the tests laid  down
in judgments prior to Forty-sixth Constitutional Amendment  for  determining
whether a contract is a works contract or a sale  of  goods  are  no  longer
applicable. There is no question of ascertaining the dominant  intention  of
the contract now since the sale of goods element  is  a  deemed  sale  under
Article 366(29-A)(b) and can be taxed separately.  Hindustan  Shipyard7  was
distinguished and it was submitted that in Associated Cement[15]   a  three-
Judge Bench of this Court has  overruled  the  decision  in  Rainbow  Colour
Lab[16] and it has  been  expressly  noted  that  cases  such  as  Hindustan
Shipyard7 relate to the situation prior to Forty-sixth Amendment  where  the
court had no jurisdiction to bifurcate a works  contract  and  impose  sales
tax on the transfer of property in goods involved in the  execution  of  the
contract.  Reference was also made to a decision of  this  Court  in  P.N.C.
Construction[17].  According to learned Advocate General, it has now

become possible for the States to levy sales tax on the value of  the  goods
involved in the works contract in the same way in which the  sales  tax  was
leviable on the price of the goods supplied in a building contract. This  is
where the concept of “value addition” comes in. It is on account  of  Forty-
sixth Amendment to the Constitution that the State Government  is  empowered
to levy sales tax on the contract value which earlier was not possible.
47.          Mr.  Darius  Khambata  submits  that   a   composite   contract
comprising both a works contract and a transfer of immovable  property  does
not denude it of its character  as  a  works  contract.  According  to  him,
Article  366(29-A)(b)  provides  for  a  situation  where  the   goods   are
transferred in the form of immovable property. He referred to an  Australian
case, M.R. Hornibrook[18] in this regard which has  been  approved  by  this
Court in Builders’ Association4.
48.         Learned Advocate General  has  also  pressed  into  service  the
aspect theory of legislation. His submission is that  different  aspects  of
the same transaction can involve more  than  one  taxable  event.  There  is
nothing  to  prevent  the  taxation  of  different  aspects  of   the   same
transaction  as  separate  taxable  events.  This  would  not  constitute  a
splitting of an indivisible contract. Reference is made  to  a  decision  of
this Court in


Federation of Hotel  &  Restaurant[19].   The  submission  of  the   learned
Advocate General is  that transfer of immovable property cannot be taxed  as
a sale of goods but there is no constitutional bar to tax only the  sale  of
goods element and separately tax the transfer of immovable property.  Taxing
the sale of goods element in a works contract under  Article  366  (29-A)(b)
read with Entry 54 List II is permissible, provided the tax is  directed  to
the value of the  goods  and  does  not  purport  to  tax  the  transfer  of
immovable property.
49.         Stoutly defending the  impugned  judgment  of  the  Bombay  High
Court, learned Advocate  General  submits  that  Section  2(24)  explanation
b(ii) of MVAT Act has  been  rightly  held  to  be  constitutional   as  the
provisions in the MVAT Act offer diverse options for valuation of  the  sale
of goods element in a works contract.  Each of these options  is  consistent
with the methods approved of by this Court in Gannon Dunkerley-II11.
50.         As regards challenge to the constitutional validity of Rule  58A
and Rule 58(1A), it is submitted by   learned Advocate  General  that  these
provisions are consistent with the principles laid down in Gannon Dunkerley-
II11. The measure of tax is not determinative of its essential character  or
of the competence of the legislature. He sought  to  dispel  the  impression
that Rule 58(1A) may result in double taxation. Distinguishing the  decision
of this Court in Larsen & Toubro-II[20], learned  Advocate  General  submits
that the observations  made  in  para  19  does  not  apply  to  Maharashtra
inasmuch as Section 45(4) of the MVAT Act ensures  that  it  is  either  the
builder or the sub-contractor who pays the tax (being  treated  as  one  and
jointly/severally  liable).  In  any  case  all  claims  of  alleged  double
taxation will be determined in the process of assessment of each  individual
case.
51.         Highlighting the MOFA agreement in prescribed  Form  V,  learned
Advocate General argues that the clauses therein indicate that it  comprises
of a works contract along with the agreement for sale. There  is  no  reason
to deny the applicability of Article 366(29-A) to  such  a  works  contract.
His argument is that sale of goods element in the works  contract  contained
in a MOFA agreement is taxable under Section 2(24) explanation b(ii) of  the
MVAT Act.  As long  as  there  is  an  obligation  to  construct  under  the
agreement between the promoter and  the  flat  purchaser  (in  the  case  of
Maharashtra being an agreement under the MOFA)  the  deemed  sale  of  goods
involved in the execution of such a works contract can be taxed  even  after
incorporation of the goods in the works and  when  the  property  passes  as
between the promoter and the flat purchaser. It is  submitted that  what  is
at issue before this Court is not the  determination  of  when  the  taxable
event takes place but the exigibility to tax of a deemed sale of goods in  a
composite contract.
52.         Prior to Forty-sixth Amendment  in  the  Constitution,  levy  of
sales tax on the sale of goods  involved  in  the  execution  of  the  works
contract was held to be unconstitutional in Gannon Dunkerley-I3. That was  a
case where the assessee (Gannon  Dunkerley)  was  carrying  on  business  as
engineers and contractors. Its business consisted  mainly  of  execution  of
contracts  for  construction  of  buildings,  bridges,   dams,   roads   and
structural  contracts  of  all  kinds.  During  the  assessment  year  under
consideration,  the return filed  by the  assessee  showed  as  many  as  47
contracts most of which were building contracts which were executed  by  it.
From the total of the amount which  the  assessee  received  in  respect  of
sanitary contracts  and  other  contracts  20  per  cent  and  30  per  cent
respectively were deducted for labour and  the  balance  was  taken  as  the
turnover of the assessee for the assessment year in question. Sales tax  was
levied on the said balance treating it as taxable turnover under the  Madras
General Sales Tax Act, 1939. Assessee questioned the  levy of sales tax   on
the ground that there was no sale of  goods  as  understood  in  India  and,
therefore, no sales tax could be levied on any portion of the  amount  which
was received by the assessee from the  persons  for  whose  benefit  it  had
constructed  buildings.  The  Madras   High   Court   concluded   that   the
transactions in question were not contracts for sale  of  goods  as  defined
under the provisions of the Sale of Goods Act, 1930 which was  in  force  on
the date on which the Constitution  came  into  force  and,  therefore,  the
assessee was not liable to pay sales tax on the amounts received by it  from
the persons for whom  it  had  constructed  buildings  during  the  year  of
assessment. It is from this judgment that the  matter  reached  this  Court.
The Constitution Bench of this  Court  held  that  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 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. It was  held  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  State  Legislature
to impose tax on the supply  of  the  materials  used  in  such  a  contract
treating it as a sale. The Constitution Bench said,  “……..when the  work  to
be executed is, as in the present case, a house, the  construction  imbedded
on the land becomes an accretion to it on the principle  quicquid  plantatur
solo, solo cedit, and it vests in the other party not as  a  result  of  the
contract but as the owner of the land. Vide Hudson  on  Building  Contracts,
7th Edn., p. 386………”  It was further stated,  “…..that  exception  does  not
apply to buildings which are constructed in execution of a  works  contract,
and the law with reference to them is that the title to the same  passes  to
the owner of the land as an accretion thereto. Accordingly, there can be  no
question of title to the materials passing as  movables  in  favour  of  the
other party to the contract…….”
53.         In Gannon Dunkerley-I3, this  Court  held  that  in  a  building
contract which was one, entirely indivisible, there was  no  sale  of  goods
and it was not within the competence of the provincial State legislature  to
impose tax on the supply of materials used in such a  contract  treating  it
as a sale.  The above statement was founded on the premise  that  the  works
contract was a composite contract  which  is  inseparable  and  indivisible.
Entry 48 of List II of Schedule Seven of the Government of India  Act,  1935
was under consideration before this Court in  Gannon  Dunkerley-I3.   It  is
observed that the expression “sale of goods” in  that  entry  has  the  same
meaning as the said expression had in the  Sale  of  Goods  Act,  1930.   In
other words,  the  essential  ingredients  of  sale  of  goods  are  (i)  an
agreement to sell movables for a price and  (ii)  property  passing  therein
pursuant to that agreement.
54.         The problems connected with powers of States to levy tax,  inter
alia, on goods involved in execution  of  works  contract  following  Gannon
Dunkerley-I3 was elaborately examined by the Law Commission  of  India.   In
its 61st Report, Chapter 1A, the Law Commission  specifically  examined  the
taxability of works  contract.   The  Law  Commission  noted  the  essential
nature and features of the building contracts  and  the  difference  between
contract of works and contract for sale.  It examined the  question  whether
the power to tax indivisible contracts of works should be conferred  on  the
States. The Law Commission suggested three alternatives  (a)  amendment   in
the State List, Entry 54, or (b) adding a fresh entry in the State List,  or
(c) insertion in Article 366  a wide definition of “sale” so as  to  include
works contract.  It preferred the last one, as, in its opinion,  this  would
avoid multiple amendments.
55.          Having  regard  to  the  above  recommendation   of   the   Law
Commission, the Constitution Bill  No.52  of  1981  was  introduced  in  the
Parliament.*
56.          The  Parliament  then  enacted  the  Constitution  (Forty-sixth
Amendment)  Act,  1982  which  received  the  assent  of  the  President  on
02.02.1983.  Accordingly, clause 29-A was inserted in  Article  366  of  the
Constitution which is set out as below.**
57.         Following the above amendment in  the  Constitution,  the  sales
tax legislations in various States were amended  and  provisions  were  made
for  imposition  of  sales  tax  in  relation   to   works   contract.   The
constitutional  validity  of  the  Forty-sixth  Amendment   by   which   the
legislatures of the States were empowered  to  levy  sales  tax  on  certain
transactions described in clauses (a) to (f) of clause 29-A of  Article  366
of  the  Constitution  as  well  as  the  amendments  made  in   the   State
legislations were challenged in Builders’ Association4.    The  Constitution
Bench  of  this  Court  upheld  the  constitutionality  of  the  Forty-sixth
Amendment.  The Court  observed  that  the  object  of  the  new  definition
introduced in clause 29-A of Article 366 of the Constitution was to  enlarge
the scope of the expression “tax of sale or purchase of goods”  wherever  it
occurs in the Constitution so that it  may  include  within  its  scope  any
transfer, delivery or supply of goods that may take place under any  of  the
transactions referred  to  in  sub-clauses  (a)  to  (f).  The  Constitution
Bench***  explained that clause 29-A refers to 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. The emphasis is on the transfer  of  property
in goods – whether as goods or in some other form. A  transfer  of  property
in goods under sub-clause (b) of clause 29-A is deemed to be a sale  of  the
goods involved in the execution of a works contract  by  the  person  making
the transfer and a purchase  of  those  goods  by  a  person  to  whom  such
transfer was made.
58.         Article 286 puts certain restrictions  upon  the  power  of  the
State to enact laws concerning imposition of sales tax.  It lays  down  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  (a)
outside the State, or (b) in the course of import  of  the  goods  into,  or
export of the goods out of  the  territory  of  India.   Sub-clause  (2)  of
Article 286 enables the Parliament to enact law formulating  principles  for
determining when a sale or purchase of goods takes place in any of the  ways
mentioned in clause (1).  As regards inter-state trade and commerce,  clause
(3) puts two restrictions.  It provides that  any  law  of  a  State  shall,
insofar as it imposes, or authorises the imposition of  (a)  a  tax  on  the
sale or purchase of goods declared by Parliament by law  to  be  of  special
importance in inter-state trade or commerce;  (b)  a  tax  on  the  sale  or
purchase of goods, being a tax of the nature referred to in sub-clause  (b),
sub-clause (c) and sub-clause (d) of clause 29-A of Article 366, be  subject
to such restrictions and conditions in regard to the system of  levy,  rates
and other incidents of tax as the Parliament may  by  law  specify.   Clause
(3) was substituted by Constitution Forty-sixth  Amendment  Act,  1982  with
effect from 02.02.1983.
59.         Clause 29-A was inserted  in  Article  366  by  the  Forty-sixth
Amendment with effect from 02.02.1983.  Entry 54 of  List  II  (State  List)
enables the State to make laws relating to taxes on the sale or purchase  of
goods other than the newspapers, subject to the provisions of Entry 92-A  of
List I.  Entry 63 of List II enables the States to provide  rates  of  stamp
duty in respect of documents other than those  specified  in  provisions  of
List I with regard to the rates of stamp duty.  Entry 92-A of List  I  deals
with taxes  on the sale or purchase of goods  other  than  newspapers  where
such sale or purchase takes place in the  course  of  inter-state  trade  or
commerce. Entry 6  of  List  III  deals  with  the  subjects,  “transfer  of
property other  than  the  agricultural  land;  registration  of  deeds  and
documents”.
60.         It is important to ascertain  the meaning of sub-clause  (b)  of
clause 29-A of Article 366 of  the  Constitution.   As  the  very  title  of
Article 366 shows, it is the definition clause. It starts by saying that  in
the Constitution unless  the  context  otherwise  requires  the  expressions
defined in that article shall have the  meanings  respectively  assigned  to
them in the article. The definition of expression “tax on sale  or  purchase
of the goods” is contained in clause (29-A).  If the first  part  of  clause
29-A is read with sub-clause (b) along with latter part of this  clause,  it
reads like this: tax on the sale or purchaser of the goods” includes  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  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.  The definition of “goods” in clause 12  is  inclusive.   It  includes
all materials, commodities and  articles.  The  expression,  ‘goods’  has  a
broader meaning than merchandise. Chattels or movables are goods within  the
meaning              of  clause 12.  Sub-clause (b) refers  to  transfer  of
property  in  goods (whether as goods or in some  other  form)  involved  in
the execution           of  a works contract.   The   expression   “in  some
other form” in the bracket is of utmost significance as by  this  expression
the ordinary  understanding  of  the  term  ‘goods’  has  been  enlarged  by
bringing within its fold  goods            in  a  form  other  than   goods.
Goods in some  other form  would thus          mean goods which have  ceased
to be chattels or movables or merchandise and become  attached  or  embedded
to earth.  In other words, goods which have by incorporation become part  of
immovable property are deemed as goods. The definition of ‘tax on  the  sale
or purchase of goods’ includes a tax on the  transfer  or  property  in  the
goods as goods or which have lost its form as goods and have  acquired  some
other form involved in the execution of a works contract.
61.         Viewed thus, a  transfer  of  property  in  goods  under  clause
       29-A(b) of Article 366 is deemed to be a sale of the  goods  involved
in the execution of a works contract by the person making the  transfer  and
the purchase of those goods by the person to whom such transfer is made.
62.         The States have  now  been  conferred  with  the  power  to  tax
indivisible contracts of works. This has been done by  enlarging  the  scope
of  “tax  on  sale  or  purchase  of  goods”  wherever  it  occurs  in   the
Constitution. Accordingly, the expression “tax on the sale  or  purchase  of
goods” in Entry 54 of List  II  of  Seventh  Schedule  when  read  with  the
definition clause 29-A, includes a tax on the transfer of property in  goods
whether as goods or in the form other than goods involved in  the  execution
of works contract. The taxable event is deemed sale.
63.         Gannon Dunkerley-I3 and few  other  decisions  following  Gannon
Dunkerley-I3  wherein the expression “sale” was given restricted meaning  by
adopting the definition of the word “sale” contained in the  Sale  of  Goods
Act has been undone by the Forty-sixth Constitutional  Amendment  so  as  to
include works contract. The meaning of sub-clause  (b)  of  clause  29-A  of
Article 366 of the Constitution also  stands  settled  by  the  Constitution
Bench of this Court in Builders’ Association4.  As a result of  clause  29-A
of Article 366, tax on the sale or purchase of goods may include  a  tax  on
the transfer in goods as goods or in a form other  than  goods  involved  in
the execution of the works contract. It is open to the States to divide  the
works contract into two separate contracts by  legal fiction:  (i)  contract
for sale of goods involved in the works contract  and  (ii)  for  supply  of
labour  and  service.  By  the  Forty-sixth  Amendment,  States  have   been
empowered to bifurcate the contract and to levy sales tax on  the  value  of
the material in the execution of the works contract.
64.         Whether  contract involved a dominant intention to transfer  the
property in goods, in  our  view,   is  not  at  all  material.  It  is  not
necessary to ascertain what is the dominant intention of the contract.  Even
if the dominant intention of the contract is not to  transfer  the  property
in goods and  rather  it  is  the  rendering  of  service  or  the  ultimate
transaction is transfer of immovable property, then also it is open  to  the
States to levy sales tax on the  materials  used  in  such  contract  if  it
otherwise has elements of works contract.  The view  taken  by  a  two-Judge
Bench of this Court in  Rainbow  Colour  Lab16  that  the  division  of  the
contract after Forty-sixth Amendment can be made only if the works  contract
involved a dominant intention to transfer the property in goods and  not  in
contracts where the transfer of property  takes  place  as  an  incident  of
contract of service is no longer good law, Rainbow  Colour  Lab16  has  been
expressly overruled by a three-Judge Bench in Associated Cement15.
65.         Although, in Bharat Sanchar5, the Court was concerned with  sub-
clause (d) of clause  29-A  of  Article  366  but  while  dealing  with  the
question as to whether the nature  of  transaction  by  which  mobile  phone
connections are enjoyed is a sale or service or both, the three-Judge  Bench
did consider the scope of definition in clause 29-A  of  Article  366.  With
reference to sub-clause (b)  it  said:  “…….  sub-clause  (b)  covers  cases
relating to works contract. This was the  particular  fact  situation  which
the Court was faced with in Gannon Dunkerley-I3  and  which  the  Court  had
held was not a sale. The effect in law of a transfer of  property  in  goods
involved in the execution of  the  works  contract  was  by  this  amendment
deemed to be a sale. To that extent the decision in Gannon Dunkerley-I3  was
directly overcome”. It then went on to  say  that  all  the  sub-clauses  of
Article 366(29-A) serve to bring transactions  where  essential  ingredients
of a ‘sale’ as defined in the Sale of Goods Act,  1930  are  absent,  within
the ambit of purchase or sale for the purposes of levy of sales tax.
66.         It then clarified that Gannon Dunkerley-I3 survived  the  Forty-
sixth Constitutional Amendment in two respects. First, with  regard  to  the
definition of “sale” for the purposes of the  Constitution  in  general  and
for the purposes of Entry 54 of List II in particular except to  the  extent
that the clauses in Article  366(29-A)  operate  and  second,  the  dominant
nature test would be confined to a  composite  transaction  not  covered  by
Article 366  (29-A).   In  other  words,  in  Bharat  Sanchar5,  this  Court
reiterated what was stated  by  this  Court  in  Associated  Cement15   that
dominant nature test has no application to a composite  transaction  covered
by the clauses of Article 366(29-A). Leaving  no  ambiguity,  it  said  that
after the Forty-sixth Amendment, the sale element of those  contracts  which
are covered by six sub-clauses of clause 29-A of Article 366  are  separable
and may be subjected to sales tax by the States under Entry 54  of  List  II
and there is no question of the dominant nature test applying.
67.         In view of the statement  of  law  in  Associated  Cement15  and
Bharat Sanchar5, the argument advanced on  behalf  of  the  appellants  that
dominant nature test must  be  applied  to  find  out  the  true  nature  of
transaction as to whether there is a contract  for  sale  of  goods  or  the
contract of service in a composite transaction covered  by  the  clauses  of
Article 366 (29-A) has no merit and the same is rejected.
68.         In Gannon Dunkerley-II11, this Court,  inter  alia,  established
the five following propositions : (i) as a result of  Forty-sixth  Amendment
the contract which was single and indivisible has been altered  by  a  legal
fiction into a contract which is divisible into one for sale  of  goods  and
the other for supply of labour and service and as a result of such  contract
which was single and indivisible has been brought on  par  with  a  contract
containing two separate agreements; (ii) if the legal fiction introduced  by
Article 366 (29-A)(b) is carried to its logical end, it  follows  that  even
in a single and indivisible works contract there is a  deemed  sale  of  the
goods which are involved in the  execution  of  a  works  contract.  Such  a
deemed sale has all the incidents of the  sale  of  goods  involved  in  the
execution of a works contract where the contract is divisible into  one  for
sale of goods and the other for supply of  labour  and  services;  (iii)  in
view  of   sub-clause  (b)  of  clause  29-A  of  Article  366,  the   State
legislatures are competent to impose tax on  the  transfer  of  property  in
goods involved in the execution of works contract. Under Article  286(3)(b),
Parliament has been empowered to make  a  law  specifying  restrictions  and
conditions in regard to the system of levy, rates or incidents of such  tax.
This does not mean that  the  legislative  power  of  the  State  cannot  be
exercised till the enactment of the  law  under                      Article
286(3)(b) by the Parliament. It only means that in the event of  law  having
been made by  Parliament  under  Article  286(3)(b),  the  exercise  of  the
legislative power of the State under Entry 54 in List II to  impose  tax  of
the nature referred to in sub-clauses (b), (c) and (d) of clause  (29-A)  of
Article 366 would be subject to restrictions and  conditions  in  regard  to
the system of levy, rates and other incidents of tax contained in  the  said
law; (iv) while enacting  law imposing a tax on sale or  purchase  of  goods
under Entry 54 of the State List read with  Article  366  (29-A)(b),  it  is
permissible for the State legislature to make a law imposing tax on  such  a
deemed sale which constitutes a sale in the course of the inter-state  trade
or commerce under Section 3 of the Central Sales Tax Act  or  outside  under
Section 4 of the Central Sales Tax Act or sale in the course  of  import  or
export under Section 5 of the Central Sales Tax Act; and  (v)   measure  for
the levy of tax contemplated by Article 366 (29-A)(b) is the  value  of  the
goods involved in the execution of a  works  contract.  Though  the  tax  is
imposed on the transfer of property in goods involved in the execution of  a
works contract, the measure for levy of such imposition is the value of  the
goods involved in the execution of a  works  contract.  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  works  and  not  the
cost of acquisition of the goods by the contractor.
69.         In Gannon Dunkerley-II11, sub-section (3) of Section  5  of  the
Rajasthan Sales Tax Act and Rule 29(2)(1) of the Rajasthan Sales  Tax  Rules
were declared as unconstitutional and void. It was so declared  because  the
Court found that Section 5(3) transgressed the  limits  of  the  legislative
power conferred on the State legislature under Entry 54 of the  State  List.
However,  insofar  as  legal  position  after   Forty-sixth   Amendment   is
concerned, Gannon Dunkerley-II11 holds unambiguously that  the  States  have
now legislative power to impose tax on transfer  of  property  in  goods  as
goods or in some other form in the execution of works contract.
70.         The Forty-sixth Amendment leaves no manner  of  doubt  that  the
States have power to bifurcate the contract and levy sales tax on the  value
of the material involved in the execution of the works contract. The  States
are now empowered to levy sales tax on the material used in  such  contract.
In other words, clause 29-A of Article 366 empowers the States to  levy  tax
on the deemed sale.
71.         Now, if  by  legal  fiction  provided  in  clause  (29-A)(b)  of
Article 366, the works contract becomes separable  and  divisible,  one  for
the materials and the other for services and for  the  work  done,  whatever
has been said by this Court  in  Gannon  Dunkerley-I3  with  regard  to  the
definition of works contract in Section 2(i) of  the  Madras  General  Sales
Tax Act pales into insignificance insofar as ambit and  scope  of  the  term
“works contract” within the meaning of Article 366(29-A)  is  concerned.  To
say that insertion of clause (29-A) in Article 366  has  not  undone  Gannon
Dunkerley-I3 in any manner, in our view, is not correct. The narrow  meaning
given to the term “works contract” in  Gannon  Dunkerley-I3  now  no  longer
survives.
72.         There is no doubt that to  attract  Article  366(29-A)(b)  there
has to be a works contract but then what is its meaning.   The  term  “works
contract” needs to be understood in a manner that the Parliament had in  its
view at the time of Forty-sixth Amendment and which is more  appropriate  to
Article 366(29-A)(b).
73.         The ordinary dictionary meaning  of  the  word  “work”  means  a
structure or apparatus of some kind; architecture or engineering  structure,
a building edifice. When it is used in the plural, i.e., as works, it  means
architectural or engineering operations, a fortified building,  a  defensive
structure, fortification or any of the several parts of such structures.  In
Webster Comprehensive Dictionary, International  Edition  the  term   “work”
is stated to be, ……… (2)  that upon which labor is expended; an  undertaking
task. (3) that which is  produced  by  or  as  by  labor,  specifically,  an
engineering structure;……...... In the same dictionary, the term  “works”  is
stated as a manufacturing establishment including buildings and equipment.
74.         In Radha Raman[21], Allahabad High  Court  stated  (although  in
the context of Section 40 of  the  Land  Acquisition  Act,  1894)  that  the
“work” has a very wide  meaning.   It  is  really  used  in  two  senses  of
bestowing labour and that upon which labour has been bestowed. When used  in
plural the word certainly means some outstanding or important result of  the
labour  that  has  been  bestowed  and  large  industrial   and   scientific
establishments are called “works”.
75.         Hudson’s ‘Building  Engineering  Contracts’,  Eleventh  edition,
Volume 1, for the purposes of that book, starts by saying  that  a  building
or engineering contract may be defined as an agreement under which a  person
(called builder or contractor) undertakes  for  reward  to   carry  out  for
another  (building  owner  or  employer),  works  of   building   or   civil
engineering character.  It continues to say that in the  typical  case,  the
work will be carried out upon the land of the employer  or  building  owner,
though in some special cases obligations to  build  may  arise  by  contract
where this is not so, for example, under building leases and  contracts  for
the sale of land with a house in the course of erection upon it.  The  above
statement by Hudson indicates  that  in  a  typical  case  work  (structure,
building etc.) will be  carried  out  upon  the  land  of  the  employer  or
building owner though in some special  cases  an  obligation  to  build  may
arise by contract where  this  is  not  so.   Hudson  gives  an  example  of
building leases and contracts for the sale of  land  with  a  house  in  the
course of erection upon it.
76.         In our opinion, the term ‘works  contract’  in  Article  366(29-
A)(b) is amply wide and cannot be confined to a particular understanding  of
the term or to a particular form. The term  encompasses  a  wide  range  and
many varieties of contract. The Parliament had such wide meaning  of  “works
contract” in its view at the time of Forty-sixth Amendment.  The  object  of
insertion of clause 29-A in Article 366 was to  enlarge  the  scope  of  the
expression “tax of sale or purchase of goods” and overcome Gannon Dunkerley-
I3.  Seen thus, even if in a contract, besides the obligations of supply  of
goods and materials and performance of labour and services, some  additional
obligations are imposed, such contract does not cease to be works  contract.
The additional obligations in the contract would not  alter  the  nature  of
contract so long as the contract provides  for  a  contract  for  works  and
satisfies  the   primary   description   of   works   contract.   Once   the
characteristics or elements of works contract are satisfied  in  a  contract
then irrespective of additional obligations, such contract would be  covered
by the term ‘works contract’. Nothing in  Article  366(29-A)(b)  limits  the
term   “works contract” to contract for labour  and  service  only.  Learned
Advocate General for Maharashtra was right in his submission that  the  term
“works contract” cannot be confined to a  contract  to  provide  labour  and
services but is a contract for undertaking or bringing into  existence  some
“works”. We are also in agreement with the submission of Mr. K.N. Bhat  that
the term “works contract” in Article 366(29-A)(b) takes within its fold  all
genre of works contract and is not restricted to one specie of  contract  to
provide for labour and services above.  The  Parliament  had  all  genre  of
works contract in view when clause 29-A was inserted in Article 366.
77.         The difference between a contract for work (or  service)  and  a
contract for sale (of goods) has  come  up  for  consideration  before  this
Court on more than one occasion. Before we consider some  of  the  decisions
of this Court in this regard,  it  is  of  interest  to  refer  to  two  old
decisions of English courts.  In  Lee[22],  it  was  laid  down  that  if  a
contract would result in the transaction  of  property  in  goods  from  one
party to another then it must be a contract of sale.
78.         However, the statement of law in Lee21 did not  find  favour  in
Robinson[23] where it was  held  that  if  the  substance  of  the  contract
required skill and labour for the production of the articles then  it  would
not make any difference that there would pass some materials in addition  to
the skill.
79.         In Chandra  Bhan  Gosain[24],  this  Court  exposited  that  for
finding out whether a contract is one of work done and  materials  found  or
one for sale of goods depends on its essence. If not of its essence  that  a
chattel should be produced and transferred as a chattel, then it  may  be  a
contract for work done and materials found and not a contract  for  sale  of
goods.
80.         In Purshottam Premji9, the difference  between  a  contract  for
work  and  a  contract  for  sale  was  explained  like  this:  The  primary
difference between a contract for work or service and a  contract  for  sale
of goods is that in the former there is in the  person  performing  work  or
rendering  service  no  property  in  the  thing   produced   as   a   whole
notwithstanding that a part or even the whole of the materials used  by  him
may have been its property. In a  case  of  contract  for  sale,  the  thing
produced as a whole has individual existence as the  sole  property  of  the
party who produced it at some time before delivery and the property  therein
passes only under the contract relating thereto to other  party  for  price.
Mere transfer of property in goods used in the performance of  the  contract
is not sufficient; to constitute a sale there must be an  agreement  express
or implied relating to the sale of goods and completion of the agreement  by
passing of title in the very goods contracted to  be  sold.  Ultimately  the
true effect of an accretion made pursuant to a contract has  to  be  judged,
not by an artificial rule that the accretion may be presumed to have  become
by virtue of affixing to a chattel of part of  that  chattel  but  from  the
intention of the parties to the contract.
81.          The  factors  highlighted    in   Purshottam   Premji9    which
distinguish a contract for work from a contract for sale  are  relevant  but
not exhaustive.  It is not correct to  say  that  these  factors  should  be
considered as the only factors to  differentiate  a  works  contract  and  a
contract for sale.  In  our  view,  there  are  not  and  there   cannot  be
absolute tests to distinguish a sale and works contract.
82.          This  Court  in  Associated   Hotels[25],   stated   that   the
determination  as  to  whether  the  contract  involved  in  a   transaction
constitutes a contract of sale or a contract of work or service  depends  in
each case upon its facts and circumstances.  Mere  passing  of  property  in
article  or  commodity  during  the  course  of  the  performance   of   the
transaction does not render  it  a  transaction  of  sale.  For  even  in  a
contract purely of work or service, it is possible that  articles  may  have
to be used by the person executing the  work  and  property  in  such  cases
articles or materials where passed  to  the  other  party.  That  would  not
necessarily convert the contract into one of sale of those materials. It  is
stated in Associated Hotels25   that in every case the Court  will  have  to
find out what is the primary object of the transaction and the intention  of
the parties while entering upon it.  It has  been  clarified  that  in  some
cases it may be that even while entering into a contract  of  work  or  even
service, parties might enter into  separate  agreements,  one  of  work  and
service and the other of sale and purchase of materials to be  used  in  the
course of executing the work or performing the service. But,  then  in  such
cases the transaction will not be one and indivisible  but  will  fall  into
the two separate agreements one of work or service and the other of sale.
83.         Halsbury’s Laws of England, Third Edition, Vol.  41,  para  603,
while distinguishing a contract  of  sale  from  a  contract  for  work  and
labour, has highlighted the test thus: whether or not the  work  and  labour
bestowed end in anything that can  properly  become  the  subject  of  sale;
neither the ownership of materials, nor the value of the  skill  and  labour
as compared with the value of the materials, is  conclusive,  although  such
matters  may  be  taken  into   consideration   in   determining,   in   the
circumstances of a particular case, whether the  contract  is  in  substance
one for work and labour or one for the sale of a chattel.
84.         In B.C. Kame6, the Court following Associated Hotels24  observed
that determination of the question whether a  contract  is  a  contract  for
‘work and labour’  or a contract for ‘sale’ was not  free  from  difficulty,
particularly, when the contract is a composite one.  Having  said  that  the
Court applied the  test stated in Halsbury’s Laws of England.
85.         In Hindustan Aeronautics[26], the  Court  noted  the  difference
between contract for service and contract for sale of goods in these  words:

           “13. It is well settled that the difference between contract  of
           service and contract for sale of goods, is, that in the  former,
           there is in the person performing work or rendering  service  no
           property in the things produced as a whole notwithstanding  that
           a part or even the whole of materials used by him had  been  his
           property. In the case of a contract for sale, the thing produced
           as a whole has individual existence as the sole property of  the
           party who produced it some time before delivery and the property
           therein passed only under the contract relating thereto  to  the
           other party for price. It is necessary, therefore, in every case
           for the courts to find out whether  in  essence  there  was  any
           agreement to work for a stipulated consideration…………”

86.         The Court went on to say further in Hindustan  Aeronautics25  as
follows;
           “18. It cannot be said as a general proposition  that  in  every
           case of works contract, there is necessarily implied the sale of
           the component parts  which  go  to  make  up  the  repair.  That
           question would naturally depend upon the facts and circumstances
           of each  case.  Mere  passing  of  property  in  an  article  or
           commodity during the course of performance of the transaction in
           question does not render the transaction to  be  transaction  of
           sale. Even in a contract purely  of  works  or  service,  it  is
           possible that articles  may  have  to  be  used  by  the  person
           executing the work, and property in such articles  or  materials
           may pass to the other party. That would not necessarily  convert
           the contract into one of sale of those materials……”


87.         In Kone Elevators[27], the Court again highlighted the tests  to
distinguish a works contract and a contract for sale  of  goods.  The  Court
said;
           “5. It can be treated as well settled that there is no  standard
           formula by which one can distinguish a “contract for sale”  from
           a  “works  contract”.  The  question  is  largely  one  of  fact
           depending upon the terms of the contract including the nature of
           the obligations to be discharged thereunder and the  surrounding
           circumstances. If the intention is to transfer  for  a  price  a
           chattel in which the transferee had no previous  property,  then
           the contract is a contract for sale. Ultimately, the true effect
           of an accretion made pursuant to a contract has to be judged not
           by artificial rules but from the intention of the parties to the
           contract. In a “contract  of  sale”,  the  main  object  is  the
           transfer of property and delivery of possession of the property,
           whereas the main object in a “contract  for  work”  is  not  the
           transfer of the property but it is  one  for  work  and  labour.
           Another test often to be applied is: when and how  the  property
           of the dealer in such a transaction passes to the  customer:  is
           it by transfer at the time of delivery of the  finished  article
           as a chattel or by accession during the procession  of  work  on
           fusion to the movable property of the customer?  If  it  is  the
           former, it is a “sale”; if it is the  latter,  it  is  a  “works
           contract”. Therefore, in judging whether the contract is  for  a
           “sale” or for “work and labour”, the essence of the contract  or
           the reality of the transaction as a whole has to be  taken  into
           consideration. The  predominant  object  of  the  contract,  the
           circumstances of the case and the custom of the trade provide  a
           guide in deciding whether transaction is a “sale”  or  a  “works
           contract”. Essentially, the question is of interpretation of the
           “contract”. It is settled law that the  substance  and  not  the
           form of the contract is material in determining  the  nature  of
           transaction. No definite rule can be formulated to determine the
           question as to whether a particular given contract is a contract
           for sale of goods or is a works contract. Ultimately, the  terms
           of a given contract would be determinative of the nature of  the
           transaction, whether it is  a  “sale”  or  a  “works  contract”.
           Therefore, this question has to be ascertained on facts of  each
           case, on proper construction of  terms  and  conditions  of  the
           contract between the parties.”


88.         In Hindustan Shipyard7, this Court stated that it was  difficult
to lay down an absolute rule to  distinguish  a  contract  for  sale  and  a
contract for labour. The question  under  consideration  in  that  case  was
whether the transactions involved in manufacture  and  supply  of  ships  by
Hindustan Shipyard to its customers are “sale” as defined in clause  (n)  of
Section 2 of Andhra Pradesh General Sales Tax Act, 1957 or a works  contract
as defined in clause (t) of Section 2 of that Act. While  dealing  with  the
above question, the Court in para  6  stated,  “the  distinction  between  a
contract of sale and works contract is not  free  from  difficulty  and  has
been the subject matter  of  several  judicial  decisions.  No  straitjacket
formula can be made available nor can such quick-witted tests be devised  as
would be infallible. It is all a question of determining  the  intention  of
the parties by culling out the same on an overall  reading  of  the  several
terms and conditions of a contract…….” The Court did note  the  observations
made in Variety Body Builders[28], that there  is  no  standard  formula  by
which one can distinguish a contract of sale from a contract  for  work  and
labour. There may be many  common  features  in  both  the  contracts,  some
neutral in a particular contract, and yet certain clinching in a given  case
may fortify conclusion one way or the other.
89.         The Court then analysed the recitals and  terms  and  conditions
of the contract and also took into  consideration  para  603  of  Halsbury’s
Laws of England, Fourth  Edition,  Volume  41,  Benjamin’s  Sale  of  Goods,
Fourth Edition, Para 1.042 and Pollock and Mulla on  Sale  of  Goods  [1990,
Fifth Edition, Page 53] and summed up the legal position in sub-para  2  and
sub-para 3 of para 14 (pgs. 591-592) as under :
           “(2) Transfer of property of goods for a price is  the  linchpin
           of the definition of sale. Whether a particular contract is  one
           of sale of goods or for work and labour depends  upon  the  main
           object of the parties found out from an overview of the terms of
           the contract, the circumstances  of  the  transactions  and  the
           custom of the  trade.  It  is  the  substance  of  the  contract
           document/s, and not merely the form,  which  has  to  be  looked
           into. The court may form an opinion that  the  contract  is  one
           whose main object is transfer of property  in  a  chattel  as  a
           chattel to the buyer, though some work may  be  required  to  be
           done under the contract as ancillary or incidental to the  sale,
           then it is a sale. If the primary object of the contract is  the
           carrying out of work by bestowal  of  labour  and  services  and
           materials are incidentally used in execution of such  work  then
           the contract is one for work and labour.


           (3) If the thing to be delivered has  any  individual  existence
           before the delivery as the sole property of the party who is  to
           deliver it, then it is a sale. If ‘A’ may transfer property  for
           a price in a thing in which ‘B’ had no  previous  property  then
           the contract is a contract for sale. On the other hand where the
           main object of work undertaken by the payee of the price is  not
           the transfer of a chattel qua chattel, the contract is  one  for
           work and labour.”


90.         The Court in Hindustan Shipyard7 also set out three  categories:
(a) the contract may be for work  to  be  done,  for  remuneration  and  for
supply  of  materials  used  in  the  execution  of  work   for   a   price,
(b) contract for work in which the use of  the  materials  is  accessory  or
incidental to the execution of the work  and  (c)  contract  for  supply  of
goods where some work is required to be done  as  incidental  to  the  sale.
Having regard to the recitals of the  contract,  the  Court  then  concluded
that the contracts in question involved sale of  respective  vessels  within
the meaning of clause (m) of the Andhra Pradesh General Sales  Tax  Act  and
were not merely the works contract as defined in clause (t) thereof.
91.         In our opinion, the  tests  laid  down  in  Hindustan  Shipyard7
after  Forty-sixth Amendment are not of much help in determining  whether  a
contract is a works contract or  sale  of  goods.  In  any  case,  Hindustan
Shipyard7 also says that there is no  absolute  rule  for  distinguishing  a
contract for sale (of goods) and a contract for labour (or services).
92.         It seems to us (and that is  the  view  taken  in  some  of  the
decisions) that a contract may involve both a contract of  work  and  labour
and a contract of sale of goods. In our  opinion,  the  distinction  between
contract for sale of goods and contract for work  (or  service)  has  almost
diminished in the matters of composite contract involving both  (a  contract
of work/labour and a contract for sale  for  the  purposes  of  Article  366
        (29-A)(b).  Now by legal fiction under Article 366(29-A)(b),  it  is
permissible to make such contract divisible by separating  the  transfer  of
property in goods as goods or in some other form from the contract  of  work
and labour. A transfer  of  property  in  goods  under  clause  29(A)(b)  of
Article 366 is deemed to be a sale of goods involved in the execution  of  a
works contract by the person making the transfer and the purchase  of  those
goods by the person to whom such transfer is made.   For  this  reason,  the
traditional decisions which hold that the substance of the contract must  be
seen have lost their significance. What was viewed traditionally has  to  be
now understood in light of the philosophy of Article 366(29-A).
93.         The question is: Whether taxing sale of goods  in  an  agreement
for sale of flat which is to be constructed  by  the  developer/promoter  is
permissible  under  the  Constitution?  When  the  agreement   between   the
promoter/developer and the  flat  purchaser  is  to  construct  a  flat  and
eventually sell the flat with the fraction of land, it is obvious that  such
transaction involves the activity of construction inasmuch  as  it  is  only
when the flat is constructed then it can be conveyed. We,  therefore,  think
that there is no reason why such activity of construction is not covered  by
the term “works contract”. After all, the term “works contract”  is  nothing
but a contract in which one of the parties is obliged  to  undertake  or  to
execute works. Such activity of construction has all the characteristics  or
elements of works contract.  The ultimate transaction  between  the  parties
may be sale of flat but it cannot be said that the characteristics of  works
contract are  not  involved  in  that  transaction.   When  the  transaction
involves the activity  of  construction,  the  factors  such  as,  the  flat
purchaser has no control over the type and standard of the  material  to  be
used in the construction of building or   he  does  not  get  any  right  to
monitor or supervise the construction activity or  he  has  no  say  in  the
designing or lay-out  of  the  building,  in  our  view,  are  not  of  much
significance and in any case these  factors  do  not  detract  the  contract
being works contract insofar as construction part is concerned.
94.         For sustaining the levy of tax on the goods deemed to have  been
sold in execution of a works contract,  in  our  opinion,  three  conditions
must be fulfilled: (i) there must  be  a  works  contract,  (ii)  the  goods
should have been involved in the execution of a works  contract,  and  (iii)
the property in those goods must be transferred to a third party  either  as
goods or in some other form. In a building contract or any  contract  to  do
construction, the above three things are fully met.  In a contract to  build
a flat there will necessarily be a sale of goods element.   Works  contracts
also  include  building  contracts  and  therefore  without  any   fear   of
contradiction it can be stated that building contracts are  species  of  the
works contract.
95.         Ordinarily in the case of a works contract the property  in  the
goods used in the construction of the building passes to the  owner  of  the
land on which the building is constructed when the goods and materials  used
are incorporated in the building. But there may be contract to the  contrary
or a statute may provide otherwise.  Therefore, it cannot be said to  be  an
absolute proposition in law that the ownership of the  goods  must  pass  by
way of accretion or exertion to the  owner  of  the  immovable  property  to
which they are affixed or upon which the building is built.
96.         Value addition as a concept after Forty-sixth Amendment  to  the
Constitution has been accepted  by  this  Court  in  P.N.C.  Construction17.
While dealing with this concept, the Court  said  that  value  addition  was
important concept which  had  arisen  after  the  Forty-sixth  Amendment  by
insertion of sub-clause (b) of clause (29-A) in  Article  366.  It  has  now
become possible for the States to levy sales tax on the value of  the  goods
involved in a works contract in the same way in  which  the  sales  tax  was
leviable on the price of the goods in a building  contract.  On  account  of
the Forty-sixth Amendment in the  Constitution  the  State  Governments  are
empowered to levy sales tax on the contract  value  which  earlier  was  not
possible.
97.         Where a contract comprises  of  both  a  works  contract  and  a
transfer of immovable property, such contract does  not  denude  it  of  its
character as  works  contract.   Article  366(29-A)(b)  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. The decision  of  the  Australian  High  Court  in  M.R.
Hornibrook18 is  worth  noticing  in  this  regard.   Section  3(4)  of  the
Australian Sales  Tax  Assessment  Act,  1930  was  brought  in  by  way  of
amendment by the Legislature in 1932 which reads, “For the purposes of  this
Act, a person shall be deemed to have sold goods if, in the  performance  of
any contract under which  he  has  received,  or  is  entitled  to  receive,
valuable consideration, he supplies goods the property in which  whether  as
goods (or in some other form) passes, under the terms of  the  contract,  to
some other person”.  The question for consideration  before  the  Australian
High Court in light of the above provision was whether  the  contractor  was
liable to pay sales tax on  the  transfer  of  goods  involved  in  a  works
contract. The majority judgment held as follows:
           “In my opinion the commissioner is right in his contention  that
           this provision  applies  to  the  present  case.  The  appellant
           company, in the performance of a contract for building a  bridge
           under which contract it was entitled to  receive  and  doubtless
           has received valuable consideration, has supplied goods, namely,
           reinforced concrete piles. Such piles are  plainly  manufactured
           articles.  They  are  chattels.  They  were   intended   to   be
           incorporated in a structure and were so incorporated. They  lost
           their identity as goods in that structure. But  this  fact  does
           not prevent the piles from being goods any more than it prevents
           bricks or stones or nuts and bolts from being  goods.  The  fact
           that the goods were specially manufactured and  designed  for  a
           particular purpose  cannot  be  held  to  deprive  them  of  the
           character of goods.” (Emphasis supplied)

98.         M.R. Hornibrook18 has been followed by this Court  in  Builders’
Association4. This Court said  that  sub-clause  (b)  of  clause  (29-A)  of
Article 366 of the Constitution of  India  had  more  or  less  adopted  the
language used in Section 3(4) of the Australian Act.
99.         Learned Advocate General for Maharashtra vehemently argued  that
there was nothing to prevent the taxation of different aspects of  the  same
transaction as separate taxable events. Pressing into  service  the  aspects
theory, he argued that a contract for carrying out works  coupled  with  the
sale of immovable property may be taxed by both, the State legislatures  and
the Parliament within their respective spheres of legislative competence  as
there is deemed sale  of  goods  involved  in  works  contracts.  The  works
contract aspect can be taxed by the State legislatures  under  Entry  54  of
List II  of  Seventh  Schedule  read  with  Article  366  (29-A)(b)  of  the
Constitution. The transfer  of  immovable  property  can  be  taxed  by  the
Parliament under Entry 97  of  List  I.   Mr.  K.V.  Vishwanathan,  however,
argued that the aspect theory has no application as the  State  legislatures
inherently lack the  legislative  competence  to  tax  the  transfer  of  an
immovable property. According to him, the aspect theory would apply  when  a
tax is sought to be imposed on more than one distinct field  of  legislation
in  relation  to  the  same  matter  provided  that  there  exists  in   the
States/Union legislative competence/legislative power to levy  a  tax  under
each distinct head.
100.        We have no doubt that the State  legislatures  lack  legislative
power to levy tax on the transfer of immovable property under  Entry  54  of
List II of the Seventh Schedule. However, the States do have  competence  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. Aspects theory  though  does
not allow the State legislature to entrench upon  the  Union  List  and  tax
services by including the cost of such service in the  value  of  goods  but
that does not detract the State to tax the sale of  goods  element  involved
in the execution of works contract in a  composite  contract  like  contract
for construction of building and sale of a flat  therein.   In  para  88  of
Bharat Sanchar5, the Court stated:  “the aspects  theory  does  not  however
allow the State to  entrench  upon  the  Union  List  and  tax  services  by
including the cost of such service in the value of the goods. Even in  those
composite contracts which are by legal fiction deemed to be divisible  under
Article 366(29-A), the value of the goods involved in the execution  of  the
whole transaction cannot be assessed to sales tax”. Having  said  that,  the
Court also stated that the States were not competent to include the cost  of
service in the value  of  the  goods  sold  (i.e.  the  sim  card)  nor  the
Parliament could include the value of the sim card in the cost of  services.
But the statement in para  92(C) of the Report is clear that it is upto  the
States to tax the sale of goods element in a composite contract of sale  and
service. Bharat Sanchar5  thus supports the view that taxation of  different
aspects of the same transaction as separate taxable events is permissible.
101.        In light of the above discussion, we  may  summarise  the  legal
position, as follows:
      (i)   For sustaining the levy of tax on the goods deemed to have  been
sold in execution of a works contract, three conditions must  be  fulfilled:
(one) there must be a works contract,  (two)  the  goods  should  have  been
involved in the execution of a works contract and (three)  the  property  in
those goods must be transferred to a third party either as goods or in  some
other form.
      (ii)  For the purposes of Article 366(29-A)(b), in a building contract
or any contract to do construction, if the  developer  has  received  or  is
entitled to receive valuable  consideration,  the  above  three  things  are
fully  met.  It  is  so  because  in  the  performance  of  a  contract  for
construction of  building,  the  goods  (chattels)  like  cement,  concrete,
steel, bricks etc. are intended to be  incorporated  in  the  structure  and
even though they lost their identity as  goods  but  this  factor  does  not
prevent them from being goods.
      (iii) Where a contract comprises of  both  a  works  contract  and   a
transfer of immovable property, such contract does  not  denude  it  of  its
character as works contract.  The term “works contract” in Article 366  (29-
A)(b) takes within  its  fold  all  genre  of  works  contract  and  is  not
restricted to one specie of contract to  provide  for  labour  and  services
alone. Nothing in Article 366(29-A)(b) limits the term “works contract”.
      (iv)  Building contracts are species of the works contract.
      (v)   A contract may involve both a contract of work and labour and  a
contract for sale. In  such  composite  contract,  the  distinction  between
contract for sale of goods and contract for work (or service)  is  virtually
diminished.
      (vi)  The dominant nature test has no application and the  traditional
decisions which have held that the substance of the contract  must  be  seen
have  lost  their  significance  where  transactions  are  of   the   nature
contemplated in Article 366(29-A). Even if the  dominant  intention  of  the
contract is not  to  transfer  the  property  in  goods  and  rather  it  is
rendering of service or the ultimate transaction is  transfer  of  immovable
property, then also it is open to the  States  to  levy  sales  tax  on  the
materials used in such contract if such contract otherwise has  elements  of
works contract. The enforceability test is also not determinative.
      (vii) A transfer of property in goods under clause 29-A(b)  of Article
366 is deemed to be a sale of the goods  involved  in  the  execution  of  a
works contract by the person making the transfer and the purchase  of  those
goods by the person to whom such transfer is made.
      (viii)      Even in a single and indivisible works contract, by virtue
of the legal fiction introduced by Article 366(29-A)(b), there is  a  deemed
sale of goods which are involved in the execution  of  the  works  contract.
Such a deemed sale has all the incidents of the sale of  goods  involved  in
the execution of a works contract where the contract is divisible  into  one
for the sale of goods and the other for supply of labour  and  services.  In
other words,  the  single  and  indivisible  contract,  now  by  Forty-sixth
Amendment has been brought on par with a contract  containing  two  separate
agreements and States have now power to levy sales tax on the value  of  the
material in the execution of works contract.
      (ix)  The expression “tax on the sale or purchase of goods”  in  Entry
54 in List II of Seventh Schedule when read with the definition clause  29-A
of Article 366 includes a tax on the transfer of property in  goods  whether
as goods or in the form other than goods involved in the execution of  works
contract.
      (x)    Article  366(29-A)(b)  serves  to  bring   transactions   where
essential ingredients of ‘sale’ defined in the Sale of Goods Act,  1930  are
absent within the ambit of sale or purchase for  the  purposes  of  levy  of
sales tax. In other words, transfer of movable property in a works  contract
is deemed to be sale even though it may not be sale within  the  meaning  of
the Sale of Goods Act.
      (xi)  Taxing the sale of goods  element  in  a  works  contract  under
Article 366(29-A)(b) read with Entry 54 List II is  permissible  even  after
incorporation of goods provided tax is directed to the value  of  goods  and
does not purport to tax the transfer of immovable property.   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
works even though property passes as between  the  developer  and  the  flat
purchaser after incorporation of goods.
102.        The crucial question would now remain: whether  the  view  taken
in Raheja Development1 with reference to definition of “works  contract”  in
KST  Act  is  legally  unjustified?  The  following  definition  of   “works
contract” was under consideration before this Court in Raheja  Development1:
“works contract” includes any agreement for carrying out for cash,  deferred
payment  or  other  valuable  consideration,  the  building,   construction,
manufacture, processing, fabrication, erection, installation,  fitting  out,
improvement, modification,  repair  or  commissioning  of  any  moveable  or
immovable property”.
103.        The Court also noticed the definition of “dealer”  and  “taxable
turn over ”.
104.        The broad facts in Raheja Development1 were these:
     •  Raheja  Development  carried  on  the  business  of   real   estate
       development and allied contracts;
     • Raheja Development entered  into  development  agreements  with  the
       owners of land;
     • Raheja Development entered into agreements  of  sale  with  intended
       purchasers. The  agreements  provided  that  on  completion  of  the
       construction, the residential apartments or the commercial complexes
       would be handed over to the purchasers who would  get  an  undivided
       interest in the land also;
     • The owners of the land would then transfer the ownership directly to
       the society formed under the Karnataka Ownership Flat (Regulation of
       the Promotion of Construction, Sale, Management and  Transfer)  Act,
       1972 (for short, ‘KOFA’).


105.        In light of  the  above  facts  and  the  definition  of  “works
contract”, the question before this Court  was  whether  Raheja  Development
were liable to pay turnover tax on  the  value  of  goods  involved  in  the
execution of the works contract.
106.        Section 5-B of the KST Act provides for levy of tax on  transfer
of property in goods (whether as goods or in some other  form)  involved  in
the execution of works contract.
107.        On consideration of the arguments that were  put  forth  by  the
parties, the Court in Raheja Development1 held as under:
      (i)   The definition of the term “works contract” in  the  Act  is  an
inclusive definition.
      (ii)  It is a wide  definition  which  includes  “any  agreement”  for
carrying out building or construction activity for  cash,  deferred  payment
or other valuable consideration.
      (iii) The definition of works contract does  not  make  a  distinction
based on who carries on the construction activity.  Even  an  owner  of  the
property may be said to be carrying on a works contract if  he  enters  into
an agreement to construct for  cash,  deferred  payment  or  other  valuable
consideration.
      (iv)  The developers had  undertaken  to  build  for  the  prospective
purchaser.
      (v)   Such construction/development was to be on payment of a price in
various installments set out in the agreement.
      (vi)  The developers were not the owners. They  claimed  lien  on  the
property. They had right to terminate the agreement and dispose of the  unit
if a breach was committed by the purchaser. A  clause  like  this  does  not
mean that the agreement ceases to be “works contract”. So long as  there  is
no termination, the construction is for and on behalf of the  purchaser  and
it remains a “works contract”.
      (vii) If there is a termination and a particular unit  is  not  resold
but retained by the developer, there would be  no  works  contract  to  that
extent.
      (viii)     If the agreement is entered into after the flat or unit  is
already constructed then there would be no works contract. But, so  long  as
the agreement is entered into before the construction is complete  it  would
be works contract.

108.        The correctness of the view taken  in  Raheja  Development1  has
been doubted in the referral order principally  for  the  reasons:  (a)  the
developer had undertaken the contract to develop the property of the  owner.
It is not alleged by the department that  there  is  monetary  consideration
involved in the development agreement. If the development agreement  is  not
a works contract, could the department rely upon the second  contract  which
is the tripartite agreement and interpret it to be  a  works  contract;  (b)
if the ratio in Raheja Development1 is to be accepted then  there  would  be
no difference between works contract and a contract for sale of  chattel  as
a chattel and (c) from the definition  of  works  contract,  the  contractor
must have undertaken the work of construction for and on behalf of the  flat
purchaser for cash, deferred or any other valuable consideration  but  could
it  be  said  that  developer  was  contractor  for  the  prospective   flat
purchaser.
109.        In Raheja  Development1,  the  Court  on  consideration  of  the
clauses (q) and (r) of the recitals and clauses (1), 5(c) and (vii)  of  the
agreement between the flat  purchaser,  developer  and  owner  of  the  land
observed that the agreement had an element for  carrying  out  building  and
construction  activity  for  cash,  deferred  payment  or   other   valuable
consideration. The developer had undertaken to  build  for  the  prospective
purchaser. Having regard to the various clauses of  the  recitals  and  also
the clauses of the agreement, the Court was of the view that such  agreement
was a typical agreement and so long as  there  was  no  termination  of  the
contract, the construction is for and on behalf  of  the  purchaser  and  it
remains a “works contract”.
110.         The  argument  on  behalf  of  the  developers  that  the  flat
purchaser is entitled to transfer of flat  and  conveyance  of  fraction  of
land only when all installments have been fully paid  and  that  shows  that
the agreement between the developer and the flat purchaser is  the  sale  of
flat and not to  appoint  the  developer  as  the  contractor  of  the  flat
purchaser for the purposes of carrying out the construction of the flat  for
and on behalf of the flat purchaser has no merit. The  submission  overlooks
the typical nature of the development  agreement  which  is  followed  by  a
tripartite agreement between the owner of the land, the  developer  and  the
flat  purchaser.   Effectively  and  de  facto  it  is  the  developer   who
constructs the building for the flat purchaser. The developer  does  so  for
monetary consideration.  The label  of  payment  is  not  decisive  but  the
factum of the payment is.  The construction is done on payment of  price  as
agreed upon between  the  developer  and  the  flat  purchaser.  It  is  not
necessary to recapitulate all clauses of the agreement  under  KOFA  or  for
that matter under MOFA. Raheja Development1 takes note of  relevant  clauses
of the recitals and the agreement under  KOFA.  We  need  not  repeat  them.
Similarly, Form V of the Maharashtra Ownership Flat Rules  contains  recital
such as, ‘as a  result  of  the  Development  agreement  the  promoters  are
entitled and enjoined upon to construct buildings on the said land’. One  of
the relevant clauses (omitting unnecessary portion) in Form  V  reads,  “the
promoter shall construct the said building/s….in accordance with the  plans,
designs, specifications …..which have been seen and  approved  by  the  flat
purchaser with the owner, such variations and modifications as the  promoter
may consider necessary  or  as  may  be  required  by  the  concerned  local
authority/the government…..provided that the promoter shall have  to  obtain
prior consent in writing to the flat purchaser in respect of  variations  or
modifications which may adversely affect the flat of the purchaser”. It  is,
thus, not correct to say that the work is undertaken by  the  developer  for
himself and for the owner and the construction is not  carried  for  and  on
behalf of the purchaser.
111.        In the development agreement between the owner of the  land  and
the developer, direct monetary consideration may not be  involved  but  such
agreement cannot be seen in isolation to the  terms  contained  therein  and
following development  agreement,  the  agreement   in  the  nature  of  the
tripartite agreement between the owner of the land, the developer  and   the
flat purchaser whereunder the developer has undertaken to construct for  the
flat purchaser for monetary consideration.   Seen  thus,  there  is  nothing
wrong if the transaction is  treated  as  a  composite  contract  comprising
          of both a works contract and a transfer of immovable property  and
levy sales tax on the value of the material involved  in  execution  of  the
           works contract.  The observation in the referral  order  that  if
the ratio in Raheja Development1 is to be accepted then there  would  be  no
difference between works contract and a contract  for  sale  of  chattel  as
chattel overlooks the legal position which we have summarized above.
112.        The argument that flat is to be  sold  as  a  flat  and  not  an
aggregate of its component parts is  already  negated  by  the  Constitution
Bench in the case of  Builders’  Association4.  As  a  matter  of  fact,  in
Builders’ Association4, this argument was advanced on behalf of the  States.
Repelling  the  argument,  the  Constitution  Bench  observed  that  it  was
difficult to agree with the contention of the  States  that  the  properties
that are transferred to the owner in the execution of a works  contract  are
not  the  goods  involved  in  the  execution  of  works  contract,  but   a
conglomerate, that is the entire building which is actually constructed.
113.        Yet another argument advanced on behalf  of  the  appellants  is
that in Raheja Development1, it is noticed that the builder has  a  lien  on
the property but incorrectly states  that  lien  is  because  they  are  not
owners.  It is argued that lien is because if the monies are  not  recovered
from the prospective flat purchasers, the lien can  be  exercised  and  this
would show that  the  contract  is  a  contract  of  an  agreement  to  sell
immovable property. The argument is insignificant because if  the  developer
has undertaken to build for the prospective purchaser for cash  or  deferred
payment or a valuable consideration pursuant to  a  contract  then  to  that
extent, the contract is works contract and there is deemed sale of  material
(goods) used in the construction of building and merely because the  builder
has a right of lien in the event due monies are not paid does not alter  the
character of contract being works contract.
114.        In Article 366(29-A)(b), the term ‘works  contract’  covers  all
genre of works contract  and  it  is  not  limited  to  one  specie  of  the
contract. In Raheja Development1, the definition of “works contract” in  KST
Act  was  under  consideration.  That  definition  of  “works  contract”  is
inclusive  and  refers  to  building  contracts  and  diverse   construction
activities for monetary consideration viz; for  cash,  deferred  payment  or
other valuable  consideration  as  works  contract.  Having  regard  to  the
factual position, inter alia,  Raheja Development1 entered into  development
agreements with the owners of the land and it also entered  into  agreements
for sale with the  flat  purchasers,  the  consideration  being  payment  in
installments and also the clauses of the  agreement  the  Court   held  that
developer had undertaken to build for the flat  purchaser  and  so  long  as
there was no termination of the contract, the construction  is  for  and  on
behalf of the purchaser  and  it  remains  a  “works  contract”.  The  legal
position summarized by us and the foregoing  discussion  would  justify  the
view taken by the two Judge Bench in Raheja Development1.
115.        It may, however, be  clarified  that  activity  of  construction
undertaken by the developer would be works contract only from the stage  the
developer enters into  a  contract  with  the  flat  purchaser.   The  value
addition made to the goods transferred after the agreement is  entered  into
with the flat purchaser can only be made chargeable  to  tax  by  the  State
Government.
116.        The reasons stated in the referral order for reconsideration  of
Raheja Development1 do not make out  any  good  ground  for  taking  a  view
different from what has been taken by this Court in Raheja Development1.  We
are in agreement with the submission of   Mr. K.N. Bhat  that  since  Raheja
Development1 in May, 2005 almost all States  have  modified  their  laws  in
line with Raheja Development1 and there is no justification  for  change  in
the  position  settled  after  the  decision  of  this   Court   in   Raheja
Development1.
117.        The submission  of  Mr.  K.N.  Bhat  that  the  view  in  Raheja
Development1 that when a completed  building  is  sold,  there  is  no  work
contract and, therefore, no liability to tax is  not  correct  statement  of
law, does not appeal to us.  If at the time of construction  and  until  the
construction was completed, there was no contract for  construction  of  the
building with the flat purchaser, the goods used in the construction  cannot
be deemed to have been sold by the builder since at that time  there  is  no
purchaser.   That  the  building  is  intended  for  sale  ultimately  after
construction does not make any difference.
118.        We are clearly of the view that Raheja  Development1  lays  down
the correct legal position and we approve the same.
119.         There  is  challenge  to   the   constitutional   validity   of
explanation (b)(ii) to Section 2(24) which was  brought  by  amendment  with
effect from 20.06.2006 in MVAT Act and  sub-rule  (1A)  which  was  inserted
into Rule 58 of the MVAT Rules by a notification dated 01.06.2009.
120.        Clause (24)**** of Section 2 defines sale  to  mean  a  sale  of
goods made within the State for cash or deferred payment or  other  valuable
consideration but does not include  a  mortgage,  hypothecation,  charge  of
pledge;  and  the  words  “sell”,  “buy”  and  “purchase”,  with  all  their
grammatical variations and cognate expressions. An explanation  is  appended
to this clause. Clause (b)***** of the explanation to Section 2(24)  defines
what would be a sale for the purpose of the clause and brought in its  ambit
the transactions mentioned therein. Explanation  (b)(ii)  was  amended  with
effect from 20.06.2006 by inserting the  following  words  after  the  words
“works contract”: “including,  an  agreement  for  carrying  out  for  cash,
deferred  payment   or   other   valuable   consideration,   the   building,
construction, manufacture, processing, fabrication, erection,  installation,
fitting out, improvement,  modification,  repair  or  commissioning  of  any
movable or immovable property”.
121.        There is no doubt in our mind that the amendment in  explanation
b(ii) to Section 2(24) was brought because of the judgment of this Court  in
Raheja Development1. We have already  held  that  Raheja  Development1  lays
down the correct legal position.   Thus,  in our view, there is no merit  in
the  challenge  to  the  constitutional  validity  to  the   provisions   of
explanation (b)(ii) to Section 2(24) of MVAT which were amended with  effect
from 20.06.2006. The Division Bench of the Bombay High Court took  the  view
that the provision under challenge was not in breach of  any  constitutional
boundaries. This is what it said:
      “34.  The amended definition of the expression sale in clause b(ii) of
      the Explanation to Section 2(24)  brings  within  the  ambit  of  that
      expression transactions of that nature which are referable to  Article
      366(29A)(b). The  transactions  which  the  legislature  had  in  mind
      involve works contracts. What the state legislatures can tax under the
      expanded definition contained in clause b of Article  366  (29A)  must
      meet the governing requirements  of  that  clause.  There  must  be  a
      transfer of property in goods involved in the  execution  of  a  works
      contract. The relevant clause in Section 2(24)  is  valid  because  it
      does not transgress  the  boundaries  set  out  in  Article  366(29A).
      Indeed, after the  46th  Amendment,  State  legislation  must  confine
      itself to the limits set out even in  the  expanded  concept  of  what
      constitutes a sale or purchase of goods  in  Article  366(29A).  State
      legislation cannot expand the ambit of what constitutes a tax  on  the
      sale or purchase of goods  beyond  the  constitutional  frontiers.  In
      order that Section 2(24) remains within constitutional boundaries,  in
      the context of works contracts, it must be read to cover  those  cases
      which fall within the expanded definition as elaborated after the 46th
      Amendment. Whether there is a works contract in a given  case  is  for
      assessing authorities to  determine.  As  noted  earlier,  it  is  not
      possible to provide a comprehensive or all encompassing list  of  what
      contracts  constitute  works   contracts.   Section   2(24)   properly
      construed, even after its amendment, reaches out to those cases  which
      fall within the  ambit  of  Article  366(29A).  Explanation  b(ii)  to
      Section 2(24) in other words covers those transactions where there  is
      a transfer of property in goods, whether as  goods  or  in  any  other
      form, involved in the  execution  of  a  works  contract.  Once  those
      parameters are met, the amended definition in the State legislation in
      the present case provides a clarification or clarificatory  instances.
      When constitutional norms  govern  state  legislation  such  as  those
      provided in Article 366(29A) in this case,  the  legislation  must  be
      construed in the context of those norms which  it  cannot  transgress.
      The law is valid because it does not breach those  boundaries.   There
      is no breach of constitutional boundaries.”

122.        We are in agreement with the above view and reject challenge  to
amendment to the provisions of explanation (b)(ii) to Section 2(24) of  MVAT
Act.
123.        Sub-rule (1A)****** was inserted into Rule 58 by a  notification
dated 01.06.2009. As a matter  of  fact,  Rule  58(1)   of  the  MVAT  Rules
provides that the value of the goods at the time  of  the  transfer  of  the
property in goods involved in the execution  of  a  works  contract  may  be
determined by effecting certain deductions from  the  value  of  the  entire
contract insofar as the amounts relating to deductions pertain to  the  said
works contract. The challenge was laid to Rule  58(1A)  of  the  MVAT  Rules
before the Bombay High Court. The Division Bench of the  Bombay  High  Court
found that there was nothing to show that the proviso to the said  provision
was arbitrary. It held that the Legislature was acting within the  field  of
the legislative powers in devising a  measure for the tax by  excluding  the
cost of the land. The Division  Bench  recorded  the  following  reasons  in
repelling the challenge to Rule 58(1A).
      “35.  The challenge to Rule 58(1A), may now be  considered.  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  involved  in  the  execution  of  the
      construction contract is also transferred, it is the latter  component
      which is brought to tax. The  value  of  the  goods  at  the  time  of
      transfer is to be calculated after making  the  deductions  which  are
      specified under sub-rule  (1).  The  judgment  in  the  second  Gannon
      Dunkerley specifies the nature of such deductions which  can  be  made
      from the entire value of the works contracts. This  was  permitted  to
      the States as a convenient mode for determining the value of the goods
      in the execution of the works contract. Similarly,  the  cost  of  the
      land is required to be excluded from the total agreement  value.  Sub-
      rule (1A) stipulates that the cost 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 as applicable on 1 January of the  year
      in which the agreement to sell the property is registered. The Proviso
      stipulates that deduction towards the cost of land under the  sub-rule
      shall not exceed 70% of the agreement value. The petitioners have  not
      brought on the record any material to indicate that the proviso to sub-
      rule (1A) of Rule 58  is  arbitrary.  Rule  58(1A)  provides  for  the
      measure of the tax. The measure of the tax, as  held  by  the  Supreme
      Court in its decision in Union of India v. Bombay  Tyre  International
      Ltd. [(1984) 1 SCC 467], must be distinguished from the charge of  tax
      and the incidence of tax. The Legislature was acting within the  filed
      of its legislative powers  in  devising  a  measure  for  the  tax  by
      excluding the cost of the land.”

124.        The value of the goods which can constitute the measure  of  the
levy of the  tax  has  to  be  the  value  of  the  goods  at  the  time  of
incorporation of goods in the works even though  property  in  goods  passes
later. Taxing the sale of goods element in a works contract  is  permissible
even after incorporation of goods provided tax is directed to the  value  of
goods at the time of incorporation and does not purport to tax the  transfer
of immovable property.  The mode of valuation  of  goods  provided  in  Rule
58(1A) has to be read in the manner that meets this  criteria  and  we  read
down Rule 58(1-A) accordingly.  The  Maharashtra  Government  has  to  bring
clarity in Rule 58 (1-A) as indicated above. Subject to  this,  validity  of
Rule 58(1-A) of MVAT Rules is sustained.
125.        Once we  have  held  that  Raheja  Development1  lays  down  the
correct law, in our opinion, nothing turns on the circular dated  07.02.2007
and the notification dated 09.07.2010.  The circular  is  a  trade  circular
which is  clarificatory  in  nature  only.   The  notification  enables  the
registered dealer to opt for a composition  scheme.   The   High  Court  has
dealt with the circular and notification.  We do not find any error  in  the
view of the High Court in this regard.  Moreover, the Advocate  General  for
Maharashtra clearly stated before us that  implementation  of  Rule  58(1-A)
shall not result in double taxation and in any case all  claims  of  alleged
double taxation will be determined in the  process  of  assessment  of  each
individual case.
126.        After having given answer to the reference, we send the  matters
back to the Regular Bench for final disposal.
                                             ……………………….J.
                                             (R.M.  Lodha)



                                             ……………………….J.
                                             (J. Chelameswar)


                                             ……………………….J.
                                             (Madan B. Lokur)
New Delhi,
September 26, 2013.
-----------------------
[1]    K. Raheja Development Corporation v. State of Karnataka; (2005) 5
SCC 162
[2]    M/s. Larsen & Toubro Limited & Anr. v. State of Karnataka & Anr.;
SLP(C) No. 17741 of 2007
[3]    State of Madras v. Gannon Dunkerley and Co.; (1959) SCR 379
[4]    Builders’ Association of India and others v. Union of India and
others; (1989) 2 SCC 645
[5]    Bharat Sanchar Nigam Limited and another v. Union of India and
others; (2006) 3 SCC 1
[6]   The Assistant Sales Tax Officer and Others v.  B.C.  Kame,  Proprietor
Kame Photo Studio;
        [(1977) 1 SCC   634]
[7]    Hindustan Shipyard Ltd. v. State of A.P.; [(2000) 6 SCC 579]
[8]    Nahalchand Laloochand Private Limited v. Panchali Cooperative
Housing Society Limited; (2010) 9
        SCC 536
[9]     Commissioner of Sales Tax, M.P. v. Purshottam Premji; [1970] 26
S.T.C. 38
[10]    State of Andhra Pradesh & Ors. v. Larsen & Toubro Ltd. & Ors.;
[(2008) 9 SCC 191]
[11]   M/s. Gannon Dunkerley & Co. and others v. State of Rajasthan and
Others; [(1993) 1 SCC 364]
[12]    Keshav Mills Co. Ltd. v. Commissioner of Income Tax, Bombay North,
Ahmedabad; [AIR 1965 SC
           1636]
[13]    Dewan Joynal Abedin v. Abdul Wazed; [(1988) Supp SCC 580]
[14]    Kartar Singh Bhadana v. Hari Singh Nalwa & Ors.; [(2001) 4 SCC 661]
[15]    Associated Cement Companies Ltd. v. Commissioner of Customs;
[(2001) 4 SCC 593]
[16]    Rainbow Colour Lab & Anr. v. State of M.P. & Ors.;  [(2000) 2 SCC
385]
[17]   State of U.P. & Ors. v. P.N.C. Construction Co. Ltd. & Ors.;  [(2007)
7 SCC 320]
[18]    M.R. Hornibrook (Pty.) Ltd. v. The Federal Commissioner of
Taxation; [(1939) 62 C.L.R. 272
[19]    Federation of Hotel & Restaurant Association  of India, etc. v.
Union of India & Ors.; [(1989) 3 SCC
           634]
[20]   State of Andhra Pradesh & Ors.v. Larsen & Toubro Ltd. & Ors.;
[(2008) 9 SCC 191]
*        *The relevant portion of statement of objects and reasons reads :

            “STATEMENT OF OBJECTS AND REASONS
            Sales  tax  laws enacted  in  pursuance  of  the  Government  of
      India  Act,1935  as  also the laws relating to sales tax passed  after
      the  coming into   force   of   the  Constitution  proceeded  on  the
      footing  that the expression  "sale  of  goods", having regard to  the
      rule as   to broad  interpretation   of  entries  in  the  legislative
      lists, would  be  given a  wider   connotation.   However,  in  Gannon
      Dunkerley's case (A.I.R. 1958 S.C.  560), the Supreme Court held  that
      the expression "sale of goods" as used in the entries in  the  Seventh
      Schedule to the Constitution has the same meaning as in  the  Sale  of
      Goods Act, 1930.   This   decision related to works contracts.
            2.  By a series of subsequent decisions, the Supreme Court  has,
      on the basis of the decision in Gannon Dunkerley's case, held various
      other transactions  which  resemble,  in substance,  transactions  by
      way   of sales, to be not liable to sales tax.  As a result  of  these
      decisions, a  transaction, in order to be subject to the levy of sales
      tax  under entry 92A of the Union List or entry 54 of the State  List,
      should have the  following  ingredients,  namely,  parties  competent
      to   contract, mutual  assent  and  transfer   of  property  in  goods
      from  one   of  the parties to the contract to the other party thereto
      for a price.
            5.   The various problems  connected  with  the  power  of  the
      States  to levy  a  tax on the sale of  goods  and  with  the  Central
      Sales Tax  Act, 1956  were  referred to the Law Commission of India.
      The   Commission considered these matters in their Sixty-first  Report
      and, recommended, inter alia, certain amendments in  the  Constitution
      if as a matter of administrative policy it is decided to levy  tax  on
      transactions of the nature mentioned in the preceding paragraphs.
             9.    It  is,  therefore,  proposed  to  suitably   amend   the
      Constitution  to include in article 366 a definition of  "tax  on  the
      sale or purchase of goods"  by  inserting  a  new  clause   (29A).  
      The  definition  would specifically include within the scope  of  that
      expression tax on---
            (i) transfer for consideration of controlled commodities;
            (ii)   the  transfer  of  property  in  goods  involved  in  the
        execution of a works contract;
            (iii)  delivery of goods  on  hire-purchase  or  any  system  of
        payment  by instalments;
            (iv)  transfer of the right to use any goods for any purpose for
        cash, deferred payment or other valuable consideration;
            (v)  the  supply of goods by an  unincorporated  association  or
        body  of persons  to  a  member  thereof for cash, deferred  payment
          or  other valuable consideration;
            (vi)  the supply, by way of or as part of any service,  of  food
        or  any drink  for  cash,  deferred payment  or  other   valuable
        consideration.
            12.   Clause  (3) of article 286 is proposed to be amended   to
      enable Parliament  to specify, by law, restrictions and conditions in
      regard to  the  system of levy, rates and other incidents of the  tax
      on  the transfer  of  goods involved  in  the  execution  of  a  works
      contract,  on the  delivery  of goods on hire-purchase or  any  system
      of  payment  by instalments and on the right to use any goods.
            13.   The  proposed amendments would help in  the  augmentation
      of  the State  revenues to a considerable extent.   Clause  6  of  the
      Bill  seeks to  validate  laws  levying  tax on the supply of food  or
        drink  for consideration and also the collection or recoveries  made
      by way of tax under  any such law.  However,  no  sales  tax  will  be
      payable on food or drink  supplied  by a hotelier to a  person  lodged
      in the hotel  during the  period from the date of the judgment in  the
      Associated Hotels  of India  case  and the commencement of the present
      Amendment Act if  the conditions   mentioned   in  sub-clause  (2)  of
      clause 6 of the  Bill  are satisfied.   In the case of food  or  drink
      supplied by restaurants this relief will be available only in  respect
      of the period after the date  of   judgment   in  the  Northern  India
      Caterers (India) Limited case  and the  commencement  of  the  present
      Amendment Act.”
*       ** (29-A) “tax on the sale or purchase of goods” includes—
      (a) a tax on the transfer, otherwise than in pursuance of a  contract,
of property in any goods  for  cash,  deferred  payment  or  other  valuable
consideration;
      (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) a tax on the delivery of goods on hire-purchase or any  system  of
payment by instalments;
      (d) a tax on the transfer of the  right  to  use  any  goods  for  any
purpose (whether or not for a specified period) for cash,  deferred  payment
or other valuable consideration;
      (e) a tax on the supply of goods by any unincorporated association  or
body of persons to a member thereof for  cash,  deferred  payment  or  other
valuable consideration;
      (f) a tax on the supply, by way of or as part of  any  service  or  in
any other manner whatsoever, of goods, being food or any ‘other article  for
human consumption or any drink (whether or  not  intoxicating),  where  such
supply  or  service,  is  for  cash,  deferred  payment  or  other  valuable
consideration,
      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;’.
*     **  ***36. ……..After the 46th Amendment the works contract  which  was
an indivisible one is by a legal fiction altered into a  contract  which  is
divisible into one for sale of goods and the other for supply of labour  and
services. After the 46th Amendment, it has become possible  for  the  States
to levy sales tax on the value of goods involved in a works contract in  the
same way in which the sales tax was leviable on the price of the  goods  and
materials supplied in a building contract which had  been  entered  into  in
two distinct and separate parts as stated above…….
      39. In view of the foregoing statements with regard to the passing  of
the property in goods which are involved in works  contract  and  the  legal
fiction created by clause (29-A) of Article 366 of the  Constitution  it  is
difficult to agree with the contention of the  States  that  the  properties
that are transferred to the owner in the execution of a works  contract  are
not the goods involved in  the  execution  of  the  works  contract,  but  a
conglomerate, that is the entire  building  that  is  actually  constructed.
After the 46th Amendment it is not possible to accede to  the  plea  of  the
States that what is transferred in a works contract  is  the  right  in  the
immovable property.
      40………. The 46th Amendment does no more than  making  it  possible  for
the States to levy sales tax on the price of goods  and  materials  used  in
works contracts as if there was a sale of such goods and  materials.  We  do
not accept the argument that sub-clause (b) of Article 366(29-A)  should  be
read as being equivalent to a separate entry  in  List  II  of  the  Seventh
Schedule to the Constitution enabling the States to levy tax  on  sales  and
purchases independent of Entry 54 thereof. As the Constitution exists  today
the power of the States to levy  taxes  on  sales  and  purchases  of  goods
including the “deemed” sales and purchases of goods under clause  (29-A)  of
Article 366 is to be found only in Entry 54 and not outside it…..
       41. ……… The case-book is full of the illustrations  of  the  infinite
variety of the manifestation of ‘works contracts’.  Whatever  might  be  the
situational differences of individual cases, the constitutional  limitations
on the taxing power of the State as  are  applicable  to  ‘works  contracts’
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(29-A),  would  equally  apply  to  other  species   of   ‘works
contracts’ with the requisite situational modifications.
      42. The constitutional amendment in Article 366(29-A)  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……….

[21]    Radha Raman v. State of Uttar Pradesh & Ors.; [AIR (1954) Allahabad
700]
[22]    Lee v. Griffin; [(1861) 1 B. & S. 272]
[23]    Robinson v. Graves; [(1935) 1 KB 579]
[24]    Chandra Bhan Gosain v. State of Orissa and Others; [(1964) 2 SCR
879
[25]    The State of Punjab v. M/s. Associated Hotels of India Ltd.;
[(1972) 1 SCC 472]
[26]    Hindustan Aeronautics Ltd. v. State of Karnataka; [(1984) 1 SCC
706]
[27]    State of A.P. v. Kone Elevators (India) Ltd.; [(2005) 3 SCC 389]
[28]    State of Gujarat (Commissioner of Sales Tax, Ahmedabad) v.
M/s.Variety Body Builders; [(1976) 3 SCC 500]
*     **** “2(24)  “sale” means a sale of goods made within  the  State  for
   cash or deferred payment or other valuable  consideration  but  does  not
   include a mortgage,  hypothecation,  charge  or  pledge;  and  the  words
   “sell”, “buy” and “purchase”, with all their grammatical  variations  and
   cognate expressions, shall be construed accordingly.”
*     ***** “(b)(i)    the transfer of  property  in  any  goods,  otherwise
      than in pursuance of a contract, for cash,  deferred payment or  other
      valuable consideration;
       ii)       the transfer of property in goods (whether as goods or  in
           some  other  form)  involved  in  the  execution  of   a   works
           contract…..
      iii)       a delivery of goods on  hire-purchase  or  any  system  of
           payment by instalments;
       iv)       the transfer of the right to use any goods for any propose
           (whether or not for  a  specified  period)  for  cash,  deferred
           payment or other valuable consideration;
        v)       the supply of goods by any association or body of  persons
           incorporated or not, to a  member  thereof  for  cash,  deferred
           payment or other valuable consideration;
       vi)       the supply, by way of or as part of any service or in  any
           other manner whatsoever, of  goods,  being  food  or  any  other
           article for human consumption  or  any  drink  (whether  or  not
           intoxicating), where such supply or service is made or given for
           cash, deferred payment or other valuable consideration;”
*     ****** “(1A)  In case of a construction  contract,  where  along  with
    the immovable property, the land or, as the case may be, interest in the
    land, underlying the immovable property  is  to  be  conveyed,  and  the
    property in the goods (whether as goods or in some other form)  involved
    in the execution of the construction contract is also transferred to the
    purchaser such transfer is liable to tax under this rule. The  value  of
    the said goods at the time of the transfer  shall  be  calculated  after
    making the deductions under sub-rule (1) and the cost of the  land  from
    the total agreement value.
      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, as applicable on the 1st January of the  year  in
    which the agreement to sell the property is registered:
      Provided that, deduction towards cost  of  land  under  this  sub-rule
    shall not exceed 70% of the agreement value.”

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