REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2516 OF 2020
(Arising out of SLP (Civil) No. 32044 of 2011)
STATE OF ORISSA …APPELLANT(S)
Vs.
M/S B. ENGINEERS & BUILDERS LTD. & ORS. …RESPONDENT(S)
JUDGMENT
Dinesh Maheshwari, J.
1. Before entering into the subject matter, we may notice at the
outset that this petition for special leave to appeal is barred by limitation
by a period of 274 days. Though objections have been raised on behalf of
the contesting respondent against the prayer for condonation of delay but,
the record shows that notices on the application seeking condonation of
delay as also on the petition for leave to appeal were issued way back on
18.11.2011 and for a long time, the matter remained pending while
awaiting service on the respondents. Ultimately, after completion of
service, we had heard learned counsel for the contesting parties on
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merits. Having regard to the circumstances of the case and after having
heard the contesting parties on merits, we find no reason to close the
matter only on the ground of delay. Accordingly, delay in filing is
condoned.
1.1. Leave granted.
2. This appeal by special leave is directed against the judgment and
order dated 05.08.2008 as passed by the Orissa High Court at Cuttack in
W.P. (C) No. 8857 of 2003, whereby the High Court accepted the claim of
the respondent No. 1 of present appeal1
, for reimbursement of the
amount of sales tax levied in respect of the works contracts executed by
it. The High Court also directed the Opposite Parties to grant appropriate
reimbursement as claimed by the writ petitioner in terms of Clause 45.2 of
the General Conditions of Contract2
under the National Competitive
Bidding Contract3
while quashing the clarification Circular dated
07.11.2001 issued by the Government of Orissa in its Department of
Water Resources.
2.1. The appellant State of Orissa has challenged the order so passed
by the High Court while essentially raising the questions concerning the
nature and implication of the sales tax, levied in relation to the works
contracts executed by the writ petitioner, under the Orissa Sales Tax Act,
19474
as amended in terms of the Constitution (Forty-sixth Amendment)
1 Hereinafter also referred to as ‘the writ petitioner’ or ‘the contractor company’.
2 ‘GCC’ for short
3 ‘NCB’ for short
4 Hereinafter also referred to as ‘the Act of 1947’
2
Act, 19825
; and concerning the operation and import of the relevant
stipulations in the contracts in question.
3. The factual and background aspects of the matter, being not of
much dispute and confined to a narrow compass, may be noticed, in brief,
as follows:
3.1. The respondent No. 1 of this appeal, said to be a company of
engineers and builders, who had been engaged in undertaking various
works contracts, responded to the tenders floated by the respondent Nos.
6 to 18 (various offices of the Government of Orissa) and, on being
determined as the lowest tenderer, was awarded the contracts from time
to time.
3.2. It is not in dispute that the aforesaid contracts awarded to the
respondent No. 1 carried the stipulations regarding taxes in Clause 45 of
GCC. The claim of the respondent No. 1 for reimbursement of sales tax
had been essentially based on Clause 45.2 of GCC, which carried the
stipulation that any Central or State sales tax and other taxes on
completed items of works (excluding penalty), as may be levied and paid
by the contractor shall be reimbursed by the employer on proof of
payment (and) on production of assessment certificate.
3.3. The sales tax regime in the State of Orissa is primarily governed
by the Act of 1947. By way of the Orissa Sales Tax (Amendment) Act,
1984 and the Orissa Sales Tax (Amendment) Act, 19856
, the
5 Hereinafter also referred to as ‘the forty-sixth amendment’
6 These amendments were introduced after the forty-sixth amendment of the Constitution whereby,
Clause (29-A) was inserted to Article 366 and it was, inter alia, provided that the expression “tax on
the sale or purchase of goods” includes a tax on the transfer of property in goods involved in the
3
amendments were brought about in the Act of 1947 with effect from
07.04.1984 whereby, inter alia, the definition of expression “Works
contract” was inserted; the definition of the expression “Sale” was
expanded so as to include therein the transfer of property in goods
involved in the execution of a works contract; and specific meaning was
also assigned to the expression “taxable turnover” in respect of a works
contract for the purpose of the rate of tax payable by a dealer. The rate of
tax payable by a dealer on the “taxable turnover” in respect of “works
contract” was fixed at 4%.
3.4. On 04.11.1986, the Government of Orissa, in its Department of
Irrigation and Power, issued a Circular to the effect that in case of works
contract executed on or after 07.04.1984, containing the specific clause
for reimbursement of sales tax, the Department of Irrigation and Power
would be liable for reimbursement of the amount of sales tax actually paid
by the concerned contractor on production of necessary documentary
evidence. Pursuant to these observations and directions, reimbursement
of the sales tax paid by the contractor company in respect of assessment
years 1995-1996 to 1997-1998 was allowed.
3.5. Later on, the State Government issued a notification under
Section 5 of the Act of 1947 whereby, the rate of tax payable by a dealer
on the taxable turnover in respect of the works contract was increased to
8%. Thereafter, by way of the orders of assessment for the years 1998-
1999 to 2000-2001, the Assessing Authority levied sales tax @ 8% on the
execution of a works contract.
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taxable turnover in respect of the works contracts executed by the
contractor company. With reference to such assessments, the contractor
company claimed reimbursement of the sales tax paid in respect of the
works contracts executed by it.
3.6. However, in the meantime, the Government of Orissa, in its
Department of Water Resources, issued another Circular dated
27.01.2000 to the Engineers-incharge of various offices and projects that
the question as to whether sales tax deducted from the bills of the
contractor and paid to the sales tax officer will be again reimbursed to the
contractor whose quoted price was inclusive of all taxes as per Clause
13.3 of the Instructions to Bidders7
, was under active consideration; and it
was directed that no reimbursement of sales tax be made under Clause
45.2 of GCC until clarification was communicated in that regard.
3.7. Thereafter, on 07.11.2001, the State Government, in its
Department of Water Resources, issued the impugned Circular, said to be
a clarificatory one, stating that a completed item of works, for which the
contractor had entered into an agreement with the department, was either
an immovable property or a works contract and in either case, was not
exigible to sales tax; and therefore, the question of payment of sales tax
on such immovable property or works contract and consequential
reimbursement by the department as per Clause 45.2 of the General
Conditions of Contract, or similar provision in other contracts, did not
arise. Accordingly, the State Government instructed its Engineers7 ‘ITB’ for short
5
incharge not to reimburse the sales tax levied on cement, steel etc.; and
also directed for recovery of the amount from the contractor wherever any
such amount of sales tax had been reimbursed. These directions of the
Government were followed up by another Circular dated 19.06.2002 to
the same effect.
3.8. In view of the aforementioned Circulars dated 07.11.2001 and
19.06.2002, its claim, for reimbursement of the sales tax paid, being in
jeopardy and rather, the proposition for recovery of the amount already
reimbursed looming large, the contractor company preferred the writ
petition leading to this appeal, while seeking the following reliefs: –
“(i) Issue a Rule Nisi Calling upon the Opposite Parties to
show cause as to why the alleged clarification dated
07.11.2001 under Annexure-1, and the subsequent direction
for recovery of the amount earlier reimbursed, vide letter
dated 19.6.2002 under Annexure-3 ought not to be declared
illegal, invalid and non-est in the eyes of law;
And
(ii) issue a further Rule Nisi Calling upon the Opp. Parties to
show cause as to why the reimbursement claims made by
the petitioner under Annexure-5 series may not be granted
with a period stipulated by this Hon’ble Court;
And
(iii) in the event the Opp. Parties fail to show cause or show
insufficient cause make the said Rule Nisi absolute and issue
an appropriate writ of Mandamus or a writ of certiorari in line
with the aforesaid Rule Nisi;
And/or
(iv) further be pleased to direct either of the Opp. Parties i.e.,
the contracting parties (Opp. Parties 6-18) or the Sales-tax
Authorities (Opp. Parties 3-5) to effect reimbursement or
refund along with interest from the date of deposit of tax;
And
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(v) to pass any other writ/writs, order/orders as this Hon’ble
Court may deem just and proper.”
4. The High Court in its impugned order dated 05.08.2008, examined
the contentions of the parties and granted the prayers of the writ
petitioner while observing and holding, inter alia, as under:-
“8…… The petitioner now claims reimbursement of tax paid
by it on actual turnover of the works contract and not on the
tax paid by it on the materials procured by it, which have
gone into for the purpose of execution of the works contract.
The further admitted fact that O.Ps. 6 to 18 have, in fact,
deducted the sales tax at source from the bills raised by the
petitioner from time to time in due progress of the work and
the same have in turn been deposited with the Sales Tax
Department.
**** **** ****
10. Now Annexure-1, which is sought to be quashed, is a
clarification but not in supersession of Annexure-10, as it is
projected by the State Government. The said clarification
cannot take away the effect of the statutory provision. The
orders of assessment in Annexure-4 series indicate that after
deducting the labour charges, services charges, amount of
tax paid, materials used in the execution of works contract,
from the gross turn over of the assessment year, the balance
has been put to tax by the Sales Tax Authority. The tax, as we
find, has been imposed in the light of the decision in Gannon
Dunkerly (supra).
From the discussion made above, the irresistible
conclusion is that the sales tax has been levied in the orders
of assessment in respect of the amount received pertaining
to items of work completed during the financial year. The
clarification in Annexure-1, which unilaterally takes away the
claim of the petitioner for reimbursement, is contrary to
Clause-45.2 of the General Conditions of the Contract and
Section 5 (2) (AA) of the Orissa Sales Tax Act as well as the
decision of the apex Court in Gannon Dunkerly (supra).
Accordingly, the clarification letter dated 7.11.2001
(Annexure-1) issued by the Financial Adviser-cum-Additional
Secretary to Government, Department of Water Resources is
quashed and the O.Ps. are directed to grant appropriate
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reimbursement in terms of Clause-45.2 of the General
Conditions of Contract, as claimed by the petitioner.”
5. Assailing the order so passed by the High Court, learned senior
counsel for the appellant has strenuously argued that the impugned order
is contrary to the facts of the case as also the principles of law applicable
and hence, deserves to be set aside.
5.1. The learned senior counsel for the appellant has referred to
Clause (29-A) of Article 366 of the Constitution of India; and the principles
enunciated by this Court in the cases of Builders’ Association of India
and Ors. v. Union of India and Ors.: (1989) 2 SCC 645 and Gannon
Dunkerley and Co. and Ors. v. State of Rajasthan and Ors.: (1993) 1
SCC 364 to submit that by the forty-sixth amendment of Constitution, a
fiction was created for treating the works contract as deemed sale on
which, sales tax would be leviable but, only on the value of goods which
went into the execution of any works contract.
5.2. Further, with reference to the definitions of “sale”, “goods” and
“works contract” as contained in the Act of 1947 as also Section 5(2)(AA)
thereof and the relevant clauses governing the contracts in question, the
learned counsel has submitted that any payment against the monthly
running bill to the contractor does not constitute payment for any
“completed item of work”; and the only meaning of the nomenclature
“completed item of work” is the completion of the works contract as such.
Learned counsel would maintain that sales tax is not leviable on the
“completed item of work” in a works contract but, the contractor is bound
8
to pay sales tax on “taxable turnover” which, for the purpose of sales tax,
could only be on the value of goods utilised in completion of the works
contract.
5.3. The learned senior counsel has elaborated on the aforesaid
aspects with the submissions that every amount of sales tax on the
“taxable turnover”, which is required to be paid by the contractor, is
achieved either by deduction of such amount of sales tax from the
monthly running bills by the employer for deposit of the same with the
Sales Tax Department or by way of payment by the contractor directly to
the Sales Tax Department. According to the learned counsel, where the
amount payable as sales tax by the contractor is deducted by the
employer at the time of making payment of monthly running bills and is
deposited by the employer with the Sales Tax Department, there would
not arise any question of making any reimbursement of the amount so
deducted and paid to the Sales Tax Department back to the contractor
because the liability to pay sales tax on the value of material/goods
utilised in any works contract is that of the contractor; and the claim for its
reimbursement is entirely impermissible.
5.4. The learned senior counsel for the appellant has strenuously
argued that the High Court has failed to examine the import and effect of
Clause 13.3 of the Instructions to Bidders and Clause 45.1 of the General
Conditions of Contract which make it clear that the bid price quoted by the
contractor is inclusive of all duties, taxes and other levies, including
9
royalties on all materials to be used in performance of the works contract.
Hence, according to the learned counsel, when sales tax on the
goods/materials forms a part of contract price, the claim for
reimbursement has rightly been denied by the Government.
5.5. As regards Clause 45.2 of the General Conditions of Contract, the
learned counsel would re-emphasise that thereunder, reimbursement is
permissible when there is any sales tax levied on a “completed item of
work” but in the context of a works contract in a construction project,
there is no sales tax on the “completed item of work” which is an
immovable property. The learned counsel would submit that earlier, the
Circular dated 04.11.1986 came to be issued on an erroneous
understanding of Clause 45.2 in relation to works contract but
subsequently, clarificatory Circulars dated 07.11.2001 and 19.06.2002
were issued, stating the correct position of law that the said Clause 45.2
applied only to the sales tax on “completed item of work”; and the sales
tax levied in terms of Section 5(2)(AA) of the Act of 1947 was not
reimbursable and had to be borne by the contractor in view of clear
stipulation in Clause 45.1 of the General Conditions of Contract.
According to the learned counsel, reliance on the Circular dated
04.11.1986 on behalf of the respondent No. 1 is entirely misplaced and
the said Circular, by no means, could be construed as that of amending
the contractual terms as also the liability of the contractor in terms of
Section 5(2)(AA) of the Act of 1947.
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6. Per contra, learned senior counsel for the contractor company (the
respondent No. 1 herein) has duly supported the order impugned with
reference to the reasonings therein.
6.1. Learned senior counsel for the contractor company has contended
that the argument made on behalf of the appellant, that the deduction in
the running bills had only been of the sales tax payable on various items,
is contrary to the record because the deductions were made on a deemed
sale on turnover basis and not item-wise and such a recovery of sales tax
is squarely covered by Clause 45.2 of GCC whereunder, the contractor
company is entitled to the claimed reimbursement.
6.2. The learned senior counsel has again referred to the decision of
this Court in the case of Gannon Dunkerley (supra) and the provisions
contained in Section 5 (2) (AA) of the Act of 1947 as also the said Clause
45.2 of GCC and the Circular dated 04.11.1986 to submit that deduction
of sales tax on turnover basis pre-supposes the existence of sale and
therefore, the contractor company is entitled to the reimbursement as
claimed. According to the learned counsel, the Circular dated 07.11.2001
had been directly against the statutory provisions as also the contractual
stipulations and the same has rightly been disapproved by the High
Court. The learned counsel has also referred to various decisions
including that in the case of State of U.P. and Ors. v. P.N.C.
Construction C. Ltd. and Ors.: (2007) 7 SCC 320.
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7. We have heard learned counsel for the parties at sufficient length
and have examined the record with reference to the law applicable.
8. Having regard to the issues raised, appropriate it would be to take
note of the relevant provisions of law; the referred conditions governing
the contractual relations of the parties; and the referred Circulars issued
by the Government of Orissa.
8.1. By way of the Constitution (Forty-sixth Amendment) Act, 1982,
Clause (29-A) came to be inserted to Article 366 of the Constitution of
India, providing for inclusive definition of the expression “tax on the sale
or purchase of goods” in relation to various transactions and dealings. As
regards “works contract”, the said expression came to be assigned the
meaning in sub-clause (b) thereof, which reads as under:-
“(29-A) “tax on the sale or purchase of goods” includes-
(a)… … …
(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) to (f) … … …”
8.1.1. The constitutional validity of the aforementioned provisions by
which the legislatures of the States were empowered to levy sales tax on
certain transactions described in sub-clauses (a) to (f) of Clause (29-A) of
Article 366 of the Constitution as also the question, as to whether the
power of the State legislature to levy tax on the transfer of property in
goods involved in the execution of works contracts is subject to the
restrictions and conditions contained in Article 286 of the Constitution,
12
were considered and decided by the Constitution Bench of this Court in
the case of Builders’ Association (supra). Therein, while upholding the
constitutional validity of the aforementioned provisions, the Constitution
Bench explained the unique features of a composite contract relating to
work and materials; and expounded on the meaning, effect and amplitude
as also contours of the provisions pertaining to the taxing power of the
States in relation to works contract in the following words: -
“38. In Benjamin’s Sale of Goods (3rd Edn.) in para 43 at p.
36 it is stated thus:
“Chattel to be affixed to land or another chattel.—
Where work is to be done on the land of the employer
or on a chattel belonging to him, which involves the
use or affixing of materials belonging to the person
employed, the contract will ordinarily be one for work
and materials, the property in the latter passing to the
employer by accession and not under any contract of
sale. Sometimes, however, there may instead be a
sale of an article with an additional and subsidiary
agreement to affix it. The property then passes before
the article is affixed, by virtue of the contract of sale
itself or an appropriation made under it.”
39. In view of the foregoing 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. We are surprised at the attitude of the States which have
put forward the plea that on the passing of the 46th
Amendment the Constitution had conferred on the States a
larger freedom than what they had before in regard to their
power to levy sales tax under Entry 54 of the State List. The
13
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. We may recapitulate here the observations of the
Constitution Bench in the case of Bengal Immunity Co. Ltd.
[AIR 1955 SC 661 in which this Court has held that the
operative provisions of the several parts of Article 286 which
imposes restrictions on the levy of sales tax by the States are
intended to deal with different topics and one could not be
projected or read into another and each one of them has to
be obeyed while any sale or purchase is taxed under Entry
54 of the State List.”
(emphasis supplied)
8.1.2. In the case of Gannon Dunkerley (supra), while dealing with the
scope of the legislative power of State under Entry 54 of the State List
contained in Seventh Schedule to the Constitution, particularly in the
context of inter-State trade or commerce, another Constitution Bench of
this Court found no reason to reopen the issues covered by the decision
in Builders’ Association case (supra) and held on the limitations of the
powers of State legislature as under:-
“31…..the legislative power conferred under Entry 54 of the
State List does not extend to imposing tax on a sale or
purchase of goods which takes place outside the State or
which takes place in the course of import or export of goods.
In view of the aforesaid limitations imposed by the
Constitution on the legislative power of the States under
Entry 54 of the State List, it is beyond the competence of the
State Legislature to make a law imposing or authorising the
imposition of a tax on transfer of property in goods involved in
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the execution of a works contract, with the aid of sub-clause
(b) of clause (29-A) of Article 366, in respect of transactions
which take place in the course of inter-State trade or
commerce or transactions which constitute sales outside the
State or sales in the course of import or export.
**** **** ****
41. It must, therefore, be held that while enacting a law
imposing a tax on sale or purchase of goods under Entry 54
of the State List read with sub-clause (b) of clause (29-A) of
Article 366 of the Constitution, it is not permissible for the
State Legislature to make a law imposing tax on such a
deemed sale which constitutes a sale in the course of interState trade or commerce under Section 3 of the Central
Sales Tax Act or an outside sale 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. So also it is not
permissible for the State Legislature to impose a tax on
goods declared to be of special importance in inter-State
trade or commerce under Section 14 of the Central Sales Tax
Act except in accordance with the restrictions and conditions
contained in Section 15 of the Central Sales Tax Act.”
8.1.3. In the said case of Gannon Dunkerley, the Constitution Bench
explained the purport and effect of the legal fiction introduced by subclause (b) of Clause (29-A) of Article 366 of the Constitution and also
enunciated the principles for its operation as follows: -
“36. 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 a 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.
**** **** ****
47……..The value of the goods involved in the execution of a
works contract will, therefore, have to be determined by
taking into account the value of the entire works contract and
deducting therefrom the charges towards labour and services
which would cover—
(a) Labour charges for execution of the works;
15
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect’s fees;
(d) charges for obtaining on hire or otherwise machinery and
tools used for the execution of the works contract;
(e) cost of consumables such as water, electricity, fuel, etc.
used in the execution of the works contract the property in
which is not transferred in the course of execution of a works
contract; and
(f) cost of establishment of the contractor to the extent it is
relatable to supply of labour and services;
(g) other similar expenses relatable to supply of labour and
services;
(h) profit earned by the contractor to the extent it is relatable
to supply of labour and services.
The amounts deductible under these heads will have to be
determined in the light of the facts of a particular case on the
basis of the material produced by the contractor.”
(emphasis supplied)
8.1.4. The salient features of the legal fiction introduced by sub-clause
(b) of Clause (29-A) of Article 366 of the Constitution and the co-related
concept of “value addition” came to be succinctly explained by this Court
in the case of P.N.C. Construction Co. (supra) in the following words: -
“21. “Value addition” is an important concept which has
arisen after the Forty-sixth Amendment to the Constitution.
Prior to the said Amendment this Court had taken the view in
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd
[AIR 1958 SC 560] that “works contract” was an indivisible
contract and the turnover of the goods used in the execution
of the works contract could not, therefore, become exigible to
sales tax. To overcome the effect of the said decision, the
concept of “deemed sale” was introduced by Parliament by
introducing sub-clause (b) of Clause 29-A in Article 366 of the
Constitution which states that the tax on sale or purchase of
goods would include a tax on transfer of property in goods
involved in the execution of works contract. The emphasis is
on the expression “transfer of property in goods (whether
goods as such or in some other form)”. Therefore, after the
Forty-sixth Amendment to the Constitution, the works
contract which was an indivisible contract is, by a legal
fiction, divided into two parts—one for sale of goods and the
16
other for supply of labour and services. Therefore, after the
Forty-sixth Amendment, it became 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 supplied in a building contract. This
is where the concept of “value addition” comes in. It is on
account of the 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.”
(emphasis supplied)
8.2. Having thus noticed the source of power of the State legislature to
levy sales tax in relation to the works contract but only on the value of the
goods/materials involved therein, we may also take note of the relevant
amended provisions of the Orissa Sales Tax Act, 1947, which read as
under:-
“Section 2(g) “Sale” means with all its grammatical variations
and cognate expression, any transfer of property in goods for
cash or deferred, payment or other valuable consideration
and includes,--
(i) … … …
(ii) (ii) transfer of property in goods (whether as goods or
in some other form) involved in the execution of a
works contract;
(iii) to (vi) … … …
Section 2(jj)- “Works Contract” includes any agreement for
carrying out, for cash or 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 immoveable property.
S.5(2)(AA)- Notwithstanding anything contained in subsection (2)(A), “taxable turnover” in respect of:
(i) ‘works contract’ shall be deemed to be the gross value
received or receivable by dealer for carrying out such
contract, less the amount of labour charges and service
charges incurred for the execution of this contract… … …”
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8.3. As noticed, the claim for reimbursement made by the contractor
company is based on Clause 45.2 of GCC whereas this claim is being
resisted by the appellant State with reference to Clause 13.3 of ITB and
Clause 45.1 of GCC. The referred clauses, as placed before us for
consideration, read as under: -
Clause 13.3 of ITB
“13.3 All duties, taxes and other levies including royalty
payable by the contractor under the contract or for any other
cause shall be included in the rates, price and total bid price
submitted by the bidder.”
Clauses 45.1 and 45.2 of GCC
“45.1 The rates quoted by the contractor shall be deemed to
be inclusive of the sales and other taxes including royalties
on all materials that the contractor will have to purchase for
performance of this contract.
45.2 Any Central or State Sales Tax and other taxes on
completed items of works of this contract as may be levied
excluding penalty levied for Contractor’s fault and paid by the
Contractor shall be reimbursed by the Employer to the
Contractor on proof of payment on production of assessment
certificate on every financial year. During the course of
contract period, deductions of sales tax on works contract
turnover at the source, shall be made from each bill at such
rate and conditions as may be required under the provisions
of Orissa Sales Tax Act and Rules.”(sic)
8.4. Now, the three Circulars issued by the Government of Orissa in
regard to the acceptance and then denial of the claim for reimbursement
of sales tax in works contract, which form the part of controversy herein,
may also be noticed.
8.4.1. In its initial Circular dated 04.11.1986, the State Government
issued directions and guidance for such reimbursement of sales tax in
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relation to the existing work contracts; and also directed that any such
clause for reimbursement be not included in future contracts.. This
Circular dated 04.11.1986 reads as under:-
“Government of Orissa
Irrigation and Power Department
48154/Dated 4th No November, 1986
No. FA-1-11/86
From
Shri P.K. Das
Financial Adviser-cumJoint Secretary to Government
To
The Engineer-in-Chief, Irrigation, Orissa/Chief Engineer,
Delta and Flood Control/ Chief Engineer, Medium IrrigationI/Chief Engineer, Medium Irrigation-II/Chief Engineer,
Rengali, Gohira and Samkoi Projects/ Chief Engineer,
Rengali Irrigation Project, Samal/ Chief Engineer, Mahanadi
Birupa Barrage Project/Chief Engineer, Upper Kolab Project,
Bariniput/Chief Engineer, Potteru Irrigation Project/Chief
Engineer, Electricity-cum-Chief Engineer, Electrical Projects,
Orissa/General Manager, Upper Indravati Project/Chief
Engineer (Ele.) Upper Kolab Hydro Ele. Project.
Sub: RE-IMBURSEMENT OF SALES TAX ON WORKS
CONTRACTS
Sir,
1. I am directed to say that in accordance with the Orissa Sales
Tax (Amendment) Act, 1984 read with Orissa Sales Tax
(Amendment) Ordinance, 1985, Sales Tax has become
payable on the turn over of Works Contracts with effect from
07.04.1984.
2. Under the Law, Sales Tax is payable by the concerned
contractor/dealer, and not by this Department. Yet, a question
arose as to whether this Department was legally liable to
reimburse the amount of sale tax actually paid or payable by
the Contractor/dealers in so far as the contracts relating to
this Department are concerned. After due consideration of
the legal aspects of the problem, the following instructions
are issued for information and guidance of all concerned.
19
(i) In case of Works- Contracts executed on or after
07.04.1984 which contained specific clauses for
reimbursement of Sales Tax, this Department is liable
to reimburse the amount of sale tax actually paid by the
concerned contractor on production of necessary
documentary evidence in token of making such
payment, after obtaining an undertaking from the
concerned contractor to the following effect:-
If the Contractor prefers or has preferred
appeal/revision before the concerned appellate
authority under the Sales Tax Law for remission of the
Sales Tax dues paid by him and said appeal/revision
results in any reduction of such dues, the differential
amount, the amount of Sales Tax reimbursed and the
amount of Sales Tax reimbursed and the amount of
Sales Tax payable as decided on appeal/revision will
be refunded back to Government by the Contractor.
(ii) Similar reimbursement will also be permissible and in
the same manner as indicated in Sl. (i) above in case
of contracts executed prior to 07.04.1984 where the
work was in progress beyond that date, which
contained specific clause for such reimbursement.
(iii) The amount of penalty levied if any, under the Sales
Tax Law on any count and paid by the Contractordealer shall not be reimbursed by the Department to
the concerned Contractor.
(iv) No clause either for reimbursement for Sales Tax or
payment of such Tax by the department to the
Contractor should be inserted in the Notice Inviting
Tenders or Tender document and no tender containing
any clause or condition to the above effect should be
accepted.
3. I am to request that the above guideline may be brought to
the notice of all concerned.
4. If any amount of Sales Tax has been reimbursed/paid to any
Contractor in any case, not in conformity with the guidelines
as noted vide paragraph-2 above, a proposal should be
furnished to this Department seeking Government approval
to that effect, furnishing full facts and figures on that score,
clearly indicating the extent and manner of deviation from any
of the guidelines as noted above Sls. (i) to (iv) of Paragraph-2
20
above. This may please be treated as urgent and the
proposal(s) should be submitted to Government in all such
cases by 30.11.1986 at latest. If there is no need for
furnishing any proposal on the above score, a Nil report
should be submitted by the aforesaid target date.
5. Receipt of the letter may please be acknowledged by
return of post.
Yours faithfully
Sd/- 04.11.1986
FA-cum-Joint Secretary to Govt.”
8.4.2. However, in the Circular dated 27.01.2000, the State Government
asked the Engineers-incharge to await its decision on the queries raised
on the issue pertaining to such reimbursement of the amount of sales tax
in relation to the works contracts. This Circular dated 27.01.2000 reads as
under:-
“Government of Orissa
Department of Water Resources
No. IIT-RVN-11/2000-5295 Dated: 27.01.2000
From
Shri N. Behera,
FA-cum-Addl. Secretary to Government
To
The Engineer-in-Chief, Water Resources/
Engineer-in-Chief, Planning & Designs/
Engineer-in-Chief, Rengali Irrigation Project/
All the Chief Engineers & Basin Manages/
All the Chief Engineers/
All the Chief Construction Engineers/
Director, Ground Water Survey and Investigation
Sub: Reimbursement of Sales Tax on Works contract.
Sir,
21
I am directed to say that clause 13.3 of ITB of the NCB bid
document approved by World Bank stipulates that “All duties,
taxes and other levies including royalty payable by the
contractor under the contract or for any other cause shall be
included in the rates, prices and total bid price submitted by
the Bidder.”
The clause 45.2 at G.C.C. of the said document stipulates
that “Any Central or State Sales Tax and other Taxes on
completed item of work of this contract as may be levied
excluding penalty levied for contractor’s default and paid by
the contractors shall be reimbursed by the employer to the
contractor on proof of payment. During the course of contract
period deduction of Sales Tax on works contract turn over at
the sources shall be made from each bill at such rate and
conditions as may be required under the provision of Orissa
Sales Tax Act and Rules.”
Some Chief Engineers have sought for clarification as to
whether Sales Tax deducted from the bills of the contractor
and paid to the sales tax officer will be again reimbursed to
the contractor whose quoted price is inclusive of all taxes as
per clause 13.3 of ITB. In some cases, A. G. Audit has raised
objection against such reimbursement. This is under active
consideration of govt. for issuing necessary clarification.
Therefore, you are hereby instructed that no
reimbursement of sales tax should be made under clause
45.2 of G. C. C. of NCB agreements for World Bank works
and works covered under similar contracts till clarification is
communicated by Government.
This may please be brought to the notice of all
Subordinate Officers under your control.
Receipt of the letter may please be acknowledged.
Yours faithfully
Sd/-
FA-cum-Addl. Secretary to Government”
8.4.3. Thereafter, by the impugned Circular dated 07.11.2001, the State
Government purportedly came out with the clarification but, in effect,
issued directions squarely opposite to those contained in the earlier
Circular dated 04.11.1986, while asserting that no such claim for
22
reimbursement of the amount of sales tax pertaining to works contract
was admissible. This Circular dated 07.11.2001 reads as under: -
“Government of Orissa
Department of Water Resources
No. IIT RVN. 11/2000-42711/UR Dated 07.11.2001
From
Shri B. Pradhan,
FA-cum-Addl. Secretary to Government.
To
The Engineer in Chief, Water Resources/
Engineer in Chief, Planning and Designs/
Engineer in Chief, Rengali Irrigation Project/
All the Chief Engineers and Basin Manager/
All the Chief Engineers/
All the Chief Construction Engineer/
Director, Ground Water Survey and Investigation.
Sub: Clarification on reimbursement of sales tax in
respect of works contracts
Sir,
In continuation of this Department letter no.5295 dt.5295
dt.27.01.2000 on the subject mentioned above, I am directed
to say that as per Orissa Sales Tax Act transfer of property in
execution of works contracts (Whether as goods or in some
other form) is subject to levy of Sales Tax. When a building, a
bridge, a road, a canal, a plant etc., is constructed, the
ingredients like cement, iron & steel, bricks, stones etc.
involved in execution of the contract are subject to levy of
sales tax. The completed item i.e., a bridge, a building, a
road, or a canal, as the case may be, is not subjected to levy
of sales tax because after construction these become
immovable property not susceptible to transfer of property for
the purpose of sales tax assessment.
23
As per clause 13.3 of I.T.B. of the NCB bid document read
with clause 45.1 of the general conditions of the contract the
rates quoted by the contractor shall be deemed to be
inclusive of sales and other taxes including royalties on all
materials that the contractor will have to purchase for
performance of the contract.
Clause 45.2 of the G.C.C. speaks that any Central or State
Sales Tax and other taxes on completed items of work of the
contract as may be levied, excluding penalty levied for
contractors default and paid by the contractor shall be
reimbursed by the employer to the contractor on proof of
payment. It is clarified that a completed item of work for
which the contractor has entered into agreement with the
department is either immovable property or a works contract
and in either case is not exigible to sales tax. Therefore, the
question of payment of sales tax on such immovable property
and consequential reimbursement of the sales tax by the
department as per clause 45.2 of the G.C.C. or similar
provision existing in other contracts does not arise. A
contractor may, however, have to pay sales tax as assessed
by the sales tax officer on items which go into construction of
the work. This tax is not reimbursable since the contractor is
expected to have built it into his rates.
In view of the above, you are hereby instructed not to
reimburse sales tax levied on cement, steel etc.,
misinterpreting clause 45.2 of the G.C.C. of N.C.B.
agreement for World Bank assisted works and the works
covered under other agreement containing similar clause.
Besides if any amount of sales tax has already been
reimbursed, immediate steps should be taken for recovery of
the amount from the contractors.
This has been concurred in by Finance Department in their
U.O.R.No.3896/ SF. Dt. 24.09.2001.
Yours faithfully,
Sd/-
Financial Adviser-cum-Addl. Secretary to Government”
9. Now, while taking up the points arising for determination, we may
usefully summarise the relevant aspects pertaining to this case.
24
9.1. It is evident that the contractor company (respondent No. 1 herein)
seeks to assert its right to claim reimbursement of the amount of sales tax
levied in respect of the works contracts executed by it on the strength of
the stipulations contained in Clause 45.2 of GCC of NCB bid documents.
On the other hand, the appellant State seeks to resist the right so claimed
by the contractor company with reference to the principles enunciated in
the cited decisions that after the forty-sixth amendment and insertion of
sub-clause (b) of Clause (29-A) to Article 366, the State could levy sales
tax on the price of goods and materials used in works contract as if there
was a sale of such goods and materials and then, on two-fold assertions
on that basis: one, that in the context of a works contract, there is no
sales tax on the “completed item of work” which is an immovable property
and, therefore, question of any reimbursement does not arise; and
second, that in works contract, the contractor may have to pay sales tax
assessed on the items which go into the construction but, such amount of
sales tax is not reimbursable because the contractor is supposed to have
provided for the same in its rates, as envisaged by Clauses 13.3 of ITB
and 45.1 of GCC.
9.2. So far as the basic factual aspects are concerned, it is not in
dispute that the respondent No. 1 indeed undertook execution of various
works contracts with the respective offices of the appellant State of
Orissa. It remains indisputable that in relation to such contracts, Clause
13.3 of ITB stipulated that all duties, taxes and other levies including
25
royalties payable by the contractor were to be included in the bid price
and Clause 45.1 of GCC specifically provided that the rates quoted by the
contractor shall be deemed to be inclusive of the sales and other taxes
including royalties on all materials that the contractor was to purchase for
performance of the contract. However, and at the same time, it is also
indisputable that as per Clause 45.2 of GCC, any Central or State Sales
Tax and other taxes on “completed items of works” of the contract as
might be levied upon, and paid by, the contractor (excluding penalty
levied for contractor’s fault) were to be reimbursed to the contractor on
proof of payment and assessment. This Clause 45.2 further envisaged
that during the course of contract period, deductions of sales tax on
“works contract turnover” was to be made at the source, from each bill as
per the rate and conditions prescribed under the provisions of Act of
1947. It is also not in dispute that in the course of execution of such
contracts, various running bill payments were made to the respondent No.
1 and while making such payments, deductions were indeed made
towards the amount of sales tax; and such deducted amount of sales tax
was deposited with the Sales Tax Department of the Government of
Orissa. Further, it is also borne out that reimbursement of the sales tax so
levied upon, and paid by, the respondent No. 1 in respect of the
assessments for the years 1995-1996 to 1997-1998 was allowed; but
such claim for reimbursement by the respondent No. 1 in respect of the
assessments for the years 1998-1999 to 2000-2001 was declined.
26
9.3. As noticed, after the amendments were brought about in the Act of
1947 for levying sales tax on works contract with effect from 07.04.1984,
the Circular dated 04.11.1986 was issued by the Government of Orissa to
the effect that in case of works contract executed on or after 07.04.1984,
containing the specific clause for reimbursement of sales tax, the
Department of Irrigation and Power would be liable for reimbursement of
the amount of sales tax actually paid by the concerned contractor on
production of necessary documentary evidence. The aforementioned
reimbursements were allowed to the respondent No. 1 pursuant to these
observations and directions in the Circular dated 04.11.1986. However,
by way of the subsequent Circular dated 07.11.2001, the Government of
Orissa came out with total volte-face on its opinion in relation to the claim
for reimbursement of sales tax paid by the contractors while stating that a
“completed item of work” in relation to a works contract was not exigible
to sales tax and, as regards the sales tax on the items which go into the
work, the contractor is expected to have included the same in the rates. It
was, therefore, observed that the question of reimbursement as per
Clause 45.2 of GCC or similar provision in other contracts did not arise.
9.4. The High Court, in its impugned order dated 05.08.2008, has
rejected the contentions of the appellant State and has disapproved the
aforesaid Circular dated 07.11.2001 essentially with reference to the fact
that the claim for reimbursement was being made of the tax that was
levied on the turnover of the works contracts and not of the tax paid by
27
the contractor on the materials procured by it. The High Court has also
found that the sales tax was levied after necessary deductions and in
accordance with the decision in Gannon Dunkerley (supra) for which,
the contractor was entitled to claim reimbursement under Clause 45.2 of
GCC and that the clarification Circular dated 07.11.2001 cannot take
away the effect of statutory provisions.
10. Having taken all the relevant aspects in comprehension and
having examined the matter in its totality, we are clearly of the view that
the High Court has rightly allowed the writ petition filed by the respondent
No. 1 and no case for interference in this appeal is made out.
11. Before proceeding further, we may at once observe that so far as
the aforesaid Circulars are concerned, neither of them could be decisive
of the issues at hand. As noticed, in the Circular dated 04.11.1986, the
State Government expressed the view that the reimbursement in question
was required to be allowed in terms of Clause 45.2 of GCC but later on, in
the Circular dated 07.11.2001, the State Government took a diametrically
opposite view to say that such reimbursement was not to be allowed in
relation to the works contract. Obviously, the said Circulars had been
based on the given day understanding of the State Government on the
operation of the relevant provisions of law and the terms of contract. Such
vacillating understanding on the part of the State Government cannot be
determinative of the contractual obligations of the parties, which are
required to be decided with reference to the principles of law applicable
28
and on true construction of the terms of contract. Therefore, we would
ignore the said Circulars while dealing with the principal issues involved in
this matter but shall refer to them at a later and appropriate stage.
12. Reverting to the core issues, it remains rather indisputable that as
per Clause 45.2 of GCC, the amount of sales tax on completed items of
works of the contract, as might have been levied upon, and paid by, the
contractor, except the penalty levied for contractor’s own fault, was to be
reimbursed to the contractor on proof of payment and assessment. It was
also provided in Clause 45.2 itself that, during the course of contract
period, deductions of sales tax on works contract turnover would be made
from the running bills at the prescribed rates and conditions. As noticed, it
is not in dispute that while making payment of various running bills in the
course of execution of contracts by the respondent No. 1, deductions
were indeed made towards the amount of sales tax and such deducted
amount of sales tax was deposited with the Sales Tax Department of the
Government of Orissa. Such deductions and deposits with Sales Tax
Department had clearly been in accordance with the stipulation contained
in the second part of Clause 45.2 ibid. However, and even after making
deductions in terms of the second part of Clause 45.2, the appellant State
seeks to deny the operation of first part of this Clause 45.2 (whereby the
contractor is entitled to reimbursement of the amount of sales tax) on the
grounds that: (a) the reimbursement is envisaged of the sales tax levied
on the “completed item of work” but, in works contract, such “completed
29
item” is not exigible to sales tax and hence, the question of
reimbursement does not arise; and (b) that as per Clause 45.1 of GCC
read with Clause 13.3 of ITB, the contractor is deemed to have provided
for the leviable amount of sales tax on goods/materials in its rates and
hence, the contractor cannot claim any reimbursement thereof. The
question is as to whether such contentions of the appellant against the
operation of first part of Clause 45.2 of GCC could be countenanced? In
our view, the answer could only be in the negative.
13. Taking up the main plank of the case of the appellant about the
nature, extent and implication of the levy of sales tax in relation to a works
contract, it could be usefully recapitulated that in view of the forty–sixth
amendment to the Constitution of India, Clause (29-A) came to be
inserted to Article 366; and, by virtue of sub-clause (b) thereof, it became
permissible 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. In other words, after the forty-sixth amendment to the
Constitution, the works contract is divided into two parts by a legal fiction:
one for sale of goods/materials and other for supply of labour/services;
and it is possible for the States to levy sales tax on the value of
goods/materials involved in such works contract. These features have
been expounded and explained by this Court in the referred cases of
Builders’ Association, Gannon Dunkerley and P.N.C. Construction
Co. (supra) and need no further enlargement.
30
13.1. As regards the relevant provisions of the State enactment, it is at
once clear that after the aforesaid forty-sixth amendment to the
Constitution, the State of Orissa also proceeded to carry out the
necessary amendment to the Act of 1947 and provided for levy of sales
tax in relation to a works contract, inter alia, by expanding the definition
of “Sale” so as to include therein the transfer of property in goods
involved in the execution of a works contract; and by specifying that
“taxable turnover” in respect of works contract shall be deemed to be the
gross value received or receivable by dealer for carrying out such
contract less the amount of labour and service charges incurred in
execution of the contract. On their essence and intent, what turns out of
these amended provisions of the Act of 1947 is that in relation to a works
contract, there would be deemed to be the sale of goods involved in
execution thereof; and sales tax would be leviable on the taxable turnover
(and not on the gross turnover) of such works contract.
13.2. As noticed, it has been the consistent case of the respondent No.
1 that in the running bill payments, the amount of sales tax was deducted
and the same was deposited with the Sales Tax Department. It has also
been the consistent case of the respondent No. 1 that in the referred
orders of assessment, sales tax was levied on the applicable rates on the
“taxable turnover” in respect of the works contracts executed by it and the
claim for reimbursement was made of the amount of sales tax so levied
and paid. The High Court has also recorded a categorical finding that
31
after deducting the labour charges, service charges and the tax paid from
the gross turnover, the balance had been put to tax by the Assessing
Authority. These assertions of the respondent No. 1 as also the findings of
the High Court are not the subject matter of dispute. That being the
position, it is but evident that in relation to the works contracts executed
by the respondent No. 1, the appellant and its offices have indeed levied
the sales tax on the taxable turnover that was arrived at after due
deduction of labour/service charges, in conformity with Section 5(2)(AA)
of the Act of 1947. There had neither been any levy of the sales tax on
the entire turnover of the works contracts nor any such levy could have
been effected because, as noticed, the taxing event of sale in a works
contract is confined to the use of the goods/materials in execution of the
contract.
14. While the aforesaid legal and factual aspects remain more or less
indisputable, what the appellant seeks to contend is that the
reimbursement envisaged by the first part of Clause 45.2 of GCC is of the
tax levied on the “completed item of work” but in a works contract, sales
tax is not levied on the completed item of work because such completed
item in a works contract becomes an immovable property. Such a
contention of the appellant remains wholly untenable in view of the
scheme of levy of sales tax in a works contract as also the scheme of
reimbursement envisaged by Clause 45.2 of GCC.
32
14.1. Contextually read, it is but apparent that the expression
“completed item of work” in Clause 45.2 ibid., signifies the intent that
reimbursement would be permissible only after execution of a particular
item of work has been completed and accomplished. In other words, this
expression is clearly intended to contradistinguish the cases where any
item of work remains incomplete and yet any claim for reimbursement of
the sales tax levied is sought for. This expression cannot be read to mean
as if signifying the levy of sales tax itself on the completed item of work
because such reading of this expression would be totally disjunct from the
context and would be entirely detached from the real intent.
14.2. Viewed from another angle, it would appear that if the contention
on the part of the appellant as regards interpretation of the first part of
Clause 45.2 is accepted, it would practically result in holding that the said
Clause 45.2 is not at all applicable to a works contract. Such a result
cannot be countenanced for two major reasons: First, that if such a
clause was not to be applied to the works contract, there was no reason
to have retained the same in relation to the works contracts awarded to
the respondent No. 1. When such a stipulation forms the part of contract,
it would be rather preposterous to say that the same would stand but
would not operate. Secondly, and more significantly, in the second part of
this very Clause 45.2, it has specifically been provided that deductions of
sales tax on works contract turnover at source shall be made from each
bill. It is not far to seek, and is rather evident on a bare reading of Clause
33
45.2 in its entirety, that it is to apply in relation to the sales tax on works
contract too. As noticed, the second part of Clause 45.2 had indeed been
applied and enforced by the appellant and its offices by regularly making
deduction of the amount of sales tax in the running payments of the
respondent no. 1 and by regularly depositing the same with the Sales Tax
Department. It would again be preposterous, nay absurd, to say that the
second part of Clause 45.2 entitling the appellant and its offices to make
deduction of sales tax on works contract turnover at source could be
enforced but when it comes to reimbursement, the first part of this very
Clause 45.2 would not apply to a works contract.
14.3. Viewed from any angle, we are satisfied that heavy reliance on
behalf of the appellant on the expression “completed item of work”, as
occurring in the first part of Clause 45.2, is entirely misplaced. The only
implication of this expression is that a claim for reimbursement of sales
tax cannot be made in relation to a particular work or item whose
execution is pending or is in progress and has not been completed. So far
the levy of sales tax in relation to a works contract is concerned, the same
is on “taxable turnover” and not on the entire turnover. It follows
necessarily that the claim for reimbursement could only be made of the
amount of sales tax that had been levied; and had been paid by the
contractor. Hence, the suggestion as if the expression “completed item of
work” refers to the end-product of a works contract is without any
34
substance. The contentions urged in that regard are required to be, and
are, rejected.
15. We may now take up the other line of argument on behalf of the
appellant that as per Clause 45.1 of GCC read with Clause 13.3 of ITB,
the contractor is deemed to have provided for the leviable amount of
sales tax on goods/materials in its rates and hence, the contractor cannot
claim any reimbursement thereof.
15.1. It remains trite that the terms of contract bind the parties thereto
and unless there be any case of ambiguity or violation of law, ordinarily,
the terms of contract, revealing the intent of parties, are required to be
given effect to. The submission on the part of the appellant, that first part
of Clause 45.2 of GCC would not operate because of Clause 45.1 of GCC
read with Clause 13.3 of ITB, remains entirely baseless and appears to
be of a desperate attempt to wriggle out of the contractual obligations.
Even when the contractors were given instructions in the said Clause
13.3 of ITB to include all duties taxes and other levies in the bid price and
even when the said Clause 45.1 of GCC provided that the rates quoted
by the contractor shall be deemed to be inclusive of the taxes and
royalties on all the materials which were to be procured for performance
of the contract, it was yet provided in the first part of Clause 45.2 of GCC
that the sales tax and other taxes on completed items of work, as may be
levied upon, and paid by, the contractor shall be reimbursed to the
contractor on proof of payment/on production of assessment certificate. It
35
is, therefore, crystal clear that even when the contract provided that the
rates quoted by the contractor shall be deemed to be inclusive of sales
and other taxes and royalties on the materials, it was agreed to between
the parties that sales tax and other taxes under completed items of work,
as paid by the contractor were to be reimbursed.
15.2. It would at once appear that if the contention on the part of the
appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC is
accepted in the manner that when the rates quoted by the contractor are
inclusive of the taxes on the goods/materials to be used in performance of
the contract, reimbursement of the sales tax levied upon, and paid by, the
contractor is not to be allowed, it would practically result in rendering the
first part of Clause 45.2 otiose and redundant. Neither that had been the
intent of the parties nor could the terms of contract be construed in this
manner.
15.3. In our view, the implication and effect of Clauses 13.3 of ITB and
45.1 of GCC had only been that while making the bid and quoting the
rates, the contractor was supposed to include the taxes, duties, royalties
etc. payable by it over the materials to be procured and utilised in
performance of the contract and hence, while raising the bills, the
contractor was not entitled to claim any amount towards any such
tax/duty/royalty paid by it on the materials purchased for performance of
the contract. These clauses, i.e., Clause 13.3 of ITB and 45.1 of GCC,
which prohibit the contractor from demanding taxes, duties, royalties etc.
36
on the materials procured by it for performance of the contract do not, and
cannot, conversely operate over the sales tax which is levied upon the
contractor and which is primarily recovered with deductions from the
running bill payments. In other words, in our view, on a plain reading of
the aforesaid relevant terms of the contract, it is clear that while the
contractor cannot claim any payment towards the taxes/duties/royalties
etc. on the goods/materials purchased by it for performance of the
contract but that does not disentitle the contractor from claiming
reimbursement of the sales tax levied upon it by the employer, of course
after proof of payment/assessment. It is also pertinent to mention that the
respondent No.1 only claimed reimbursement of the sales tax paid by it
on the turnover of the works contract and not of any tax or duty or royalty
paid by it on the material procured for the purpose of execution of the
works contract. Therefore, the contentions urged on behalf of the
appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC over
the claim of the contractor also deserve to be, and are, rejected.
16. To summarise the discussion in the preceding paragraphs, we are
clearly of the view that by virtue of Clause 45.2 of GCC, the contractor
company is rightfully entitled to claim reimbursement of the amount of
sales tax levied on the taxable turnover of the works contracts executed
by it. A fortiori, the grounds on which the appellant seeks to resist the
claim of the contractor company for such reimbursement, i.e., with
reference to the expression “completed item of work” in the said Clause
37
45.2 and with reference to the stipulations contained in Clauses 13.3 of
ITB and 45.1 of GCC, are wholly untenable and the appellant and its
contracting offices are under obligation to honour the claim so made by
the contractor company.
17. Before finally concluding on this matter, we are inclined to make a
few comments as regards the Circulars issued by the State Government
pertaining to the subject of reimbursement of sales tax in works contracts.
While noticing that diametrically opposite views were expressed by the
State Government in the two main Circulars dated 04.11.1986 and
07.11.2001, we had observed in the earlier part of this judgment that the
said Circulars were based on the given day understanding of the State
Government but such vacillating understanding of the State Government
was not determinative of the matter; and hence, we had ignored the said
Circulars while dealing with the principal issues involved in this matter, but
had also indicated that we shall refer to the said Circulars at a later and
appropriate stage.
17.1. The basic reason for which we feel impelled to refer to these
Circulars now and at this concluding stage is borne out of the contents of
the Circular dated 04.11.1986, which was issued by the State
Government closely following the amendment of the Act of 1947 with
insertion of the provisions aimed at facilitating the levy of sales tax on the
goods involved in a works contract. Being aware of its obligation in terms
38
of the said Clause 45.2 of GCC (or similar clause/s in other contracts), the
instructions were issued by the State Government in the said Circular
dated 04.11.1986 for: (a) making reimbursement of the amount of sales
tax actually paid by the contractor on production of necessary
documentary evidence of such payment; (b) not making reimbursement
against the amount of penalty, if any, levied upon the contractor; and (c)
obtaining undertaking from the contractor to refund the excess amount of
reimbursement, in case of reduction of its liability towards sales tax in
appeal or revision [vide sub-paragraphs (i) to (iii) of paragraph 2 of the
Circular dated 04.11.1986]. However, the significant feature is that in the
second set of instructions in this very Circular, as contained in subparagraph (iv) of paragraph 2 thereof, the Engineers-incharge were
instructed that no such clause for reimbursement of sales tax or payment
of such tax by the department to the contractor be inserted in the Notice
Inviting Tenders or Tender document; and no tender containing any
clause or condition to that effect be accepted. The said second set of
instructions in sub-paragraph (iv) of paragraph 2 of this Circular was,
obviously, meant for future contracts, but, its contrast with the first set of
instructions in the preceding sub-paragraphs fortifies the conclusion that
the State Government was fully conscious of its obligation to make
reimbursement in relation to the existing contracts which carried such
reimbursement clause/s.
39
17.2. As to what stipulations, terms and conditions are to form the part of
contract remains a matter essentially in the domain of the contracting
parties (of course, subject to the applicable requirements of law) and no
comments as regards future contracts are requisite herein but, on a
comprehensive reading of the Circular dated 04.11.1986, it is evident that
the State Government was fully conscious of its obligation towards
reimbursement under the existing terms of contracts and hence, issued
directions for due discharge of such obligation with necessary safeguards
and, at the same time, provided that henceforth, neither such a clause be
inserted in the contract documents nor any tender containing such a
clause or condition be accepted.
17.3. Evidently, the doubts at the later stage, as indicated in the Circular
dated 27.01.2000, and converse decision against the obligation of
reimbursement, as stated in the Circular dated 07.11.2001, had only been
of unwarranted attempts to wriggle out of the contractual obligations with
rather perverse construction of the plain terms of the existing contracts.
Be that as it may, the propositions in the said ill-advised Circular dated
07.11.2001 stand disapproved with the conclusions reached by us
hereinbefore. We say no more.
18. In the result, this appeal fails and is, therefore, dismissed with no
40
order as to costs. Pending interlocutory applications also stand disposed
of.
.……………..………….J.
(A.M.KHANWILKAR)
.………..…………….….J.
(INDIRA BANERJEE)
..………..………….…….J.
(DINESH MAHESHWARI)
New Delhi,
Dated: 5th June, 2020.
41
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2516 OF 2020
(Arising out of SLP (Civil) No. 32044 of 2011)
STATE OF ORISSA …APPELLANT(S)
Vs.
M/S B. ENGINEERS & BUILDERS LTD. & ORS. …RESPONDENT(S)
JUDGMENT
Dinesh Maheshwari, J.
1. Before entering into the subject matter, we may notice at the
outset that this petition for special leave to appeal is barred by limitation
by a period of 274 days. Though objections have been raised on behalf of
the contesting respondent against the prayer for condonation of delay but,
the record shows that notices on the application seeking condonation of
delay as also on the petition for leave to appeal were issued way back on
18.11.2011 and for a long time, the matter remained pending while
awaiting service on the respondents. Ultimately, after completion of
service, we had heard learned counsel for the contesting parties on
1
merits. Having regard to the circumstances of the case and after having
heard the contesting parties on merits, we find no reason to close the
matter only on the ground of delay. Accordingly, delay in filing is
condoned.
1.1. Leave granted.
2. This appeal by special leave is directed against the judgment and
order dated 05.08.2008 as passed by the Orissa High Court at Cuttack in
W.P. (C) No. 8857 of 2003, whereby the High Court accepted the claim of
the respondent No. 1 of present appeal1
, for reimbursement of the
amount of sales tax levied in respect of the works contracts executed by
it. The High Court also directed the Opposite Parties to grant appropriate
reimbursement as claimed by the writ petitioner in terms of Clause 45.2 of
the General Conditions of Contract2
under the National Competitive
Bidding Contract3
while quashing the clarification Circular dated
07.11.2001 issued by the Government of Orissa in its Department of
Water Resources.
2.1. The appellant State of Orissa has challenged the order so passed
by the High Court while essentially raising the questions concerning the
nature and implication of the sales tax, levied in relation to the works
contracts executed by the writ petitioner, under the Orissa Sales Tax Act,
19474
as amended in terms of the Constitution (Forty-sixth Amendment)
1 Hereinafter also referred to as ‘the writ petitioner’ or ‘the contractor company’.
2 ‘GCC’ for short
3 ‘NCB’ for short
4 Hereinafter also referred to as ‘the Act of 1947’
2
Act, 19825
; and concerning the operation and import of the relevant
stipulations in the contracts in question.
3. The factual and background aspects of the matter, being not of
much dispute and confined to a narrow compass, may be noticed, in brief,
as follows:
3.1. The respondent No. 1 of this appeal, said to be a company of
engineers and builders, who had been engaged in undertaking various
works contracts, responded to the tenders floated by the respondent Nos.
6 to 18 (various offices of the Government of Orissa) and, on being
determined as the lowest tenderer, was awarded the contracts from time
to time.
3.2. It is not in dispute that the aforesaid contracts awarded to the
respondent No. 1 carried the stipulations regarding taxes in Clause 45 of
GCC. The claim of the respondent No. 1 for reimbursement of sales tax
had been essentially based on Clause 45.2 of GCC, which carried the
stipulation that any Central or State sales tax and other taxes on
completed items of works (excluding penalty), as may be levied and paid
by the contractor shall be reimbursed by the employer on proof of
payment (and) on production of assessment certificate.
3.3. The sales tax regime in the State of Orissa is primarily governed
by the Act of 1947. By way of the Orissa Sales Tax (Amendment) Act,
1984 and the Orissa Sales Tax (Amendment) Act, 19856
, the
5 Hereinafter also referred to as ‘the forty-sixth amendment’
6 These amendments were introduced after the forty-sixth amendment of the Constitution whereby,
Clause (29-A) was inserted to Article 366 and it was, inter alia, provided that the expression “tax on
the sale or purchase of goods” includes a tax on the transfer of property in goods involved in the
3
amendments were brought about in the Act of 1947 with effect from
07.04.1984 whereby, inter alia, the definition of expression “Works
contract” was inserted; the definition of the expression “Sale” was
expanded so as to include therein the transfer of property in goods
involved in the execution of a works contract; and specific meaning was
also assigned to the expression “taxable turnover” in respect of a works
contract for the purpose of the rate of tax payable by a dealer. The rate of
tax payable by a dealer on the “taxable turnover” in respect of “works
contract” was fixed at 4%.
3.4. On 04.11.1986, the Government of Orissa, in its Department of
Irrigation and Power, issued a Circular to the effect that in case of works
contract executed on or after 07.04.1984, containing the specific clause
for reimbursement of sales tax, the Department of Irrigation and Power
would be liable for reimbursement of the amount of sales tax actually paid
by the concerned contractor on production of necessary documentary
evidence. Pursuant to these observations and directions, reimbursement
of the sales tax paid by the contractor company in respect of assessment
years 1995-1996 to 1997-1998 was allowed.
3.5. Later on, the State Government issued a notification under
Section 5 of the Act of 1947 whereby, the rate of tax payable by a dealer
on the taxable turnover in respect of the works contract was increased to
8%. Thereafter, by way of the orders of assessment for the years 1998-
1999 to 2000-2001, the Assessing Authority levied sales tax @ 8% on the
execution of a works contract.
4
taxable turnover in respect of the works contracts executed by the
contractor company. With reference to such assessments, the contractor
company claimed reimbursement of the sales tax paid in respect of the
works contracts executed by it.
3.6. However, in the meantime, the Government of Orissa, in its
Department of Water Resources, issued another Circular dated
27.01.2000 to the Engineers-incharge of various offices and projects that
the question as to whether sales tax deducted from the bills of the
contractor and paid to the sales tax officer will be again reimbursed to the
contractor whose quoted price was inclusive of all taxes as per Clause
13.3 of the Instructions to Bidders7
, was under active consideration; and it
was directed that no reimbursement of sales tax be made under Clause
45.2 of GCC until clarification was communicated in that regard.
3.7. Thereafter, on 07.11.2001, the State Government, in its
Department of Water Resources, issued the impugned Circular, said to be
a clarificatory one, stating that a completed item of works, for which the
contractor had entered into an agreement with the department, was either
an immovable property or a works contract and in either case, was not
exigible to sales tax; and therefore, the question of payment of sales tax
on such immovable property or works contract and consequential
reimbursement by the department as per Clause 45.2 of the General
Conditions of Contract, or similar provision in other contracts, did not
arise. Accordingly, the State Government instructed its Engineers7 ‘ITB’ for short
5
incharge not to reimburse the sales tax levied on cement, steel etc.; and
also directed for recovery of the amount from the contractor wherever any
such amount of sales tax had been reimbursed. These directions of the
Government were followed up by another Circular dated 19.06.2002 to
the same effect.
3.8. In view of the aforementioned Circulars dated 07.11.2001 and
19.06.2002, its claim, for reimbursement of the sales tax paid, being in
jeopardy and rather, the proposition for recovery of the amount already
reimbursed looming large, the contractor company preferred the writ
petition leading to this appeal, while seeking the following reliefs: –
“(i) Issue a Rule Nisi Calling upon the Opposite Parties to
show cause as to why the alleged clarification dated
07.11.2001 under Annexure-1, and the subsequent direction
for recovery of the amount earlier reimbursed, vide letter
dated 19.6.2002 under Annexure-3 ought not to be declared
illegal, invalid and non-est in the eyes of law;
And
(ii) issue a further Rule Nisi Calling upon the Opp. Parties to
show cause as to why the reimbursement claims made by
the petitioner under Annexure-5 series may not be granted
with a period stipulated by this Hon’ble Court;
And
(iii) in the event the Opp. Parties fail to show cause or show
insufficient cause make the said Rule Nisi absolute and issue
an appropriate writ of Mandamus or a writ of certiorari in line
with the aforesaid Rule Nisi;
And/or
(iv) further be pleased to direct either of the Opp. Parties i.e.,
the contracting parties (Opp. Parties 6-18) or the Sales-tax
Authorities (Opp. Parties 3-5) to effect reimbursement or
refund along with interest from the date of deposit of tax;
And
6
(v) to pass any other writ/writs, order/orders as this Hon’ble
Court may deem just and proper.”
4. The High Court in its impugned order dated 05.08.2008, examined
the contentions of the parties and granted the prayers of the writ
petitioner while observing and holding, inter alia, as under:-
“8…… The petitioner now claims reimbursement of tax paid
by it on actual turnover of the works contract and not on the
tax paid by it on the materials procured by it, which have
gone into for the purpose of execution of the works contract.
The further admitted fact that O.Ps. 6 to 18 have, in fact,
deducted the sales tax at source from the bills raised by the
petitioner from time to time in due progress of the work and
the same have in turn been deposited with the Sales Tax
Department.
**** **** ****
10. Now Annexure-1, which is sought to be quashed, is a
clarification but not in supersession of Annexure-10, as it is
projected by the State Government. The said clarification
cannot take away the effect of the statutory provision. The
orders of assessment in Annexure-4 series indicate that after
deducting the labour charges, services charges, amount of
tax paid, materials used in the execution of works contract,
from the gross turn over of the assessment year, the balance
has been put to tax by the Sales Tax Authority. The tax, as we
find, has been imposed in the light of the decision in Gannon
Dunkerly (supra).
From the discussion made above, the irresistible
conclusion is that the sales tax has been levied in the orders
of assessment in respect of the amount received pertaining
to items of work completed during the financial year. The
clarification in Annexure-1, which unilaterally takes away the
claim of the petitioner for reimbursement, is contrary to
Clause-45.2 of the General Conditions of the Contract and
Section 5 (2) (AA) of the Orissa Sales Tax Act as well as the
decision of the apex Court in Gannon Dunkerly (supra).
Accordingly, the clarification letter dated 7.11.2001
(Annexure-1) issued by the Financial Adviser-cum-Additional
Secretary to Government, Department of Water Resources is
quashed and the O.Ps. are directed to grant appropriate
7
reimbursement in terms of Clause-45.2 of the General
Conditions of Contract, as claimed by the petitioner.”
5. Assailing the order so passed by the High Court, learned senior
counsel for the appellant has strenuously argued that the impugned order
is contrary to the facts of the case as also the principles of law applicable
and hence, deserves to be set aside.
5.1. The learned senior counsel for the appellant has referred to
Clause (29-A) of Article 366 of the Constitution of India; and the principles
enunciated by this Court in the cases of Builders’ Association of India
and Ors. v. Union of India and Ors.: (1989) 2 SCC 645 and Gannon
Dunkerley and Co. and Ors. v. State of Rajasthan and Ors.: (1993) 1
SCC 364 to submit that by the forty-sixth amendment of Constitution, a
fiction was created for treating the works contract as deemed sale on
which, sales tax would be leviable but, only on the value of goods which
went into the execution of any works contract.
5.2. Further, with reference to the definitions of “sale”, “goods” and
“works contract” as contained in the Act of 1947 as also Section 5(2)(AA)
thereof and the relevant clauses governing the contracts in question, the
learned counsel has submitted that any payment against the monthly
running bill to the contractor does not constitute payment for any
“completed item of work”; and the only meaning of the nomenclature
“completed item of work” is the completion of the works contract as such.
Learned counsel would maintain that sales tax is not leviable on the
“completed item of work” in a works contract but, the contractor is bound
8
to pay sales tax on “taxable turnover” which, for the purpose of sales tax,
could only be on the value of goods utilised in completion of the works
contract.
5.3. The learned senior counsel has elaborated on the aforesaid
aspects with the submissions that every amount of sales tax on the
“taxable turnover”, which is required to be paid by the contractor, is
achieved either by deduction of such amount of sales tax from the
monthly running bills by the employer for deposit of the same with the
Sales Tax Department or by way of payment by the contractor directly to
the Sales Tax Department. According to the learned counsel, where the
amount payable as sales tax by the contractor is deducted by the
employer at the time of making payment of monthly running bills and is
deposited by the employer with the Sales Tax Department, there would
not arise any question of making any reimbursement of the amount so
deducted and paid to the Sales Tax Department back to the contractor
because the liability to pay sales tax on the value of material/goods
utilised in any works contract is that of the contractor; and the claim for its
reimbursement is entirely impermissible.
5.4. The learned senior counsel for the appellant has strenuously
argued that the High Court has failed to examine the import and effect of
Clause 13.3 of the Instructions to Bidders and Clause 45.1 of the General
Conditions of Contract which make it clear that the bid price quoted by the
contractor is inclusive of all duties, taxes and other levies, including
9
royalties on all materials to be used in performance of the works contract.
Hence, according to the learned counsel, when sales tax on the
goods/materials forms a part of contract price, the claim for
reimbursement has rightly been denied by the Government.
5.5. As regards Clause 45.2 of the General Conditions of Contract, the
learned counsel would re-emphasise that thereunder, reimbursement is
permissible when there is any sales tax levied on a “completed item of
work” but in the context of a works contract in a construction project,
there is no sales tax on the “completed item of work” which is an
immovable property. The learned counsel would submit that earlier, the
Circular dated 04.11.1986 came to be issued on an erroneous
understanding of Clause 45.2 in relation to works contract but
subsequently, clarificatory Circulars dated 07.11.2001 and 19.06.2002
were issued, stating the correct position of law that the said Clause 45.2
applied only to the sales tax on “completed item of work”; and the sales
tax levied in terms of Section 5(2)(AA) of the Act of 1947 was not
reimbursable and had to be borne by the contractor in view of clear
stipulation in Clause 45.1 of the General Conditions of Contract.
According to the learned counsel, reliance on the Circular dated
04.11.1986 on behalf of the respondent No. 1 is entirely misplaced and
the said Circular, by no means, could be construed as that of amending
the contractual terms as also the liability of the contractor in terms of
Section 5(2)(AA) of the Act of 1947.
10
6. Per contra, learned senior counsel for the contractor company (the
respondent No. 1 herein) has duly supported the order impugned with
reference to the reasonings therein.
6.1. Learned senior counsel for the contractor company has contended
that the argument made on behalf of the appellant, that the deduction in
the running bills had only been of the sales tax payable on various items,
is contrary to the record because the deductions were made on a deemed
sale on turnover basis and not item-wise and such a recovery of sales tax
is squarely covered by Clause 45.2 of GCC whereunder, the contractor
company is entitled to the claimed reimbursement.
6.2. The learned senior counsel has again referred to the decision of
this Court in the case of Gannon Dunkerley (supra) and the provisions
contained in Section 5 (2) (AA) of the Act of 1947 as also the said Clause
45.2 of GCC and the Circular dated 04.11.1986 to submit that deduction
of sales tax on turnover basis pre-supposes the existence of sale and
therefore, the contractor company is entitled to the reimbursement as
claimed. According to the learned counsel, the Circular dated 07.11.2001
had been directly against the statutory provisions as also the contractual
stipulations and the same has rightly been disapproved by the High
Court. The learned counsel has also referred to various decisions
including that in the case of State of U.P. and Ors. v. P.N.C.
Construction C. Ltd. and Ors.: (2007) 7 SCC 320.
11
7. We have heard learned counsel for the parties at sufficient length
and have examined the record with reference to the law applicable.
8. Having regard to the issues raised, appropriate it would be to take
note of the relevant provisions of law; the referred conditions governing
the contractual relations of the parties; and the referred Circulars issued
by the Government of Orissa.
8.1. By way of the Constitution (Forty-sixth Amendment) Act, 1982,
Clause (29-A) came to be inserted to Article 366 of the Constitution of
India, providing for inclusive definition of the expression “tax on the sale
or purchase of goods” in relation to various transactions and dealings. As
regards “works contract”, the said expression came to be assigned the
meaning in sub-clause (b) thereof, which reads as under:-
“(29-A) “tax on the sale or purchase of goods” includes-
(a)… … …
(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) to (f) … … …”
8.1.1. The constitutional validity of the aforementioned provisions by
which the legislatures of the States were empowered to levy sales tax on
certain transactions described in sub-clauses (a) to (f) of Clause (29-A) of
Article 366 of the Constitution as also the question, as to whether the
power of the State legislature to levy tax on the transfer of property in
goods involved in the execution of works contracts is subject to the
restrictions and conditions contained in Article 286 of the Constitution,
12
were considered and decided by the Constitution Bench of this Court in
the case of Builders’ Association (supra). Therein, while upholding the
constitutional validity of the aforementioned provisions, the Constitution
Bench explained the unique features of a composite contract relating to
work and materials; and expounded on the meaning, effect and amplitude
as also contours of the provisions pertaining to the taxing power of the
States in relation to works contract in the following words: -
“38. In Benjamin’s Sale of Goods (3rd Edn.) in para 43 at p.
36 it is stated thus:
“Chattel to be affixed to land or another chattel.—
Where work is to be done on the land of the employer
or on a chattel belonging to him, which involves the
use or affixing of materials belonging to the person
employed, the contract will ordinarily be one for work
and materials, the property in the latter passing to the
employer by accession and not under any contract of
sale. Sometimes, however, there may instead be a
sale of an article with an additional and subsidiary
agreement to affix it. The property then passes before
the article is affixed, by virtue of the contract of sale
itself or an appropriation made under it.”
39. In view of the foregoing 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. We are surprised at the attitude of the States which have
put forward the plea that on the passing of the 46th
Amendment the Constitution had conferred on the States a
larger freedom than what they had before in regard to their
power to levy sales tax under Entry 54 of the State List. The
13
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. We may recapitulate here the observations of the
Constitution Bench in the case of Bengal Immunity Co. Ltd.
[AIR 1955 SC 661 in which this Court has held that the
operative provisions of the several parts of Article 286 which
imposes restrictions on the levy of sales tax by the States are
intended to deal with different topics and one could not be
projected or read into another and each one of them has to
be obeyed while any sale or purchase is taxed under Entry
54 of the State List.”
(emphasis supplied)
8.1.2. In the case of Gannon Dunkerley (supra), while dealing with the
scope of the legislative power of State under Entry 54 of the State List
contained in Seventh Schedule to the Constitution, particularly in the
context of inter-State trade or commerce, another Constitution Bench of
this Court found no reason to reopen the issues covered by the decision
in Builders’ Association case (supra) and held on the limitations of the
powers of State legislature as under:-
“31…..the legislative power conferred under Entry 54 of the
State List does not extend to imposing tax on a sale or
purchase of goods which takes place outside the State or
which takes place in the course of import or export of goods.
In view of the aforesaid limitations imposed by the
Constitution on the legislative power of the States under
Entry 54 of the State List, it is beyond the competence of the
State Legislature to make a law imposing or authorising the
imposition of a tax on transfer of property in goods involved in
14
the execution of a works contract, with the aid of sub-clause
(b) of clause (29-A) of Article 366, in respect of transactions
which take place in the course of inter-State trade or
commerce or transactions which constitute sales outside the
State or sales in the course of import or export.
**** **** ****
41. It must, therefore, be held that while enacting a law
imposing a tax on sale or purchase of goods under Entry 54
of the State List read with sub-clause (b) of clause (29-A) of
Article 366 of the Constitution, it is not permissible for the
State Legislature to make a law imposing tax on such a
deemed sale which constitutes a sale in the course of interState trade or commerce under Section 3 of the Central
Sales Tax Act or an outside sale 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. So also it is not
permissible for the State Legislature to impose a tax on
goods declared to be of special importance in inter-State
trade or commerce under Section 14 of the Central Sales Tax
Act except in accordance with the restrictions and conditions
contained in Section 15 of the Central Sales Tax Act.”
8.1.3. In the said case of Gannon Dunkerley, the Constitution Bench
explained the purport and effect of the legal fiction introduced by subclause (b) of Clause (29-A) of Article 366 of the Constitution and also
enunciated the principles for its operation as follows: -
“36. 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 a 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.
**** **** ****
47……..The value of the goods involved in the execution of a
works contract will, therefore, have to be determined by
taking into account the value of the entire works contract and
deducting therefrom the charges towards labour and services
which would cover—
(a) Labour charges for execution of the works;
15
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect’s fees;
(d) charges for obtaining on hire or otherwise machinery and
tools used for the execution of the works contract;
(e) cost of consumables such as water, electricity, fuel, etc.
used in the execution of the works contract the property in
which is not transferred in the course of execution of a works
contract; and
(f) cost of establishment of the contractor to the extent it is
relatable to supply of labour and services;
(g) other similar expenses relatable to supply of labour and
services;
(h) profit earned by the contractor to the extent it is relatable
to supply of labour and services.
The amounts deductible under these heads will have to be
determined in the light of the facts of a particular case on the
basis of the material produced by the contractor.”
(emphasis supplied)
8.1.4. The salient features of the legal fiction introduced by sub-clause
(b) of Clause (29-A) of Article 366 of the Constitution and the co-related
concept of “value addition” came to be succinctly explained by this Court
in the case of P.N.C. Construction Co. (supra) in the following words: -
“21. “Value addition” is an important concept which has
arisen after the Forty-sixth Amendment to the Constitution.
Prior to the said Amendment this Court had taken the view in
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd
[AIR 1958 SC 560] that “works contract” was an indivisible
contract and the turnover of the goods used in the execution
of the works contract could not, therefore, become exigible to
sales tax. To overcome the effect of the said decision, the
concept of “deemed sale” was introduced by Parliament by
introducing sub-clause (b) of Clause 29-A in Article 366 of the
Constitution which states that the tax on sale or purchase of
goods would include a tax on transfer of property in goods
involved in the execution of works contract. The emphasis is
on the expression “transfer of property in goods (whether
goods as such or in some other form)”. Therefore, after the
Forty-sixth Amendment to the Constitution, the works
contract which was an indivisible contract is, by a legal
fiction, divided into two parts—one for sale of goods and the
16
other for supply of labour and services. Therefore, after the
Forty-sixth Amendment, it became 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 supplied in a building contract. This
is where the concept of “value addition” comes in. It is on
account of the 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.”
(emphasis supplied)
8.2. Having thus noticed the source of power of the State legislature to
levy sales tax in relation to the works contract but only on the value of the
goods/materials involved therein, we may also take note of the relevant
amended provisions of the Orissa Sales Tax Act, 1947, which read as
under:-
“Section 2(g) “Sale” means with all its grammatical variations
and cognate expression, any transfer of property in goods for
cash or deferred, payment or other valuable consideration
and includes,--
(i) … … …
(ii) (ii) transfer of property in goods (whether as goods or
in some other form) involved in the execution of a
works contract;
(iii) to (vi) … … …
Section 2(jj)- “Works Contract” includes any agreement for
carrying out, for cash or 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 immoveable property.
S.5(2)(AA)- Notwithstanding anything contained in subsection (2)(A), “taxable turnover” in respect of:
(i) ‘works contract’ shall be deemed to be the gross value
received or receivable by dealer for carrying out such
contract, less the amount of labour charges and service
charges incurred for the execution of this contract… … …”
17
8.3. As noticed, the claim for reimbursement made by the contractor
company is based on Clause 45.2 of GCC whereas this claim is being
resisted by the appellant State with reference to Clause 13.3 of ITB and
Clause 45.1 of GCC. The referred clauses, as placed before us for
consideration, read as under: -
Clause 13.3 of ITB
“13.3 All duties, taxes and other levies including royalty
payable by the contractor under the contract or for any other
cause shall be included in the rates, price and total bid price
submitted by the bidder.”
Clauses 45.1 and 45.2 of GCC
“45.1 The rates quoted by the contractor shall be deemed to
be inclusive of the sales and other taxes including royalties
on all materials that the contractor will have to purchase for
performance of this contract.
45.2 Any Central or State Sales Tax and other taxes on
completed items of works of this contract as may be levied
excluding penalty levied for Contractor’s fault and paid by the
Contractor shall be reimbursed by the Employer to the
Contractor on proof of payment on production of assessment
certificate on every financial year. During the course of
contract period, deductions of sales tax on works contract
turnover at the source, shall be made from each bill at such
rate and conditions as may be required under the provisions
of Orissa Sales Tax Act and Rules.”(sic)
8.4. Now, the three Circulars issued by the Government of Orissa in
regard to the acceptance and then denial of the claim for reimbursement
of sales tax in works contract, which form the part of controversy herein,
may also be noticed.
8.4.1. In its initial Circular dated 04.11.1986, the State Government
issued directions and guidance for such reimbursement of sales tax in
18
relation to the existing work contracts; and also directed that any such
clause for reimbursement be not included in future contracts.. This
Circular dated 04.11.1986 reads as under:-
“Government of Orissa
Irrigation and Power Department
48154/Dated 4th No November, 1986
No. FA-1-11/86
From
Shri P.K. Das
Financial Adviser-cumJoint Secretary to Government
To
The Engineer-in-Chief, Irrigation, Orissa/Chief Engineer,
Delta and Flood Control/ Chief Engineer, Medium IrrigationI/Chief Engineer, Medium Irrigation-II/Chief Engineer,
Rengali, Gohira and Samkoi Projects/ Chief Engineer,
Rengali Irrigation Project, Samal/ Chief Engineer, Mahanadi
Birupa Barrage Project/Chief Engineer, Upper Kolab Project,
Bariniput/Chief Engineer, Potteru Irrigation Project/Chief
Engineer, Electricity-cum-Chief Engineer, Electrical Projects,
Orissa/General Manager, Upper Indravati Project/Chief
Engineer (Ele.) Upper Kolab Hydro Ele. Project.
Sub: RE-IMBURSEMENT OF SALES TAX ON WORKS
CONTRACTS
Sir,
1. I am directed to say that in accordance with the Orissa Sales
Tax (Amendment) Act, 1984 read with Orissa Sales Tax
(Amendment) Ordinance, 1985, Sales Tax has become
payable on the turn over of Works Contracts with effect from
07.04.1984.
2. Under the Law, Sales Tax is payable by the concerned
contractor/dealer, and not by this Department. Yet, a question
arose as to whether this Department was legally liable to
reimburse the amount of sale tax actually paid or payable by
the Contractor/dealers in so far as the contracts relating to
this Department are concerned. After due consideration of
the legal aspects of the problem, the following instructions
are issued for information and guidance of all concerned.
19
(i) In case of Works- Contracts executed on or after
07.04.1984 which contained specific clauses for
reimbursement of Sales Tax, this Department is liable
to reimburse the amount of sale tax actually paid by the
concerned contractor on production of necessary
documentary evidence in token of making such
payment, after obtaining an undertaking from the
concerned contractor to the following effect:-
If the Contractor prefers or has preferred
appeal/revision before the concerned appellate
authority under the Sales Tax Law for remission of the
Sales Tax dues paid by him and said appeal/revision
results in any reduction of such dues, the differential
amount, the amount of Sales Tax reimbursed and the
amount of Sales Tax reimbursed and the amount of
Sales Tax payable as decided on appeal/revision will
be refunded back to Government by the Contractor.
(ii) Similar reimbursement will also be permissible and in
the same manner as indicated in Sl. (i) above in case
of contracts executed prior to 07.04.1984 where the
work was in progress beyond that date, which
contained specific clause for such reimbursement.
(iii) The amount of penalty levied if any, under the Sales
Tax Law on any count and paid by the Contractordealer shall not be reimbursed by the Department to
the concerned Contractor.
(iv) No clause either for reimbursement for Sales Tax or
payment of such Tax by the department to the
Contractor should be inserted in the Notice Inviting
Tenders or Tender document and no tender containing
any clause or condition to the above effect should be
accepted.
3. I am to request that the above guideline may be brought to
the notice of all concerned.
4. If any amount of Sales Tax has been reimbursed/paid to any
Contractor in any case, not in conformity with the guidelines
as noted vide paragraph-2 above, a proposal should be
furnished to this Department seeking Government approval
to that effect, furnishing full facts and figures on that score,
clearly indicating the extent and manner of deviation from any
of the guidelines as noted above Sls. (i) to (iv) of Paragraph-2
20
above. This may please be treated as urgent and the
proposal(s) should be submitted to Government in all such
cases by 30.11.1986 at latest. If there is no need for
furnishing any proposal on the above score, a Nil report
should be submitted by the aforesaid target date.
5. Receipt of the letter may please be acknowledged by
return of post.
Yours faithfully
Sd/- 04.11.1986
FA-cum-Joint Secretary to Govt.”
8.4.2. However, in the Circular dated 27.01.2000, the State Government
asked the Engineers-incharge to await its decision on the queries raised
on the issue pertaining to such reimbursement of the amount of sales tax
in relation to the works contracts. This Circular dated 27.01.2000 reads as
under:-
“Government of Orissa
Department of Water Resources
No. IIT-RVN-11/2000-5295 Dated: 27.01.2000
From
Shri N. Behera,
FA-cum-Addl. Secretary to Government
To
The Engineer-in-Chief, Water Resources/
Engineer-in-Chief, Planning & Designs/
Engineer-in-Chief, Rengali Irrigation Project/
All the Chief Engineers & Basin Manages/
All the Chief Engineers/
All the Chief Construction Engineers/
Director, Ground Water Survey and Investigation
Sub: Reimbursement of Sales Tax on Works contract.
Sir,
21
I am directed to say that clause 13.3 of ITB of the NCB bid
document approved by World Bank stipulates that “All duties,
taxes and other levies including royalty payable by the
contractor under the contract or for any other cause shall be
included in the rates, prices and total bid price submitted by
the Bidder.”
The clause 45.2 at G.C.C. of the said document stipulates
that “Any Central or State Sales Tax and other Taxes on
completed item of work of this contract as may be levied
excluding penalty levied for contractor’s default and paid by
the contractors shall be reimbursed by the employer to the
contractor on proof of payment. During the course of contract
period deduction of Sales Tax on works contract turn over at
the sources shall be made from each bill at such rate and
conditions as may be required under the provision of Orissa
Sales Tax Act and Rules.”
Some Chief Engineers have sought for clarification as to
whether Sales Tax deducted from the bills of the contractor
and paid to the sales tax officer will be again reimbursed to
the contractor whose quoted price is inclusive of all taxes as
per clause 13.3 of ITB. In some cases, A. G. Audit has raised
objection against such reimbursement. This is under active
consideration of govt. for issuing necessary clarification.
Therefore, you are hereby instructed that no
reimbursement of sales tax should be made under clause
45.2 of G. C. C. of NCB agreements for World Bank works
and works covered under similar contracts till clarification is
communicated by Government.
This may please be brought to the notice of all
Subordinate Officers under your control.
Receipt of the letter may please be acknowledged.
Yours faithfully
Sd/-
FA-cum-Addl. Secretary to Government”
8.4.3. Thereafter, by the impugned Circular dated 07.11.2001, the State
Government purportedly came out with the clarification but, in effect,
issued directions squarely opposite to those contained in the earlier
Circular dated 04.11.1986, while asserting that no such claim for
22
reimbursement of the amount of sales tax pertaining to works contract
was admissible. This Circular dated 07.11.2001 reads as under: -
“Government of Orissa
Department of Water Resources
No. IIT RVN. 11/2000-42711/UR Dated 07.11.2001
From
Shri B. Pradhan,
FA-cum-Addl. Secretary to Government.
To
The Engineer in Chief, Water Resources/
Engineer in Chief, Planning and Designs/
Engineer in Chief, Rengali Irrigation Project/
All the Chief Engineers and Basin Manager/
All the Chief Engineers/
All the Chief Construction Engineer/
Director, Ground Water Survey and Investigation.
Sub: Clarification on reimbursement of sales tax in
respect of works contracts
Sir,
In continuation of this Department letter no.5295 dt.5295
dt.27.01.2000 on the subject mentioned above, I am directed
to say that as per Orissa Sales Tax Act transfer of property in
execution of works contracts (Whether as goods or in some
other form) is subject to levy of Sales Tax. When a building, a
bridge, a road, a canal, a plant etc., is constructed, the
ingredients like cement, iron & steel, bricks, stones etc.
involved in execution of the contract are subject to levy of
sales tax. The completed item i.e., a bridge, a building, a
road, or a canal, as the case may be, is not subjected to levy
of sales tax because after construction these become
immovable property not susceptible to transfer of property for
the purpose of sales tax assessment.
23
As per clause 13.3 of I.T.B. of the NCB bid document read
with clause 45.1 of the general conditions of the contract the
rates quoted by the contractor shall be deemed to be
inclusive of sales and other taxes including royalties on all
materials that the contractor will have to purchase for
performance of the contract.
Clause 45.2 of the G.C.C. speaks that any Central or State
Sales Tax and other taxes on completed items of work of the
contract as may be levied, excluding penalty levied for
contractors default and paid by the contractor shall be
reimbursed by the employer to the contractor on proof of
payment. It is clarified that a completed item of work for
which the contractor has entered into agreement with the
department is either immovable property or a works contract
and in either case is not exigible to sales tax. Therefore, the
question of payment of sales tax on such immovable property
and consequential reimbursement of the sales tax by the
department as per clause 45.2 of the G.C.C. or similar
provision existing in other contracts does not arise. A
contractor may, however, have to pay sales tax as assessed
by the sales tax officer on items which go into construction of
the work. This tax is not reimbursable since the contractor is
expected to have built it into his rates.
In view of the above, you are hereby instructed not to
reimburse sales tax levied on cement, steel etc.,
misinterpreting clause 45.2 of the G.C.C. of N.C.B.
agreement for World Bank assisted works and the works
covered under other agreement containing similar clause.
Besides if any amount of sales tax has already been
reimbursed, immediate steps should be taken for recovery of
the amount from the contractors.
This has been concurred in by Finance Department in their
U.O.R.No.3896/ SF. Dt. 24.09.2001.
Yours faithfully,
Sd/-
Financial Adviser-cum-Addl. Secretary to Government”
9. Now, while taking up the points arising for determination, we may
usefully summarise the relevant aspects pertaining to this case.
24
9.1. It is evident that the contractor company (respondent No. 1 herein)
seeks to assert its right to claim reimbursement of the amount of sales tax
levied in respect of the works contracts executed by it on the strength of
the stipulations contained in Clause 45.2 of GCC of NCB bid documents.
On the other hand, the appellant State seeks to resist the right so claimed
by the contractor company with reference to the principles enunciated in
the cited decisions that after the forty-sixth amendment and insertion of
sub-clause (b) of Clause (29-A) to Article 366, the State could levy sales
tax on the price of goods and materials used in works contract as if there
was a sale of such goods and materials and then, on two-fold assertions
on that basis: one, that in the context of a works contract, there is no
sales tax on the “completed item of work” which is an immovable property
and, therefore, question of any reimbursement does not arise; and
second, that in works contract, the contractor may have to pay sales tax
assessed on the items which go into the construction but, such amount of
sales tax is not reimbursable because the contractor is supposed to have
provided for the same in its rates, as envisaged by Clauses 13.3 of ITB
and 45.1 of GCC.
9.2. So far as the basic factual aspects are concerned, it is not in
dispute that the respondent No. 1 indeed undertook execution of various
works contracts with the respective offices of the appellant State of
Orissa. It remains indisputable that in relation to such contracts, Clause
13.3 of ITB stipulated that all duties, taxes and other levies including
25
royalties payable by the contractor were to be included in the bid price
and Clause 45.1 of GCC specifically provided that the rates quoted by the
contractor shall be deemed to be inclusive of the sales and other taxes
including royalties on all materials that the contractor was to purchase for
performance of the contract. However, and at the same time, it is also
indisputable that as per Clause 45.2 of GCC, any Central or State Sales
Tax and other taxes on “completed items of works” of the contract as
might be levied upon, and paid by, the contractor (excluding penalty
levied for contractor’s fault) were to be reimbursed to the contractor on
proof of payment and assessment. This Clause 45.2 further envisaged
that during the course of contract period, deductions of sales tax on
“works contract turnover” was to be made at the source, from each bill as
per the rate and conditions prescribed under the provisions of Act of
1947. It is also not in dispute that in the course of execution of such
contracts, various running bill payments were made to the respondent No.
1 and while making such payments, deductions were indeed made
towards the amount of sales tax; and such deducted amount of sales tax
was deposited with the Sales Tax Department of the Government of
Orissa. Further, it is also borne out that reimbursement of the sales tax so
levied upon, and paid by, the respondent No. 1 in respect of the
assessments for the years 1995-1996 to 1997-1998 was allowed; but
such claim for reimbursement by the respondent No. 1 in respect of the
assessments for the years 1998-1999 to 2000-2001 was declined.
26
9.3. As noticed, after the amendments were brought about in the Act of
1947 for levying sales tax on works contract with effect from 07.04.1984,
the Circular dated 04.11.1986 was issued by the Government of Orissa to
the effect that in case of works contract executed on or after 07.04.1984,
containing the specific clause for reimbursement of sales tax, the
Department of Irrigation and Power would be liable for reimbursement of
the amount of sales tax actually paid by the concerned contractor on
production of necessary documentary evidence. The aforementioned
reimbursements were allowed to the respondent No. 1 pursuant to these
observations and directions in the Circular dated 04.11.1986. However,
by way of the subsequent Circular dated 07.11.2001, the Government of
Orissa came out with total volte-face on its opinion in relation to the claim
for reimbursement of sales tax paid by the contractors while stating that a
“completed item of work” in relation to a works contract was not exigible
to sales tax and, as regards the sales tax on the items which go into the
work, the contractor is expected to have included the same in the rates. It
was, therefore, observed that the question of reimbursement as per
Clause 45.2 of GCC or similar provision in other contracts did not arise.
9.4. The High Court, in its impugned order dated 05.08.2008, has
rejected the contentions of the appellant State and has disapproved the
aforesaid Circular dated 07.11.2001 essentially with reference to the fact
that the claim for reimbursement was being made of the tax that was
levied on the turnover of the works contracts and not of the tax paid by
27
the contractor on the materials procured by it. The High Court has also
found that the sales tax was levied after necessary deductions and in
accordance with the decision in Gannon Dunkerley (supra) for which,
the contractor was entitled to claim reimbursement under Clause 45.2 of
GCC and that the clarification Circular dated 07.11.2001 cannot take
away the effect of statutory provisions.
10. Having taken all the relevant aspects in comprehension and
having examined the matter in its totality, we are clearly of the view that
the High Court has rightly allowed the writ petition filed by the respondent
No. 1 and no case for interference in this appeal is made out.
11. Before proceeding further, we may at once observe that so far as
the aforesaid Circulars are concerned, neither of them could be decisive
of the issues at hand. As noticed, in the Circular dated 04.11.1986, the
State Government expressed the view that the reimbursement in question
was required to be allowed in terms of Clause 45.2 of GCC but later on, in
the Circular dated 07.11.2001, the State Government took a diametrically
opposite view to say that such reimbursement was not to be allowed in
relation to the works contract. Obviously, the said Circulars had been
based on the given day understanding of the State Government on the
operation of the relevant provisions of law and the terms of contract. Such
vacillating understanding on the part of the State Government cannot be
determinative of the contractual obligations of the parties, which are
required to be decided with reference to the principles of law applicable
28
and on true construction of the terms of contract. Therefore, we would
ignore the said Circulars while dealing with the principal issues involved in
this matter but shall refer to them at a later and appropriate stage.
12. Reverting to the core issues, it remains rather indisputable that as
per Clause 45.2 of GCC, the amount of sales tax on completed items of
works of the contract, as might have been levied upon, and paid by, the
contractor, except the penalty levied for contractor’s own fault, was to be
reimbursed to the contractor on proof of payment and assessment. It was
also provided in Clause 45.2 itself that, during the course of contract
period, deductions of sales tax on works contract turnover would be made
from the running bills at the prescribed rates and conditions. As noticed, it
is not in dispute that while making payment of various running bills in the
course of execution of contracts by the respondent No. 1, deductions
were indeed made towards the amount of sales tax and such deducted
amount of sales tax was deposited with the Sales Tax Department of the
Government of Orissa. Such deductions and deposits with Sales Tax
Department had clearly been in accordance with the stipulation contained
in the second part of Clause 45.2 ibid. However, and even after making
deductions in terms of the second part of Clause 45.2, the appellant State
seeks to deny the operation of first part of this Clause 45.2 (whereby the
contractor is entitled to reimbursement of the amount of sales tax) on the
grounds that: (a) the reimbursement is envisaged of the sales tax levied
on the “completed item of work” but, in works contract, such “completed
29
item” is not exigible to sales tax and hence, the question of
reimbursement does not arise; and (b) that as per Clause 45.1 of GCC
read with Clause 13.3 of ITB, the contractor is deemed to have provided
for the leviable amount of sales tax on goods/materials in its rates and
hence, the contractor cannot claim any reimbursement thereof. The
question is as to whether such contentions of the appellant against the
operation of first part of Clause 45.2 of GCC could be countenanced? In
our view, the answer could only be in the negative.
13. Taking up the main plank of the case of the appellant about the
nature, extent and implication of the levy of sales tax in relation to a works
contract, it could be usefully recapitulated that in view of the forty–sixth
amendment to the Constitution of India, Clause (29-A) came to be
inserted to Article 366; and, by virtue of sub-clause (b) thereof, it became
permissible 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. In other words, after the forty-sixth amendment to the
Constitution, the works contract is divided into two parts by a legal fiction:
one for sale of goods/materials and other for supply of labour/services;
and it is possible for the States to levy sales tax on the value of
goods/materials involved in such works contract. These features have
been expounded and explained by this Court in the referred cases of
Builders’ Association, Gannon Dunkerley and P.N.C. Construction
Co. (supra) and need no further enlargement.
30
13.1. As regards the relevant provisions of the State enactment, it is at
once clear that after the aforesaid forty-sixth amendment to the
Constitution, the State of Orissa also proceeded to carry out the
necessary amendment to the Act of 1947 and provided for levy of sales
tax in relation to a works contract, inter alia, by expanding the definition
of “Sale” so as to include therein the transfer of property in goods
involved in the execution of a works contract; and by specifying that
“taxable turnover” in respect of works contract shall be deemed to be the
gross value received or receivable by dealer for carrying out such
contract less the amount of labour and service charges incurred in
execution of the contract. On their essence and intent, what turns out of
these amended provisions of the Act of 1947 is that in relation to a works
contract, there would be deemed to be the sale of goods involved in
execution thereof; and sales tax would be leviable on the taxable turnover
(and not on the gross turnover) of such works contract.
13.2. As noticed, it has been the consistent case of the respondent No.
1 that in the running bill payments, the amount of sales tax was deducted
and the same was deposited with the Sales Tax Department. It has also
been the consistent case of the respondent No. 1 that in the referred
orders of assessment, sales tax was levied on the applicable rates on the
“taxable turnover” in respect of the works contracts executed by it and the
claim for reimbursement was made of the amount of sales tax so levied
and paid. The High Court has also recorded a categorical finding that
31
after deducting the labour charges, service charges and the tax paid from
the gross turnover, the balance had been put to tax by the Assessing
Authority. These assertions of the respondent No. 1 as also the findings of
the High Court are not the subject matter of dispute. That being the
position, it is but evident that in relation to the works contracts executed
by the respondent No. 1, the appellant and its offices have indeed levied
the sales tax on the taxable turnover that was arrived at after due
deduction of labour/service charges, in conformity with Section 5(2)(AA)
of the Act of 1947. There had neither been any levy of the sales tax on
the entire turnover of the works contracts nor any such levy could have
been effected because, as noticed, the taxing event of sale in a works
contract is confined to the use of the goods/materials in execution of the
contract.
14. While the aforesaid legal and factual aspects remain more or less
indisputable, what the appellant seeks to contend is that the
reimbursement envisaged by the first part of Clause 45.2 of GCC is of the
tax levied on the “completed item of work” but in a works contract, sales
tax is not levied on the completed item of work because such completed
item in a works contract becomes an immovable property. Such a
contention of the appellant remains wholly untenable in view of the
scheme of levy of sales tax in a works contract as also the scheme of
reimbursement envisaged by Clause 45.2 of GCC.
32
14.1. Contextually read, it is but apparent that the expression
“completed item of work” in Clause 45.2 ibid., signifies the intent that
reimbursement would be permissible only after execution of a particular
item of work has been completed and accomplished. In other words, this
expression is clearly intended to contradistinguish the cases where any
item of work remains incomplete and yet any claim for reimbursement of
the sales tax levied is sought for. This expression cannot be read to mean
as if signifying the levy of sales tax itself on the completed item of work
because such reading of this expression would be totally disjunct from the
context and would be entirely detached from the real intent.
14.2. Viewed from another angle, it would appear that if the contention
on the part of the appellant as regards interpretation of the first part of
Clause 45.2 is accepted, it would practically result in holding that the said
Clause 45.2 is not at all applicable to a works contract. Such a result
cannot be countenanced for two major reasons: First, that if such a
clause was not to be applied to the works contract, there was no reason
to have retained the same in relation to the works contracts awarded to
the respondent No. 1. When such a stipulation forms the part of contract,
it would be rather preposterous to say that the same would stand but
would not operate. Secondly, and more significantly, in the second part of
this very Clause 45.2, it has specifically been provided that deductions of
sales tax on works contract turnover at source shall be made from each
bill. It is not far to seek, and is rather evident on a bare reading of Clause
33
45.2 in its entirety, that it is to apply in relation to the sales tax on works
contract too. As noticed, the second part of Clause 45.2 had indeed been
applied and enforced by the appellant and its offices by regularly making
deduction of the amount of sales tax in the running payments of the
respondent no. 1 and by regularly depositing the same with the Sales Tax
Department. It would again be preposterous, nay absurd, to say that the
second part of Clause 45.2 entitling the appellant and its offices to make
deduction of sales tax on works contract turnover at source could be
enforced but when it comes to reimbursement, the first part of this very
Clause 45.2 would not apply to a works contract.
14.3. Viewed from any angle, we are satisfied that heavy reliance on
behalf of the appellant on the expression “completed item of work”, as
occurring in the first part of Clause 45.2, is entirely misplaced. The only
implication of this expression is that a claim for reimbursement of sales
tax cannot be made in relation to a particular work or item whose
execution is pending or is in progress and has not been completed. So far
the levy of sales tax in relation to a works contract is concerned, the same
is on “taxable turnover” and not on the entire turnover. It follows
necessarily that the claim for reimbursement could only be made of the
amount of sales tax that had been levied; and had been paid by the
contractor. Hence, the suggestion as if the expression “completed item of
work” refers to the end-product of a works contract is without any
34
substance. The contentions urged in that regard are required to be, and
are, rejected.
15. We may now take up the other line of argument on behalf of the
appellant that as per Clause 45.1 of GCC read with Clause 13.3 of ITB,
the contractor is deemed to have provided for the leviable amount of
sales tax on goods/materials in its rates and hence, the contractor cannot
claim any reimbursement thereof.
15.1. It remains trite that the terms of contract bind the parties thereto
and unless there be any case of ambiguity or violation of law, ordinarily,
the terms of contract, revealing the intent of parties, are required to be
given effect to. The submission on the part of the appellant, that first part
of Clause 45.2 of GCC would not operate because of Clause 45.1 of GCC
read with Clause 13.3 of ITB, remains entirely baseless and appears to
be of a desperate attempt to wriggle out of the contractual obligations.
Even when the contractors were given instructions in the said Clause
13.3 of ITB to include all duties taxes and other levies in the bid price and
even when the said Clause 45.1 of GCC provided that the rates quoted
by the contractor shall be deemed to be inclusive of the taxes and
royalties on all the materials which were to be procured for performance
of the contract, it was yet provided in the first part of Clause 45.2 of GCC
that the sales tax and other taxes on completed items of work, as may be
levied upon, and paid by, the contractor shall be reimbursed to the
contractor on proof of payment/on production of assessment certificate. It
35
is, therefore, crystal clear that even when the contract provided that the
rates quoted by the contractor shall be deemed to be inclusive of sales
and other taxes and royalties on the materials, it was agreed to between
the parties that sales tax and other taxes under completed items of work,
as paid by the contractor were to be reimbursed.
15.2. It would at once appear that if the contention on the part of the
appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC is
accepted in the manner that when the rates quoted by the contractor are
inclusive of the taxes on the goods/materials to be used in performance of
the contract, reimbursement of the sales tax levied upon, and paid by, the
contractor is not to be allowed, it would practically result in rendering the
first part of Clause 45.2 otiose and redundant. Neither that had been the
intent of the parties nor could the terms of contract be construed in this
manner.
15.3. In our view, the implication and effect of Clauses 13.3 of ITB and
45.1 of GCC had only been that while making the bid and quoting the
rates, the contractor was supposed to include the taxes, duties, royalties
etc. payable by it over the materials to be procured and utilised in
performance of the contract and hence, while raising the bills, the
contractor was not entitled to claim any amount towards any such
tax/duty/royalty paid by it on the materials purchased for performance of
the contract. These clauses, i.e., Clause 13.3 of ITB and 45.1 of GCC,
which prohibit the contractor from demanding taxes, duties, royalties etc.
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on the materials procured by it for performance of the contract do not, and
cannot, conversely operate over the sales tax which is levied upon the
contractor and which is primarily recovered with deductions from the
running bill payments. In other words, in our view, on a plain reading of
the aforesaid relevant terms of the contract, it is clear that while the
contractor cannot claim any payment towards the taxes/duties/royalties
etc. on the goods/materials purchased by it for performance of the
contract but that does not disentitle the contractor from claiming
reimbursement of the sales tax levied upon it by the employer, of course
after proof of payment/assessment. It is also pertinent to mention that the
respondent No.1 only claimed reimbursement of the sales tax paid by it
on the turnover of the works contract and not of any tax or duty or royalty
paid by it on the material procured for the purpose of execution of the
works contract. Therefore, the contentions urged on behalf of the
appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC over
the claim of the contractor also deserve to be, and are, rejected.
16. To summarise the discussion in the preceding paragraphs, we are
clearly of the view that by virtue of Clause 45.2 of GCC, the contractor
company is rightfully entitled to claim reimbursement of the amount of
sales tax levied on the taxable turnover of the works contracts executed
by it. A fortiori, the grounds on which the appellant seeks to resist the
claim of the contractor company for such reimbursement, i.e., with
reference to the expression “completed item of work” in the said Clause
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45.2 and with reference to the stipulations contained in Clauses 13.3 of
ITB and 45.1 of GCC, are wholly untenable and the appellant and its
contracting offices are under obligation to honour the claim so made by
the contractor company.
17. Before finally concluding on this matter, we are inclined to make a
few comments as regards the Circulars issued by the State Government
pertaining to the subject of reimbursement of sales tax in works contracts.
While noticing that diametrically opposite views were expressed by the
State Government in the two main Circulars dated 04.11.1986 and
07.11.2001, we had observed in the earlier part of this judgment that the
said Circulars were based on the given day understanding of the State
Government but such vacillating understanding of the State Government
was not determinative of the matter; and hence, we had ignored the said
Circulars while dealing with the principal issues involved in this matter, but
had also indicated that we shall refer to the said Circulars at a later and
appropriate stage.
17.1. The basic reason for which we feel impelled to refer to these
Circulars now and at this concluding stage is borne out of the contents of
the Circular dated 04.11.1986, which was issued by the State
Government closely following the amendment of the Act of 1947 with
insertion of the provisions aimed at facilitating the levy of sales tax on the
goods involved in a works contract. Being aware of its obligation in terms
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of the said Clause 45.2 of GCC (or similar clause/s in other contracts), the
instructions were issued by the State Government in the said Circular
dated 04.11.1986 for: (a) making reimbursement of the amount of sales
tax actually paid by the contractor on production of necessary
documentary evidence of such payment; (b) not making reimbursement
against the amount of penalty, if any, levied upon the contractor; and (c)
obtaining undertaking from the contractor to refund the excess amount of
reimbursement, in case of reduction of its liability towards sales tax in
appeal or revision [vide sub-paragraphs (i) to (iii) of paragraph 2 of the
Circular dated 04.11.1986]. However, the significant feature is that in the
second set of instructions in this very Circular, as contained in subparagraph (iv) of paragraph 2 thereof, the Engineers-incharge were
instructed that no such clause for reimbursement of sales tax or payment
of such tax by the department to the contractor be inserted in the Notice
Inviting Tenders or Tender document; and no tender containing any
clause or condition to that effect be accepted. The said second set of
instructions in sub-paragraph (iv) of paragraph 2 of this Circular was,
obviously, meant for future contracts, but, its contrast with the first set of
instructions in the preceding sub-paragraphs fortifies the conclusion that
the State Government was fully conscious of its obligation to make
reimbursement in relation to the existing contracts which carried such
reimbursement clause/s.
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17.2. As to what stipulations, terms and conditions are to form the part of
contract remains a matter essentially in the domain of the contracting
parties (of course, subject to the applicable requirements of law) and no
comments as regards future contracts are requisite herein but, on a
comprehensive reading of the Circular dated 04.11.1986, it is evident that
the State Government was fully conscious of its obligation towards
reimbursement under the existing terms of contracts and hence, issued
directions for due discharge of such obligation with necessary safeguards
and, at the same time, provided that henceforth, neither such a clause be
inserted in the contract documents nor any tender containing such a
clause or condition be accepted.
17.3. Evidently, the doubts at the later stage, as indicated in the Circular
dated 27.01.2000, and converse decision against the obligation of
reimbursement, as stated in the Circular dated 07.11.2001, had only been
of unwarranted attempts to wriggle out of the contractual obligations with
rather perverse construction of the plain terms of the existing contracts.
Be that as it may, the propositions in the said ill-advised Circular dated
07.11.2001 stand disapproved with the conclusions reached by us
hereinbefore. We say no more.
18. In the result, this appeal fails and is, therefore, dismissed with no
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order as to costs. Pending interlocutory applications also stand disposed
of.
.……………..………….J.
(A.M.KHANWILKAR)
.………..…………….….J.
(INDIRA BANERJEE)
..………..………….…….J.
(DINESH MAHESHWARI)
New Delhi,
Dated: 5th June, 2020.
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