1. Challenge to the validity of the East Punjab General Sales Tax Act regarding the imposition of tax on materials used in construction works treated as a sale. (Para 1 , 2 , 3 )
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1958 Supreme(SC) 47
SUPREME COURT OF INDIA
7th April 1958
S.R. DAS, C.J.I., T.L. VENKARATARAMA AYYAR, S.K. DAS, A.K. SARKAR AND VIVIAN BOSE, JJ.
Firm of M/s. Peare Lal Hari Singh, Petitioner
Versus
The State of Punjab and another, Respondents.
Petn. No. 128 of 1957.
Advocates appeared
Mr. Gopal Singh, Advocate, for Petitioner; Mr. N. S. Bindra, Senior Advocate (Mr. T. M. Sen Advocate with him) for Respondents.
Advocates:
Gopal Singh, N.S.BINDRA, T.M.SEN
Gopal Singh, N.S.BINDRA, T.M.SEN
A lump sum contract for construction is a contract for work and labour, not a sale of goods. Therefore, the supply of materials in such works contracts is not taxable as a "sale of goods" under Entry 48, List II of the Government of India Act, 1935.
Headnote:(A) East Punjab General Sales Tax Act, 1948 - Sections 2(c), 2(d), 2(h), 2(j), 4(1) and 5 - Government of India Act, 1935 - Entry 48, List II - Tax on supply of materials in construction works - Whether a contract for construction of buildings for a lump sum constitutes a "sale of goods" - The expression "sale of goods" in Entry 48 has the same import as in the Sale of Goods Act, 1930; in a building contract, there is no sale of materials as such, and accordingly, the Provincial Legislature has no power to impose a tax thereon under Entry 48. (Para 3)
(B) Nature of Construction Contract - Where tenders are called and accepted for executing works for a lump sum, the contract is one and indivisible for construction and not a combination of an agreement for sale of materials and an agreement for work and labour. (Para 4)
(C) Ownership of Materials - A provision in the general conditions of contract stating that materials brought to the site shall become the property of the employer is intended to ensure that materials of the right quality are used and does not convert a lump sum construction contract into a contract for the sale of materials. (Para 5)
Facts of the case:
A firm of building contractors entered into a lump sum contract for the construction of buildings. The assessing authority issued a notice for tax assessment under the sales tax act, treating the supply of materials in the construction work as a sale. The contractors challenged the legality of the assessment, contending that the legislature lacked the power to tax materials in construction works as there was no sale in fact or in law of those materials.
Findings of Court:
The court found that the contract was for a lump sum for the execution of works and was indivisible. The clause vesting materials in the government upon arrival at the site was for quality control and not for the purpose of purchasing the materials.
Issues: Whether the supply of materials in a construction contract constitutes a "sale of goods" taxable under Entry 48, List II of the Government of India Act, 1935, and whether the specific lump sum contract in question was an agreement for the sale of materials.
Ratio Decidendi: The court ruled that a building contract is not a sale of materials. The expression "sale of goods" must be interpreted as per the Sale of Goods Act, 1930. A lump sum contract for construction is a contract for work and labour; clauses ensuring the quality of materials by vesting ownership in the employer do not transform the agreement into a contract of sale. (Paras 3, 5, 6)
Result: Petition allowed.
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Table of Contents
2. Whether a lump sum construction contract constitutes a sale of materials or an indivisible contract for work and labour, and the validity of the taxing provisions. (Para 3 , 4 , 7 , 8 )
3. A lump sum construction contract is indivisible; clauses vesting materials in the government for quality assurance do not convert the agreement into a contract of sale. (Para 4 , 5 , 6 )
4. In a building contract, there is no sale of materials; thus, the Provincial Legislature cannot impose sales tax on such materials under Entry 48, List II. (Para 3 , 6 )
5. Petition allowed; writ of prohibition issued restraining assessment of tax on materials supplied in construction contracts. (Para 9 )
6. Does a lump sum contract for construction constitute a sale of materials?
No. A lump sum contract for the construction of buildings is one and indivisible. It is an agreement for work and labour, not a combination of an agreement for the sale of materials and an agreement for work. (Para 4 , 6 )
7. Does a contractual clause vesting materials in the owner upon delivery constitute a sale?
No. Such clauses are typically inserted to ensure materials of the right quality are used and do not indicate an intention to purchase materials separately from the construction contract. (Para 5 , 6 )
8. Can a Provincial Legislature tax materials used in construction works under Entry 48 of List II?
No. Since there is no sale of goods in a building contract, the Provincial Legislature has no power to impose a tax on the supply of materials under Entry 48. (Para 3 , 6 )
Judgment
T. L. VENKATARAMA AIYAR J. This is a petition under Art. 32 of the Constitution, and the question that is raised therein for our decision is as to the validity of certain provisions of the East Punjab General Sales, Tax Act (East Punj. XLVI of 1948), hereinafter referred to as the Act, imposing a tax on the supply of materials in construction works treating it as a sale.
2. It will be convenient at this stage to refer to the relevant provisions of the Act. Section 2 (c) defines "contract" as meaning,
"Any agreement for carrying out for cash or deferred payment or other valuable consideration, -
(i) the construction, fitting out, improvement, or repair of any building, road, bridge or other immovable property; or
(ii) the installation or repair of any machinery affixed to a building or other immovable property . . . . . ."
"Dealer" is defined in S. 2 (d) as any person engaged in the business of selling or supplying goods. Section 2 (h) defines "sale" as meaning "any transfer of property in goods for cash or deferred payment or other valuable consideration, including a transfer of property in goods involved in the execution of a contract . . . . . . ." "Turnover" is defined in S. 2 (j) as including "the carrying out of any contract, less such portion as may be prescribed of such amount, representing the usual proportion of the cost of labour to the cost of materials used in carrying out such contract" Section 4 (1) enacts that,
". . . . . every dealer whose gross turnover during the year immediately preceding the commencement of this Act exceeded the taxable quantum shall be liable to pay tax under this Act on all sales effected after the coming into force of this Act."
Section 5 provides that the tax shall be levied every year on the taxable turnover of a dealer at such rates as the Provincial Government may by notification direct. Rule 28 prescribes the mode of computing the taxable consideration with reference to contracts as provided in sub-cl. (ii) of cl. (i) of S. 2.
3. The petitioners are a firm of building contractors. In December, 1956, they entered into a contract with the Military Engineering Services Department of the Government for the construction of certain buildings known as "Married accommodation" at Ambala Cantonment and received a sum of Rs. 32,000 on 31st January 1957, as advance. On 14th February 1957, the assessing authority, Jullundur District issued a notice intimating the petitioners that as they had failed to apply for registration under S. 7 of the Act assessment would be made under S. 18, sub-s. (2) for the periods commencing from 1st April 1955, onwards, and calling upon them to produce their account books and attend the hearing on 16th February 1957. Thereupon, the petitioners filed the present petition under Art. 32 of the Constitution challenging the legality of the assessment proceedings, the main ground of attack being that the legislature of the Province of Punjab had, under Entry 48 in List II of Sch. VII to the Government of India Act, 1935, no power to impose tax on the supply of materials in construction works as there was no sale in fact on in law of those materials, and that the provisions of the Act which sought to do it were ultra vires. This question is now concluded by the decision of this Court in State of Madras v. Gannon Dunkerley & Co., C. A. No. 210 of 1956 D/- 1-4-1958 : wherein it has been held that the expression "sale of goods" in Entry 48 has the same import which it bears in the Sale of Goods Act, 1930, that in a building contract there is no sale of materials as such, and that accordingly the Provincial Legislature had no power to impose a tax thereon under Entry 48.
4. In this view, we have now to consider the contention advanced by Mr. Bindra for the respondents that the building contract entered into by the petitioners with the Government was not an agreement simpliciter for the construction of works, but that on its true construction, it comprised a distinct agreement f
