The State Legislature is not competent to impose sales tax on the transfer of property in goods involved in the execution of works contract which constitutes a sale in the course of inter-State trade or commerce or sale outside the State or a sale in course of the import or export, nor it is competent to impose tax on "declared goods" within the meaning of sections 14 and 15 of the Central Sales Tax Act.

SACHCHIDA NAND JHA, J.

1. The vires of section 25-A of the Bihar Finance Act, 1981 and the related rules and notification regarding deduction of sales tax at source from the contractors' bills has again been called in question in these writ petitions.

2. Entry 54 of the State List of the Seventh Schedule to the Constitution of India authorizes the State Legislatures to make law with respect to imposition of taxes on the sale and purchase of goods other than newspapers, subject to the provisions of entry 92A of the Union List. In State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353, the Supreme Court held that the expression "sale of goods" in entry 54 has the same meaning as in the Sale of Goods Act, 1930. The essential ingredients of sale being an agreement to sell movables for a price and transfer of property pursuant thereto, in works contract there is no sate of goods because such a contract is indivisible in which there is neither agreement to sell the materials used in the construction nor there is passing of the property in such materials pursuant to any such agreement. The State Legislatures were therefore, not competent to impose tax on the supply of materials used in such a contract treating them as sale under entry 54 of the State List.

3. In order to overcome the effect of the abovesaid decision and to confer power upon the State Legislatures to snake law for imposition of taxes on the sale and purchase of goods involved in the execution of works contract, a new definition clause "tax on sale or purchase of goods" was inserted in article 366 of the Constitution by the Constitution (Forty-sixth Amendment) Act, 1982 to include amongst others, "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" within the ambit of tax on sale and purchase of goods, wherever the term occurs in the Constitution. Article 286 which contains provisions relating to restrictions on the State's power to impose tax on the sale and purchase of goods was also amended by substituting clause (3). So amended, article 286 runs as follows :

286. Restrictions as to imposition of tax on the sale or purchase of goods. -

(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place -

(a) outside the State; or

(b) in the course of the import of the goods into, or export of the goods out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1).

(3) Any law of a State shall, in so far as it imposes, or authorises the imposition of, -

(a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or

(b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29-A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify."

4. Entry 92A of the Union List (List I), which finds mention in entry 54 of the State List (List-II), may also be quoted to complete the reference, as under :

Taxes on the sale or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter-State trade or commerce.

5. After the 46th Amendment, different States amended their respective tax laws making provisions for imposition of tax on transfer of goods involved in the execution of works contract and recovery of such tax in advance by way of deduction at source from the contractors' bills and invoices. In Bihar, section 25-A was inserted in the Bihar Finance Act, 1981 by the Finance Act of 1984.

6. The amendments brought about in different State enactments gave rise to dispute a