WP(C) 3097/2007 BEFORE THE HON’BLE MR JUSTICE I.A.ANSARI WP(C) No. 3097 of 2007. AFCONS INFRASTRUCTURE LTD., A Limited Company incorporated under the Companies Act, 1956, having its registered office at Afcons House, 16, Shah Industrial Estate, Veera Desai Road, Andheri (West), Mumbai - 400 050 and one; of its place of business at AT Road, Guwahati, represented by one of its director Mr. S Paramesivan, resident of Afcons House, 16, Shah Industrial Estate, Veera Desai Road, Andheri (West), Mumbai - 400 050 . ----- PETITIONER. VERSUS 1. THE STATE OF ASSAM, Represented by the Commissioner & Secretary to the Government of Assam, Department of Finance (Taxation), Dispur, Guwahati - 781 006. 2. COMMISSIONER OF TAXES, Kar Bhawan, GS Road, Dispur, Guwahati - 781 006. 3. THE JOINT COMMISSIONER OF TAXES, Kar Bhawan, GS Road, Dispur, Guwahati - 781 006. 4. THE ADDITIONAL COMMISSIONER OF TAXES, Kar Bhawan, GS Road, Dispur, Guwahati - 781 006. 5. THE SUPERINTENDENT OF TAXES, Guwahati Unit - D, Kar Bhawan, Guwahati. ----- RESPONDENTS. WP(C) No. 3582 of 2007 HINDUSTAN CONSTRUCTION CO. LTD., A Limited Company incorporated under the Companies Act, 1956, having its registered office at Hincon House, Lal Bahadur Shastri Marg, Vikhroli (West), Mu mbai - 400 083. . ----- PETITIONER. VERSUS 1. THE STATE OF ASSAM, Represented by the Commissioner & Secretary to the Government of Assam, Department of Finance (Taxation), Dispur, Guwahati - 781 006. 2. COMMISSIONER OF TAXES, Kar Bhawan, GS Road, Dispur, Guwahati - 781 006. 3. THE JOINT COMMISSIONER OF TAXES, Kar Bhawan, GS Road, Dispur, Guwahati - 781 006. 4. THE ADDITIONAL COMMISSIONER OF TAXES, Kar Bhawan, GS Road, Dispur, Guwahati - 781 006. 5. THE SUPERINTENDENT OF TAXES, Guwahati Unit - D, Kar Bhawan, Guwahati. ----- RESPONDENTS. BEFORE THE HON’BLE MR. JUSTICE I A ANSARI. For the petitioner : DR. AK SARAF, Senior Advocate. MR. D BARUAH, MS. ML GOPE, MS. N HAWELIA, MR. S CHETIA, MR. A GOYAL, Advocates. For the respondents: MR. R DUBEY, Advocate. Date of hearing : 27-07-2007 Date of judgment : 10.08.2007 JUDGMENT AND ORDER I have heard Dr. AK Saraf, learned Senior counsel, appearing on behalf o f the petitioners, and Mr. R Dubey, learned counsel for the respondents. 2. The material facts, which have given rise to these two writ petitions, a re thus: The writ petitioners are works contractors and engaged in civil constru ction works. In the course of execution of the works contract, the petitioners u se various goods including the goods, which stand declared as goods of special i mportance in inter-State trade or commerce under Section 14 of the Central Sales Tax Act, 1956, and known as declared goods. When the Superintendent of Taxes in formed the petitioners that all goods including declared goods, used in executio n of works contract, shall, in terms of Schedule V to the Assam Value Added Tax Act, 2003, (in short, Assam VAT Act), be subject to levy of Value Added Tax (i n short, VAT ) @ 12.5%, the petitioners disputed the assertion that the declare d goods too, used in the execution of works contract, were subject to tax at a r ate exceeding 3% on sale or purchase price thereof. Thereafter, an order, und er Section 105 of the VAT Act read with Rule 56 of the Assam Value Added Tax Rul es, 2005 (in short, ’the VAT Rules’), was made, on 10-04-2007, by the Joint Comm issioner of Taxes, Assam, and Additional Commissioner of Taxes, Assam, holding t hat the State can levy tax on works contract by treating the same as distinct sp ecies apart from the constituent materials undergoing bodily transfer. With the clarification, so issued, the claim of the petitioners that the declared goods, used in the execution of works contract, cannot be taxed at a rate higher than 3% has been answered in the negative. With the help of these two writ petitions, the petitioners put to challenge the order, dated 10.04.2007, aforementioned. 3. The question, therefore, which falls for determination, in the present w rit petitions, is this: whether the State has the power to levy taxes on declare d goods at a rate higher than 3%, when there is deemed sale of such goods in the course of execution of works contract? This question brings to fore a larger an d more significant question and the question is: whether the goods, which are de clared to be goods of special importance in inter-State trade or commerce and kn own as declared goods are, even if used in the execution of works contract, rema in subject to the restrictions or limitations imposed on the legislative power o f the State by Section 15 of the Act of 1956, so far as, at least, the rate of t ax is concerned? 4. For the purpose of appreciating the controversy raised in the present wr it petitions, the historical background of the 46th amendment of the Constitutio n, which made provisions for levy of sales tax on works contract, needs to be re called. Before the 46th amendment, there was conflict of judicial opinion as reg ards the question as to whether the State has legislative power to impose sales tax on goods involved in the execution of works contract, where the contract was single and indivisible. The question, therefore, raised was if there is at all a sale of those materials, which are used in the execution of a works contract. The Madras High Court, in Gannon Dunkerley & Co. (Madras) Ltd. -vs- State of Mad ras (AIR 1954 Mad 1130), took the view that works contract was not a contract fo r sale of materials used in the execution of the works contract, for, the contra ct, being entire and indivisible, cannot be broken into two separate segments, o ne being the contract for sale of materials and the other being the contract for payment of the works done. The Court, therefore, concluded that the definition of ’sale’, as contained in the Madras General Sales Tax Act, 1939, which include d, within the definition of the term ’sale’, a transfer of property in goods inv olved in the execution of a works contract, was beyond the legislative competenc e of the Provincial legislature. This view was followed in judicial pronouncemen ts of some of the High Courts. To the contrary was the view taken by the Mysore High Court, in Mohamed Khasim -vs- State of Mysore, reported in (1955) 6 STC 211 (MYS), for, this decision upheld the power of the State to impose sales tax on the entire turnover relating to construction work by treating the goods, used in execution of the works contract, as transfer of property in goods involved in t he execution of the works contract. 5. The above conflict of judicial opinion was resolved by the Apex Court in State of Madras -vs- Gannon Dunkerley & Co. (Madras) Ltd, (AIR 1958 SC 560), wh erein the decision of the Madras High Court was affirmed holding to the effect, inter alia, that in a building contract, which is entire and indivisible, there is no sale of goods, because, in such a contract, the agreement between the part ies is that the contractor should construct the building according to the specif ications contained in the agreement and, in consideration therefor, receive paym ent as provided by the contract agreement and that in such an agreement, there i s neither contract to sell the materials used in the construction nor does the p roperty, in the goods, used in the construction work, pass, as movables to the p erson, who allots the works contract. The Apex Court, therefore, took the view t hat it was not within the legislative competence of the Provincial legislature, under Entry 48 in list II of 7th Schedule to the Government of India Act, 1935, to impose tax on the supply of materials used in a works contract by treating th e supply of such materials as a ’sale’. In Gannon Dunkerley & Co. (Madras) Ltd. (supra), the Apex Court also clarified that while the legislature is incompetent to impose sales tax on the goods used in execution of those works contract, whe rein the contracts are entire and indivisible, there may be a case, wherein the parties have entered into a distinct and separate contract, one for transfer of the materials for money consideration and the other for payment of remuneration for the service rendered and the works done. In the latter case, pointed out the Supreme Court, there are really two agreements, though there may be a single in strument embodying both the agreements; hence, the power of the State to separat e the agreement to sell from the agreement to do the work and render service is possible and, consequently, the State may impose tax so far as the agreement rel ating to transfer of materials for money consideration is concerned. In short, i n Gannon Dunkerley & Co. (Madras) Ltd. (supra), what was held was that in the ca se of building construction, if the works contract is entire and indivisible, th e property in goods does not pass to the other party to the contract, but if a c ontract consists of two separate parts, one relating to the supply of materials for money consideration and the other for payment of remuneration for services r endered and for the works done, the legislature is competent to impose tax so fa r as the supply of materials is concerned and, hence, the State cannot, if the c ontract is one, which is indivisible, impose sales tax on the goods, used in the execution of the works contract, by treating the use of such goods as transfer of property in the goods used in the execution of the works contract. 6. Following the decision in Gannon Dunkerley & Co. (Madras) Ltd. (supra), the Apex Court, in Pandit Banarasi Das Bhanot and others -vs- State of M.P., rep orted in 9 STC 389, held that in a building construction, which is one, entire a nd indivisible, there is no sale of materials used and, hence, it is beyond the powers of the State legislature to impose tax on supply of those materials, whic h are used in such works contract. 7. Consequent upon the decisions in Gannon Dunkerley & Co. (Madras) Ltd. ( supra) and Pandit Banarasi Das Bhanot (supra), it became impossible for the Stat es to bring the works contract, involving use of materials, within the State’s s ales tax enactments. Hence, by the 46th amendment of the Constitution, power was given to the State legislature to impose sales tax on the transfer of property in goods -whether as goods or in some other form - involved in the execution of works contract. Article 366 of the Constitution, which is the definition clause, stood accordingly amended by insertion of Clause 29(A). This clause (29-A) of A rticle 366 reads as under:- (29-A) tax on the sale or purchase of goods includes- (a) a tax on the transfer, otherwise than in pursuance of a contract , of property in any goods for cash, deferred payment or other valuable consider ation; (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments; (d) a tax on the transfer of the right to use any goods for any purp ose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association o r body of persons to a member thereof for cash, deferred payment or other valuab le consideration; (f) a tax on the supply, by way of or as part of any service or in a ny other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or ser vice, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deem ed to be a sale of those goods by the person making the transfer, delivery or su pply and a purchase of those goods by the person to whom such transfer, delivery or supply is made; 8. Following insertion of Clause 29(A) of Article 366, Article 286 was also amended by bringing in clause (3). With the amendment, so made, Article 286 rea ds runs as under:- Article 286: Restrictions as to imposition of tax on the sale or purchase of go ods - (1) No law of a State shall impose, or authorize to imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place- (a) outside the State; or (b) in the course of import of the goods into, or export of the goods out of , the territory of India. (2) Parliament may by law formulate principles for determining when a sale o r 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 authorize the impo sition 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 referr ed to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause 29 A of Arti cle 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. 9. What is, now, of utmost importance to note is that Article 366 (29A) of the Constitution was obviously not enacted to confer larger benefits on the pers ons engaged in carrying out works contract, who transfer the property in the goo ds used, in such works contract, to the other person to the contract. The object of the amendment was, in fact, to bring into the tax net of the State legislatu re those transactions, which would not have, otherwise, been brought to, or fall en under, the State’s sales tax enactments. 10. Article 286 of the Constitution imposes fetters on the powers of the Sta te to impose tax on the sale and purchase of goods, where such sale or purchase of goods takes place outside the State or in course of import of the goods into, or export of the goods out of, the territory of India. By clause (2) of Article 286, Parliament is authorized to formulate principles for determining as to whe n a sale or purchase of goods takes place in any of the ways mentioned in clause (1), namely, outside the State or in the course of import into, or export out o f, the territory of India. Clause (3) of the Article 286 provides, inter alia, t hat any law of the State, in so far as it imposes or authorizes imposition of ta x on the sale or purchase of goods declared by Parliament by law to be of specia l importance in the inter-State trade or commerce, be subject to such restrictio ns and conditions with regard to the system of levy of rates and other incidence of tax as the Parliament may be law specify. The object of Article 286 of the C onstitution is to invest the Parliament with exclusive authority to enact laws i mposing tax on sale or purchase of goods, where such sale or purchase takes plac e in the course of inter-State trade or commerce or in the course of import into , and export out of, the territory of India. It is in exercise of the authority under Article 286 that the Central Sales Tax Act, 1956, has been enacted. 11. As the Central Sales Tax Act, 1956, has been enacted by the Parliament i n exercise of its powers under Article 286, it logically follows that any State enactment relating to imposition of sales tax on sale or purchase, which takes p lace in the course of inter-State trade or commerce, shall be subject to the res trictions and conditions imposed by the Central Sales Tax Act, 1956. It further follows from the conclusion, so reached, that when the Parliament declares a goo d as goods of special importance under Section 14 of the Central Sales Tax Act, 1956, the legislative power of the State to impose tax on such goods shall be su bject to the restrictions and limitations, which Section 15 of the said Act impo ses. Situated thus, it is clear that even the declared goods, when used in the e xecution of works contract, would be subject to the limitations imposed by Secti on 14. 12. From what has been pointed out above, it is clear that the legislative p ower of the State, under Entry 54 of State List, to impose tax on sale or purcha se of goods is subject to two limitations. One limitation, which flows from the entry itself, is that the State’s legislative power is subject to the provision s of Entry 92A of List-I and the other one flows from the restrictions containe d in Article 286. Under Entry 92A of List-I, Parliament has the power to make la ws in respect of taxes on sales and purchases, which take place in the course of inter-State trade and commerce. The levy and collection of such tax is governed by Article 269. This shows that the State’s legislative power, under Entry 54, does not extend to imposing tax on sale and purchase of goods, which takes place outside the State or in the course of import or export of goods. Naturally, the refore, the State’s legislative power to impose sales tax on sale or purchase of declared goods shall be, if I may reiterate, subject to the restrictions impose d by law, which may be made by the Parliament. 13. For determining the extent to which insertion of Sub-clause (b) of Claus e (29-A) in Article 366 changed the power of the State to impose sales tax, the contents of Sub-Clause (b) of Clause (29-A) needs to be, now, examined. I may po int out that Article 366 is the definition clause of the Constitution. In the l ight of the insertion of Sub-Clause (b) of Clause (29-A), when Clause (29-A) is considered, what becomes transparent is that according to Clause (29-A), tax on the sale or purchase of goods includes, inter alia, a tax on the transfer of p roperty in goods (whether as goods or in some other form) involved in the execut ion of a works contract; and such transfer, delivery or supply of any goods shal l be deemed to be a sale of those goods by the person making the transfer, deliv ery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. 14. When the provisions of Clause (29-A) are read, in the light of Sub-Claus e (b) thereof, it becomes clear that tax on sale or purchase of goods includes, 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 and that such transfer of property in goods shall be deemed to be a sale of the goods by the p erson, who makes transfer, deliver or supply, and a purchase of those goods by t he person to whom such transfer, delivery or supply is made. 15. The Constitutional validity of the 46th amendment as well as the amendme nts made in the State legislations came to be considered by a Constitution Bench , in Builders Association of India and others Vs. Union of India and others, rep orted in (1989) 2 SCC 645, wherein the Apex Court points out that what the 46th Amendment has done is that it clarified that a transfer of property in goods (wh ether as goods or in some other form) involved in the execution of a works contr act would be deemed to be a sale of goods involved in the execution of the works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. Thus, what was, before the 46th Amendment , not regarded as a sale, because it was, initially, not a sale, became, with th e help of the deeming provisions introduced by Sub-Clause (b) of Clause (29-A), a sale of goods. The object of the new definition of sale, introduced by Clause (29-A), was, thus, as observed by the Constitution Bench, in Builders Associatio n (supra), to enlarge the scope of tax on sale or purchase of goods so that it m ay include, within its sweep, transfer, delivery or supply of goods even in exec ution of a works contract. So construed, points out the Supreme Court, in Builde rs Association (supra), the expression tax on the sale or purchase of goods , i n Entry 54 of the State List, includes a tax on the transfer of property in good s involved in the execution of the works contract. 16. Referring to Clause (3) of Article 286, the Supreme Court, in Builders Association (supra), observes that Clause (3) of Article 286 deals with a tax on sale or purchase of goods declared by the Parliament by law to be of special im portance in inter-State trade or commerce and the restriction, so envisaged, by Clause (3) of Article 286, being general in nature, applies with equal vigour to transfer, delivery or supply of goods, which are deemed to be sales by virtue o f Clause (29-A) of Article 366. 17. Leaving no room for doubt, the Constitution Bench, in Builders Associati on (supra), holds, If any declared goods, which are referred to in Section 14 o f the Central Sales Tax Act, 1956 are involved in such transfer, supply or deliv ery, which is referred to in clause (29-A) of Article 366, the sales tax law of a State, which provides for levy of sales tax thereon will have to comply with t he restrictions mentioned in Section 15 of the Central Sales Tax Act, 1956. (Emphasis is added) 18. From the observations noted above, it becomes clear that even when decla red goods are used in execution of a works contract and though use of such decla red goods would amount to sale for the purpose of taxation, yet the tax on sale or purchase of such goods would be subject to restrictions, which Section 15 of the Central Sales Act, 1956, imposes on the sale or purchase of goods in general . 19. I may, at this stage, pause and point out that before the 46th Amendment , as already discussed above, the Supreme Court’s view, as propounded in Gannon Dunkerly & Co. (Madras) Ltd. (supra), was that when a works contract is executed , the property does not pass as a moveable property unless there is an express a greement stating that the property, in such movables, will pass to the person, w ho has assigned the contract, as and when the goods are used in the construction of the building and that in the absence of any such agreement, transfer of prop erty in goods passes not as movables, but by aggression and in an unidentifiable and invisible manner. In all such cases, according to what was laid down in Gan non Dunkerly & Co. (Madras) Ltd. (supra), it was not possible to disintegrate th e contract into a contract of