M/S. Aristo Printers Pvt. Ltd. vs. Commissioner Of Trade Tax U.P.

REPORTABLE
2025 INSC 1188

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 703 OF 2012
(Arising out of Special Leave Petition (Civil) No. 15476/2011)

M/S. ARISTO PRINTERS PVT. LTD. …APPELLANT

VERSUS

COMMISSIONER OF TRADE TAX,
LUCKNOW, U.P. …RESPONDENT


WITH
CIVIL APPEAL NO. 705 OF 2012

(Arising out of Special Leave Petition (Civil) No. 15478/2011)



J U D G M E N T





Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2025.10.07
15:39:20 IST
Reason:



J.B. PARDIWALA, J.
For the convenience of exposition, this judgment is divided into the
following parts:
INDEX
A. FACTUAL MATRIX .................................................................. 2
B. SUBMISSIONS ON BEHALF OF THE PARTIES .......................... 6
(i) Submissions on behalf of the Appellant....................................... 6
(ii) Submissions on behalf of the Respondent .................................. 7
C. ISSUE TO BE DETERMINED .................................................... 7
D. ANALYSIS ............................................................................... 8
(i) Relevant provisions under the Act, 1948 ..................................... 8
th
(ii) Works Contract – Pre and Post 46 Amendment ...................... 12
(iii) Whether the ink, chemical and other processing materials are
liable to the levy of tax under Section 3F(1)(b) of the Act, 1948? .... 32
a. Tangible Transfer of property ....................................................... 34
b. No transfer of property due to consumption of goods .................. 42
c. Transfer of property despite consumption of goods ..................... 48
d. Application to the facts at hand ................................................... 52
E. CONCLUSION ........................................................................ 57





Civil Appeal Nos. 703 & 705 of 2012 Page 1 of 59


1. These appeals are at the instance of an assessee and are directed
against the judgment and order passed by the High Court of
Judicature at Allahabad, dated 8.12.2010, in Trade Tax Revision
Nos. 106 & 121 of 2003 respectively (hereinafter, the “ Impugned
Judgment ”), by which the revisions filed by Revenue came to be
allowed and the order passed by the Trade Tax Tribunal,
Ghaziabad, was set aside.
A. FACTUAL MATRIX
2. The appellant-assessee is engaged in the business of printing
lottery tickets. It would undertake the work of printing on the
paper that was supplied to it by the parties. The ink and
processing material, including the necessary chemicals used in
the process of printing, were procured by the appellant itself.
3. The Trade Tax Officer, Ward 5, Ghaziabad (hereinafter, the
“ Assessing Authority ”) vide orders dated 28.10.1999 for AY
1996-1997 and AY 1997-1998 respectively, levied trade tax on the
value of ink, processing material and packing material used by the
appellant for executing the printing work on the basis of Section
3F of the Uttar Pradesh Trade Tax Act, 1948 (for short, “ the Act,
1948 ”).

4. The appellant, being aggrieved by the aforementioned orders of
the Assessing Authority, preferred appeals before the Deputy
Commissioner (Appeals)-II, Trade Tax, Ghaziabad (hereinafter,
the “ Appellate Authority ”). It was argued by the appellant before
the Appellate Authority that the ink, chemicals and other
processing materials had not been passed on with the lottery
tickets and thus the value of such goods could not have been
made liable to tax under Section 3F of the Act, 1948. The Appellate
Authority vide order dated 14.03.2000 accepted the claim of the
Civil Appeal Nos. 703 & 705 of 2012 Page 2 of 59

appellant and accordingly deleted the tax assessed on the value
of ink and other processing materials. However, the Appellate
Authority upheld the levy of tax on the packing materials. The
relevant finding of the Appellate Authority is as follows:

(Emphasis supplied)


5. In the circumstances referred to above, two sets of appeals were
filed before the Trade Tax Tribunal, Bench-I, Ghaziabad
(hereinafter, the “ Tribunal ”) against the order dated 14.03.2000
passed by the Appellate Authority. One set of appeals by the
Commissioner of Trade Tax, Uttar Pradesh, against the deletion
of tax on the ink and processing material. Another set of appeals
by the assessee assailing the levy of tax on the packing material.
6. The Tribunal vide an order dated 06.08.2002 allowed the
appellant’s appeals and set aside the levy of tax on the packaging
material. Furthermore, the Tribunal dismissed the Revenue’s
Civil Appeal Nos. 703 & 705 of 2012 Page 3 of 59

appeals and affirmed the order of the Appellate Authority, which
had deleted the tax on the value of ink and other processing
materials, including chemicals. The Tribunal based its decision
on this Court’s decision in Rainbow Colour Lab & Anr v. State
of M.P & Ors. , reported in (2000) 2 SCC 385 , and the Bombay
High Court’s decision in Commissioner of Sales Tax,
Maharashtra, Bombay v. R.M.D.C. Press Pvt Ltd , reported in
1998 SCC OnLine Bom 435 .
7. The Revenue, being aggrieved by the aforementioned order passed
by the Tribunal, challenged it before the High Court vide two
Revision Applications, i.e., Trade Tax Revision No. 106 of 2003
and Trade Tax Revision No. 121 of 2003, respectively. The High
Court, vide the impugned judgment, allowed both the Revision
Applications and thereby quashed and set aside the order of the
Tribunal as well as the order passed by the Appellate Authority,
so far as they set aside the tax on the value of ink and processing
material, i.e., chemical. The relevant findings of the High Court
are as follows:
“In my view the order of the Tribunal is not sustainable.
Section 3-F of the Act levies tax on the value of goods
involved in execution of works contract. The printing
work has been held to be works contract by the Apex
Court in the case of State of Maharashtra Vs.
M/s. Sarvodaya Printing Press Fine Art Printer (Supra).
The question for consideration is whether in the
printing of lottery tickets, ink and processing materials,
namely, chemicals, etc. are passed on to the
customers. Undoubtedly, ink passed on to the
customers as it is apparent on the printing paper. The
inks are diluted in chemicals (processing material) and
such ink in the diluted forms are being used in the
printing, therefore, both ink and chemical (processing
material) are passed on to the customers. It was not
the case of the assessee at any stage that the chemical
(processing material) was consumable and evaporates
Civil Appeal Nos. 703 & 705 of 2012 Page 4 of 59

in the process of printing and is not passed on to the
customers. Therefore, I am of the view that both the ink
and chemical used in the printing are passed on to the
customers. It may be mentioned here that the assessee
had also purchased and used consumable but the
same has not been taxed.

The Division Bench of the Bombay High Court in the
case of Commissioner of Sales Tax v. Matushree Textile
Limited (supra) has held that the contract of dyeing
and printing of cloth is a work contract and there is a
transfer of property in colours, dyes and chemical.

In the case of Commissioner of Sales Tax, Mumbai, vs.
Hari and Company (supra), the Division Bench of
Bombay High Court has held that the contract for
bringing out the Xerox copies amounts to works
contract and the ink used for providing Xerox copies is
passed on to the customers and, therefore, its value is
liable to tax.

It may be mentioned here that the decision in the case
of R.M.D.C. Press Pvt. Ltd. relied upon by the Tribunal
is no longer a good law in view of the decision of the
Apex Court in the case of Associated Cement
Companies Ltd. vs. C.C. reported in 2002 NTN
(Vol. 20)-73 and in view of the decision of the Apex
Court in the case of State of Maharashtra vs.
Sarvodaya Printing Press Fine Art Printer.

In view of the above, the order of the Tribunal as well
as the order of the first appellate authority are not
sustainable and liable to be set aside, so far it deletes
the tax on the value of ink and processing materials,
namely, chemical, the order of the assessing authority
in this regard is restored.”
(Emphasis Supplied)

8. The High Court allowed the revision applications on the ground
that the diluted ink (consisting of the ink and the chemicals) was
passed onto the customers and thus the ink and the processing
material, i.e., the chemical, could not be considered as
consumables.
Civil Appeal Nos. 703 & 705 of 2012 Page 5 of 59


9. In such circumstances referred to above, the appellant assessee
is here before this Court with the present appeals.
B. SUBMISSIONS ON BEHALF OF THE PARTIES
(i) Submissions on behalf of the Appellant
10. Mr. Niraj Kumar, the Learned counsel appearing for the appellant,
vehemently submitted that the High Court committed a gross
error in passing the impugned judgment. According to the learned
counsel, the High Court fundamentally misunderstood the nature
of lottery tickets, erroneously treating them as “goods”. It was
submitted that the legal status of lottery tickets is already settled
law, establishing them as “actionable claims”, which are explicitly
excluded from the definition of “goods” under the Act, 1948. Since
the very foundation of the tax is on the transfer of property in
goods, and lottery tickets are not goods, the entire basis for the
tax on the printing of these tickets is incorrect from the outset.
11. The Learned counsel further submitted that the ink and chemicals
used in the printing process were essentially consumables whose
property is never transferred to the customer. These materials are
entirely used up and consumed during the execution of the
printing job. Since the customer does not receive the ink or
chemicals in any form, but only the service of printing, these items
should not be treated as goods that are transferred in execution
of the works contract. Reliance was placed on Pest Control India
Ltd v. Union of India & Ors. , reported in 1989 SCC OnLine Pat
288 , and Deputy Commissioner of Sales Tax (Law), Board of
Revenue (Taxes), Ernakulam v. M.K Velu , reported in 1993 SCC
OnLine Ker 577.
12. In such circumstances referred to above, the Learned counsel
prayed that there being merit in his appeals, the same may be
Civil Appeal Nos. 703 & 705 of 2012 Page 6 of 59

allowed and the impugned judgment passed by the High Court be
set aside.
(ii) Submissions on behalf of the Respondent
13. On the other hand, Mr. Bhakti Vardhan Singh, Learned counsel
appearing for the State, submitted that the High Court did not
commit any error, not to mention any error of law, in passing the
impugned judgment.
14. Mr. Singh, placing reliance on Commissioner of Sales Tax v.
Matushree Textile Limited , reported in 2003 SCC OnLine Bom
830 , and Commissioner of Sales Tax, Mumbai v. Hari and
Company , reported in 2006 SCC OnLine Bom 1466, submitted
that in the facts at hand, it is evident that ink and chemicals have
been transferred to the customer and thereby are liable to the levy
of tax under Section 3F(1)(b) of the Act, 1948.
15. In such circumstances referred to above, the Learned counsel
prayed that, there being no merit in the appeals, the same may be
dismissed.
C. ISSUE TO BE DETERMINED
16. Having heard the learned counsel appearing for the parties and
having gone through the materials on record, the following
question falls for our consideration:
I. Whether tax can be levied under Section 3F of the Act, 1948,
on the ink and processing material used by the appellant in
undertaking the printing work?



Civil Appeal Nos. 703 & 705 of 2012 Page 7 of 59

D. ANALYSIS
(i) Relevant provisions under the Act, 1948
17. Before adverting to the rival submissions canvassed on either side,
we must look into a few relevant provisions of the Act, 1948.
Section 2(d) of the Act, 1948, defines “goods”. The same reads
thus:
“2(d) "goods" means every kind or class of movable
property and includes all materials, commodities and
articles involved in the execution of a works contract,
and growing crops, grass, trees and things attached to,
or fastened to anything permanently attached to the
earth which, under the contract of sale, are agreed to
be severed, but does not include actionable claims,
stocks, shares, securities or postal stationery sold by
the Postal Department;”

18. Section 2(h) of the Act, 1948, defines “Sale”. The same reads thus:
“2(h) 'Sale', with its grammatical variations and
cognate expressions, means any transfer of property in
goods (otherwise than by way of a mortgage,
hypothecation, charge or pledge) for cash or deferred
payment or other valuable consideration, and includes-
(i) a transfer, otherwise than in pursuance of a
contract of property in any goods for cash, deferred
payment or other valuable consideration;
(ii) a transfer of property in goods (whether as
goods, or in some other form) involved in the
execution of a works contract ;
(iii) the delivery of goods on hire purchase or any
system of payment by instalments;
(iv) a transfer of the right to use any goods for any
purpose (whether or not for a specified period) for
cash, deferred payment or other valuable
consideration;
(v) the supply of goods by any unincorporated
association or body of persons to a member thereof
for cash, deferred payment or other valuable
consideration; and
(vi) the supply, by way of or as part of any service
or in any other manner whatsoever, of goods, being
food or any other article for human consumption or
Civil Appeal Nos. 703 & 705 of 2012 Page 8 of 59

any drink (whether or not intoxicating) where such
supply or service is for cash or deferred payment
or other valuable consideration ;
Explanation I.--A sale or purchase shall be deemed to
have taken place in the State,--
(i) in a case falling under sub-clause (ii) if the
goods are in the State at the time of transfer
of property in such goods (whether as goods
or in some other form) involved in the
execution of the works contract,
notwithstanding that the agreement for the
works contract has been wholly or in part
entered into outside the State ;
(ii) in a case falling under sub-clause (iv), if the
goods are used by the lessee within the State
during any period, notwithstanding that the
agreement for the lease has been entered into
outside the State or that the goods have been
delivered to lessee outside the State.
Explanation II.--Notwithstanding anything contained
in this Act, two independent sales or purchases shall,
for the purposes of this Act, be deemed to have taken
place-
(a) when the goods are transferred from a principal
to his selling, agent and from the selling agent to
his purchaser,
(b) when the goods are transferred from the seller
to a buying agent and from the buying agent to his
principal, if the agent is found, in either of the cases
aforesaid,--
(i) to have sold the goods at one rate and passed
on the sale proceeds to his principal at another
rate; or
(ii) to have purchased the goods at one rate and
passed them on to his principal at another rate;
or
(iii) not to have accounted to his principal for the
entire collection or deductions made by him, in
the sales or purchases effected by him on behalf
of his principal; or
(iv) to have acted for a fictitious or non-existent
principal;”

19. Section 2(m) of the Act, 1948, defines “Works contract”. The same
reads thus:
Civil Appeal Nos. 703 & 705 of 2012 Page 9 of 59

“2(m) 'Works contract' includes any agreement for
carrying out, for cash, deferred payment or other
valuable consideration, the building construction,
manufacture, processing, fabrication, erection,
installation, fitting out, improvement, modification,
repair or commissioning of any movable or immovable
property;”

20. Section 3F of the Act, 1948, deals with the taxation of goods
involved in the execution of the works contract. The relevant
portion of the same reads thus:
“Section 3F - Tax on the right to use any goods or goods
involved in the execution of works contract:
(1) Notwithstanding anything contained in Section 3A
or Section 3AAA or Section 3D but subject to the
provisions of Sections 14 and 15 of the Central Sales
Tax Act, 1.956, every dealer shall, for each assessment
year, pay a tax on the net turnover of--
(a) [...]
(b) transfer of property in goods (whether as
goods or in some other form) involved in the
execution of a works contract.
at such rate not exceeding twenty percent as the
State Government may, by notification, declare and
different rates may be declared for different goods
or different classes of dealers.
(2) For the purposes of determining the net turnover
referred to in sub-section (1), the following amounts
shall be deducted from the total amount received or
receivable by a dealer in respect of a--
(a) [...]
(b) transfer referred to in clause (b) of sub-section
(1),-
(i) the amount representing the sales value of the
goods covered by Sections 3, 4 and 5 of the
Central Sales Tax Act, 1956;
(ii) the amount representing the value of the
goods exempted under Section 4;
(iii) the amount representing the value of the
goods, on the sale or purchase whereof tax has
been levied or is leviable under this Act at some
earlier stage;
Civil Appeal Nos. 703 & 705 of 2012 Page 10 of 59

(iv) the amount representing the value of the
goods manufactured in a new unit exempted
under Section 4A or Section 4AAA;
(v) the amount representing the value of the
goods supplied to the contractor by the
contractee:
Provided that the ownership of such goods
remains with the contractee under the terms of
the contract;
(vi) the amount representing the labour charges
for the execution of the works contract;
(vii) all amounts paid to the sub-contractor as the
consideration for execution of the works
contract, whether wholly or in part:
Provided that no deduction under this sub-
clause shall be allowed unless the dealer
claiming deduction produces proof that the sub-
contractor is a registered dealer liable to tax
under this Act and that such amount is included
in the return of turnover filed by such sub-
contractor under the provisions of this Act;
(viii) the amount representing the charges for
planning, designing and architect's fees;
(ix) the amount representing the charges for
obtaining on hire or otherwise machinery and
tools used for execution of the works contract;
(x) the amount representing the cost of
consumables used in the execution of the
works contract, the property in which is
not transferred in the execution of the
works contract ;
(xi) the amount representing the cost of
establishment and other similar expenses of the
contractor to the extent it is relatable to supply
of labour and services;
(xii) the amount representing the profit earned
by the contractor to the extent it is relatable to
the supply of labour and services.
(3) Where in respect of transfer referred to in clause (b)
of subsection (1), the contractor does not maintain
proper accounts or the accounts maintained by him are
not found by the assessing authority to be worthy of
credence and the amount actually incurred towards
charges for labour and other services and profit
relating to supply of labour and services are not
Civil Appeal Nos. 703 & 705 of 2012 Page 11 of 59

ascertainable, such charges for labour and other
services and such profit may, for the purposes of
deductions under clause (b) of sub-section (2), be
determined on the basis of such percentage of the
value of the (a) transfer referred to in clause (a) of sub-
section (1), whether such transfer was agreed to during
that assessment year or earlier, works contract as may
be prescribed and different percentages may be
prescribed for different types of works contract.”

th
(ii) Works Contract – Pre and Post 46 Amendment

21. We deem it necessary and appropriate to briefly refer to the history
of the law relating to works contracts. Entry 54 in List II of the
Seventh Schedule to the Constitution of India enables the State
Legislature to enact legislation providing for levying and collecting
tax in respect of the sale and purchase of goods. Article 286 of the
Constitution prohibits the State Legislatures from imposing tax on
the sale or purchase of goods where such sale or purchase takes
place outside the State, or in the course of the import of the goods
into, or export of the goods out of, the territory of India.

22. The scope and ambit of the powers of the States to levy sales tax
on goods involved in the execution of works contracts have been
the subject matter of several judicial pronouncements. The
decision of this Court in State of Madras v. Gannon Dunkerley
& Co. (Madras) Ltd. , reported in 1958 SCC OnLine SC 100
(hereinafter, “ Gannon Dunkerley-I ”), is the leading case on the
subject. That was a case where the assessee’s (Gannon Dunkerley)
business primarily consisted of executing contracts for the
construction of buildings, bridges, dams, roads, and other
structural projects. During the relevant assessment year under
consideration, sales tax was levied under the Madras General
Sales Tax Act, 1939, on the value of materials used by the
assessee in execution of the works contracts. The assessee
Civil Appeal Nos. 703 & 705 of 2012 Page 12 of 59

questioned the levy of sales tax on the ground that there was no
sale of goods as understood in India and therefore, no sales tax
could be levied on any portion of the amount which was received
by the assessee from the persons for whose benefit it had
constructed buildings. The Constitution Bench of this Court held:
a. In a building contract where the agreement between the
parties was that the contractor should construct the
building according to the specifications contained in the
agreement and in consideration received payment as
provided therein, there was neither a contract to sell the
materials used in the construction nor the property passed
therein as movables. It was held that in a building contract,
which is one entire and indivisible contract, there was no
sale of goods, and it was not within the competence of the
Provincial State Legislature to impose tax on the supply of
the materials used in such a contract, treating it as a sale.
In a building contract, the title to the materials used in the
construction passes to the owner of the land as an accretion,
and there is no question of title to the materials passing as
movables in favour of the other party to the contract.

b. The expression “sale of goods” in Entry 48 in List II of the
Seventh Schedule to the Government of India Act, 1935
(similar to Entry 54 in List II) must be construed in the same
sense it has been understood under the Sale of Goods Act,
1930 (for short, “ the Act, 1930 ”) and to constitute “sale of
goods”, the essential ingredients are: (a) there should be an
agreement to sell movables; (b) it should be for a price; and
(c) there should be passing of goods pursuant to the
agreement.
Civil Appeal Nos. 703 & 705 of 2012 Page 13 of 59

Thus, by virtue of this Court’s decision in Gannon Dunkerley-I
( supra ), no sales tax could be levied on the amounts received
under a works contract by a building contractor even though it
had supplied goods for the construction of the building.
23. The decision of this Court in Gannon Dunkerley-I ( supra ) was
applied in various other decisions wherein courts were dealing
with the issue of transfer of goods in execution of works contracts.
One such example is the case of Northern India Caterers (India)
Ltd. v. Lt. Governor of Delhi , reported in (1978) 4 SCC 36 . In
this case, this Court held that there was no sale when food and
drink were supplied to guests residing in a hotel and that the
supply of meals was essentially in the nature of a service provided
to the guests and could not be identified as a transaction of sale.
This Court declined to accept the position that the revenue was
entitled to split up the transaction into two parts, one of service
and the other of the sale of food items. Accordingly, the proprietor
of the restaurant, who provided many services in addition to the
supply of food, was not liable to pay sales tax on the value of the
goods supplied by him.
24. A summary of the position of law with regard to taxation of goods
transferred in execution of works contracts before the enactment
of the Forty-sixth Amendment is as follows: (i) works contracts are
indivisible, i.e., the revenue could not split a single works contract
into two – one pertaining to the provision of goods and another
pertaining to the provision of services; (ii) to constitute ‘Sale’ all
ingredients as mentioned under the Act, 1930 had to be fulfilled;
and (iii) to determine whether a particular contract was a works
contract or a contract for sale, the dominant nature of the contract
Civil Appeal Nos. 703 & 705 of 2012 Page 14 of 59

was looked into on a fact specific basis via the terms and
conditions of contract and other related aspects.

25. To overcome the effect of various judicial decisions, the Parliament
amended the Constitution by the Constitution (Forty-sixth
Amendment) Act, 1982. The constitutional amendments relevant
for the purpose herein are as follows:
Amendment of Article 366 – Insertion of clause
(29-A)
"366. Definitions.-In this Constitution, unless the
context otherwise requires, the following
expressions have the meanings hereby
respectively assigned to them, that is to say-
(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) […]
and such transfer, delivery or supply of any goods
shall be deemed to be a sale of those goods by the
person making the transfer, delivery or supply and
a purchase of those goods by the person to whom
such transfer, delivery or supply is made;”
Amendment of Article 286 – Insertion of clause (3)
“286. Restrictions as to imposition of tax on the sale
or purchase of goods
(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."
Amendment of the Seventh Schedule – Insertion
of entry 92B
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“92B. Taxes on the consignment of goods (whether
the consignment is to the person making it or to any
other person), where such consignment takes place
in the course of inter-State or commerce”

26. In light of the Forty-sixth Amendment to the Constitution, several
state governments amended their sales tax laws and made
provisions for the imposition of sales tax in relation to works
contracts. Each State adopted its own method of determining
taxable turnover either by framing rules under its sales tax law or
by issuing administrative directions. The method adopted by the
States for determining the taxable turnover relating to works
contracts for purposes of levy of sales tax were such that sales tax
had to be paid by the building contractors not merely on the value
of materials supplied by them in connection with the works
contracts but also on the expenditure they had incurred in
securing the services of architects and engineers who had
supervised the execution of the works, and also on the amount
which they were entitled to receive for supervising the execution
of the works. While levying sales tax on the price of the materials
supplied for the construction of houses, factories, bridges, etc.,
the sales tax authorities of the States did not take into account
the conditions and restrictions imposed by Article 286 of the
Constitution and the provisions of the Central Sales Tax Act, 1956
(for short, “ the Act, 1956 ”).
27. The validity of such State legislations as well as the constitutional
validity of the Forty-sixth Amendment was considered by this
Court in Builders Association of India & Ors. v. Union of India
& Ors. , reported in (1989) 2 SCC 645 . The Court upheld the
constitutionality of the Forty-sixth Amendment. On the issue of
Civil Appeal Nos. 703 & 705 of 2012 Page 16 of 59

the validity of the State legislations, it was contended by the States
that:
a. When a works contract is executed, what is handed over is
a ‘conglomerate’ of all the goods used, and the goods pass in
an indivisible manner. In such cases, it was not possible to
disintegrate the contract into a contract for sale and a
contract for work, and thus, Article 366(29-A)(b) of the
Constitution has conferred on the legislatures of States the
power to levy tax on works contract; and
b. The power to levy tax provided under Article 366(29-A)(b)
was independent of the power conferred on the legislatures
of states under Entry 54, and the same was not bound by
restrictions imposed under Article 286 and the Act, 1956.
28. Rejecting the aforesaid contentions, this Court made the following
pertinent observations:
“32 [...]Sub-clause (b) of clause (29-A) states that ‘tax
on the sale or purchase of goods’ includes among other
things a tax on the transfer of property in the goods
(whether as goods or in some other form) involved in the
execution of a works contract. It does not say that a tax
on the sale or purchase of goods included a tax on the
amount paid for the execution of a works contract. It
refers to a tax on the transfer of property in
goods (whether as goods or in some other
form) involved in the execution of a works contract. The
emphasis is on the transfer of property in
goods (whether as goods or in some other form). The
latter part of clause (29-A) of Article 366 of the
Constitution makes the position very clear. While
referring to the transfer, delivery or supply of any goods
that takes place as per sub-clauses (a) to (f) of clause
(29-A), the latter part of clause (29-A) says that “such
transfer, delivery or supply of any goods” shall be
deemed to be a sale of those goods by the person
making the transfer, delivery or supply and a purchase
of those goods by the person to whom such transfer,
delivery or supply is made. Hence, a transfer of
Civil Appeal Nos. 703 & 705 of 2012 Page 17 of 59

property in goods under sub-clause (b) of clause (29-A)
is deemed to be a sale of the goods involved in the
execution of a works contract by the person making the
transfer and a purchase of those goods by the person
to whom such transfer is made. The object of the new
definition introduced in clause (29-A) of Article 366 of
the Constitution is, therefore, to enlarge the scope of
‘tax on sale or purchase of goods’ wherever it occurs in
the Constitution so that it may include within its scope
the transfer, delivery or supply of goods that may take
place under any of the transactions referred to in sub-
clauses (a) to (f) thereof wherever such transfer,
delivery or supply becomes subject to levy of sales tax.
So construed the expression ‘tax on the sale or
purchase of goods’ in Entry 54 of the State List,
therefore, includes a tax on the transfer of property in
goods (whether as goods or in some other form)
involved in the execution of a works contract also. The
tax leviable by virtue of sub-clause (b) of clause (29-A)
of Article 366 of the Constitution thus becomes subject
to the same discipline to which any levy under entry 54
of the State List is made subject to under the
Constitution. The position is the same when we look at
Article 286 of the Constitution.[...]We are of the view
that all transfers, deliveries and supplies of goods
referred to in clauses (a) to (f) of clause (29-A) of Article
366 of the Constitution are subject to the restrictions
and conditions mentioned in clause (1), clause (2) and
sub-clause (a) of clause (3) of Article 286 of the
Constitution and the transfers and deliveries that take
place under sub-clauses (b), (c) and (d) of clause (29-A)
of Article 366 of the Constitution are subject to an
additional restriction mentioned in sub-clause (b) of
Article 286(3) of the Constitution.
xxx
36. Even after the decision of this Court in the State of
Madras v. Gannon Dunkerley & Co. (Madras) Ltd. it
was quite possible that where a contract entered into
in connection with the construction of a building
consisted of two parts, namely, one part relating to the
sale of materials used in the construction of the
building by the contractor to the person who had
assigned the contract and another part dealing with
the supply of labour and services, sales tax was
leviable on the goods which were agreed to be sold
Civil Appeal Nos. 703 & 705 of 2012 Page 18 of 59

under the first part. But sales tax could not be levied
when the contract in question was a single and
indivisible works contract. After the 46th Amendment
the works contract which was an indivisible one is by
a legal fiction altered into a contract which is divisible
into one for sale of goods and the other for supply of
labour and services. After the 46th Amendment, it has
become possible for the States to levy sales tax on the
value of goods involved in a works contract in the same
way in which the sales tax was leviable on the price of
the goods and materials supplied in a building contract
which had been entered into in two distinct and
separate parts as stated above. It could not have been
the contention of the Revenue prior to the 46th
Amendment that when the goods and materials had
been supplied under a distinct and separate contract
by the contractor for the purpose of construction of a
building the assessment of sales tax could be made
ignoring the restrictions and conditions incorporated in
Article 286 of the Constitution. If that was the position
can the States contend after the 46th Amendment
under which by a legal fiction the transfer of property
in goods involved in a works contract was made liable
to payment of sales tax that they are not governed by
Article 286 while levying sales tax on sale of goods
involved in a works contract? They cannot do so. When
the law creates a legal fiction such fiction should be
carried to its logical end. There should not be any
hesitation in giving full effect to it. If the power to tax a
sale in an ordinary sense is subject to certain
conditions and restrictions imposed by the
Constitution, the power to tax a transaction which is
deemed to be a sale under Article 366(29-A) of the
Constitution should also be subject to the same
restrictions and conditions[…]
xxx
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
Civil Appeal Nos. 703 & 705 of 2012 Page 19 of 59

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 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.- 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)

Thus, this Court in Builders Association ( supra ) clarified that
the power to levy tax under Article 366(29A)(b) did not vest in
the States the power to tax works contracts themselves, nor did
it allow the States to levy taxation dehors the restrictions
imposed under Article 286 of the Constitution and the Act,
1956.
Civil Appeal Nos. 703 & 705 of 2012 Page 20 of 59


29. In Gannon Dunkerley & Co. & Ors. v. State of Rajasthan &
Ors. , reported in (1993) 1 SCC 364 (hereinafter, “ Gannon
Dunkerley-II ”), once again, this Court was faced with a host of
questions pertaining to the imposition of tax on the transfer of
property in goods involved in the execution of works contracts.
One of the contentions raised herein was that after the enactment
of the Forty-sixth Amendment, no amendment was brought to the
Act, 1956, applying its provision to the transfer of property in
goods involved in the execution of the works contracts.
Consequently, Sections 3, 4 and 5 of the Act, 1956 would not be
applicable to such transfers. This Court held as follows:
“31. The legislative power of the States under Entry 54
of the State List is subject to two limitations — one
flowing from the entry itself which makes the said
power “subject to the provisions of Entry 92-A of List
I”, and the other flowing from the prohibition contained
in Article 286. Under Entry 92-A of List I, Parliament
has the power to make a law in respect of taxes on sale
or purchase of goods other than newspapers where
such sale or purchase takes place in the course of inter-
State trade or commerce. The levy and collection of
such tax is governed by Article 269. This shows that
the legislative power under Entry 54 of the State List is
not available in respect of transactions of sale or
purchase which take place in the course of inter-State
trade or commerce. Similarly clause (1) of Article 286
prohibits the State from making a law imposing or
authorising 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 goods into or export of the goods out of the
territory of India. As a result of the said provision, 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
Civil Appeal Nos. 703 & 705 of 2012 Page 21 of 59

imposing or authorising the imposition of a tax on
transfer of property in goods involved in 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. Consequently, it is not permissible for a State
to frame the legislative enactment in exercise of the
legislative power conferred by Entry 54 in State List in
a manner as to assume the power to impose tax on
such transactions and thereby transgress these
constitutional limitations. Apart from the limitations
referred to above which curtail the ambit of the
legislative competence of the State Legislatures, there
is clause (3) of Article 286 which enables Parliament to
make a law placing restrictions and conditions on the
exercise of the legislative power of the State under
Entry 54 in State List in regard to the system of levy,
rates and other incidents of tax. Such a law may be in
relation to (a) goods declared by Parliament by law to
be of special importance in inter-State trade or
commerce, or (b) to taxes of the nature referred to in
sub-clauses (b), (c) and (d) of clause (29-A) of Article
366. When such a law is enacted by Parliament the
legislative power of the States under Entry 54 in State
List has to be exercised subject to the restrictions and
conditions specified in that law. In exercise of the
power conferred by Article 286(3)(a) Parliament has
enacted Sections 14 and 15 of the Central Sales Tax
Act, 1956. No law has, however, been made by
Parliament in exercise of its power under Article
286(3)(b).
xxx
34. The question is whether in the absence of an
amendment in the Central Sales Tax Act specifically
applying its provisions to a transfer of property in
goods involved in the execution of a works contract, the
provisions of Sections 3, 4 and 5 contained in Chapter
II can be held applicable to such a transfer. In this
context, it may be mentioned that prior to the Forty-
sixth Amendment, a distinction was being made
between a ‘works contract’ which was entire and
indivisible and a works contract composed of two
distinct and separate contracts — one, for transfer of
Civil Appeal Nos. 703 & 705 of 2012 Page 22 of 59

materials and other, for payment of remuneration for
services and for work done. The non-availability of the
legislative power of the States under Entry 54 of the
State List, as construed by this Court in the Gannon
Dunkerley case was confined, in its application, to
works contracts falling in the first category, i.e.,
contracts which were entire and indivisible and it was
permissible for the States to impose tax on sale or
purchase of goods where the parties had entered into
distinct and separate contracts one for the transfer of
materials and other for payment of service and for
work done. The provisions of Sections 3, 4 and 5 of the
Central Sales Tax Act were applicable where there
were two separate contracts[...]

35. This would mean that as a result of the Forty-sixth
Amendment, the contract which was single and
indivisible has been altered by a legal fiction into a
contract which is divisible into one for sale of goods
and other for supply of labour and services and as a
result such a contract which was single and indivisible
has been brought on a par with a contract containing
two separate agreements. Since the provisions of
Sections 3, 4 and 5 were applicable to such contracts
containing two separate agreements, there is no
reason why the said provisions should not apply to a
contract which, though single and indivisible, by legal
fiction introduced by the Forty-sixth Amendment, has
been altered into a contract which is divisible into one
for sale of goods and other for labour and services[...]

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.

37. For the reasons aforesaid, we are of the view that
even in the absence of any amendment having been
made in the Central Sales Tax Act (after the Forty-sixth
Amendment) expressly including transfers of property
Civil Appeal Nos. 703 & 705 of 2012 Page 23 of 59

in goods involved in execution of a works contract, the
provisions contained in Sections 3, 4 and 5 would be
applicable to such transfers and the legislative power
of the State to impose tax on such transfers under
Entry 54 of the State List will have to be exercised
keeping in view the provisions contained in Sections 3,
4 and 5 of the Central Sales Tax Act. For the same
reasons Sections 14 and 15 of the Central Sales Tax
Act would also be applicable to the deemed sales
resulting from transfer of property in goods involved in
the execution of a works contract and the legislative
power under Entry 54 in State List will have to be
exercised subject to the restrictions and conditions
prescribed in the said provisions in respect of goods
that have been declared to be of special importance in
inter-State trade or commerce.
xxx
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 inter-State 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.”
(Emphasis supplied)

30. After laying down the scope of power of the State legislatures to
enact laws imposing tax on the transfer of property in goods
involved in the execution of a works contract, the Court discussed
various aspects relating to such laws. One important aspect
discussed by the Court was when the tax could be imposed, on
Civil Appeal Nos. 703 & 705 of 2012 Page 24 of 59

what value it was to be imposed, and how to measure such value.
The relevant observations read thus:
“45. On behalf of the contractors, it has been urged
that under a law imposing a tax on the transfer of
property in goods involved in the execution of a works
contract under Entry 54 of the State List read with
Article 366(29-A)(b), the tax is imposed on the goods
which are involved in the execution of a works contract
and the measure for levying such a tax can only be the
value of the goods so involved and the value of the
works contract cannot be made the measure for levying
the tax. The submission is further that the value of such
goods would be the cost of acquisition of the goods by
the contractor and, therefore, the measure for levy of
tax can only be the cost at which the goods involved in
the execution of a works contract were obtained by the
contractor. On behalf of the States, it has been
submitted that since the property in goods which are
involved in the execution of a works contract passes
only when the goods are incorporated in the works, the
measure for the levy of the tax would be the value of
the goods at the time of their incorporation in the works
as well as the cost of incorporation of the goods in the
works. We are in agreement with the submission that
measure for the levy of the tax contemplated by Article
366(29-A)(b) is the value of the goods involved in the
execution of a works contract. In Builders' Association
case it has been pointed out that in Article 366(29-
A)(b), “[t]he emphasis is on the transfer of property in
goods (whether as goods or in some other form)”.)This
indicates that though the tax is imposed on the transfer
of property in goods involved in the execution of a
works contract, the measure for levy of such imposition
is the value of the goods involved in the execution of a
works contract. We are, however, unable to agree with
the contention urged on behalf of the contractors that
the value of such goods for levying the tax can be
assessed only on the basis of the cost of acquisition of
the goods by the contractor. Since the taxable event is
the transfer of property in goods involved in the
execution of a works contract and the said transfer of
property in such goods takes place when the goods are
incorporated in the works, the value of the goods which
can constitute the measure for the levy of the tax has
Civil Appeal Nos. 703 & 705 of 2012 Page 25 of 59

to be the value of the goods at the time of incorporation
of the goods in the works and not the cost of acquisition
of the goods by the contractor. We are also unable to
accept the contention urged on behalf of the States that
in addition to the value of the goods involved in the
execution of the works contract the cost of
incorporation of the goods in the works can be included
in the measure for levy of tax. Incorporation of the
goods in the works forms part of the contract relating
to work and labour which is distinct from the contract
for transfer of property in goods and, therefore, the cost
of incorporation of the goods in the works cannot be
made a part of the measure for levy of tax
contemplated by Article 366(29-A)(b).
xxx
47. Keeping in view the legal fiction introduced by the
Forty-sixth Amendment whereby the works contract
which was entire and indivisible has been altered into
a contract which is divisible into one for sale of goods
and other for supply of labour and services, the value
of the goods involved in the execution of a works
contract on which tax is leviable must exclude the
charges which appertain to the contract for supply of
labour and service[...]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;
(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;
Civil Appeal Nos. 703 & 705 of 2012 Page 26 of 59

(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)

Thus, this Court in Gannon Dunkerley -II ( supra ) held that the
taxable event is the transfer of property in goods involved in the
execution of a works contract, and that transfer occurs when the
goods are incorporated in the “works”. Consequently, it is the
value of goods at the time of incorporation which have to
constitute the measure for the levy of the tax.
31. A Three-judge Bench of this Court in Larsen and Toubro Limited
& Anr. v. State of Karnataka & Anr. , reported in (2014) 1 SCC
708 , was faced with the question whether taxing the sale of goods
in an agreement for the sale of a flat by a developer/promoter was
permissible. This Court, when dealing with the said issue, made
some pertinent observations with regard to: (i) the interpretation
of Article 366(29-A)(b) of the Constitution; (ii) the scope and
meaning of works contract; and (iii) the application of the
dominant intention test. They read as follows:
“56. It is important to ascertain the meaning of sub-
clause (b) of clause (29-A) of Article 366 of the
Constitution. As the very title of Article 366 shows, it is
the definition clause. It starts by saying that in the
Constitution unless the context otherwise requires the
expressions defined in that article shall have the
meanings respectively assigned to them in the article.
The definition of expression “tax on sale or purchase of
the goods” is contained in clause (29-A). If the first part
of clause (29-A) is read with sub-clause (b) along with
latter part of this clause, it reads like this: “tax on the
sale or purchase of the goods” includes a tax on the
transfer of property in goods (whether as goods or in
Civil Appeal Nos. 703 & 705 of 2012 Page 27 of 59

some other form) involved in the execution of a works
contract and such transfer, delivery or supply of any
goods shall be deemed to be a sale of those goods by
the person making the transfer, delivery or supply and
a purchase of those goods by the person to whom such
transfer, delivery or supply is made. The definition of
“goods” in clause (12) is inclusive. It includes all
materials, commodities and articles. The expression
“goods” has a broader meaning than merchandise.
Chattels or movables are goods within the meaning of
clause (12). Sub-clause (b) refers to transfer of property
in goods (whether as goods or in some other form)
involved in the execution of a works contract. The
expression “in some other form” in the bracket is of
utmost significance as by this expression the ordinary
understanding of the term “goods” has been enlarged
by bringing within its fold goods in a form other than
goods. Goods in some other form would thus mean
goods which have ceased to be chattels or movables or
merchandise and become attached or embedded to
earth. In other words, goods which have by
incorporation become part of immovable property are
deemed as goods. The definition of “tax on the sale or
purchase of goods” includes a tax on the transfer of
property in the goods as goods or which have lost its
form as goods and have acquired some other form
involved in the execution of a works contract.

57. Viewed thus, a transfer of property in goods under
clause (29-A)(b) of Article 366 is deemed to be a sale of
the goods involved in the execution of a works contract
by the person making the transfer and the purchase of
those goods by the person to whom such transfer is
made.

58. The States have now been conferred with the
power to tax indivisible contracts of works[…]The
taxable event is a deemed sale.

59. […] It is open to the States to divide the works
contract into two separate contracts by legal fiction : (i)
contract for sale of goods involved in the works
contract, and (ii) for supply of labour and service. By
the Forty-sixth Amendment, the States have been
empowered to bifurcate the contract and to levy sales
Civil Appeal Nos. 703 & 705 of 2012 Page 28 of 59

tax on the value of the material in the execution of the
works contract.

60. Whether the contract involved a dominant intention
to transfer the property in goods, in our view, is not at
all material. It is not necessary to ascertain what is the
dominant intention of the contract. Even if the
dominant intention of the contract is not to transfer the
property in goods and rather it is the rendering of
service or the ultimate transaction is transfer of
immovable property, then also it is open to the States
to levy sales tax on the materials used in such contract
if it otherwise has elements of works contract. The view
taken by a two-Judge Bench of this Court in Rainbow
Colour Lab that the division of the contract after the
Forty-sixth Amendment can be made only if the works
contract involved a dominant intention to transfer the
property in goods and not in contracts where the
transfer of property takes place as an incident of
contract of service is no longer good law, Rainbow
Colour Lab has been expressly overruled by a three-
Judge Bench in Associated Cement.
xxx
68. There is no doubt that to attract Article 366(29-A)(b)
there has to be a works contract but then what is its
meaning. The term “works contract” needs to be
understood in a manner that Parliament had in its view
at the time of the Forty-sixth Amendment and which is
more appropriate to Article 366(29-A)(b).
xxx
72. In our opinion, the term “works contract” in Article
366(29-A)(b) is amply wide and cannot be confined to
a particular understanding of the term or to a particular
form. The term encompasses a wide range and many
varieties of contract. Parliament had such wide
meaning of “works contract” in its view at the time of
the Forty-sixth Amendment. The object of insertion of
clause (29-A) in Article 366 was to enlarge the scope of
the expression “tax on sale or purchase of goods” and
overcome Gannon Dunkerley (1). Seen thus, even if in
a contract, besides the obligations of supply of goods
and materials and performance of labour and services,
some additional obligations are imposed, such contract
does not cease to be works contract. The additional
obligations in the contract would not alter the nature of
Civil Appeal Nos. 703 & 705 of 2012 Page 29 of 59

contract so long as the contract provides for a contract
for works and satisfies the primary description of
works contract. Once the characteristics or elements of
works contract are satisfied in a contract then
irrespective of additional obligations, such contract
would be covered by the term “works contract”.
Nothing in Article 366(29-A)(b) limits the term “works
contract” to contract for labour and service only. The
learned Advocate General for Maharashtra was right
in his submission that the term “works contract”
cannot be confined to a contract to provide labour and
services but is a contract for undertaking or bringing
into existence some “works”. We are also in agreement
with the submission of Mr K.N. Bhat that the term
“works contract” in Article 366(29-A)(b) takes within its
fold all genre of works contract and is not restricted to
one specie of contract to provide for labour and services
alone. Parliament had all genre of works contract in
view when clause (29-A) was inserted in Article 366.
xxx
87. It seems to us (and that is the view taken in some
of the decisions) that a contract may involve both a
contract of work and labour and a contract of sale of
goods. In our opinion, the distinction between contract
for sale of goods and contract for work (or service) has
almost diminished in the matters of composite contract
involving both a contract of work/labour and a contract
for sale for the purposes of Article 366(29-A)(b). Now by
legal fiction under Article 366(29-A)(b), it is permissible
to make such contract divisible by separating the
transfer of property in goods as goods or in some other
form from the contract of work and labour. A transfer
of property in goods under clause (29-A)(b) of Article
366 is deemed to be a sale of goods involved in the
execution of a works contract by the person making the
transfer and the purchase of those goods by the person
to whom such transfer is made. For this reason, the
traditional decisions which hold that the substance of
the contract must be seen have lost their significance.
What was viewed traditionally has to be now
understood in light of the philosophy of Article 366(29-
A).”
(Emphasis supplied)

Civil Appeal Nos. 703 & 705 of 2012 Page 30 of 59


32. This Court in the Kone Elevator India Private Limited v. State
of Tamil Nadu, reported in (2014) 7 SCC 1 , and in State of
Karnataka & Ors v. M/s Pro Lab & Ors., reported in (2015) 8
SCC 557 respectively, once again reiterated that the dominant
intention test is not applicable when determining whether a
particular contract is a works contract for the purposes of Article
366 (29-A) (b). In Larsen and Toubro ( supra) and Pro lab ( supra)
respectively, this Court specifically reiterated that the ruling in
Rainbow Colour Lab ( supra) was overturned by a Three-judge
Bench of this Court in Associated Cement Companies Ltd v.
Commissioner of Customs , reported in (2001) 4 SCC 593 .
33. The position of law with regard to taxation of goods transferred
under works contracts after the enactment of the Forty-sixth
Amendment may be summarised as follows:
a. Vide Article 366(29-A)(b), the States can only tax the transfer
of property in goods (whether as goods or in some other
form) involved in the execution of a works contract and not
the works contract itself;
b. States cannot exercise the power conferred upon them
under Article 366(29-A)(b) dehors the restrictions imposed
under Article 286 of the Constitution and the Act, 1956
(specifically Sections 3, 4, 5, 14 and 15 respectively);
c. Indivisible works contracts are now, by virtue of the legal
fiction created under Article 366(29-A)(b), divided into two
parts, one for the sale of goods and the other for the supply
of labour and services;
d. A transfer of property in goods under Article 366(29-A)(b) is
deemed to be a sale of the goods. Article 366(29-A)(b) serves
Civil Appeal Nos. 703 & 705 of 2012 Page 31 of 59

to bring transactions where essential ingredients of “sale”
defined in the Act, 1930 are absent within the ambit of sale
or purchase for the purposes of levy of sales tax. In other
words, the transfer of movable property in a works contract
is deemed to be a sale even though it may not be considered
as “sale” within the meaning of the Act, 1930;
e. The term “works contract” in Article 366(29-A)(b) takes
within its fold all genres of works contracts and is not
restricted to one particular specie of contract to provide for
labour and services alone; and
f. The dominant nature test is no longer applicable and has
lost its significance where transactions are of the nature
contemplated in Article 366(29-A).
(iii) Whether the ink, chemical and other processing materials
are liable to the levy of tax under Section 3F(1)(b) of the
Act, 1948?
34. Section 3F(1)(b) of the Act, 1948, levies tax on the “ transfer of
property in goods (whether as goods or in some other form) involved
in the execution of a works contract ” .
35. In the case at hand, the principal question that falls for our
consideration is whether there has been a transfer of property in
the ink and other processing materials used for the purpose of
printing lottery tickets, thereby making them liable to the levy of
tax under Section 3F(1)(b) of the Act, 1948.
36. The principal contention put forward by the appellant is that the
lottery tickets are not ‘goods’ and are rather ‘actionable claims’.
Since ‘actionable claims’ are not considered as ‘goods’ under
Civil Appeal Nos. 703 & 705 of 2012 Page 32 of 59

Section 2(d) of the Act, 1948, according to the appellant, the
lottery tickets cannot be brought within the ambit of Section
3F(1)(b) of the Act, 1948. Consequently, it is not liable to pay any
tax under the said section.
37. The aforesaid contention of the appellant is devoid of any merit.
On a close reading of Section 3F(1)(b) of the Act, 1948, it is amply
clear that the tax levied is not on the ‘goods’ produced in
pursuance of a works contract , i.e., the lottery tickets in the case
at hand. The tax under Section 3F(1)(b) of the Act, 1948, is rather
on the ‘goods’ which are involved in the execution of the works
contract . Thus, the appellant's contention is misplaced, as it
equates lottery tickets with goods involved in the execution of the
works contract, which is clearly not the case.
38. In order to sustain a levy of tax under Section 3F(1)(b) of the Act,
1948, three conditions must be fulfilled: (i) there must be a works
contract; (ii) the goods should have been involved in the execution
of the works contract; and (iii) the property in those goods must
be transferred to a third party either as goods or in some other
form.
39. In the facts of the present case, it is not in dispute that the first
two conditions are fulfilled. The appellant has admitted that the
contract for printing lottery tickets is a works contract. Based on
the judgments of this Court discussed above, it cannot be said
otherwise. Further, from the record, it is clear that the ink,
chemical and other processing material were involved in the
printing of the lottery tickets.
40. The primary subject of disagreement is with regard to the third
condition. On one hand, the appellant contends that the ink and
Civil Appeal Nos. 703 & 705 of 2012 Page 33 of 59

chemical are consumed in the process of printing the tickets and
thus, there is no transfer of property in those goods.
Consequently, no tax under Section 3F(1)(b) of the Act is
maintainable. On the other hand, the Revenue contends that the
ink and chemicals have been transferred to the third party in
execution of the work contract, i.e., printing work.
41. This Court and various High Courts have, in a plethora of
judgments, discussed this aspect of the transfer of property in
goods involved in the execution of works contracts. For the
convenience of exposition, these cases are categorised under three
broad heads, in accordance with the ratio laid down in the
judgments: (a) tangible transfer of property; (b) no transfer of
property due to consumption of goods; and (c) transfer of property
despite consumption of goods.
a. Tangible Transfer of property
42. In Matushree ( supra ) the question before the Bombay High Court
was whether the coloured shade/print passed on to the fabric in
the course of dyeing and printing amounts to transfer of property
of the materials used in dyeing and printing under the
Maharashtra Sales Tax on the Transfer of Property in Goods
involved in the Execution of Works Contracts Act, 1989 (for short,
“ Maharashtra Works Contracts Act ”). In the said case, the
primary contention of the respondent was that the colours, dyes
and chemicals are consumed in the process of dyeing and
therefore, the property in those goods was not transferred as goods
or in any other form. Rejecting the said contention, the Bombay
High Court held as follows:
“32. […]According to Mr. Joshi, unless the materials
used in dyeing and printing pass in some or the other
physical form, there is no passing of property in goods.
Civil Appeal Nos. 703 & 705 of 2012 Page 34 of 59

In other words, according to Mr. Joshi if the property in
goods passes as a result of some chemical reaction,
then such passing of the property in goods is by
accretion and not by transfer of the property in goods.
The arguments put forth by Mr. Joshi can be best
understood by referring to the different forms of water
(as and by way of analogy), as stated hereinbelow:
"Water in the normal temperature is in liquid form,
in high temperature it is in the vapour form and in
low temperature it is in the solid form. These are all
different physical forms of water. However, when
the water is subjected to electrolysis and an electric
current is passed through water, due to chemical
reaction, the water molecules break into two,
namely, hydrogen and oxygen. Thus, on chemical
reaction the water is converted into a chemical form
or gaseous form comprising of hydrogen and
oxygen. According to Mr. Joshi, property in water
can be said to pass, only if, there is transfer in any
physical form (i.e., either in liquid form, solid form
or vapour form) and not in its chemical form or
gaseous form (i.e., as hydrogen and oxygen)."

33. We see no merit in the contentions raised by the
respondents. When the term "sale" in the Works
Contracts Act has been defined to include by a deemed
fiction, the transfer of property in goods in any form,
there is no reason to restrict the definition to cover only
those transactions which involve transfer of goods in
some physical form and not in some chemical form. In
our opinion, the words "some other form" used in the
definition of "sale" in the Works Contracts Act apply to
the transfer of property in goods in its every form, i.e.,
physical form or any other form, including the chemical
form. In other words, transfer of property in goods used
in the execution of a works contract, either in its
physical form or any other form including the chemical
form constitutes sale under the Works Contracts Act. In
the present case, the coloured shade is passed to the
fabrics due to the chemical reaction of the materials
used in the process of dyeing. Coloured shade may be
due to the chemical reaction of one or more materials.
The coloured shade represents the inherent chemical
property of the materials used. Once there is passing
of the chemical property of the materials used in the
Civil Appeal Nos. 703 & 705 of 2012 Page 35 of 59

execution of works contract, then under the Works
Contracts Act, there is a deemed sale of the materials
used in the execution of the works contract.
Accordingly we hold that in the process of dyeing, the
coloured shade passed on to the fabrics constitutes
sale of the materials used in dyeing, under the Works
Contracts Act.
xxx
36. […]In the present case, due to the chemical reaction
of colours, chemicals and dyes, the inherent property
in those goods are passed on to the fabrics. The fact
that after the inherent property in those goods is
transferred to the fabrics the remaining solution is
thrown out as waste or affluent, does not in any way
affect the taxability on transfer of the property in goods
already effected on the fabrics. Admittedly, after
dyeing, the solution made of colours, chemicals and
dyes is thrown as waste, because, on transfer of the
property in the form of coloured shade, the said
solution becomes worthless. Therefore, the Legislature
has sought to tax the property in goods which passes
and not the remnants or the affluent that remain after
the passing of the inherent property in those goods.
xxx
39. Now, turning to the second question, the Tribunal
has held that the coloured shade passed on to the
fabrics represents very small quantity of the materials
used in dyeing and hence the Works Contracts Act is
not applicable. As rightly contended by the counsel for
the Revenue, under the Works Contract Act, what is
relevant is the passing of property in goods used in the
execution of the works contract and not the quantity of
the material that passes. It is not the case of the
respondents that the chemical solution used for dyeing
retains its property even after dyeing. In fact, it is the
specific case of the respondents that the solution
prepared for dyeing the grey fabrics of one customer,
cannot be used for dyeing the grey fabrics of another
customer. It is the case of the respondents that on
completion of dyeing, of a particular fabric, the
chemical solution becomes worthless and is thrown as
a waste. Therefore, it is clear that on completion of
dyeing, the entire property of the materials used in
dyeing are passed on and what remains as solution is
nothing but the residue or the waste. In other words,
Civil Appeal Nos. 703 & 705 of 2012 Page 36 of 59

the coloured shade on the fabrics represents the entire
property of the materials used in dyeing. Therefore, it
was not open to the Tribunal to hold that the coloured
shade represents only very small quantity of the
materials used for dyeing and, therefore, the Act is not
applicable[…]”
(Emphasis supplied)

Thus, the Bombay High Court interpreted the meaning of the
phrase “ some other form ” to include the transfer of goods not just
in their physical form but also in other forms, such as in their
chemical form. Having regard to the facts at hand, the High Court
held that the inherent property in the colours, dyes and chemicals
could be said to have been transferred in their chemical form to
the cloth which was being dyed.
43. In Teaktex Processing Complex Limited v. State of Kerala,
reported in 2002 SCC OnLine Ker 720 , the Kerala High Court
addressed a similar question, i.e., whether dyes and chemicals
used in the process of dyeing should be considered as
consumables under Section 5C of the Kerala General Sales Tax
Act, 1963. The Kerala High Court held that the ‘dye’ used in the
process cannot be treated as a consumable. According to the High
Court, if an item which is used in the process is not in existence
in any form in the end-product, then it is to be treated as a
consumable. Since the dyes used existed in the form of colour, the
High Court held that it was inevitable that the property in them
was transferred.
44. In Hari and Company ( supra ), the respondent-assessee was
engaged in the business of photocopying, and for this purpose, it
used its own paper and ink. The question before the Bombay High
Court was whether the paper and ink used by the respondent-
assessee in the course of executing photocopying works would
Civil Appeal Nos. 703 & 705 of 2012 Page 37 of 59

constitute a transfer of property, and thus be liable to the levy of
tax under the Maharashtra Works Contracts Act. The Bombay
High Court, relying on its own decision in Matushree ( supra ), held
that the moment paper and ink changed hands, it could be
construed as a sale within the works contract.
45. In Commissioner of Sales Tax, Maharashtra State, Bombay
v. Ramdas Sobhraj , reported in 2012 SCC OnLine Bom 1608 ,
a reference was made by the Maharashtra Sales Tax Tribunal to
the Bombay High Court. The respondent-assessee was engaged in
the works of plate and film making. The activities undertaken by
the respondent-assessee are described as follows by the Bombay
High Court:
“In the job-work of plate making the customers of the
respondent-assessee supplies to the respondent-
assessee duly grained zinc or aluminium plates. On
receipt, plates are coated by dipping in water wherein
gun bio chromate is dissolved. Thereafter positives are
exposed on the treated plates by halogen lamps. The
image is formed by the positives on the plates and the
same is developed in the solution of calcium, lactic acid
ferric chloride, cupric chloride and hydrochloride. The
plates are thereafter washed in industrial solvent, as
a result of which all the chemicals are washed out and
only the images remain on the plates. Thereafter,
lacquer and ink are applied on the plates. On a specific
query, we were informed that lacquer and ink are
applied on the plates so as to ensure that the images
on the plates do not get disturbed/smudged by
constant use. After the above process the plates are
dried and again washed with water and returned to
the customers.

The activity of pure labour job consists of positive
making. In this activity, the customer supplies a design
to the respondent-assessee for the purpose of positive
making. The respondent-assessee thereafter takes a
photograph of the design in four different colours, i.e.,
yellow, red, blue and black for obtaining the final
Civil Appeal Nos. 703 & 705 of 2012 Page 38 of 59

negatives. Out of the aforesaid final negatives the
respondent-assessee obtains/prepares a number of
positives as required by its customers. It is the case of
the respondent-assessee that the aforesaid activity is
highly skilled activity requiring expertise and skill.”

The question that fell for consideration before the Bombay High
Court was whether the tribunal was justified in holding that there
was no transfer of property in ink and lacquer when undertaking
the works in the post Forty-sixth Amendment era. The Bombay
High Court, relying upon its decision in Matushree ( supra ), held
that lacquer and ink were materials used in the plate making
process, and the property in the same is passed on in the
execution of the contract under the Maharashtra Works Contracts
Act.
46. In M/s Mohan Offset Printers v. State of Tamil Nadu , reported
in 2010 SCC OnLine Mad 587 , the petitioner-assessee was
engaged in the business of printing and supplying labels, cartons
and drapers for notebooks on a work contract basis. While the
paper was supplied by the customers, the printing ink was
prepared by the petitioner-assessee. The petitioner in the said
case sought to challenge the tribunal’s decision, which held that
the printing ink used by the petitioner in the works contract would
amount to a transfer of property, and thus was liable to sales tax
under Section 3B of the Tamil Nadu General Sales Tax Act, 1959.
Section 3B of the Tamil Nadu General Sales Tax Act, 1959 dealt
with “ levy of tax on the transfer of goods involved in works
contract ” . It was the petitioner’s contention that when ink is used
for printing the materials on a work contract basis, such ink is
consumed and no transfer of property in the ink occurs. Rejecting
the contention of the petitioner, the Madras High Court held that
in the printing work undertaken, the ink is transferred onto the
Civil Appeal Nos. 703 & 705 of 2012 Page 39 of 59

papers in a tangible manner and without it, the works contract
would not be completed. Therefore, the printing ink could not be
considered a consumable and is liable to be taxed under Section
3B of the Tamil Nadu General Sales Tax Act, 1959.
47. In Unique Traders v. Commercial Tax Officer-1 , reported in
2020 SCC OnLine Mad 1155 , a Three-judge Bench of the Madras
High Court was hearing a reference that originated when a
Division Bench, noting conflicting decisions among other Division
Benches of the High Court, deemed it necessary for the law on the
subject to be settled. The appellant in this case was involved in
performing job work, wherein it would receive polythene rolls from
various parties and thereafter print on them using purchased
ethyl acetate, toluene, and ink. The question before the court was
whether the ink used in printing would amount to a transfer of
property and thus be liable to tax under Section 3B of the Tamil
Nadu General Sales Tax Act, 1959. In resolving this issue, the
Three-judge Bench extensively examined the various precedents
of this Court, its own decisions, and those of other High Courts.
The court answered the reference in favour of the revenue and
held that the ink used in printing would be liable to be taxed under
Section 3B of the Tamil Nadu General Sales Tax Act, 1959. In
addition, the court in the case also delineated very clearly as to
which precedents of its High Court on this aspect of law were
binding and which were erroneous in law.
48. The issue before this Court in Xerox Modicorp Ltd v. State of
Karnataka , reported in (2005) 7 SCC 380 , was whether toners
and developers supplied in pursuance of maintenance contracts
entered into between the parties were subject to the levy of sales
tax. It was the contention of the appellant-assessee therein that
Civil Appeal Nos. 703 & 705 of 2012 Page 40 of 59

the toners and developers are consumed in the process of the
execution of the maintenance agreement itself, and by virtue of
Explanation I to Rule 6(4) of the Karnataka Sales Tax Rules, such
consumables could not be made subject to the levy of sales tax.
Rejecting this contention, this Court held as follows:
“16. We have considered the rival submissions. As set
out hereinabove the word consumable in Explanation I
to Rule 6(4) refers to such items which get consumed
before the property in the goods can pass. We are
informed that toners and developers are liquids which
are put in the Xerox machine. They perform, to put it
simply, the same function as ink in printers. Under the
Sale of Goods Act if specified goods in a deliverable
state are delivered the property in the goods passes. It
could not be disputed that the toner and developer will
be delivered in bottles/containers. In FSMA supplies
are left with the customer. Thus clause 9 of the section
dealing with the customer's obligation provides as
follows:
“The Customer
*
9. shall be accountable to MX for xerographic
supplies stock left in trust with the customer who
shall ensure that such stock is used only in the
equipment under this agreement. MX reserves the
right to charge the customer for any stocks which
are unaccounted for, to MX's satisfaction, at the
then prevailing MX prices.”
Thus for the extra stock there is a provision which
provides that it is left in trust. However once the toner
and developer are put into the machine they are no
longer in trust. This is because the property in the toner
and developer passed the moment they are put into the
Xerox machine. Now they belonged to the customer. At
this stage they are tangible movables in which
property can pass. This is clear from the provision that
the appellants will charge for unaccounted stock at
prevailing prices. That they are goods in which
property can pass is also clear from the fact that in
SSMA the customer has to buy the toner and developer.
If as now claimed they are consumables in which
property cannot be transferred how are the appellants
charging for toners and developers. In our view, Mr Iyer
Civil Appeal Nos. 703 & 705 of 2012 Page 41 of 59

is right. The sale i.e. transfer of property takes place
before the goods are consumed. The transfer takes
place in respect of tangible goods. Just like petrol is
consumed after sale or ink is consumed after sale in
this case also the toners and developers get consumed
after sale. The property passes the moment they are
put in the machine. At that stage they are not
consumed but are tangible goods in which property can
pass.”
(Emphasis supplied)


49. In the aforementioned cases, the Courts were primarily dealing
with situations where the transfer of property resulted in a
tangible and observable presence in the final product. The judicial
reasoning focused on how the inherent properties of the goods
were physically incorporated and remained as a component of the
works delivered to the customer.
b. No transfer of property due to consumption of goods
50. In Pest Control ( supra ), the petitioner was engaged in providing
services such as pest control, household disinfection, and anti-
termite treatment. The question before the Patna High Court was
whether there was a transfer of property in the chemicals that
were involved in providing the aforementioned services. The court
upheld the contention of the petitioner that there was no transfer
of property in the chemicals and held as follows:
“12. From the plain reading of sub-clause (b) of clause
(29-A) of article 366 of the Constitution of India it
appears that there must be a transfer of property in
goods whether as goods or in some other form involved
in the execution of a works contract. Clause (12) of
article 366 and section 2(h) of the Bihar Finance Act,
1981 give some indication as to what is meant by
"goods". The inclusive definition in the Constitution as
well as in the Bihar Finance Act refers to materials,
commodities and articles or all kinds of movable
property, all materials, commodities and articles, as
such or in some other form. Before a tax can be levied
Civil Appeal Nos. 703 & 705 of 2012 Page 42 of 59

on a works contract, it must be established that there
is transfer of property in goods involved in the
execution of a works contract. The goods may have
undergone a change of form. But in whatever form,
there must be transfer of property in goods. This
presupposes that the goods existed and that either in
its original form or in some other form, it is transferred
to the principal by the contractor. If the goods do not
exist in any form whatsoever and are consumed in the
processor execution of the work, can it be said that in
such a case there is a transfer of property in goods? In
my view, the transfer of goods implies the existence of
the goods in some form or the other. If the goods do not
exist, there is no question of transfer of property in
goods. In Northern India Caterers (India) Ltd. v. Lt.
Governor of Delhi [1978] 42 STC 386 ; (1978) 1 SCR
557, the Supreme Court quoted with approval a
passage from Electa B. Merrill v. James W. Hodson
LRA 1915-B 481, dealing with a case of supply of food
or drink to customers, wherein it was held that such
supply did not partake the character of a sale of goods.
It was observed: "The necessary incident of this service
or ministry is the consumption of the food required.
This consumption involves destruction and nothing
remains of what is consumed to which the right of
property can be said to attach. Before consumption title
does not pass; after consumption there remains
nothing to become the subject of title.”

13. While it is true that in view of the Constitution
(Forty-sixth Amendment) Act, 1982, what was earlier
considered to be one indivisible contract is by legal
fiction altered into a contract which is divisible into one
for the sale of goods and the other for supply of labour
and services. It is now possible for the State to levy
sales tax on the value of goods involved in a works
contract. But even so this presupposes the existence of
goods, because there can be no transfer of property in
goods unless the goods themselves exist. In the instant
case, it is not disputed that the chemicals are used for
the purpose of eradicating pests. The chemicals are
sprayed through machines so that when the process
ends, nothing tangible remains in which property is
transferred. By the process of spraying or applying
chemicals, a place is treated against insects and pests
Civil Appeal Nos. 703 & 705 of 2012 Page 43 of 59

but in the process the chemicals are themselves
consumed and there remains nothing in which
property is transferred. I am of the view that a
transaction as the one in question really does not
involve transfer of any goods as understood in sub-
clause (b) of clause (29-A) of article 366 of the
Constitution of India or under the provisions of the
Bihar Finance Act, 1981. It is a service contract pure
and simple and does not involve any sale of goods
since there are no goods in which property can be
transferred. I am, therefore, of the view that the
contract between the petitioner-company and M/s.
Tata Iron & Steel Co. Ltd. is a mere service contract for
eradication of pests, rodents, termites, etc., and does
not fall within the purview of a contract for the supply
of goods as envisaged under the Constitution of India
and the Bihar Finance Act, 1981. In such a transaction,
there being no transfer of property in goods, no sales
tax is leviable under the provisions of the Bihar
Finance Act, 1981.”

“ 4. […]The only further question is whether the
Appellate Tribunal was justified in holding that no
transfer of property takes place in the display of
fireworks. As the explosives are consumed, nothing
tangible remains, in which property could be
transferred. It is a matter of common knowledge that
in the display of fireworks, the explosives are spent
and do not remain, once the display takes place. In the
process of execution of the work, the goods themselves
(explosives) ceased to exist. No tangible property
remains. So, there could be no transfer of property. We
concur with the decision of the Patna High Court in Pest
Control India Ltd. v. Union of India [1989] 75 STC 188.
There can be no transfer of property unless the goods
themselves exist. That is not the case herein. The
Civil Appeal Nos. 703 & 705 of 2012 Page 44 of 59

decision of the Appellate Tribunal taking the said view
is justified in law.”

“2. A bare perusal of the above Explanation is
sufficient to show that transfer of property in goods
(whether as goods or in some other form) is the sine
qua non for its application. The mere execution of a
works contract does not by itself attract liability for tax
under the Act unless it is accompanied by transfer of
property in goods, involved in the execution of the
contract. The emphasis is on the transfer of property in
goods-Builders Association of India v. Union of India
[1989] 73 STC 370 (SC) at page 396. When goods used
in the process of executing a works contract are
consumed in the process, as in the case of the
chemicals used by the petitioner or fuel and power,
there is no transfer of any goods from the contractor to
the awarder of the contract, attracting liability to tax. I
draw inspiration for this conclusion from the decision
of this Court in Deputy Commissioner of Sales Tax v.
Thomas Stephen and Co. Ltd. [1987] 66 STC 34 ;
(1987) 1 KLT 161, (paragraph 5) which was affirmed
by the Supreme Court in Deputy Commissioner v.
Civil Appeal Nos. 703 & 705 of 2012 Page 45 of 59

Thomas Stephen & Co. Ltd. [1988] 69 STC 320 (at
pages 324-325); (1988) 1 KLT 568 (paragraph 12).

3. The chemicals are being used by the petitioner only
in aid of the work undertaken by it, as a cleaning agent
for cleaning the boilers in the plant and they are
extinguished in the process. They are not transferred
to the awarder in any form, either as goods or
otherwise. The work is more or less a labour contract,
in which the petitioner utilises the chemicals just as it
uses any other item of its machinery or fuel or power
in the performance of the work. There is no transfer of
property in goods and no sale liable for tax under
Explanation 3(A).”
(Emphasis supplied)

Civil Appeal Nos. 703 & 705 of 2012 Page 46 of 59

Civil Appeal Nos. 703 & 705 of 2012 Page 47 of 59

c. Transfer of property despite consumption of goods

Civil Appeal Nos. 703 & 705 of 2012 Page 48 of 59

Civil Appeal Nos. 703 & 705 of 2012 Page 49 of 59

Civil Appeal Nos. 703 & 705 of 2012 Page 50 of 59

Civil Appeal Nos. 703 & 705 of 2012 Page 51 of 59

d. Application to the facts at hand
58. It is true that determining whether a transfer of property in goods
has occurred is a fact-intensive enquiry, heavily dependent on the
circumstances surrounding a particular case, such as the subject
and terms of the work contract itself. In such a scenario, it is
neither possible to lay down any “general principles” nor is it
advisable to do so. At this juncture, it is apt to take note of the
observations made by this Court in Collector of Central Excise,
New Delhi v. Ballarpur Industries Limited , reported in (1989)
4 SCC 566 :

Civil Appeal Nos. 703 & 705 of 2012 Page 52 of 59

The learned Author recalls Lord Lindley’s “robust
answer” to the question — Where will you draw the
line?
“Nothing is more common in life than to be unable to
draw the line between two things. Who can draw
the line between plants and animals? And yet, who
has any difficulty in saying that an oak-tree is a
plant and not an animal?”
Again, Lord Coleridge in Mayor of
Southport v. Morriss said:
“The Attorney General has asked where we are to
draw the line. The answer is that it is not necessary
to draw it at any precise point. It is enough for us to
say that the present case is on the right side of any
reasonable line that could be drawn.”
(Emphasis supplied)

59. Whilst acknowledging that there are no general rules that can be
universally applied, it is fundamental that any analysis must begin
with the correct identification of the taxable event. From the rulings
of this Court in Builders Association ( supra ), Gannon Dunkerley-
II ( supra ) and Larsen and Toubro ( supra ) respectively, it is clear
that the taxable event with respect to the transfer of property in
goods involved in works contracts is when the deemed sale occurs.
60. In Gannon Dunkerley-II ( supra ), this Court clarified that the
transfer of property in such goods takes place when the goods are
incorporated in the works. The Court’s use of the word ‘incorporated’
should not be mechanically interpreted to mean that a transfer of
property occurs only when a physical or tangible good is passed on
when executing a works contract. Rather, ‘incorporation’ is to be
understood contextually, defined by the specific nature of “the
works” contracted for.
61. Considering it from the aforesaid perspective, it is evident that the
Courts in Pest Control ( supra ) , M.K. Velu ( supra ) , Dynamic
Civil Appeal Nos. 703 & 705 of 2012 Page 53 of 59

62. This Court in Xerox Modicorp ( supra ) and the Kerala High Court
in Enviro Chemicals ( supra ) correctly identified the taxable event
as the precise moment the contractor’s goods are incorporated into
the ‘works’, i.e., when the toner is fitted into the machine or the
chemical is introduced into the effluent water. The subsequent
consumption of these items is irrelevant, as it does not negate the
transfer of property that has already occurred. The cardinal
principle, which must serve as the guiding light for any court or
Civil Appeal Nos. 703 & 705 of 2012 Page 54 of 59

tribunal adjudicating such disputes, is that the analysis must be
anchored to a singular question: has transfer of property in goods
involved in the execution of the works contract occurred?
63. In Enviro Chemicals ( supra ), the Kerala High Court correctly noted
that the items need not exist in any form in the resultant product.
To insist that a transfer of property is contingent upon the good’s
tangible presence in a final product is to impose a condition that
Article 366(29A)(b) does not contemplate and, in fact, is textually
contradictory. The statutory framework only requires that the goods
be “ involved in the execution of the works contract ”. It does not
mandate that the works contract must yield a physical end-product
or that the transfer must be tangible. To impose such a limitation
would not only lead to a gross misapplication of the law but would
also defeat the legislative intent of the Forty-sixth Amendment and
the dictum of this Court in various rulings. This Court allowed a
broad interpretation of the term ‘works contract’ in order to enable
the taxing transfer of property in goods in all genres of works
contracts.
64. Many works contracts, particularly those for services and
transformations, do not result in a new end product or a tangible
transfer of property. For example, a works contract for providing
pest control or cleaning service (as was the case in Pest Control
( supra ) and Dynamic Cleaning ( supra ), respectively) would not
lead to the creation of a new end product or a very tangible transfer
of property in goods. However, the chemicals used are indeed being
transferred, as without such transfer of goods, it would be
impossible to make an area clean or pest-free. Similarly, in M.K.
Velu ( supra ) and Microtol Sterilization ( supra ), the works
contracts therein could not have been executed successfully
Civil Appeal Nos. 703 & 705 of 2012 Page 55 of 59

without the transfer of property in the fireworks and ethylene oxide,
respectively. The chemicals, fireworks, and ethylene oxide are the
primary goods facilitating the works under the respective contracts.
It is in this context that they may said to be incorporated in the
‘works’ of the respective contracts. Consequently, it is undeniable
that the property in such goods is being transferred when the
respective works contracts are executed. These goods differ from
consumables such as water and electricity, which merely aid in
executing works contracts and the property in them is not
transferred before they are consumed.
65. Determining whether a transfer of property in goods has occurred
is undoubtedly more challenging when the good is consumed or the
transfer is intangible, as opposed to when it is tangibly present in a
final product. Thus, the courts and tribunals must be extra vigilant
when faced with such scenarios and must scrutinize the specific
facts and the nature of each works contract with great care to make
a correct determination as to whether or not a said item has been
incorporated in the ‘works’ of a contract.
66. In the facts of the present case, the levy of sales tax under Section
3F of the Act, 1948, is on the ink and the processing material used
by the appellant in printing the lottery tickets. The appellant has,
however, not provided an item-wise breakdown of such processing
material. The same was also noted by the Assessing Authority in its
orders dated 28.10.1999. If the appellant had provided an item-wise
breakdown, it would have facilitated in determining whether there
was a transfer of property with regard to each such item.
Consequently, we proceed to determine the issue on the basis of the
assumption the High Court seems to have drawn in its impugned
Civil Appeal Nos. 703 & 705 of 2012 Page 56 of 59

judgment, i.e., equating processing material with the chemical used
for diluting the ink.
67. Applying the principles laid down in the preceding paragraphs to
the facts at hand, we have no doubt in our mind that there is a
transfer of property in the ink and chemicals used in the printing
of the lottery tickets. The works contract in this instance is for the
printing of lottery tickets, and “the works” refers to the final,
tangible printed ticket. The taxable event, or the “deemed sale”,
occurs at the precise moment the ink is applied to the paper. This
act constitutes “incorporation in the works”, as the ink and the
chemicals (with which the ink is mixed) are involved in the
execution of the work contract and become a part of the lottery
ticket. In this process, there is a tangible transfer of the diluted ink,
a composite good comprising both the ink and the processing
chemicals.
68. As rightly held by the Bombay High Court in Matushree ( supra ),
the transfer of ink and chemicals in their chemically altered form
constitutes a valid transfer of property. Therefore, since it is
impossible to transfer the ink without also transferring the
chemicals it is diluted with, it can be conclusively inferred that the
property in both the ink and the chemicals has been transferred.
69. Thus, in the facts of the present case, all conditions required to
sustain a levy of tax under Section 3F(1)(b) of the Act, 1948, are
fulfilled. Consequently, the appellant is liable to pay tax under
Section 3F(1)(b) of the Act, 1948 on the ink and processing material.
E. CONCLUSION
70. In order to sustain a levy of tax under Section 3F(1)(b) of the Act,
1948, three conditions must be fulfilled: (i) there must be a works
Civil Appeal Nos. 703 & 705 of 2012 Page 57 of 59

contract; (ii) the goods should have been involved in the
execution of the works contract; and (iii) the property in those
goods must be transferred to a third party either as goods or in
some other form.
71. The appellant has admitted that the contract for printing lottery
tickets is a works contract. Based on the judgments of this Court,
it cannot be said otherwise as well. From the record, it is clear
that the ink, chemical and other processing material were
involved in the printing of the lottery tickets.
72. Further, there is a transfer of property in the ink and chemicals
used in the printing of the lottery tickets. The works contract in this
instance is for the printing of lottery tickets, and “the works” refers
to the final, tangible printed ticket. The taxable event, or the
“deemed sale”, occurs at the precise moment the ink is applied to
the paper. This act constitutes “incorporation in the works”, as the
ink and the chemicals (with which the ink is mixed) are involved in
the execution of the work contract and become a part of the lottery
ticket. In this process, there is a tangible transfer of the diluted ink,
a composite good comprising both the ink and the processing
chemicals.

73. Thus, in the facts of the present case all three conditions required
to sustain a levy of tax under Section 3F(1)(b) of the Act, 1948, are
fulfilled : (i) a works contract exists for printing of lottery tickets; (ii)
ink and chemicals have been involved in the execution of the works
contract; and (iii) the property in the ink and chemicals has been
transferred in execution of the works contract. Consequently, the
appellant is liable to pay tax under Section 3F(1)(b) of the Act, 1948
on the ink and processing material.
Civil Appeal Nos. 703 & 705 of 2012 Page 58 of 59


74. For the foregoing reasons, the appeals fail and are hereby
dismissed.
75. Before we close, we must clarify that we had heard in all four
appeals. This judgment disposes of Civil Appeal Nos. 703 & 705 of
2012 respectively. In so far as, the Civil Appeal Nos. 9189 & 8313
of 2015 respectively are concerned, we order that they be de-tagged
as we need to rehear them on a particular issue. Registry to notify
these two appeals for rehearing on any final hearing day in the
month of November 2025.

….………………………….…. J.
(J.B. PARDIWALA)


….………………………….…. J.
(K.V.VISWANATHAN)

New Delhi.
October 07, 2025.
Civil Appeal Nos. 703 & 705 of 2012 Page 59 of 59