Full Judgment Text
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PETITIONER:
CARL STILL G. m. b. H. & ANOTHER
Vs.
RESPONDENT:
THE STATE OF BIHAR AND OTHERS
DATE OF JUDGMENT:
19/04/1961
BENCH:
AIYYAR, T.L. VENKATARAMA
BENCH:
AIYYAR, T.L. VENKATARAMA
DAS, S.K.
KAPUR, J.L.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION:
1961 AIR 1615 1962 SCR (2) 81
CITATOR INFO :
R 1965 SC1655 (24)
R 1969 SC 556 (3)
ACT:
Sales Tax-Construction works-Interpretation of contract--
Supply of materials Legality of tax thereon-Sales Tax
authorities taking Proceedings to levy tax--Writ Petition to
quash Proceedings Maintainability -Bihar Sales Tax Act,
1947 (Bihar 19 of 1947), S. 2-Constitution of India, Arts.
226, 227.
HEADNOTE:
On December 19, 1953, the appellant, a company registered in
West Germany, entered into a contract with a company in
India to set up a complete coke oven battery ready for
production as well as by-products plants at Sindri in the
State of Bihar, agreeing to erect and construct buildings,
plants and machinery and deliver and supply accessories and
articles from Germany and also locally from India, and
render services fully described in the First Schedule, for
an all inclusive price of Rs. 2,31,50,000. The contract
provided that in case the contractor failed to complete the
works within the period specified therein the Indian company
might take possession of the works and the materials which
would become its property and complete the works and deduct
from the agreed price the expenses incurred in such
completion. Under cl. 15(ii) of the contract all materials
brought by the contractor upon the site shall immediately
become the company’s property, but such of them as during
the progress of the works. were rejected by the company
ceased to be Company’s property, and after the coke oven and
byproducts plants had been constructed the contractor was
entitled to remove the surplus materials. The clause
further provided that the company shall not be liable for
any loss if the materials were destroyed by fire or
otherwise. Under the Bihar Sales Tax Act, 1947, in a
contract for, execution of works, the materials used
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therein are treated as sold by the contractors and their
value is taken as the sale price liable to be taxed. The
execution of the works was completed in 1955 as provided in
the agreement and on March 20, 1956, the sales tax
authorities issued a notice to the appellant to the effect
that it was liable to pay tax for the three years 1952 to
1955, under the provisions of the Act. The appellant
represented that it had only supplied materials in execution
of works contract, that there was no sale of any goods or
materials by it and that the proceedings for taxing this
supply of materials as if they had been sold were illegal.
The sales tax authorities having proceeded to take further
steps to levy the tax in spite of its representations, the
appellant filed a petition before the High Court of Patna
under Arts. 226 and 227 of the Constitution of India for
quashing the proceedings. The High Court took the view that
under cl. 15(ii) of the contract in question the property in
the materials was to pass to the Indian company as soon as
they were brought on the site, and that, in effect, amounted
to a sale of those materials by the appellant to the
company. The Court, however, dismissed the petition on the
ground that the facts had not yet been fully investigated
and that it would be open to the sales tax authorities to
investigate the facts and upon the proper construction of
the contract come to the finding whether and if so to what
extent, the appellant was liable to pay sales tax.
Held (Shah, J., dissenting): (1) that on its proper
construction the agreement dated December 19, 1953, was a
contract entire and indivisible for the construction of
specified works for a lump sum and not a contract of sale of
materials as such and that the sales tax authorities had no
right to impose a tax on the materials supplied in execution
of that contract on the footing that such supply was a sale.
The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.,
[1959] S.C.R. 379 and Peare Lal Hari Singh v. The State of
Punjab, [1959] S.C.R. 438, followed.
(2) that where proceedings are taken before a tribunal
under a provision of law, which is ultra vires, it is open
to a party aggrieved thereby to move the court under Art.
226 for issuing appropriate writs for quashing them on the
ground that they are incompetent, without his being obliged
to wait until those proceedings run their full course.
The State of Bombay v. The United Motors (India) Ltd.,
[1953] S.C.R. 1069, Himmatlal Harilal Mehta v. State of
Madhya Pradesh, [1954] S.C.R. 1122 and The Bengal Immunity
Company Ltd. v. State of Bihar, [1955] 2 S.C.R. 603, relied
on.
In the present case, the sales tax authorities sought to
maintain the liability of the appellant to pay tax in
respect of materials supplied by it only under the contract
dated December 19, 953, and on the basis of the legality of
the provisions
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of the Bihar Sales Tax Act, 1947. Consequently, the
proceedings taken by them must be held to be illegal and
must be quashed.
Per Shah, J.-Under the agreement dated December 19, 1953,
there was a contract for the construction of a coke oven
battery and by-products plant, and also to deliver and
supply accessories and articles. Even if this delivery and
supply was incidental to the works contract, it could not be
assumed without investigation that it was not a part of a
transaction of sale liable to tax. The investigation of
facts on the question of liability to pay tax has to be made
by the taxing authorities in whom that jurisdiction is
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vested. Before these facts are ascertained, by merely
looking at the terms of the written contract and without any
investigation as to the true nature of the transaction, the
High Court could not decide whether the contract performed
was a pure works or construction contract or was a composite
contract. The High Court was, therefore, right in declining
to issue the writ prayed for.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 237 and 238
of 1960.
Appeals by special leave from the judgment and order dated
July 8, 1958, of the Patna High Court, in Misc. Judl.
Cases Nos. 713 and 819 of 1958.
A. V. Viswanatha Sastri, S. R. Banerjee and S. C.
Mazumdar, for the appellants.
S. P. Varma, for the respondents.
1961. April 19. The judgment of S. K. Das, J. L. Kapur, M.
Hidayatullah and T. L. Venkatarama AIyar, JJ., was delivered
by Venkatarama Aiyar, J. J. C. Shah, J., delivered a
separate judgment.
VENKATARAMA AIYAR, J.-Both these appeals arise out of the
same facts and involve the determination of the same
question, and this judgment will govern both of them.
The appellant in Civil Appeal No. 237 of 1960 is a company
registered at Recklinghausen near Dusseldorf in West
Germany, and carries on business in the manufacture and
erection of plants and machinery. On December 19, 1953, it
entered into a contract with a company called Sinclair
Fertilisers and Chemicals (Private) Ltd., hereinafter
referred to as the Owner, for assembling and, installing
machinery, plants and
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accessories for a coke oven battery and by-products plant at
Sindri in the State of Bihar for an all-inclusive price of
Rs. 2,31,50,000. The agreement provides that the appellants
were to supply all the materials and labour required for the
execution of the works, and that the performance was to be
split up into two categories, the German section and the
Indian section, that the German section was to consist of
deliveries of materials from Germany Free on Board ’European
ports, cost of technical drawings and services of German
specialists, and that the Indian section was to consist of
supply of Indian materials and charges for Indian labour and
services to be performed in India. The German section was
to be paid out of the lump sum stated above a sum of Rs.
1,31,50,000 in pounds sterling in London on account of the
appellant, and the Indian section was to be paid the balance
of Rs. 1,00,00,000 in Indian currency in this country, and
payments were to be made in instalments related to the
progress of the contract. Subsequent to the agreement, the
appellant entrusted the work of the Indian section to an
Indian company called the Coke Oven Construction Company
(Private) Ltd., and the Owner having accepted this
arrangement the said company has become the assignee of the
contract in so far as it relates to the execution of the
Indian section thereof. It is this company that is the
appellant in Civil Appeal No. 238 of 1960. The execution of
the works was completed in 1955 as provided in the
agreement, and the amounts due thereunder were also paid to
the two appellants.
The present dispute between the parties is as to whether the
appellants in the two appeals are liable to pay sales tax on
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the value of the materials used by them in the execution of
the works under the contract. It will be convenient now to
refer to the relevant provisions of the Bihar Sales Tax Act
(Bihar Act No. XXX of 1947), hereinafter referred to as the
Act. Section2(g)of the Act defines ’sale’ as including a
transfer of property in goods involved in the execution. of
contract. ’Contract’ is defined in s. 2(b) as meaning any
agreement for carrying out for cash or
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valuable consideration, the construction, fitting out,
improvement or repair of any building, road, bridge or other
immovable property; and ’goods’ are defined in s. 2(d) as
including "all materials, articles and commodities, whether
or not to be used in the construction, fitting out,
improvement or repair of immovable property." ’Sale price’
is defined in s. 2(h)(ii) as meaning the amount payable to a
dealer as valuable consideration for the carrying out of any
contract, less such portion as may be prescribed, of such
amount representing the usual proportion of the cost of
labour to the cost of materials used in carrying out such
contract. ’Dealer’ is defined in s. 2(c) as meaning any
person who sells or supplies any goods including goods sold
or supplied in the execution of a contract. Section 2(1)
defines ’turnover’ as meaning the aggregate of the amounts
of sale prices received and receivable by a dealer in
respect of sale or supply of goods or carrying out of any
contract, effected or made during a given period. Section 4
is the charging section, and it provides that every dealer
whose gross turnover during the accounting period exceeded
Rs. 10,000 shall be liable to pay tax on sales which take
place in Bihar, and s. 5 provides that the "tax payable by a
dealer under this Act shall be levied on his taxable
turnover at such rate or rates and subject, to such
restrictions and conditions as may be laid down from year to
year by an annual Bihar Finance, Act." The Bihar Finance Act
defines ’taxable turnover’ as meaning that part of the
dealer’s gross turnover on sales which have taken place in
Bihar during any period subject to certain deductions.
Section 9(1) of the Act provides that "No dealer shall,
while being liable under s. 4 to pay tax under this Act,
carry on business as a dealer unless he has been registered
under this Act and possesses a registration certificate".
Section 13(5) of the Act under which the present proceedings
have been initiated is as follows:-
" If upon information which has come into his possession,
the Commissioner is satisfied that any dealer has been
liable to pay tax under this Act in respect of any period
and has nevertheless wilfully
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failed to apply for registration, the Commissioner shall,
after giving the dealer a reasonable opportunity of being
heard, assess, to the best of his judgment, the amount of
tax, if any due, from the dealer in respect of such period
and subsequent periods and the Commissioner may direct that
the dealer shall pay, by way of penalty, in addition to the
amount so assessed, a sum not exceeding one and half times
that amount."
The gist of the above provisions is that in a contract for
execution of works, the materials used therein are treated
as sold by the contractor and their value is taken as the
sale price liable to be taxed, and there are provisions for
determining that value.
Acting on these provisions, the Superintendent of Sales Tax,
Dhanbad, the third respondent herein, issued on March 20,
1956, a notice to the appellant in Civil Appeal No. 237 of
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1960, under s. 13 of the Act, stating that on information
which had come to his possession he was satisfied that the
appellant was liable to pay tax for the periods 1952-53,
1953-54 and 1954-55, that it had wilfully failed to register
itself under s. 9 of the Act, and it was directed to show
cause why penalty should not be imposed. In response to
this notice, the appellant appeared before the third res-
pondent and represented that it had only supplied materials
in execution of works contract, that there was no sale of
any goods or materials by it, and that the proceedings for
taxing this supply of materials as if they had been sold
were illegal. Disagreeing with this contention, the third
respondent directed the appellant to produce all its books,
accounts and documents for purposes of assessment, and this
is quite understandable, as it was his duty to levy tax in
accordance with the provisions of the Act. Thereupon, the
appellant filed petitions before the High Court of Patna
under Arts. 226 and 227 of the Constitution for the issue of
appropriate writs for quashing the proceedings before the
third respondent and for prohibiting further proceedings
under the Act as being wholly incompetent., The grounds put
forward in support of the petition were firstly that the
State
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legislature having authority to enact a law imposing a tax
on the sale of goods was not competent to tax what under the
law was not a sale, and that as the supply of materials in
the course of the execution of works, was not in law a sale
of those goods, a tax on such supply was unauthorized; and
secondly that, even if there was a sale of materials, that
was in the course of import from Germany, and a tax thereon
was repugnant to Art. 286(1)(b) of the Constitution.
After taking over the Indian section of the contract, the
appellant in Civil Appeal No. 238 of 1960 had registered
itself on May 11, 1953, as a dealer under s. 9 of the Act
and was submitting periodical returns as required by the
certificate and the Act. But its contention at all times
has been that it is not liable to pay sales tax on the
transactions in question, as there were only supplies of
materials in execution of works contract and that they did
not amount to sale of goods. This contention was overruled
by the Superintendent of Sales Tax, Dhanbad, the third
respondent herein, and the appellant was assessed to sales
tax successively for the years 1952-53 and 195354. While
proceedings by way of appeal or revision by the appellant
against these orders of assessment were pending, the third
respondent issued further notices for assessment of tax for
the years 1954-55 and 1955-56, and directed the appellant to
produce all its books and accounts for the above period.
Thereupon the appellant filed in the High Court of Patna,
petitions under Arts. 226 and 227 of the Constitution,
similar to those filed by the appellant in Civil Appeal No.
237 of 1960, for issue of appropriate writs to quash the
orders of the Sales Tax authorities on the ground that the
provisions of the Act, in so far as they sought to tax
supply of materials in works contracts, were ultra vires.
By the time the above petitions came up for hearing, the
decision of this Court in The State of Madras v. Gannon
Dunkerley & Co. (Madras) Ltd. (1), had been reported,
wherein it was held that the expression "sale of goods" in
Entry 48 in List II of Sch. VII to
(1) [1959] S.C.R 379.
88
the Government of India Act, 1935, corresponding to Entry 54
in List 11 of Sch. VII to the Constitution of India had the
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same meaning that it has in the Sale of Goods Act, 1930,
that where there is a building contract, under which
specified work is to be executed for a lump sum, there is no
contract of sale, as such, of materials used in the works,
and that accordingly, a tax on the supply of those materials
treating it as a sale was ultra vires the powers of the
State Legislature under Entry 48 in List 11 of Sch. VII to
the Government of India Act, 1935. The learned Judges were
of opinion that this decision was distinguishable because
there was a term in the agreement before them that the
property in the materials was to pass to the owner as soon
as they were brought on the site. Dealing next with the
contention of the present appellants that, as there was no
agreement for the payment of price for the materials, as
such, they could not be held to have been sold, the learned
Judges noticed without comment the contention of the
Government Pleader for the respondents, based on s. 9 of the
Sale of Goods Act, that even though no price had been fixed
for the materials, that could be determined from the account
books and invoices and the course of dealings between the
parties. The learned Judges then proceeded to observe:
"I wish, however, to state that I do not
express any concluded opinion on the question
whether there is sale of materials liable to
be taxed in the present case. The facts have
not been fully investigated by the sales tax
authorities and the petitioners have not
furnished all the account books and documents
and other relevant information for the purpose
of deciding this question. It would be open
to the sales tax authorities to investigate
the facts and Upon proper construction of the
contract come to. the finding whether and if
so to what extent, the petitioners are liable
to pay sales tax. I have no doubt
that in deciding this question the sales tax
authorities
will keep in view the principles laid down by
the Supreme Court in State of Madras versus
Gannon Dunkerley and Company (Madras) Limited
(9 Sales Tax Cases 353)".
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With these observations the learned Judges dismissed the
petitions. It is against this judgment that the present
appeals by special leave are directed.
The first question that arises for our decision is ,whether
on the construction of the agreement dated December 19,1953,
it could be held that there was a sale by the appellants of
the materials used in the construction works, apart from the
execution of those works. In The State of Madras v. Gannon
Dunkerley & Co. (Madras) Ltd. (1), after stating that
building contracts could assume several forms, this Court
observed as follows:
"It is possible that the parties might enter
into distinct and separate contracts, one for
the transfer of materials for money
consideration and other for the payment of
remuneration for services and for work done.
In such a case there are really two
agreements, though there is a single
instrument embodying them and the power of the
State to separate the agreement of sale from
the agreement to do work and render service
and to impose a tax thereon, cannot be
questioned and will stand untouched by the
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present judgment."
The point for determination, therefore, is whether on its
true construction, the contract in question is a Combination
of two distinct agreements, one to sell materials and the
other to supply labour and services, or whether it, is only
one agreement entire and indivisible for execution of the
works. We will now refer to the relevant portion of the
agreement dated December 19, 1953. The preamble to the
agreement states that the Owner had agreed with the
contractor that the latter was to set up a complete coke
oven battery ready for production as well as by-products
plants according to specifications given therein, that the
installation was to be made at a site selected by the Owner
and that the contractor was to "erect and construct
buildings, plants and machineries and deliver and supply
accessories and articles from Germany and also locally from
India and render services fully
(1) [1959] S.C.R. 379.
12
90
described in the First Schedule......... for an all-inclu-
sive price of Rs. 2,31,50,000." Then cl. I provides that
the contractor shall execute and complete the works
mentioned in the Schedule, and el. 2 that the Owner shall
pay to the contractor for executing the contract the sum of
Rs. 2,31,50,000. Clause 4 requires the contractor to
"provide all labour, materials, machinery, plant, tools,
tackles and other implements for performing the works in a
workman-like manner." Under cl. 11, the contractor
guarantees "to accomplish full production within 22 months
from the 15th September, 1952" and further undertakes to
fulfill the guarantees prescribed in Schedule II to the
agreement "to the satisfaction of the Owner within a period
of three months from the date of accomplishment of full
production." Clause 28 provides that in case the contractor
fails or is unable to complete the works within the period,
the Owner might take possession of the works and of the
materials, "which will become the property of the owner,"
and complete the works and deduct from the agreed price the
expenses incurred in such completion.
It is clear from the above clauses that the subject matter
of the agreement was the installation of the coke oven
battery and it accessories, that the sum of Rs. 2,31,50,000
was the price agreed to be paid for the execution of those
works, and that there was no agreement for the sale of
materials, as such, by the appellants to the Owner. In
other words, the agreement in question is a contract entire
and indivisible for the construction of specified works for
a lump sum and not a contract of sale of materials as such.
Now the contention that found favour with the learned Judges
in the High Court was that there was in the contract a
clause that the property in the, materials was to pass to
the owner when they are brought on the site, and that, in
effect, amounted to a sale of those materials by the
appellant to the Owner. The clause in question is as
follows:-
"15 (ii). All materials and plant brought by
the Contractor upon the site under the German
and Indian Sections in connection with the
construction
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of the Coke Oven and by-products Plant shall
immediately they are brought upon the site
become the Owner’s property and the same shall
not on any account whatsoever be removed or
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taken away by the Contractor or by any other
person without the Owner’s prior authority in
writing. Such of them as during the progress
of the works will be rejected by the Owner in
accordance with the terms agreed upon between
the Contractor and the Owner in this respect
shall on such rejection, cease to be the
Owner’s property............ The Owner shall
not be liable for any loss or damage which may
happen to or in respect of such materials and
plant by the same being lost, stolen or
injured or destroyed by fire, tempest or
otherwise for which the contractor will be
liable......... The Owner agrees that after
the Coke Oven and by-products Plants have been
constructed according to the agreed terms, the
Contractor will be entitled to remove from the
site their tools, tackles, machines, packing
materials, protection roof and other materials
as are surplus to the requirements of the
normal operation of the Coke Oven and by-
products Plant provided that no claim for
increased cost is made in respect of anything
so removed."
In Peare Lal Hagri Singh v. The State of
Punjab (1), a building contract contained the
following clause:-
"All stores and materials brought to the Site
shall become and remain the, property of
Government and shall not be removed off the
Site without the prior written approval of the
G. E. But whenever the works are finally
completed, the contractor shall at his own
expense forthwith remove from the Site all
surplus stores and materials originally sup-
plied by him and upon such removal, the same
shall revest in and become the property of the
Contractor."
Discussing the question whether by reason of this clause
there was a Contract of sale of the materials by the
Contractor, distinct from the works contract, this Court
held that its object was only to ensure that
(1) [1959] S.C. R. 438.
92
materials of the right sort were used in the construction
and not to constitute a contract of purchase of the
materials separatism. In the present case, el. 15 is even
clearer that no sale of materials, as such, was intended,
because it expressly provides that if they were destroyed by
fire, tempest or otherwise, the loss would fall not on the
owner, which must be the result if the property is taken to
have been absolutely transferred to it, but on the
contractor.
The argument based on s. 9 of the Sale of Goods Act is, in
our opinion, equally unsound. What that section enacts is
that where there is a contract of sale of movable but the
price is not mentioned, it has to be fixed either in the
manner provided in the agreement or by having regard to the
course of dealings between the parties, and where that is
not possible, the buyer has to pay the seller a reasonable
price. But the section presupposes that there is a Contract
of sale of goods, and, as held in The State of Madras V.
Gannon Dunkerley & Co. (Madras) Ltd. (1), such a contract
requires that there must have been an agreement between the
parties for the sale of the very goods in which eventually
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property passes. If, as held by us, cl. 15 does not embody
an agreement for the sale of materials as such, there is no
contract of sale with respect to them and s. 9 of the Sale
of Goods Act can have no application. The contention,
therefore, that el. 15 of the agreement could be read as
amounting to a contract of sale of materials, and that the
price therefor could be fixed as provided in s. 9 of the
Sale of Goods Act by recourse to the account books of the
appellants or the invoices or the course of dealings between
them and the owner, must be rejected as untenable. It
follows that the agreement dated December 19, 1953, being a
contract for the construction of works, one and indivisible,
the respondents have no right to impose a tax on the mate-
rials supplied in execution of that contract on the footing
that such supply is a sale.
It is next contended for the respondents that, whatever the
merits of the contentions based on the construction of the
contract, the proper forum to agitate
(1) [1959] S.C.R. 379.
93
them would be the authorities constituted under the Act to
hear and decide disputes relating to assessment of tax, that
it was open to the appellants to satisfy those authorities
that there have been no sales such as are liable to be
taxed, that indeed they were bound to pursue the remedies
under the Act before they could invoke the jurisdiction of
the court under Art. 226 and that the learned Judges of the
High Court were, therefore, right in declining to entertain
the present petitions. It is true that if a statute sets up
a Tribunal and confides to it jurisdiction over certain
matters and if a proceeding is properly taken before it in
respect of such matters, the High Court will not, in the
exercise of its extraordinary jurisdiction under Art. 226,
issue a prerogative writ so as to remove the proceedings out
of the hands of the Tribunal or interfere with their course
before it. But it is equally well settled that, when
proceedings are taken before a Tribunal under a provision of
law, which is ultra vires, it is open to a party aggrieved
thereby to move the court under Art. 226 for issuing
appropriate writs for quashing them on the ground that they
are incompetent, without his being obliged to wait until
those proceedings run their full course. That has been held
by this court in The State of Bombay v. The United Motors
(India) Ltd. (1), Himmatlal Harilal Mehta v. The State of
Madhya Pradesh (2). and The Bengal Immunity Company Limited
v. The State of Bihar (3). The position that emerges is
that, if the proceedings before the Sales Tax Officer are
founded on the provisions of the Act, which authorizes the
levy of the tax on the supply of materials in construction
contracts, then they must in view of the decision in The
State of Madras v. Gannon Dunkerly & Co. (Madras) Lid. (4),
be held to be incompetent and quashed. But if the
proceedings relate to any extent to sales otherwise than
under the contract, then the enquiry with respect to them
must proceed
(1) [1953] S.C.R. 1069, 1077.
(2) [1954] S.C.R. 1122, 1127.
(3) [1955] 2 S.C.R. 603, 617-619, 764-766.
(4) [1959] S.C.R. 379.
94
before the authorities under the Act and the application
under Art. 226 must fail.
We must now examine the true scope of the proceedings before
the Sales Tax Officer in the light of the above principles.
We start with this that the Act contains provisions imposing
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a tax on the supply of materials under a construction
contract. The appellants were indisputably engaged in
construction works under the agreement dated December 19,
1953, and it is not suggested that they were carrying on any
independent business as dealers in the State of Bihar.
Presumably, therefore, when the sales tax authorities took
proceedings against them, it was in respect of materials
supplied by them under their contract dated December 19,
1953. When the appellants, in response to the notice issued
by the third respondent, contested their liability to be
taxed, it was on the ground that the supplies of materials
under the contract were not sales. When the appellants next
moved the court tinder Art. 226 for quashing the
proceedings, they urged that the provisions of the Act, in
so far as they purported to impose a tax on the materials
supplied in the performance of the contract, as if they were
sold, were ultra vires. If the respondents sought to tax
the appellants on the footing that sales of materials were
effected outside the contract, it was their duty to have put
that case forward in answer to the petition. They did
nothing of the kind. They did not file even a counter-
statement. At the time of the argument, when faced with the
decision of this Court in the case of The State of Madras v.
Gannon Dunkerley & Co. (Madras) Ltd. (1), their entire case
was that the agreement between the parties should be
construed as involving a sale of materials, and that their
value could be ascertained from the invoices, account books
and the course of dealings between the parties. No
contention was urged that there were sales of materials
which fell outside the agreement between the appellants and
the Owner. The learned Judges of the High Court in
dismissing the petitions made it clear that the
investigation before the sales
(1) [1959] S.C.R. 379.
95
tax authorities must be as regards their liability to pay
sales tax "upon proper construction of the contract." In
this Court also, the respondents seek in their statement to
maintain the liability of the appellants only on the basis
of the contract, reliance being placed on cl. 15 already
referred to and on s. 9 of the Sale of Goods Act. There is
no claim that the appellants are liable on the basis of
sales falling outside the agreement. It was stated before
us for the appellants, and not contradicted by the
respondents, that the Sindri Fertilisers and Chemicals
(Private) Ltd., is a company controlled by the Government.
If that is so, the respondents were at all times in
possession of facts which would have shown whether the
appellants entered into any transaction decors the
agreement, and it is significant that at no stage have they
alleged any such facts. We are satisfied that the
proceedings have at all stages gone on the footing that the
liability of the appellants arose under the contract and not
otherwise. In that view, we must hold, following the
decision in The State of Madras v. Gannon Dunkerley & Co.
(Madras) Ltd. (1) that the proceedings taken by the
respondents for imposing sales tax on the supplies of
materials by the appellants, pursuant to the contract dated
December 19, 1953, are illegal and must be quashed. In the
result, the appeals are allowed and appropriate writs as
prayed for by the appellants will be issued. The appellants
are entitled to their costs throughout.
SHAH, J.-In my view these appeals must fail.
The appellants claim that they are not liable to be taxed in
respect of the transaction dated December 19, 1953, because
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it is not a sale within the meaning of the Bihar Sales Tax
Act, 19 of 1947, but is a contract to assemble and install
machinery, plants and accessories of a coke oven battery and
other plants which under the principle of the decision of
this Court in The State of Madras v. Gannon Dunkerley & Co.
(Madras) Ltd. (1) is not subject to sales-tax.
The Act defines "sale" as meaning-omitting parts not
material-any-transfer of property in goods for
(1) [1959] S.C.R. 379.
96
cash or deferred payment or other valuable consideration,
including a transfer of property in goods involved in the
execution of contract. "Contract" is defined as meaning any
agreement for carrying out for cash or deferred payment or
other valuable consideration, the construction, fitting out,
improvement or repair of any building, road, bridge or other
immovable property. The expression "goods" means all kinds
of movable property other than actionable claims, stocks,
shares or securities and includes all materials, articles
and commodities whether or not to be used in the
construction, fitting out, improvement or repair of
immovable property. "Sale price" means the amount payable
to a dealer as valuable consideration for-(1) the sale or
supply of any goods, less any sum allowed as cash discount
according to ordinary trade practice, but including any sum
charged for anything done by the dealer in respect of the
goods at the time of, or before, delivery thereof, other
than the cost of freight or delivery or the cost of in-
stallation when such cost is separately charged; or (ii) the
carrying out of any contract, less such portions as may be
prescribed , of such amount, representing the usual
proportion of the cost of labour to the cost of materials
used in carrying out such contract.
These definitions in so far as they seek to treat goods
supplied or used in the execution of a works or construction
contract, as sold and liable to sales-tax under the Act,
must, on the decision of this Court in Gannon Dunkerley’s
case (1) be regarded as beyond the legislative competence of
the State Legislature. In Gannon Dunkerley’s case (1), this
Court held that in a building contract, the contractor
constructs the building according to the specifications
contained in the agreement and in consideration therefor
receives payment as provided therein, and in such an
agreement, there is neither a contract to sell the materials
used in the construction, nor does property pass therein as
moveables, and accordingly in a building contract which is
one, entire and indivisible, there is no sale of goods and
it is not within the competence of the Provincial
Legislature under Entry 48 in List 11 in
(1) [1959] S.C.R. 379.
97
Sch. VII of the Government of India Act, 1935, to impose a
tax on the supply of the materials used in such a contract
treating it as a sale. Relying upon the decision of this
court in Gannon Dunkerley’s case (1), the appellants contend
that the amount received by them under the contract dated
December 19, 1953, is not liable to be assessed to sales-
tax. But the question whether the contract is a pure works
contract or a composite contract has never been investi-
gated. Undoubtedly, the formal document evidencing the
contract suggests, prima facie, that it is a works contract,
but in assessing liability to tax, the taxing authority is
not restricted merely to the letter of the document: he has
to enquire into the true nature of the transaction on all
the relevant materials and to ascertain whether it partakes
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of the nature of the transaction which the statute renders
taxable. He is, in ascertaining the true nature of the
contract, also entitled to consider how the contract"was
performed. The Act entrusts power to ascertain the facts on
which the liability to tax depends to the taxing authorities
and in that behalf, the Act is exhaustive in scope and
content. The appellants in approaching the High Court by
petitions under Arts. 226 and 227 of the Constitution sought
to eliminate the entire procedure and machinery set up by
the Act for ascertaining facts on which the liability to tax
depends.
I strongly deprecate the practice of the taxpayer being
permitted to invoke the jurisdiction of the High Court to
issue high prerogative writs on certain assumed facts-facts
the truth of which has never been subjected to scrutiny in
the only manner in which the law provides they should be
scrutinised. The power to assess the facts on which the
decision as to the true nature of the taxable transaction
depends by the statute lies solely with the taxing
authorities: it does not lie with any other body or tri-
bunal. Invoking the jurisdiction of the High Court to
adjudicate upon the facts, directly or indirectly, on which
the liability to tax depends, in my view,
(1) [1959] S.C.R. 379.
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98
amounts to inviting the High Court to exercise jurisdiction
which it does not possess. This is however not to say that
the jurisdiction of the High Court to issue a writ of
prohibition restraining the levy of tax under a statute can
never be entertained. If, for instance, the statute is
beyond the legislative competence of the legislature or
defies a constitutional restriction or infringes a
fundamental right or the taxing authority arrogates to
himself powers which he does not possess or attempts to levy
tax more than once in respect of the same transaction when
it is not permitted by the statute, or the taxing authority
threatens to recover tax on an interpretation of a statutory
provision imposing tax which is on the face of the statute
erroneous, jurisdiction to issue writ of prohibition from
the High Court may properly be invoked. But the High Court
cannot be asked to ascertain disputed facts bearing upon the
taxability of a transaction, because that jurisdiction is
vested elsewhere.
The contract in question is principally a works contract.
The preamble states that the appellants had agreed with the
Sindri Fertilizers and Chemicals Ltd. to set up a complete
coke oven battery ready for production as well as by-
products plant on the site specified and to construct
buildings, plants and machineries and deliver and supply
accessories and articles and to render services fully
described in the first schedule, subject to the guarantees
to be fulfilled on the part of the appellants and terms and
conditions mutually agreed and settled and mentioned in the
second schedule for an all-inclusive price in accordance
with the preliminary site plan. It is manifest from the
preamble that there is a contract for the construction of a
coke oven battery and by-products together with the plant,
and also to deliver and supply accessories and articles.
Undoubtedly, the price agreed to be paid is an "inclusive
price" in respect of the entire contract, but that does not
affect the nature of the contract to deliver and supply
accessories and articles. The appellants have undertaken,
subject to the terms and conditions mentioned in the
contract, to execute and complete the works mentioned in the
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first schedule.
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The contract in so far as it relates to the installation of
plant and construction of building was a works contract and
notwithstanding the definition of "sale" and "contract" in
the Act, was not taxable but the contract contemplates
delivery and supply by the appellant of accessories and
articles. Even if this delivery and supply of accessories
and articles is incidental to the works contract, it cannot
be assumed without investigation that it was not a part of a
transaction of sale liable to tax. The appellants asked the
High Court to assume that the contract in question was a
pure works contract, but the High Court declined to make
that assumption. Ramaswami, C. J., in dealing with that
plea observed:
"I wish, however to state that I do not
express any concluded opinion on the question
whether there is sale of materials liable to
be taxed in the present case. The facts have
not been fully investigated by the sales tax
authorities and the petitioners have not
furnished all the account books and documents
and other relevant information for the purpose
of deciding this question. It would be open
to the sales tax authorities to investigate
the facts and upon proper construction of the
contract come to the finding whether and if so
to what extent, the petitioners are liable to
pay sales tax,"
In my view, the learned Chief Justice was right in so
approaching the question. The sales tax authorities have
made no assessment; they merely issued a notice purporting
to do so under s. 13(5) of the Act and required the
appellants to produce their books of account and records for
ascertaining whether the transaction or any part thereof was
in the nature of sale of goods. The sales tax authorities
had jurisdiction to do so and by merely looking at the terms
of the written contract and without any investigation as to
the true nature of the transaction the High Court could not
decide whether the contract performed was a pure works or
construction contract or was a composite contract. It was
urged that in the petition filed by the appellants before
the High Court, an affidavit
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in rejoinder challenging the correctness of the averment
made in the petition that it was a pure works contract was
not filed by the taxing authorities and therefore the High
Court was bound to decide the dispute on the footing set up
by the appellants. But the taxing authorities could not be
expected without investigation to assert a state of facts
which was not and could not be within their knowledge, and
their statutory authority could not, because of their
failure to so assert, be nullified.
As I have already observed, the investigation of facts on
the question of the liability to pay tax has to be made by
the taxing authorities in whom that jurisdiction is vested.
Before the facts on which the liability to tax depends are
ascertained, the High Court could not be asked to assume
that the transaction was in the nature of a pure works
contract and to decide the question as to the liability of
the appellants on that footing. There is no ground for
assuming that the taxing authorities will not give effect to
the decision of this court in Gannon Dunkerley’s case (1)
after the true nature of the transaction is ascertained.
In my view, the High Court was right in declining to issue
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the writ prayed for.
By COURT: In accordance with the opinion of the majority,
the appeals are allowed and it is directed that appropriate
writs as prayed be issued. The appellants are also entitled
to their costs throughout.
Appeals allowed.
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