# GANNON DUNKERLEY AND CO. A.ND ORS. ETC. ETC v. STATE OF RAJASTHAN AND ORS. ETC. ETC

- **Citation:** [1992] Supp. 3 S.C.R. 103
- **Court:** Supreme Court of India
- **Decided:** 1992-11-17
- **Case number:** Civil Appeal Nos. 4861-64 of 1992
- **Bench:** M.H. Kania, J.S. Ver.Ma, S.C. Agrawal, Yogeshwar Dayal, Dr. A.S. Anand
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/gannon-dunkerley-and-co-a-nd-ors-etc-etc-v-state-of-rajasthan-and-ors-etc-etc-11889
- **Pages:** 59

## Headnote

Constitution of India 195(}-Artic/es 286, 366 (29-A) (b ), Schedule VII
List II Entry 54-Transf er of property in goods involved in execution of works
contract-:-Levy of sales tax-State Legislature whether'f:ompetent to legislate-Value of goods-Whether would constitute measure of t~Value of
goods-How to be determined-Need for central legislation emphasised.
B
c
Central Sales Tax Act, 1956-Section 2(g), 3, 4, 5, 14, 15-Works
contract-Transfer of property of goods involved in such contract-'Deemed D
sale'-State Legislature-Whether competent to provide for tax of such sale.
Rajasthan Sales Tax Act 1954: Section 5(3)-Rajasthan Sales Tax
Rules 1955: Rule 29(2)(i)-Works Contract-:-Levy of sales tax-Provisions
held ultra vires Entry 54 list JI of Seventh Schedule to the Constitution-:-
Hence unconstitutional and void.
E
Statutory Interpretation-Statute-Constitutional validity of-Determined on the basis of its provisions and 011 the ambit of operation.
In State of Madras v. Ganno11 Dunkerley & Co. {Madras) Ltd. [1959]
SCR 379 it was held that the expression "sale of goods' in Entry 48 in
List II of Seventh Schedule to the Government of India Act, 1935 and
Entry 54 in List II of the Seventh Schedule to the Constitution had the
same meaning as the said expression had in the Sale of Goods Act, 1930,
its essential ingredients being an agreement to sell movables for a price
F
and property passing therein pursuant to that agreement. It was further G
held that in a building contract, which is entire and indivisible, there is
no sale of goods because in such a contract the agreement between the
parties is that the contractor should construct the building according to
the specifications contained in the agreement and in consideration there·
for receive payment as provided therein and in such an agreement, there H
103
104
SUPREME COURT REPORTS {1992) SUPP. 3 S.C.R.
A
was neither a contract to sell the materials used in the construction nor
does the property pass therein as movabies. It was, therefore, laid down
that it was not within the competence of the Provincial/State Legislature
to impose a tax on the supply of materials used in such a contract treating
it as a sale~
B
c
After the aforesaid decision in Gannon Dunkerley case the Coostitu·
tion was amended by the Forty-Sixth Amendment and thereby Clause
(29A) was inserted in Article. 366, and Clause (3) of Article 286 was
substituted. Thereafter, various State Legislatures amended their sales
tax legislation to make provision for imposition of sales tax in ~~lation
to works contracts.
The constitutional validity of the Forty-sixth Amendment as well as
the amendments made in the su,te legislations on that basis were challenged before this Court in appeals as .well ~s writ petitions filed under
D Article 32 of the Constitution.
This Court by its judgment in Builders' Association of India & Ors.
· v. Union of India [1989] 2 SCR 320 upheld the validity of the Forty-Sixth
Amendment. Since this Court had interpreted the relevant provisions of
E
the Constitution, this Court did not consider it necessary to take up each
and every writ petition to express its opinion on the validity of the
statutory provisions and rules which were questioned before the Court
and the petitioners concerned were given the liberty to approach the
authorities under the Sales Tax Act or the High Court concerned for
F
necessary relief.
After the Forty Sixth Amendment, the Rajasthan Sales Tax Act was
amended by the Rajasthan Finance Act, 1987. By the said Act, among
other provisions, the definition of 'sale' contained in clause (o) of Section
2 _was substituted, certain amendments were made in definition of 'sale
G price' contained in cl.(p) of Section 2. By the Rajasthan Sales Tax
(Amendment) Act 1988, certain further amendments were made in the
definition of 'sale' contained in clause (o) and definition .of 'turnover'
contained in clause (t) of Section 2. Clause (u) was introduced in Section
2 to define 'works contract'.

## Text

_Characters 0–39,987 of 139,559. This is a partial read: ask again with offset=39987 for what follows._

GANNON DUNKERLEY AND CO. A.ND ORS. ETC. ETC.
A
v.
STATE OF RAJASTHAN AND ORS. ETC. ETC.
NOVEMBER 17, 1992
[M.H. KANIA, CJ., J.S. VER.MA, S.C. AGRAWAL, YOGESHWAR
DAYAL AND DR. A.S. ANAND, JJ.]
Constitution of India 195(}-Artic/es 286, 366 (29-A) (b ), Schedule VII
List II Entry 54-Transf er of property in goods involved in execution of works
contract-:-Levy of sales tax-State Legislature whether'f:ompetent to legislate-Value of goods-Whether would constitute measure of t~Value of
goods-How to be determined-Need for central legislation emphasised.
B
c
Central Sales Tax Act, 1956-Section 2(g), 3, 4, 5, 14, 15-Works
contract-Transfer of property of goods involved in such contract-'Deemed D
sale'-State Legislature-Whether competent to provide for tax of such sale.
Rajasthan Sales Tax Act 1954: Section 5(3)-Rajasthan Sales Tax
Rules 1955: Rule 29(2)(i)-Works Contract-:-Levy of sales tax-Provisions
held ultra vires Entry 54 list JI of Seventh Schedule to the Constitution-:-
Hence unconstitutional and void.
E
Statutory Interpretation-Statute-Constitutional validity of-Determined on the basis of its provisions and 011 the ambit of operation.
In State of Madras v. Ganno11 Dunkerley & Co. {Madras) Ltd. [1959]
SCR 379 it was held that the expression "sale of goods' in Entry 48 in
List II of Seventh Schedule to the Government of India Act, 1935 and
Entry 54 in List II of the Seventh Schedule to the Constitution had the
same meaning as the said expression had in the Sale of Goods Act, 1930,
its essential ingredients being an agreement to sell movables for a price
F
and property passing therein pursuant to that agreement. It was further G
held that in a building contract, which is entire and indivisible, there is
no sale of goods because in such a contract the agreement between the
parties is that the contractor should construct the building according to
the specifications contained in the agreement and in consideration there·
for receive payment as provided therein and in such an agreement, there H
103
104
SUPREME COURT REPORTS {1992) SUPP. 3 S.C.R.
A
was neither a contract to sell the materials used in the construction nor
does the property pass therein as movabies. It was, therefore, laid down
that it was not within the competence of the Provincial/State Legislature
to impose a tax on the supply of materials used in such a contract treating
it as a sale~
B
c
After the aforesaid decision in Gannon Dunkerley case the Coostitu·
tion was amended by the Forty-Sixth Amendment and thereby Clause
(29A) was inserted in Article. 366, and Clause (3) of Article 286 was
substituted. Thereafter, various State Legislatures amended their sales
tax legislation to make provision for imposition of sales tax in ~~lation
to works contracts.
The constitutional validity of the Forty-sixth Amendment as well as
the amendments made in the su,te legislations on that basis were challenged before this Court in appeals as .well ~s writ petitions filed under
D Article 32 of the Constitution.
This Court by its judgment in Builders' Association of India & Ors.
· v. Union of India [1989] 2 SCR 320 upheld the validity of the Forty-Sixth
Amendment. Since this Court had interpreted the relevant provisions of
E
the Constitution, this Court did not consider it necessary to take up each
and every writ petition to express its opinion on the validity of the
statutory provisions and rules which were questioned before the Court
and the petitioners concerned were given the liberty to approach the
authorities under the Sales Tax Act or the High Court concerned for
F
necessary relief.
After the Forty Sixth Amendment, the Rajasthan Sales Tax Act was
amended by the Rajasthan Finance Act, 1987. By the said Act, among
other provisions, the definition of 'sale' contained in clause (o) of Section
2 _was substituted, certain amendments were made in definition of 'sale
G price' contained in cl.(p) of Section 2. By the Rajasthan Sales Tax
(Amendment) Act 1988, certain further amendments were made in the
definition of 'sale' contained in clause (o) and definition .of 'turnover'
contained in clause (t) of Section 2. Clause (u) was introduced in Section
2 to define 'works contract'. By the Rajasthan Sales Tax (Second AmeudH ment) Act, 1988 the definition of 'works contract' contained in cl.(i) of
.. ~
\
\
!
GANNON DUNKERLEY CO. v. STATE OF RAJASTHAN
105
Section 2 was substituted.
After the decision of this Court in Builders' Association case, Rajasthan Sales Tax (Amendment) Act 1990 was enacted whereby some minor
changes were made in the definition of 'sale' contained in clause (o) and
A
the last proviso, which was inserted in th~ definition of 'sale price' B
contained in cl.(o). by the Rajasthan Act No. 7 of 1987 was deleted.
In the Rajasthan Sales Tax Rules 1955 by Notification dated May
28, 1987 sub-rule (2) was inserted in Rule 29 to provide for deductions
of turnover relating to works contracts. After the Builders' Association
case, the said sub-rule (2) of Rule 29 was substituted by notification dated C
June 28, 1989.
In pursuance of the decision of this Court in Builders' Association
case, fresh writ petitions were filed by the appellants challenging the
validity of the provisions of the Rajasthan Sales Tax Act, 1954 and the D
Rajasthan Sales Tax Rules, 1955 relating to imposition of tax on transfer
of property in goods involved in the execution of a works contract, which
were dismissed by a Division Bench of the Rajastban High Court by
judgment dated September 3, 1991. Appeals were filed against the said
decision of the High Court.
Before the High Court the appellants tonfined their challenge to
cl.(3) of Section 5 and cl.(2-c) of Section 7 of the Rajasthan Sales Tax
Act and sub-Rule (2) of Rule 29 and sub-Rule (2) of Rule 46 of the
Rajasthan Sales Tax Rules. Sub·Rule (2) of Rule 29 relates to sub-s. (3)
of Section 5 whereas sub-Rule (2) of Rule 46 relates to sub-cl.(2) of .d.(c)
of Section 7 of the Act. However, before this court the appellants also
challenged the validity of Explanation I in definition of 'sale' contained
in clause (o) of Section 2 of the Act.
E
F
The petitioner in the writ petition (filed under Article 32 of the G
Constitution) is a company which under-takes contracts for executing .
turnkey projects involving building construction, erection and installation
of equipment etc. It challenged the validity of the provisions relating to
imposition of tax on the transfer of property in goods involved in the
execution of a ''forks contract contained in the Sales Tax Laws of the H
106
SUPREME COURT REPORTS [1992) SUPP. 3 S.C.R.
A
States of Tamil Nadu, Andhra Pradesh and Rajasthan. The. reason for
approaching this Court under Article 32 was that inspite of the decision
of this court in Builders' Association case the company was being subjected
to demands for tax in relation to works contracts by the various States
and each State is wanting to tax the same transaction on the basis that
B
c
it constitutes a sale under its sales tax Jaw. The writ petition was considered only with reference to the provisions contained in the Rajasthan
Sales Tax Act, 1954 and the Rajastban Sales Tax Rules, 1955.
On behalf of the .appellants and the petitioner (contractors) it was
contended that in view of the declaration of the law made by this court
in Builders' Association case, the State Legislature, in exercise of its
legislative power to impose 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), cannot levy such a tax in respect of
transactions which are in the nature of sales in the course of inter-state
D trade and commerce or are sales outside the Siate lev)'ing such tax or are
sales in the course of import inasmuch as it is beyond the legislative
competence of the State Legislature to impose a sales tax on inter-state
sales as well as sales outside the State and sales in the course of import
E
or export. It was urged that the existence of a law made by Parliament _
under Article 269(3), Article 286(2) and Article 286(3)(b) is a condition
precedent for the exercise of the legislative power by the State, and since
no such law has been enacted by Parliament in relation to imposition of
tax on property in goods involved in the execution of a works contract, it
is not open .to the State leg_islature to exercise the power to impose such
F
tax. Jt was also contended that the Central Sales Tax Act, 1956, having
not been amended after the Forty-Sixth Amendment to include within its
ambit a transfer of property in goods involved in the execution of a works
contract, is not applicable to such a transfer and it cannot be treated to
be a law made under Article 269(3) and Article 286(2) in relation to sales
G arising out of such transfers, and that it was not permissible for the State
Legislature to define the expression 'sale' in a manner so as to include
within its ambit an inter-State sale as well as sale outside the State or
sale in the cours of import and thereby assume power to impose tax on
the same, lt was further submitted that since the tax leviable by virtue of
H sub-clause. (b) of clause (29- A) of Article 366 .is on goods which are
GANNON DUNKERLEY CL. v. STA TE OF RAJASTIIAN
107
involved in the execution of a works contract the measure for such an A
imposition can only be the value of such goods and the value of the works
contract cannot be made the measure for such an imposition and for the
same reason, the rate of imposition cannot also be fixed on the basis of
the value of the works contract and it has to be fixed in relation to the
goods which are involved in the execution of a works contract. Relying on B
the Bengal Immunity Co. Ltd. v. The State of Bihar and Ors., (1955) .2 SCR
603 it was urged that till Parliament makes a law specifying the restrictions
and conditions in regard to the system of levy, rates and other incidents
of the tax referred to in Article 366(29-A)(b), it is not open to the State
Legislatures to impose a tax on the transfers referred to in sub-cl.(b) of C
cl.(29-A) of Article 366.
On behalf .of the states it was contended that in the absence of the
applicability of the provisions of the Central Sales Tax Act, 1956 to
transfer of property in goods involved in the execution of a works contract
and Parliament having not enacted any law under Article 269(3) and D
Article 286(2) there is no limitation whatsoever on the legislative power
- of the States to impose a tax on such a transfer, and that the nature . of
a works contract is such that th~re can never be any sale in the course
of inter-state trade or commerce or an outside sale or a sale in the course
of import in respect of goods which are involved in tl}e execution of such E
a contract, since the transfer of property in such goods takes place only
when the goods are incorporated in the works and this can only be in the
State in which the works is to be executed. It was submitted that there is
a distinction between the nature of the tax and the measure of the tax
and that though a tax on transfer of property in goods involved in the F
execution of a works contract is imposed on the goods which are involved
in the execution of works contract, the value of the works contract can be
made the measure for the levy of such a tax as well as for presecribing
the rate for imposition of such tax.
On behalf of the State of Karnataka it was submitted tly.lt as a
result of the Forty Sixth Amendment, a new field of taxation in respect
of the works contracts had been made available to the States and that
G
the said power is independent of the legislative power conferred under
Entry 54 in List II of the Seventh Schedule to the Constitution, and that H
108
SUPREME COURT REPORTS [1992] SUPP. 3 S.C.R.
A
it is not subject to the constitutional limitations contained in Article 286
of the Constitution, and that this question did not directly arise for
Cf?nsideration in the Builders' Association case. It was also' urged that the
decision in the Builders' Association case does not lay down the correct
law and needs reconsideration.
B
Allowing the appeal!J and the Writ Petition, this Court
HELD:
A.AMBIT OF THELEGISLATIVE POWER OF THE STATES TO
C IMPOSE THE TAX.OF THE NATURE REFERRED TO IN ARTICLE
366(29-A)(b ).
.D
1.1. The Court should go back upon its previous ruling on a
constitutional issue only when it is demonstrated beyond all reasonable
~.
. '
doubt that the previous ~uling given after due deliberation and full bearing
was erroneous. [132~D] ·
·
Lt. Col. Kha]oor Singh v. The Union of India & Anr., [1961] 2 S.C.R .
. 828 at p. 845; Keshav Mills Co. Ltd. v. Commissioner of Income-tax, Bombay
North {196S] 2 S.C.R. 908; Ganga Sugar Co. Ltd. etc v. State of U.P. & Ors.
E
etc., [1980] 1 S.C.R. 769 and Smith v.Allwright, 321U.S.649 at 669·(1944) ·
referred to.
F
.G
1.2. Having regard to_ the principles governing reconsideration of an
. earHer dec.ision it was n_ot appropriate to reopen the issues which are
covered by the decision in Builders' Association case and the matter be
dealt with in accordance with the law as laid down therein that the
e~pressi«;>n "tax on the ·sale or purchase of goods' in Entry 54 of the State
List 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
and the tax leviable by virtue of sub-clause (b) of clause (29-A) ·of Article
366 of the Contitution is subject to the discipline to which any levy under
Entry 54 of the State .List is made subject to under the Constitution.
[1~3-D, E]
2.1. ~~ legis~ative power of the States tinder Entry 54 of the State
1
List is subject to the limitations flowing from the provisions of Entry 92-A
· 1 H
of List I and the prohibition 'contained in Article 286. (133-F]
GANNON DUNKEf'.LEY CO. v. STA TE OF RAJASTIIAN
109
2.2. The legislative power under Entry 54 of the State List is not A
available in respect of transactions of sale or purchase which take place
in the course of inter-State trade or commerce as well as transactions of
sale or purchase which take 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. [133-H; 134-A]
B
2.3. It is beyond the competence of the State Legislature to make a
law 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 C
which take place in the course of inter-State trade or commerce or
transactions which constitute sales outside the Stat~ or sales in .the course
of import or export. [134-B, CJ
2.4. With regard to imposition of tax on sale or purchase of goods, D
after the Forty Sixth Amendment, legislation by Parliament is envisaged
in respect of the following matters: (i) formulation of principles for
determining when a sale or purchase of consignment of goods takes place
in the course of inter-State trade or commerce; Article 269(3); (ii) for·
mulation of principles for determining when a sale or purchase of goods
takes place in any of the ways mentioned in Clause (1) of Article 286
[Article 286(2)]; and (iii) declaration of goods to be. of special importance
in inter-State trade or c"mmerce and specification of restrictions and
conditions in regard to system of levy, rates and other incidents of tax in
respect of a tax on the sale or purchase of such goods [Articles 286(3) (a) J;
and (iv) specifications of restrictions and conditions in regard to system
of levy, rates and other incidents of tax in .respect of a tax on the sale or
purchase of goods being tax of the nature referred to in sub-clause (b),
sub-clause (c) and sub-clause (d) of Clause (29-A) of Article 366 [Article
286(3)(b)]. (135-B-H]
2.5. The Central Sale~ Tax Act is a composite law enacted under
Entry 92-A of List I read with Clause (1) of Article 269 as well as under
Clause (3) of Article 269, Clause (2) of Article 286 and sub-clause (a) of
Clause (3) of Article 286. No law has, however, been made hr Parliament
E
F
Gin exercise of its power undE:r Article 286(3)(b). [135-ll}
f.
110
SUPREME COURT REPORTS [1992] SUPP. 3 S.C.R.
A
2.6. The existence of a law enacted under Article 286(3)(b) is not a
B
C
condition precedent for the exercise of the taxing power of the State under
Entry 54 in List II. Article 286(3)(b) only means that in the event of a
law having been made by Parliament under Article 286(3)(b) the exercise
of the legislative power of the State under Entry 54 in List II to impose
a tax of the nature referred to in sub-clauses (b), (c) and (d) of Clause
(29-A) of Article 366 would be subject to restricti.ons and conditions in
regard to the system of levy, rates and other incidents of tax contained
in the said law. The need for the law envisaged by Article 286(3)(b) cannot,
however, be min;mised in view of the grievance there th3t is wide disparity
in tlie sales tax· legislations of the various states in the matter of imposilion, mode of assessment, rates etc. of tax on the transactions referred to
in Article 366(29-A)(b) relating to transfer of property in goods involved
in the execution of a works contract. [139-D-G]
- 3.1. In view of the legal fiction introduced by Article 366(29-A)(b)
D whereby the contract which was single and indivisible, has been altered
into a contract which is divisible into one for sale of goods and the other
for supply of labour and services, there is a deemed sale of the goods
which are involved in the execution ofa works contract and such a deemed
sale has all the incidents of a saie of goods involved in the execution of
E
a works contract where the contract is divisible into one for sale of goods
and the other' for supply of labour and services. (137-G]
""
Builders Association of India & Ors. v. Union of India, [1989] 2 S.C.ll.
320 and East End Dwellings Co. Ltd. v. Finsbury Borough Council, (1952)
A.C. 109, referred.
,, .
3.2. Even in the ~bsence of any provision expressly including trans·
fers of property in goods involved in the •execution of a works conract
. within the ambit of sections 3, 4 and 5 of the Central Sales Tax Act (after
the Forty-Sixth Amendment) the said provisions would be applicable to
J
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 ~ew the ·provisions contained in S~ions 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. ~I~!> ~.- app~icable to the deemed sales
resulting from transfer of property in goods involved in the execution of
-
,·
GANNON DUNKERLEY CO. v. STATEOFRAJASTHAN
111
a works contract and the legislative power under Entry 54 in State List A
.will have to be exercised subject to the restrictions and conditions
prescribed in respect of goods that have been declared to be of special
importance in inter-State trade or commerce. [137-H; 138-A-CJ
3.3. While enacting a law imposing a tax on sale or purchase of B
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 fo~ 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 sa~ under Section
4 of the Central Sales Tax Act or a sale in the course of import or export C
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.
D
[140-G, H; 141-A]
3.4. While defining the expression 'sale' in the sales tax legislation
it is open to the State Legislature to fix the situs of a deemed sale resulting
from a transfer falling within the ambit of Article 366(29-A)(b) but it is
not permissible for the State Legislature to define the expression 'sale' in, E
a way as to bring within the ambit of the taxing power a sale in the course
of inter-State trade or commerce, or a sale outside the State or a sale in
the course of import and export. [148-F]
4.1. The location of the situs of the sale in sales tax legislation of F
the State would have no bearing on the chargeability of tax on sales in
the course of inter-State trade or commerce since they fall outside the
field of legislative competence of the State Legislatures and will have to
be excluded while assessing the tax liability under the State legislation.
[141-H; 142-A] G
4.2. The same is true of sales which are outside the State and sales
in the course of import and export. The State Legislature cannot so frame
its law as to convert an outside sale or a sale in the course of import and
export into a sale outside the state. The question whether a sale is an
outside sale or a sale inside the State or whether it is a sale in the course H
112
SUPREME COURT REPORTS (1992] SUPP. 3 S.C.R.
A
of import or export will have to be determined in accordance with the
principles contained in Sections 4 and 5 of the Central Sales Tax Act and
the State Legislature while enacting the sales tax legislation for the State
cannot" make a departure from these principles. [142-B, CJ
B
Bengal Immunity Co. Ltd. v. State of Bihar & Ors., (1955] 2 S.C.R.
605 and Onkar Lal Nand Lal v. State of Rajasthan & Anr., [~985] Suppl.
3 S.C.R., 107~, referred to.
5.1. The measm·e for levy of the tax contemplated by Article 366(29A)(b) is the value of the goods involved .i'n the execution of a works
C contract. [142-G]
5.2. 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
D the works, the value of the goods which can constiture the measure for
the levy of tax has to be the value of goods at the time of incorporation
· of the goods in the works and not the cost of acquisition of goods by the
Contractor. [143-B, CJ·
·
5.3. The cost of incorporation of the goods in the works cannot be
E
made a part bf. the measure for the levy of tax contemplated by Article
366(29-A)(b). (143-D]
5.4. The ·,·alue of the goods involved in the execution of a works
contract will have to be determined by taking into account the value of
F
the entire works contract and deducting therefrom the charges towards
labour and services as wel.1 as the value of the goods which are not taxable
in view of Sections 3,4 and 5 of Central· Sales Tax Act and goods covered
by Sections 14 and 15 of the said Act which are exempt from tax under
the sales tax legislations of the States. (143-E, 146-C, DJ
G
5.5. The charges for labour and services which are required to be
deducted frpm -the value of the works contract would cover (i)_ labour
charges for execution ofthe works; (ii) amount paid to a sub-contractor
for labour and services; (iii) charges for obtaining on hire or otherwise
machinery and tools used for execution of the works contract; (iv)charges
H for planning, designing and architect's fees; and (v) cost of consumables
GANNON DUNKERLEY CO. v. STATE OFRAJASTIIAN
113
u~ed in execution of _the works contract, (vi) cost of establishment of the A
contractor to the extent it is relatable to supply of labOur and services;
(vii) other similar expenses relatable to.· supply of labour and services;
and (viii) profit earned by the contractor to the extant it is relatable to
suply of labour and services. [149-C, DJ
5.6. The amount de~uctible by way of charges for labour and services B
will have to be determined in the light of the fact of the fact of a particular
case on the basis of the material produced by the Contractor. In cases ,
where the Contractor does not maintain proper accounts or the accounts
maintained by him are not found worthy of credence, it would be permissible for the State legislation to prescribe a formula for determining the C
charges for labour and services by fixing a particular percentage of the
value of the works contract and to allow deduction of the amount thus
determined from the value of the works contract. The amount deductible
under such a formula should not ditTer appreciably from the expenses for
labout and services that would be incurred in the normal circumstances D
in respect of that particular type of works contract. It would be permissible
indeed necessary, to prescribe varying scales for deduction on account of
cost of labour and services for various types of works contract.
(146-G, H; 147·A·C)
6.1. In the field of taxation the legislature is permitted to exercise , E
an extremely wide discretion in classifying items for tax purposes so long
as it refrains from clear and hostile discrimination against particular
persons or classes. [147-F]
East India Tobacco Co. v. State of Andhra Pradesh [1963) 1 S.C.R. F
404 at p.411; P.M. Ashwathanarayan Shetty & Ors. v. State of Kamataka,
[1968) Supp. 3 S.C.R. 155 at p. 188; Federation of Hotel & Restaurant
Association of India v. Union of India, [1989) 1 S.C.R. 918 at p. 949; Kera/a
Hotel & Restaurant Association & Ors. v. State of Kera/a & Ors. [1990j 1
S.C.R. 516 at p.530; S.Kodar v. State of Kera/a, [1975) 1 S.C.R. 121 and
Ganga Su~ar Co. Ltd. v. State of U.P. & Ors., [1980) 1 S.C.R. 769, referred G
to.
6.2. It would be permissible for the State Legislature to tax all the
goods involved in the execution of a works contract at a uniform rate
which may be ditTerent from the rates applicable to individual goods. The H
114 '
SUPREME COURT REPORTS [1992] SUPP. 3 S.C.R.
A
goods which are involved in the execution of the works contract when
incorporated in the works·can be classified into a separate category for
the purpose of imposing the tax and a uniform rate may be p~scribed
for the sale of such goods. (148-A-B]
B. VALIDITY OF THE RAJASTHAN SALES TAX ACT AND
B RAJASTHAN SALES TAX RULES:
c
D
1.1. Section 5(3) of the Rajasthan Sales Tax Act and Clause (i) of
sub-Rule (2)' of Rule 29 of the Rajasthan Sales Tax Rules are unconstitu- • '
tional and void. [160-D]
1.2. In view of the declaration1that Section 5(3) of the Rajasthan
Sales Tax Act is unconstitutional and void, the assessment order dated.
September l, 1990 passed by the Commercial Tax Officer, Kota, under
challenge in W.P. No. 197 of 1991, cannot stand and is quashed.
·
[160-H; 161-A]
. L3 ~he c·~nstitutional validity of a statute has to be determined on
the. basis of its provisions and on the ambit of its op~ration as reasonably
construed and if,.so judged, it does not pass the test of constitutionality
• it cannot be pronounced valid merely because it is administered in a
E
manner which might not conflict with the constitutional requirements.
[158-D].
F
· The Collei:tor of Customs v. Nathe/la Sampathu Chetty & Anr., (1962)
3 S.C.R. 786 at pp. 825~, referred to.
· 2.1. In the Rajasthan Sales Tax A~t no express provision has been
made for exclusion of transactions constituting deemed sales under Article
366(29-A)(b) which take place·in the course of inter-State trade or commerce or outside the State or in the course of import and export in relation
to which the State Legislature lacks the competence to impose a tax unde~
Entry 54 of the State List. Nor has any provision been made with regard
G to exc~usion of sales of goods which are declared to be of special importance in inter-State trade or commeree and are governed by sections 14
and 15 of the Central Sales Tax Act. Under section 5(3) read with Section
.2(t) the matter has been left to the discretion of the rule making authority
to prescribe whether deductions in respect of such transactions should
H be allowed or not. (156-D-F] ·
)_
GANNON DUNKERLEY CO. v. STA TE OF RAJASTIIAN
115
2.2. By use of the word 'turnover' instead of word 'taxable turnover' A
in Sub-Section (3) of section 5 the amplitude of the incidence of tax has
been widened so as to indude transactions which are outside the sphere
of taxation available to the State Legislature under Entry 54 of the State
List. [159-H; 160~AJ
2.3. ~lause (1) of sub-Rule (2) or Rule 29 could not be construed to B
. mean that sales on which no tax is leviable under sub-Section (1) of Section
5 are to be excluded from the turnover for the purpose of computing tax
on such turnover in relation to a works contract. The High Court has
upheld the validity of sub· section (3) of Section 5 by taking into account
the provisions of sub-Rule (2) of Rule 29, but has failed to notice that C
under clause (1) of sub-Rule (2) of Rule 29, transfer of property in goods
involved in the execution of a works contract, on which no tax is leviable
under Section S, are not required to be deducted from the turnover.
[1S9~E-G]
2.4. Sub-section (3) of Section S, transgresses the limits of the D
legislative power conferred on the State Legislature under Entry 54 of the
State List inasmuch as it enables tax being imposed on deemed sales
resulting from transfer of property in goods, whether as goods or in some
other form, involved in the execution of a works contract which takes place
in the course of inter-State trade or commerce, or which takes place E
outside the state or which takes place in the course of import and export
within the meaning of Sections 3, 4 and 5 respectively of the Central Sales
Tax Act and it does not take·into account the conditions and restrictions
imposed by Section 15 of the Central Sales Tax Act on goods declared to
be of special importance in inter-State trade or commerce under Section
14 of the Central Sales Tax Act. [160-B·D]
2.5. Clause (1) of sub-Rule (2) of Rule 29 of the Rajasthan Sales Tax
Rules also suffers from the same infirmity. [160-D]
F
2.6. The invalidity of Section 5 (3) goes to the root of the imposition G
of tax and i~ the absence of the said provision the tax cannot be levied.
[160-E]
3. It was not considered necessary to examine the other questions
relating to the validity of Explanation-I to Clause (o) of Section 2 of the
Rajasthan Sales Tax Act, Explanation (i) to Clause (t) of Section 2, H
116
SUPREME COURT REPORTS (1992) SUPP. 3 S.C.R.
A
sub-section (2-C) of Section 7, Clause (ii) of sub-Rule (2) of Rule 29 and
sub-Rule (2) of the Rule 46 of the Rajasthan Sales Tax Rules. [160-F] ·
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 4861-64
of 1992.
B
From the Judgment and Order dated 3.9.1991 of the Rajasthan High
c
Court in D.B. Civil Writ Petition Nos. 5146/89, 4609/90, 338/90 and 2734
of 1991.
AND
Writ Petition (Civil) No: 197 of 1991.
Under Article 32 of the Constitution· of India.
K. P~rasara~, B.R.L.· Iyengar, F.S. Nru:iman, Harish N. Salve, C.
D NatarajaJ!,'V. Bataji, P,N. Ramalingam, Mrs. Pushpa, A.T.M. Sampath,
S.C. Sharina ·and Ravi Prakash Gupta for the Appellants/Petitioners.
E
F
G. Ramaswamy, Attroney General, Depankar Gupta, -Solicitor
General, V.R. Reddy, Addi. Solicitor General, B. Ahuja, T.S. Krish~
nainoorthy Iyer; J. Ramamurthy, B:Dutta, Ranbir Chandra,.Ashok Kumar
Sharma, P; Parmeshwaran, Ms .. A Subhashini, DA. Dave, C.B. Nath,
Siddarth, Anip Sachthey, Aruneshwar Gupta, R. Mohan,.R.P~ Singh, S'.K.
Dhingra, Sunil Kumar Jain, Vijay Hansaria and U.S, Prasad for .the
Respondents.
The Judgment of the Court was delivered by
S.C. AGRAWAL, J. Having heard learned counsel in SLP(C) Nos.
3365-68 of 1992 we hereby grant special leave to appeal and proceecl to ·
dispose of the appeals.
These appeals arising from the Judgment of the Rajasthan High
G Court dated September 3,· 1991, and the connected writ petition filed under
A~ticle 32 of the Constitution raise questions relating to imposition of tax
on the transfer of property in goods involved in the execution of works
contracts. The power to.· impose this tax became available to the State
legislatures as a result of the amendments introduced in the Constitution
H
by the Constitution (Forty Sixth Amendment) Act 1982, hereinafter
GANNON DUNKERLEY CO. v. STATEOFRAJASTIIAN(AGRAWAL,J.)
117
referred to as the Forty Sixth Amendment. The validity of the said amendA
ment has been upheld by this Court in Builders Associatiqn of India & ors.
v. Union of India, [1989] 2 SCR 320 wherein this Court has also considered
the scope and ambit of the legislative power to unpose the s~d.tax.
The relevant historical background leading to the enactment of the B
Forty Sixth Amendment has been set out in detail in the Builders Association case (supra) we would therefore only make a brief reference to the
circumstances which led to the said amendment
Under Entry 48 in List II ofSeventh,Schedule to the Gov~rnment of
India Act 1985. The legislative power t-0 impose "truces on sale of goods and C
on advertisements" was conferred on .the Provincial Legislattires under the
Constitution as adopted the said taxing power wa~ di'1ided between Parliament and the State Legislature. Under Entry 92 in List I of the Seventh
Schedule to the Constitution Parliament was empowered. to impose "taxes
on the sale or purchase of newspap_ers and on advertisements .published D
therein" and under Entry 54 in List II the State Legislatures were empowered to impose "taxes on the sale or purchase of goods other than
newspapers". With regard to imposition of sales tax on goods involved in
execution of works contracts where the contract was single and indivisible
the question arose whetherthere. is a 'sale' of those materials within the E
meaning of that word in Entry 48 in List II of the Seventh Schedule to the
Government of India Act 1935 and Entry 54 in List II of the Seventh
Schedule to the Constitution. There was sharp cleavage of opinion ·among
the High Courts on. that question. The High Court of Madras in Gannon
Dunkerley & Co. (Madras) Ltd. v.State of Madras, AIR 1954 Mad. 1130,
took the view that the e~pression 'sale of goods' in Entry 48 in I,..ist II of F
the Governme~t of India Act 1935 and Entry 54 in List II ofthe Constitution had the same meaning as it has in the Sale of Goods Act, 1930 and
that construction works contracts were not contracts for sale of the
materials used therein and that the contract, being entire and indivisible,
could not be broken into a contract for sale of materials and a contract for
payment for work done. On that view it was held that the provisions of the G
amendments introduced by the Amendment Act of 1947 in Madras
General Sales Tax Act 1939 whereby the definition of 'sale' was enlarged
to include 'a transfer of property in goods involved in the execution of a
works contract' and thereby impose sales tax on such transfers, were
declared as ultra Vires the powers of the Provincial Legislature. The same H
118
SUPREME COURT REPORTS (1992) SUPP. 3 S.C.R.
A
view was taken by the Hyderabad High Court in Jubilee Engineering Co.
B
c
Ltd. v. Sales Tax Officer, Hyderabad City & Ors., AIR 1956 Hyd 79. The
Kerala High Court in Gannon Dunkerley & Co. Madras (Pvt.) 'Ltd. v. Sales
Tax Officer, Mattancheri, AIR 1957 Kerala 146 and the Mysore High Court
in Mohamed Khasim v. State of Mysore, (1955] VI STC 211, took the
contrary view and upheld the power of the State to impose sales tax on the
turnover relating to construction works. The Nagpur High Court in Pandit
Banarsi Das v. State of Madhya Pradesh & Ors., (1955) VI STC 93, while
declining to follow the decision of the Madras High Court expressed the
view that the State Legislature could pick out a sale from the composite
transaction of a building contract which included transfer of property in
materials and could make the portion attributable to the cost of such
materials subject to payment of sales tax in exercise of its undoubted and
plenary powers. The Rajasthan High Court in Bhuramal & Ors. v. State of
Rajasthan, AIR 1957 ~aj. 104, took a sim~lar view.
D ,
. This conflict was resolved by this Court in State of Madras v. Gannon
Dunkerley & Co. (Madras) Ltd., [1959) SCR 379 wherein the decision of
the Madras High Court was affirmed and it was held that the exr.ression
. sale of goods in Entry 48 in List II of Seventh Schedule to the Government
of India Act, 1935 had the same meaning as the said expression had in the
Sale of Goods Act, 1930, its ess.ential ingredients being an agreement to
E
sell movables for a price and property passing therein pursuant to . that
agreement. It was further held that in a building contract, which is entire
and indivisible, there is no sale of goods because in such a contract the
agreement between the parties is that the contractor should construct the
F
building according to the specifications cqntained in the agreement and in
consideration therefore receive payment as provided therein and in such
an agreement, there was neither a contract to sell the materials used in the
construction nor does the•property pass therein as movables. This Court
therefore, laid down that it was not within the competence of the Provincial
Legislature under Entry 48 in List II of Seventh Schedule to the Government of India Act, 1935, to impose a tax on the supply of materials used
G in such a contract treating it as a sale. The said decision, though rendered
in the context of Entry 48 in List ·II· of the Seventh Schedule to the
Government of India Act, 1935, :was equally applicable to the provisions
found in Entry 54 in List II of the Seventh Schedule to the Constitution.
In the Gannon Dunkerlay case (supra) it was made clear that the
H abovementioned conclusions had reference to works contracts which were
(
L
c
GANNON DUNKERLEY CO. v. srATE OF RAJASTHAN (AGRA WAL, J.)
entire and indivisible and the Court has observed :
"It is possible that the parties might enter into distinct and
separate contracts one for the transfer of materials for
money consideration, and the other for 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 to sell, from the agreement to do work and render service, and to impose a tax
thereon could not be questioned and will stand untouched
by the present judgment." (p.427)
119
It may also be mentioned that in Mithan Lal v. The State of Delhi &
Anr., [1959] SCR 445 this Court, in the context of a law made by Parliament
A
B
c
in relation to Part C States under Article 246( 4) of the Constitution, had
held that Parliament could impose a tax on the supply of materials in
building contracts and to impose it under the name of sales tax because D
the said power of Parliament was plenary and absolute and was untrammelled by the limitations prescribed by Article 246 clauses (2) and (3) and
Entry 54 in List II and that the decision in Gannon Dunkerley case (supra)
which was given on a statute passed by the Provincial legislature under the
Government of India Act, 1935, had no application to such a case. (p.451) E
After the decision in Gannon Dunkerley case (supra) the matter with
regard to taxability of goods involved in execution of works contracts was
examined by the Law Commission. In its 61st Report the Law Commission
after considering the 'legal position, including the decision in Gannon
Dunkerley case (supra), expressed the view.
"Before the judgments of the Supreme Court, however,
sale was usually regarded as including a works contract.
The question is ultimately one of policy, but the Commission would prefer restoration of the power to the States.
Narrow interpretation of the expression 'sale' was not the
practice before the Supreme Court judgments. Entries in
the legislative list, should receive a broad interpretation.
Fine nuances need not be material. The transactions
F
G
resemble sale in substance.