# STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. & ORS

- **Citation:** [2020] 6 S.C.R. 801
- **Court:** Supreme Court of India
- **Decided:** 2020-06-05
- **Case number:** Civil Appeal No. 2516 of 2020
- **Bench:** A. M. Khanwilkar, Indira Banerjee, Dinesh Maheshwari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/state-of-orissa-v-m-s-b-engineers-builders-ltd-ors-34608
- **Pages:** 36

## Headnote

Orissa Sales Tax Act, 1947 - ss.2(g),(jj) & 5(2)(AA) -
Amendment in 1947 Act for levying sales tax on works contracts -
Circular dated 04.11.1986 issued for reimbursement of sales tax
paid by contractor in case of works contracts executed on or after
07.04.1984 on production of proof thereof - Works contracts
executed by respondent no.1 - Sales tax levied for 1998-99 to 200001 on the taxable turnover - Respondent claimed reimbursement -
In the meantime, in view of another Circular, it was directed that no
reimbursement of sales tax be made under Clause 45.2 of General
Conditions of Contract (GCC) until further clarification - By
impugned Circular dated 07.11.2001, State Govt. instructed not to
reimburse the sales tax levied on cement, steel etc. and directed for
its recovery wherever reimbursed - Quashed by High Court - Held:
Grounds on which the appellant resists respondent's claim for
reimbursement, i.e., w.r.t the expression"completed item of work" in
Clause 45.2, stipulations contained in Clauses 13.3 of Instructions
to Bidders (ITB) and 45.1 of GCC, are untenable - Contents of
initial Circular dated 04.11.1986 issued by State Govt. closely
following the amendment of 1947 Act aimed at facilitating the levy
of sales tax on the goods involved in a works contract - In said
Circular, the State Govt. issued directions for reimbursement of sales
tax w.r.t the existing work contracts; and also directed that any
such clause for reimbursement be not included in future contracts -
Second set of instructions of the said Circular was obviously meant
for future contracts and fortifies the conclusion that State Govt.
was fully conscious of its obligation to make reimbursement w.r.t
the existing contracts carrying such reimbursement clause/s - High
Court rightly allowed the writ petition filed by respondent no.1 -
Propositions in ill-advised Circular dated 07.11.2001 stand
[2020] 6 S.C.R. 801
801
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disapproved - Constitution (Forty-sixth Amendment) Act, 1982 -
Art.366(29-A) - Orissa Sales Tax (Amendment) Act, 1984 - Orissa
Sales Tax (Amendment) Act, 1985 - Contract.
Dismissing the appeal, the Court
HELD 1.1 In the Circular dated 04.11.1986, the State
Government expressed the view that the reimbursement in
question was required to be allowed in terms of Clause 45.2 of
GCC but later on, in the Circular dated 07.11.2001, the State
Government took a diametrically opposite view to say that such
reimbursement was not to be allowed in relation to the works
contract. Obviously, the said Circulars had been based on the
given day understanding of the State Government on the operation
of the relevant provisions of law and the terms of contract. Such
vacillating understanding on the part of the State Government
cannot be determinative of the contractual obligations of the
parties, which are required to be decided with reference to the
principles of law applicable and on true construction of the terms
of contract. [Paras 11][829-A-D]
1.2 As per Clause 45.2 of GCC, the amount of sales tax on
completed items of works of the contract, as might have been
levied upon, and paid by, the contractor, except the penalty levied
for contractor's own fault, was to be reimbursed to the contractor
on proof of payment and assessment. It was also provided in
Clause 45.2 itself that, during the course of contract period,
deductions of sales tax on works contract turnover would be made
from the running bills at the prescribed rates and conditions. It
is not in dispute that while making payment of various running
bills in the course of execution of contracts by the respondent
No. 1, deductions were indeed made towards the amount of sales
tax and such deducted amount of sales tax was deposited with
the Sales Tax Department of the Government of Orissa. Such
deductions and deposits with Sales Tax Department had clearly
been in accordance with the stipulation contained in the second
part of Clause 45.2 ibid. However,

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STATE OF ORISSA
v.
M/s. B. ENGINEERS & BUILDERS LTD. & ORS.
(Civil Appeal No. 2516 of 2020)
JUNE 05, 2020
[A. M. KHANWILKAR, INDIRA BANERJEE AND
DINESH MAHESHWARI, JJ.]
Orissa Sales Tax Act, 1947 - ss.2(g),(jj) & 5(2)(AA) -
Amendment in 1947 Act for levying sales tax on works contracts -
Circular dated 04.11.1986 issued for reimbursement of sales tax
paid by contractor in case of works contracts executed on or after
07.04.1984 on production of proof thereof - Works contracts
executed by respondent no.1 - Sales tax levied for 1998-99 to 200001 on the taxable turnover - Respondent claimed reimbursement -
In the meantime, in view of another Circular, it was directed that no
reimbursement of sales tax be made under Clause 45.2 of General
Conditions of Contract (GCC) until further clarification - By
impugned Circular dated 07.11.2001, State Govt. instructed not to
reimburse the sales tax levied on cement, steel etc. and directed for
its recovery wherever reimbursed - Quashed by High Court - Held:
Grounds on which the appellant resists respondent's claim for
reimbursement, i.e., w.r.t the expression"completed item of work" in
Clause 45.2, stipulations contained in Clauses 13.3 of Instructions
to Bidders (ITB) and 45.1 of GCC, are untenable - Contents of
initial Circular dated 04.11.1986 issued by State Govt. closely
following the amendment of 1947 Act aimed at facilitating the levy
of sales tax on the goods involved in a works contract - In said
Circular, the State Govt. issued directions for reimbursement of sales
tax w.r.t the existing work contracts; and also directed that any
such clause for reimbursement be not included in future contracts -
Second set of instructions of the said Circular was obviously meant
for future contracts and fortifies the conclusion that State Govt.
was fully conscious of its obligation to make reimbursement w.r.t
the existing contracts carrying such reimbursement clause/s - High
Court rightly allowed the writ petition filed by respondent no.1 -
Propositions in ill-advised Circular dated 07.11.2001 stand
[2020] 6 S.C.R. 801
801
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disapproved - Constitution (Forty-sixth Amendment) Act, 1982 -
Art.366(29-A) - Orissa Sales Tax (Amendment) Act, 1984 - Orissa
Sales Tax (Amendment) Act, 1985 - Contract.
Dismissing the appeal, the Court
HELD 1.1 In the Circular dated 04.11.1986, the State
Government expressed the view that the reimbursement in
question was required to be allowed in terms of Clause 45.2 of
GCC but later on, in the Circular dated 07.11.2001, the State
Government took a diametrically opposite view to say that such
reimbursement was not to be allowed in relation to the works
contract. Obviously, the said Circulars had been based on the
given day understanding of the State Government on the operation
of the relevant provisions of law and the terms of contract. Such
vacillating understanding on the part of the State Government
cannot be determinative of the contractual obligations of the
parties, which are required to be decided with reference to the
principles of law applicable and on true construction of the terms
of contract. [Paras 11][829-A-D]
1.2 As per Clause 45.2 of GCC, the amount of sales tax on
completed items of works of the contract, as might have been
levied upon, and paid by, the contractor, except the penalty levied
for contractor's own fault, was to be reimbursed to the contractor
on proof of payment and assessment. It was also provided in
Clause 45.2 itself that, during the course of contract period,
deductions of sales tax on works contract turnover would be made
from the running bills at the prescribed rates and conditions. It
is not in dispute that while making payment of various running
bills in the course of execution of contracts by the respondent
No. 1, deductions were indeed made towards the amount of sales
tax and such deducted amount of sales tax was deposited with
the Sales Tax Department of the Government of Orissa. Such
deductions and deposits with Sales Tax Department had clearly
been in accordance with the stipulation contained in the second
part of Clause 45.2 ibid. However, and even after making
deductions in terms of the second part of Clause 45.2, the appellant
State seeks to deny the operation of first part of this Clause 45.2
(whereby the contractor is entitled to reimbursement of the
amount of sales tax). Taking up the main plank of the case of the
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appellant about the nature, extent and implication of the levy of
sales tax in relation to a works contract, it could be usefully
recapitulated that in view of the forty-sixth amendment to the
Constitution of India, Clause (29-A) came to be inserted to Article
366; and, by virtue of sub-clause (b) thereof, it became permissible
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. Thus, after the forty-sixth amendment to the
Constitution, the works contract is divided into two parts by a
legal fiction: one for sale of goods/materials and other for supply
of labour/services; and it is possible for the States to levy sales
tax on the value of goods/materials involved in such works
contract. [Paras 12,13][829-D-H; 830-B-D]
1.3 As regards the relevant provisions of the State
enactment, it is at once clear that after the aforesaid forty-sixth
amendment to the Constitution, the State of Orissa also proceeded
to carry out the necessary amendment to the Act of 1947 and
provided for levy of sales tax in relation to a works contract, inter
alia, by expanding the definition of "Sale" so as to include therein
the transfer of property in goods involved in the execution of a
works contract; and by specifying that "taxable turnover" in
respect of works contract shall be deemed to be the gross value
received or receivable by dealer for carrying out such contract
less the amount of labour and service charges incurred in
execution of the contract. On their essence and intent, what turns
out of these amended provisions of the Act of 1947 is that in
relation to a works contract, there would be deemed to be the
sale of goods involved in execution thereof; and sales tax would
be leviable on the taxable turnover (and not on the gross
turnover) of such works contract. Contextually read, it is but
apparent that the expression "completed item of work" in Clause
45.2 ibid., signifies the intent that reimbursement would be
permissible only after execution of a particular item of work has
been completed and accomplished. This expression is clearly
intended to contradistinguish the cases where any item of work
remains incomplete and yet any claim for reimbursement of the
sales tax levied is sought for. This expression cannot be read to
mean as if signifying the levy of sales tax itself on the completed
item of work because such reading of this expression would be
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS.
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totally disjunct from the context and would be entirely detached
from the real intent. Viewed from another angle, it would appear
that if the contention on the part of the appellant as regards
interpretation of the first part of Clause 45.2 is accepted, it would
practically result in holding that the said Clause 45.2 is not at all
applicable to a works contract. Such a result cannot be
countenanced for two major reasons: First, that if such a clause
was not to be applied to the works contract, there was no reason
to have retained the same in relation to the works contracts
awarded to the respondent No. 1. When such a stipulation forms
the part of contract, it would be rather preposterous to say that
the same would stand but would not operate. Secondly, and more
significantly, in the second part of this very Clause 45.2, it has
specifically been provided that deductions of sales tax on works
contract turnover at source shall be made from each bill. It is not
far to seek, and is rather evident on a bare reading of Clause
45.2 in its entirety, that it is to apply in relation to the sales tax on
works contract too. The second part of Clause 45.2 had indeed
been applied and enforced by the appellant and its offices by
regularly making deduction of the amount of sales tax in the
running payments of the respondent no.1 and by regularly
depositing the same with the Sales Tax Department. It would
again be preposterous, nay absurd, to say that the second part of
Clause 45.2 entitling the appellant and its offices to make
deduction of sales tax on works contract turnover at source could
be enforced but when it comes to reimbursement, the first part
of this very Clause 45.2 would not apply to a works contract.
[Paras 13.1, 14.1 and 14.2][830-E-H; 831-G-H; 832-A-E]
1.4 The terms of contract bind the parties thereto and unless
there be any case of ambiguity or violation of law, ordinarily, the
terms of contract, revealing the intent of parties, are required to
be given effect to. By virtue of Clause 45.2 of GCC, the contractor
company is rightfully entitled to claim reimbursement of the
amount of sales tax levied on the taxable turnover of the works
contracts executed by it. A fortiori, the grounds on which the
appellant seeks to resist the claim of the contractor company for
such reimbursement, i.e., with reference to the expression
"completed item of work" in the said Clause 45.2 and with
reference to the stipulations contained in Clauses 13.3 of ITB
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and 45.1 of GCC, are wholly untenable and the appellant and its
contracting offices are under obligation to honour the claim so
made by the contractor company. [Paras 15, 16, 17][833-B; 834E-G]
1.5 The basic reason for which the Court feels impelled to
refer to these Circulars now and at this concluding stage is borne
out of the contents of the Circular dated 04.11.1986, which was
issued by the State Government closely following the amendment
of the Act of 1947 with insertion of the provisions aimed at
facilitating the levy of sales tax on the goods involved in a works
contract. Being aware of its obligation in terms of the said Clause
45.2 of GCC (or similar clause/s in other contracts), the
instructions were issued by the State Government in the said
Circular dated 04.11.1986 for: (a) making reimbursement of the
amount of sales tax actually paid by the contractor on production
of necessary documentary evidence of such payment; (b) not
making reimbursement against the amount of penalty, if any,
levied upon the contractor; and (c) obtaining undertaking from
the contractor to refund the excess amount of reimbursement, in
case of reduction of its liability towards sales tax in appeal or
revision [vide sub-paragraphs (i) to (iii) of paragraph 2 of the
Circular dated 04.11.1986]. However, the significant feature is
that in the second set of instructions in this very Circular, as
contained in sub-paragraph (iv) of paragraph 2 thereof, the
Engineers-incharge were instructed that no such clause for
reimbursement of sales tax or payment of such tax by the
department to the contractor be inserted in the Notice Inviting
Tenders or Tender document; and no tender containing any
clause or condition to that effect be accepted. The said second
set of instructions in sub-paragraph (iv) of paragraph 2 of this
Circular was, obviously, meant for future contracts, but, its
contrast with the first set of instructions in the preceding subparagraphs fortifies the conclusion that the State Government
was fully conscious of its obligation to make reimbursement in
relation to the existing contracts which carried such
reimbursement clause/s. Evidently, the doubts at the later stage,
as indicated in the Circular dated 27.01.2000, and converse
decision against the obligation of reimbursement, as stated in
the Circular dated 07.11.2001, had only been of unwarranted
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS.
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attempts to wriggle out of the contractual obligations with rather
perverse construction of the plain terms of the existing contracts.
The propositions in the said ill-advised Circular dated 07.11.2001
stand disapproved with the conclusions reached by us
hereinbefore. [Paras 17.1, 17.3][835-B-G; 836-C-D]
Builders' Association of India and Ors. v. Union of India
and Ors. (1989) 2 SCC 645 : [1989] 2 SCR 320;
Gannon Dunkerley and Co. and Ors. v. State of
Rajasthan and Ors.: (1993) 1 SCC 364 : [1992] 3 Suppl.
SCR 103; State of U.P. and Ors. v. P.N.C. Construction
C. Ltd. and Ors. (2007) 7 SCC 320 : [2007] 8 SCR
927 - referred to.
Case Law Reference
[1989] 2 SCR 320
referred to
Para 5.1
[1992] 3 Suppl. SCR 103
referred to
Para 5.1
[2007] 8 SCR 927
referred to
Para 6.2
CIVIL APPELLATE JURISDICTION: Civil Appeal No.2516 of
2020.
From the Judgment and Order dated 05.08.2008 of the High Court
of Orissa at Cuttack in W.P.(C) No.8857 of 2003.
Maninder Singh, Sr. Adv., Shibashish Misra, S. Debabrata Reddy,
Chandan Kumar Mandal, Advs. for the Appellant.
Sukumar Pattjoshi, Sr. Adv., Durga Datta, Mushtaq Ahmad, Mrs.
Kirti Renu Mishra, Ms. Apurva Upmanyu, Ms. C.K. Sucharita, Advs.
for the Respondents.
The Judgment of the Court was delivered by
DINESH MAHESHWARI, J.
1. Before entering into the subject matter, we may notice at the
outset that this petition for special leave to appeal is barred by limitation
by a period of 274 days. Though objections have been raised on behalf
of the contesting respondent against the prayer for condonation of delay
but, the record shows that notices on the application seeking condonation
of delay as also on the petition for leave to appeal were issued way back
on 18.11.2011 and for a long time, the matter remained pending while
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awaiting service on the respondents. Ultimately, after completion of
service, we had heard learned counsel for the contesting parties on merits.
Having regard to the circumstances of the case and after having heard
the contesting parties on merits, we find no reason to close the matter
only on the ground of delay. Accordingly, delay in filing is condoned.
1.1. Leave granted.
2. This appeal by special leave is directed against the judgment
and order dated 05.08.2008 as passed by the Orissa High Court at Cuttack
in W.P. (C) No. 8857 of 2003, whereby the High Court accepted the
claim of the respondent No. 1 of present appeal1, for reimbursement of
the amount of sales tax levied in respect of the works contracts executed
by it. The High Court also directed the Opposite Parties to grant
appropriate reimbursement as claimed by the writ petitioner in terms of
Clause 45.2 of the General Conditions of Contract2 under the National
Competitive Bidding Contract3 while quashing the clarification Circular
dated 07.11.2001 issued by the Government of Orissa in its Department
of Water Resources.
2.1. The appellant State of Orissa has challenged the order so
passed by the High Court while essentially raising the questions concerning
the nature and implication of the sales tax, levied in relation to the works
contracts executed by the writ petitioner, under the Orissa Sales Tax
Act, 19474 as amended in terms of the Constitution (Forty-sixth
Amendment) Act, 19825; and concerning the operation and import of
the relevant stipulations in the contracts in question.
3. The factual and background aspects of the matter, being not of
much dispute and confined to a narrow compass, may be noticed, in
brief, as follows:
3.1. The respondent No. 1 of this appeal, said to be a company of
engineers and builders, who had been engaged in undertaking various
works contracts, responded to the tenders floated by the respondent
Nos. 6 to 18 (various offices of the Government of Orissa) and, on being
determined as the lowest tenderer, was awarded the contracts from
time to time.
1 Hereinafter also referred to as 'the writ petitioner' or 'the contractor company'.
2 'GCC' for short
3 'NCB' for short
4 Hereinafter also referred to as 'the Act of 1947'
5 Hereinafter also referred to as 'the forty-sixth amendment'
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
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3.2. It is not in dispute that the aforesaid contracts awarded to the
respondent No. 1 carried the stipulations regarding taxes in Clause 45 of
GCC. The claim of the respondent No. 1 for reimbursement of sales tax
had been essentially based on Clause 45.2 of GCC, which carried the
stipulation that any Central or State sales tax and other taxes on completed
items of works (excluding penalty), as may be levied and paid by the
contractor shall be reimbursed by the employer on proof of payment
(and) on production of assessment certificate.
3.3. The sales tax regime in the State of Orissa is primarily governed
by the Act of 1947. By way of the Orissa Sales Tax (Amendment) Act,
1984 and the Orissa Sales Tax (Amendment) Act, 19856, the amendments
were brought about in the Act of 1947 with effect from 07.04.1984
whereby, inter alia, the definition of expression "Works contract" was
inserted; the definition of the expression "Sale" was expanded so as to
include therein the transfer of property in goods involved in the execution
of a works contract; and specific meaning was also assigned to the
expression "taxable turnover" in respect of a works contract for the
purpose of the rate of tax payable by a dealer. The rate of tax payable
by a dealer on the "taxable turnover" in respect of "works contract"
was fixed at 4%.
3.4. On 04.11.1986, the Government of Orissa, in its Department
of Irrigation and Power, issued a Circular to the effect that in case of
works contract executed on or after 07.04.1984, containing the specific
clause for reimbursement of sales tax, the Department of Irrigation and
Power would be liable for reimbursement of the amount of sales tax
actually paid by the concerned contractor on production of necessary
documentary evidence. Pursuant to these observations and directions,
reimbursement of the sales tax paid by the contractor company in respect
of assessment years 1995-1996 to 1997-1998 was allowed.
3.5. Later on, the State Government issued a notification under
Section 5 of the Act of 1947 whereby, the rate of tax payable by a dealer
on the taxable turnover in respect of the works contract was increased
to 8%. Thereafter, by way of the orders of assessment for the years
1998-1999 to 2000-2001, the Assessing Authority levied sales tax @ 8%
6 These amendments were introduced after the forty-sixth amendment of the Constitution
whereby, Clause (29-A) was inserted to Article 366 and it was, inter alia, provided that
the expression "tax on the sale or purchase of goods" includes a tax on the transfer of
property in goods involved in the execution of a works contract.
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on the taxable turnover in respect of the works contracts executed by
the contractor company. With reference to such assessments, the
contractor company claimed reimbursement of the sales tax paid in
respect of the works contracts executed by it.
3.6. However, in the meantime, the Government of Orissa, in its
Department of Water Resources, issued another Circular dated
27.01.2000 to the Engineers-incharge of various offices and projects
that the question as to whether sales tax deducted from the bills of the
contractor and paid to the sales tax officer will be again reimbursed to
the contractor whose quoted price was inclusive of all taxes as per Clause
13.3 of the Instructions to Bidders7, was under active consideration; and
it was directed that no reimbursement of sales tax be made under Clause
45.2 of GCC until clarification was communicated in that regard.
3.7. Thereafter, on 07.11.2001, the State Government, in its
Department of Water Resources, issued the impugned Circular, said to
be a clarificatory one, stating that a completed item of works, for which
the contractor had entered into an agreement with the department, was
either an immovable property or a works contract and in either case,
was not exigible to sales tax; and therefore, the question of payment of
sales tax on such immovable property or works contract and
consequential reimbursement by the department as per Clause 45.2 of
the General Conditions of Contract, or similar provision in other contracts,
did not arise. Accordingly, the State Government instructed its Engineersincharge not to reimburse the sales tax levied on cement, steel etc.; and
also directed for recovery of the amount from the contractor wherever
any such amount of sales tax had been reimbursed. These directions of
the Government were followed up by another Circular dated 19.06.2002
to the same effect.
3.8. In view of the aforementioned Circulars dated 07.11.2001
and 19.06.2002, its claim, for reimbursement of the sales tax paid, being
in jeopardy and rather, the proposition for recovery of the amount already
reimbursed looming large, the contractor company preferred the writ
petition leading to this appeal, while seeking the following reliefs: -
"(i) Issue a Rule Nisi Calling upon the Opposite Parties to show
cause as to why the alleged clarification dated 07.11.2001 under
Annexure-1, and the subsequent direction for recovery of the
7 'ITB' for short
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
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amount earlier reimbursed, vide letter dated 19.6.2002 under
Annexure-3 ought not to be declared illegal, invalid and non-est in
the eyes of law;
And
(ii) issue a further Rule Nisi Calling upon the Opp. Parties to
show cause as to why the reimbursement claims made by the
petitioner under Annexure-5 series may not be granted with a
period stipulated by this Hon'ble Court;
And
(iii) in the event the Opp. Parties fail to show cause or show
insufficient cause make the said Rule Nisi absolute and issue an
appropriate writ of Mandamus or a writ of certiorari in line with
the aforesaid Rule Nisi;
And/or
(iv) further be pleased to direct either of the Opp. Parties i.e., the
contracting parties (Opp. Parties 6-18) or the Sales-tax Authorities
(Opp. Parties 3-5) to effect reimbursement or refund along with
interest from the date of deposit of tax;
And
(v) to pass any other writ/writs, order/orders as this Hon'ble Court
may deem just and proper."
4. The High Court in its impugned order dated 05.08.2008,
examined the contentions of the parties and granted the prayers of the
writ petitioner while observing and holding, inter alia, as under:-
"8...... The petitioner now claims reimbursement of tax paid by it
on actual turnover of the works contract and not on the tax paid
by it on the materials procured by it, which have gone into for the
purpose of execution of the works contract. The further admitted
fact that O.Ps. 6 to 18 have, in fact, deducted the sales tax at
source from the bills raised by the petitioner from time to time in
due progress of the work and the same have in turn been deposited
with the Sales Tax Department.
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10. Now Annexure-1, which is sought to be quashed, is a
clarification but not in supersession of Annexure-10, as it is
projected by the State Government. The said clarification cannot
take away the effect of the statutory provision. The orders of
assessment in Annexure-4 series indicate that after deducting the
labour charges, services charges, amount of tax paid, materials
used in the execution of works contract, from the gross turn over
of the assessment year, the balance has been put to tax by the
Sales Tax Authority. The tax, as we find, has been imposed in the
light of the decision in Gannon Dunkerly (supra).
From the discussion made above, the irresistible conclusion
is that the sales tax has been levied in the orders of assessment in
respect of the amount received pertaining to items of work
completed during the financial year. The clarification in Annexure1, which unilaterally takes away the claim of the petitioner for
reimbursement, is contrary to Clause-45.2 of the General
Conditions of the Contract and Section 5 (2) (AA) of the Orissa
Sales Tax Act as well as the decision of the apex Court in Gannon
Dunkerly (supra). Accordingly, the clarification letter dated
7.11.2001 (Annexure-1) issued by the Financial Adviser-cumAdditional Secretary to Government, Department of Water
Resources is quashed and the O.Ps. are directed to grant
appropriate reimbursement in terms of Clause-45.2 of the General
Conditions of Contract, as claimed by the petitioner."
5. Assailing the order so passed by the High Court, learned senior
counsel for the appellant has strenuously argued that the impugned order
is contrary to the facts of the case as also the principles of law applicable
and hence, deserves to be set aside.
5.1. The learned senior counsel for the appellant has referred to
Clause (29-A) of Article 366 of the Constitution of India; and the principles
enunciated by this Court in the cases of Builders' Association of India
and Ors. v. Union of India and Ors.: (1989) 2 SCC 645 and Gannon
Dunkerley and Co. and Ors. v. State of Rajasthan and Ors.: (1993)
1 SCC 364 to submit that by the forty-sixth amendment of Constitution,
a fiction was created for treating the works contract as deemed sale on
which, sales tax would be leviable but, only on the value of goods which
went into the execution of any works contract.
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
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5.2. Further, with reference to the definitions of "sale", "goods"
and "works contract" as contained in the Act of 1947 as also Section
5(2)(AA) thereof and the relevant clauses governing the contracts in
question, the learned counsel has submitted that any payment against
the monthly running bill to the contractor does not constitute payment
for any "completed item of work"; and the only meaning of the
nomenclature "completed item of work" is the completion of the works
contract as such. Learned counsel would maintain that sales tax is not
leviable on the "completed item of work" in a works contract but, the
contractor is bound to pay sales tax on "taxable turnover" which, for the
purpose of sales tax, could only be on the value of goods utilised in
completion of the works contract.
5.3. The learned senior counsel has elaborated on the aforesaid
aspects with the submissions that every amount of sales tax on the
"taxable turnover", which is required to be paid by the contractor, is
achieved either by deduction of such amount of sales tax from the monthly
running bills by the employer for deposit of the same with the Sales Tax
Department or by way of payment by the contractor directly to the
Sales Tax Department. According to the learned counsel, where the
amount payable as sales tax by the contractor is deducted by the employer
at the time of making payment of monthly running bills and is deposited
by the employer with the Sales Tax Department, there would not arise
any question of making any reimbursement of the amount so deducted
and paid to the Sales Tax Department back to the contractor because
the liability to pay sales tax on the value of material/goods utilised in any
works contract is that of the contractor; and the claim for its
reimbursement is entirely impermissible.
5.4. The learned senior counsel for the appellant has strenuously
argued that the High Court has failed to examine the import and effect
of Clause 13.3 of the Instructions to Bidders and Clause 45.1 of the
General Conditions of Contract which make it clear that the bid price
quoted by the contractor is inclusive of all duties, taxes and other levies,
including royalties on all materials to be used in performance of the
works contract. Hence, according to the learned counsel, when sales
tax on the goods/materials forms a part of contract price, the claim for
reimbursement has rightly been denied by the Government.
5.5. As regards Clause 45.2 of the General Conditions of Contract,
the learned counsel would re-emphasise that thereunder, reimbursement
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is permissible when there is any sales tax levied on a "completed item of
work" but in the context of a works contract in a construction project,
there is no sales tax on the "completed item of work" which is an
immovable property. The learned counsel would submit that earlier, the
Circular dated 04.11.1986 came to be issued on an erroneous
understanding of Clause 45.2 in relation to works contract but subsequently,
clarificatory Circulars dated 07.11.2001 and 19.06.2002 were issued,
stating the correct position of law that the said Clause 45.2 applied only
to the sales tax on "completed item of work"; and the sales tax levied in
terms of Section 5(2)(AA) of the Act of 1947 was not reimbursable and
had to be borne by the contractor in view of clear stipulation in Clause
45.1 of the General Conditions of Contract. According to the learned
counsel, reliance on the Circular dated 04.11.1986 on behalf of the
respondent No. 1 is entirely misplaced and the said Circular, by no means,
could be construed as that of amending the contractual terms as also the
liability of the contractor in terms of Section 5(2)(AA) of the Act of
1947.
6. Per contra, learned senior counsel for the contractor company
(the respondent No. 1 herein) has duly supported the order impugned
with reference to the reasonings therein.
6.1. Learned senior counsel for the contractor company has
contended that the argument made on behalf of the appellant, that the
deduction in the running bills had only been of the sales tax payable on
various items, is contrary to the record because the deductions were
made on a deemed sale on turnover basis and not item-wise and such a
recovery of sales tax is squarely covered by Clause 45.2 of GCC
whereunder, the contractor company is entitled to the claimed
reimbursement.
6.2. The learned senior counsel has again referred to the decision
of this Court in the case of Gannon Dunkerley (supra) and the provisions
contained in Section 5 (2) (AA) of the Act of 1947 as also the said
Clause 45.2 of GCC and the Circular dated 04.11.1986 to submit that
deduction of sales tax on turnover basis pre-supposes the existence of
sale and therefore, the contractor company is entitled to the
reimbursement as claimed. According to the learned counsel, the Circular
dated 07.11.2001 had been directly against the statutory provisions as
also the contractual stipulations and the same has rightly been disapproved
by the High Court. The learned counsel has also referred to various
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
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decisions including that in the case of State of U.P. and Ors. v. P.N.C.
Construction C. Ltd. and Ors.:(2007) 7 SCC 320.
7. We have heard learned counsel for the parties at sufficient
length and have examined the record with reference to the law applicable.
8. Having regard to the issues raised, appropriate it would be to
take note of the relevant provisions of law; the referred conditions
governing the contractual relations of the parties; and the referred
Circulars issued by the Government of Orissa.
8.1. By way of the Constitution (Forty-sixth Amendment) Act,
1982, Clause (29-A) came to be inserted to Article 366 of the Constitution
of India, providing for inclusive definition of the expression "tax on the
sale or purchase of goods" in relation to various transactions and dealings.
As regards "works contract", the said expression came to be assigned
the meaning in sub-clause (b) thereof, which reads as under:-
"(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) ... ... ..."
8.1.1. The constitutional validity of the aforementioned provisions
by which the legislatures of the States were empowered to levy sales
tax on certain transactions described in sub-clauses (a) to (f) of Clause
(29-A) of Article 366 of the Constitution as also the question, as to whether
the power of the State legislature to levy tax on the transfer of property
in goods involved in the execution of works contracts is subject to the
restrictions and conditions contained in Article 286 of the Constitution,
were considered and decided by the Constitution Bench of this Court in
the case of Builders' Association (supra). Therein, while upholding the
constitutional validity of the aforementioned provisions, the Constitution
Bench explained the unique features of a composite contract relating to
work and materials; and expounded on the meaning, effect and amplitude
as also contours of the provisions pertaining to the taxing power of the
States in relation to works contract in the following words: -
"38. In Benjamin's Sale of Goods (3rd Edn.) in para 43 at p. 36
it is stated thus:
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"Chattel to be affixed to land or another chattel.-Where
work is to be done on the land of the employer or on a chattel
belonging to him, which involves the use or affixing of materials
belonging to the person employed, the contract will ordinarily
be one for work and materials, the property in the latter passing
to the employer by accession and not under any contract of
sale. Sometimes, however, there may instead be a sale of an
article with an additional and subsidiary agreement to affix it.
The property then passes before the article is affixed, by virtue
of the contract of sale itself or an appropriation made under
it."
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 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
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
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Bengal Immunity Co. Ltd. [AIR 1955 SC 661 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)
8.1.2. In the case of Gannon Dunkerley (supra), while dealing
with the scope of the legislative power of State under Entry 54 of the
State List contained in Seventh Schedule to the Constitution, particularly
in the context of inter-State trade or commerce, another Constitution
Bench of this Court found no reason to reopen the issues covered by the
decision in Builders' Association case (supra) and held on the limitations
of the powers of State legislature as under:-
"31.....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 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 subclause (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.
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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
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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."
8.1.3. In the said case of Gannon Dunkerley, the Constitution
Bench explained the purport and effect of the legal fiction introduced by
sub-clause (b) of Clause (29-A) of Article 366 of the Constitution and
also enunciated the principles for its operation as follows: -
"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.
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47........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;
STATE OF ORISSA v. M/s. B.