STATE OF U.P. AND ORS. v. M-S. P.N.C. CONSTRUCTION CO. LTD. & ORS

Citation: [2007] 8 S.C.R. 927

Court: Supreme Court of India

Bench: S.H. KAPADIA, B. SUDERSHAN REDDY

Case summary

STATE OF U.P. AND ORS. v. M-S. P.N.C. CONSTRUCTION CO. LTD. & ORS.pdf

Judgment text

STATE OF U. P. AND ORS. v. MIS. P. N. C. CONSTRUCTION CO. LTD. & ORS. AUGUST 8, 2007 [S. H. KAPADIA AND B. SUDERSHAN REDDY, JJ. ] Constitution of India, 1950: Article 366(29A){b)-Tax on transfer ofproperty on goods involved in a 'works contract ·~He_ld, after the Forty-Sixth Amendment, State Government is empowered to levy sales tax on value of goods involved in a works contract in the same way in which sales tax was leviable on the price of goods supplied in a building contract-Thus, State Government has been empowered to levy sales tax on contract value. U. P. Trade Tax Act, 1948: Ss. 2(h), 2(m) and 4B(2)-'Sale'-'Works contract'-Contract for widening ofroads - Recognition certificate for purchase ofraw material i. e. cement, sand, bitumen, furnace oil, HSD, Lubricant etc. for manufacture of Hot Mix issued to assessee earlier, sought to be revoked by issuing a show cause notice dated 9. 5.

2001-He/d: Withdrawal of recognition certificate was erroneous as it was contrary to the definition ofthe word 'sale' in ~. 2(h) which had to be read with s. 4B(2) of the Act-Show cause notice being based on complete misreading ofprovisions ofthe Act was rightly set aside by High Court. Words and Phrases: Expressions, 'deemed sale', "value addition", "works contract"- Connotation of The respondent-assessee company entered into a 'works contract' with National Highway Authority of India for widening the roads, maintenance and repairs thereof. The assessee was issued a 'recognition certificate' u/s 4-B of the U. P. Trade Tax Act, 1948 for purchase of raw materials, i. e. cement, sand, bitumen, furnace oil, HSD, Lubricant etc. for manufacture ofHot Mix. ~ Pursuant to the recognition certificate the assessee purchased the said raw )materials against Form No. 38 at concessional rate of tax. However, on 17. 1. 2001, the Commissioner, Trade Tax, U. P.

issued a Circular stating that purchase of the raw materials used in construction of roads cannot be made against Form No. 38. This Circular was followed by another Circular dated 23. 2. 2001 to the effect that the recognition certificate u/s 48 of the Act with regard to bitumen, chemical compound etc. against Form No. 38 should be reviewed. Consequently, a show cause notice was issued to the assessee as to why the recognition certificate granted to it should not be revoked. The assessee filed a writ petition before the High Court challenging the show cause +- t notice as also the two Circulars dated 17. 1. 2001 and 23. 2. 2001 contending that the raw materials used by it in execution ofthe works contr~ct constituted 'deemed sale' under Article 366(29A) of the Constitution of India and, therefore, the assessee was entitled to the benefit ofconcessional rate ofduty >on the purchase of the raw materials.

On behalfof Revenue it was contended that final product was not the Hot Mix but the road to be constructed from the ~ Hot Mix manufactured by the assessee and . as the end product, i. e. , the road, ~ was not saleable and as it was not the notified product, the assessee was not entitled to claim the benefit of concessional rate of duty on purchase of raw materials u/s 4-8 of the Act. The High Court accepting the plea of the J > assessee, held that the impugned showcause notice was liable to be set aside. Aggrieved, Revenue filed the instant appeals. Dismissing the appeals, the Court HELD: 1. 1. Under Section 2(m) of the U. P. Trade Tax Act, 1948 the expression "works contract" is defined to include any agreement for carrying out building construction, manufacture, processing, fabrication, erection, \-installation, repair or commissioning of moveable or immoveable property for t I cash, deferred payment or in other valuable consideration.

"Value Addition" is an important concept which has arisen after the Forty-sixth Amendment to -{ I ~ the Constitution. Prior to the said Amendment this Court had taken the view* that "works contract" was an indivisible contract and the turnover ofthe goods used in the execution of the works contract could not, therefore, become exigible to sales tax. To overcome the effect of the said decision, the concept ,.. I of"deemed sale" was introduced by the Parliament by introducing sub-clause (b) of Clause (29A) in Article 366 of the Constitution which states that the t· tax on sale or purchase ofgoods would include a tax on transfer of property I in goods involved in the execution of works contract. The emphasis is on the expression "transfer of property in goods (whether goods as such or in some • L I STATE OF U. P. v. P. N. C. CONSTRUCTION CO. LTD. 929 otherform)". (Paras 10 and 14) (933-F; 937-B, CJ • 1. 2.

After the Forty-Sixth Amendment to the Constitution, the 'works contract' which was an indivisible contract is, by a legal fiction, divided into two parts - one for sale ofgoods and the other for supply oflabour and services, and thus it became possible for the States to levy sales tax on the value of the goods involved in a works contract in the same way in which the sales tax was leviable on the price ofthe goods supplied in a building contract. This is where the concept of"Value Addition" comes in. It is on account of the Forty-Sixth -->+ Amendment to the Constitution that the State Government is empowered to levy sales tax on the contraet value which earlier was not possible. (Para 14) (937-D, E) Builders' Association ofIndia and Ors. v. Union ofIndia and Ors. , (1989) 2 SCR 320 = (1989) 2 SCC 645; Mis. Gannon Dunkerley and Co. and Ors. v. State ofRajasthan and Ors. , (1992) Supple. 3 SCR 103 = (199311 SCC 364 and State ofKera/a and Anr. v. Builders Association ofIndia and Ors.

, [19961 Supple. 9 SCR 300 (1997) 2 SCC 183, relied on. \ *State ofMadras v. Gannon Dunkerley & Co. (Madras) Ltd. , AIR (1958) ~ SC 560, referred to. 1. 3. In the instant case, a perusal of various Notifications issued under the U. P. Trade Tax Act, 1948, shows that 'Hot Mix' is a notified item; and cement, sand, bitumen, furnace oil, HSD, Lubricant etc. are the raw-materials which fall in the category of "goods" for the purpose of s. 48(2) of the Act and are required by the assessee for the manufacture of Hot Mix. Pursuant to the recognition certificate given by the A. O. (issuing authority) the assessee · purchased the aforestated raw-materials at the concessional rate ofduty. The ,,. impugned show cause notice dated 9. 5. 01 was based on complete misreading 'r of the provisions of the Act. Under Section 2(h) of the Act the word "sale" is defined to mean any transfer ofproperty in goods for cash or deferred payment or for value consideration.

The definition of the word "sale" includes transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. These words flow from the definition of the word "sale" in the Act to Article 366(29A){b) of the Constitution. (Paras 10, 14 and 15) (934-D; 938-F, G) Mis. Gannon Dunkerley and Co. and Ors. v. State ofRajasthan and Ors. , (1993) 1 sec 364, reiterated. 1. 4. The High Court was, therefore, right in setting aside the show cause ·· · •. notice dated 9. 5. 2001 issued by the A. O. (issuing authority). The withdrawal of recognition certificate was erroneous as it was contrary to the definition ofthe word "sale" in ~ection 2(h) ofthe Act which had to be read with Section 48(2) of the Act. Therefore, the two circulars dated 17. 1. 2001and23. 2. 2001 issued by the Commissioner, Trade Tax, U. P. , cannot constitute the basis for issuing the impugned show cause notice dated 9. 5. 2001.

(Para 161 [939-B, C) CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7256 of2005. From the Judgment & Order dated 14. 03. 2002 ofthe High Court of Judicature at Allahabad in Civil Misc. Writ Petition 741 of2001. WITH C. A. Nos. 7257 to 7264/2005 and C. A. Nos. 3553 and 3555/2007. Sunil Gupta, T. N. Singh, G. Venkateswara Rao and Kamlendra Mishra for the Appellants. Anil B. Diwan, S. Ganesh, E. C. Agrawala, Mahesh Agarwal, Rishi Agrawala, Gaurav Goel, Amit Sharma, Neha Aggarwal, Adarsh Upadhyay, Vishwajit Singh, Ujjwal Banerjee, H. K. Puri, Arun Kumar Sinha, Rakesh Singh, t-lukesh Kumar Sinha, Abhishek Chaudhary, A. P. Dhamija, Ram Niwas and Pratibha Jain for the Respondents. The Judgment of the Court was delivered by KAPADIA, J. l. Leave granted in Special leave petitions. 2. This batch of civil appeals is directed against the judgment and order dated 14. 3. 02 passed by the Allahabad High Court in Writ Petition No. 741 of 2001. 3. Civil Appeal No.

7256 of 2005 is the lead case in which the facts are as follow. .. 4. M/s. P. N. C. Construction Co. Ltd. (assessee) is a public limited company incorporated under the Companies Act, 1956. It is registered under the U. P. Trade Tax Act, 1948. It entered into a contract with National Highway Authority of India, New Delhi, for construction 4/6 lane of national highways STATEOFU. P. v. P. N. C. CONSTRUCTION CO. LTD. [KAPADIA,J. ] 931 of north, south, east and west of the Agra-Gwalior section of NH-3 and for laning of24 to 41 kms. of Agra-8holpur section ofNH-3 in the State ofU. P. Assessee was awarded work by the Construction Division, Agra and Mathura, for widening the roads, maintenance and repairs. 5. Assessee applied for grant of 'recognition certificate' under Section 4-8 of the U. P. Trade Tax Act, I948 (for short, 'the Act') for purchase ofraw- J3 materials for manufacture of Hot Mix. The Trade Tax Officer rejected the request of the assessee.

Aggrieved by the said decision, an appeal was preferred before Dy. Commissioner (Appeals) which was also dismissed vide order dated 24. 4. 97. Aggrieved by the decision, the assessee preferred Second Appeal No. 75of1997 before the Trade Tax Tribunal, Agra, which came to the conclusion that Hot Mix was manufactured by the assessee in the plant from cement, sand, bitumen, furnace oil, HSD, Lubricant etc. for the construction of roads. The Tribunal found that the A. O. had in fact granted recognition certificate to Mis. National Highway Construction Company, Mathura and Mis. Oriental Construction Engineers Ltd. , Mathura, for manufacturing of Hot Mix. Therefore, the Tribunal allowed the assessee's appeal and directed the A. O. to grant recognition certificate for the purchase ofcement, sand, bitumen,, furnace oil, HSD, Lubricant etc. (raw-materials) against Form No. 3-8 at a concessional rate oftax. Consequently, the A. O.

issued recognition certificate in favour of the assessee for the purchase of the aforestated raw-materials. Pursuant to the recognition certificate, assessee purchased the said rawmaterials against Form No. 38. 6. However, on 17. 1. 2001 the Commissioner, Trade Tax, U. P. issued a circular stating that purchase of raw-materials used in the construction of roads, cannot be made against Form No. 38. This circular dated 17. 1. 01 was followed by another circular dated 23. 2. 01 to the effect that recognition certificate under Section 48 of the Act with regard to purchase of bitumen, chemical compound etc. against Form No. 38 should be reviewed by the A. O. (issuing authority). Pursuant to the aforestated two circulars dated 17. 1. 0l and 23. 2. 01 (impugned circulars), show cause notice was issued on 9. 5. 01 to the assessee herein as to why the recognition certificate earlier granted to the assessee should not be revoked. The impugned notice dated 9. 5.

01 as well as the aforestated two impugned circulars dated 17. 1. 01 and 23. 2. 01 were challenged by the assessee before the High Court vide Writ Petition No. 741 of200l. 7. The main contention of the assessee before the High Court was that the raw-materials used by the assessee in execution of works contract constituted 'deemed sale' under Article 366(29A) of the Constitution oflndia and, therefore, the assessee was entitled to the benefit of concessional rate of duty on the purchase of aforestated raw-materials. Before the High Court, assessee further contended that it was open to the State to challenge the order of the Tribunal directing the A. O. to grant recognition certificate to the assessee; that the State did not challenge the decision of the Tribunal and, therefore, the impugned circulars dated 17. l. 01 and 23:2. 0 I constituted colourable exercise of power by the Commissioner in order to get over the judgment of the Tribunal which was against the Department. 8.

That, it was not open to the issuing authority to cancel the recognition certificate granted to the assessee by invoking the aforestated impugned circulars dated 17. 1. 0I and 23. 2. 0I. At this stage, we may point out that the assessee did challenge the validity of the said circulars dated 17. 1. 01 and 23. 2. 0 I before the High Court. However, the High Court has focused its attention only to the validity of the show cause notice dated 9. 5. 01 by the A. O. threatening withdrawal of the recognition certificate. Before the High Court, it was contended on behalf of the State (Department) that the writ petition was premature and that the appropriate remedy available to the assessee was to raise the contentions in adjudication before the assessing authority.

The Department further contended that in the meantime assessee was not entitled to sell Hot Mix either in the State or in the course of inter- State trade as provided under Section 4-B(2) of the Act as the final product was not the Hot Mix but the road to be constructed from the Hot Mix manufactured by the assessee. On behalf of the Department, it was submitted that road was the end product; that it was not saleable; that it was not the notified product and, therefore, assessee was not entitled to claim the benefit of concessional rate of duty on purchase of raw-materials under Section 4of the Act. -~ 9. By the impugned judgment, the High Court came to the conclusion that the impugned notice dated 9. 5. 01 came to be issued on account of aforestated two circulars dated 17. 1. 0I and 23. 2. 0I issued by the Commissioner, Trade Tax, U. P. The High Court further held that there was no allegation, in the show cause notice dated 9. 5.

01, of the assessee having violated any terms or conditions of the recognition certificate. According to the High Court, the impugned notice dated 9. 5. 01 was issued only on the basis of the aforestated two circulars dated 17. 1. 0 I and 23. 2. 0I much after the grant of recognition certificate and since the object behind the issuance of the aforestated two STATEOFU. P. v. P. N. C. CONSTRUCTION CO. LTD. [KAPADIA,J. ) 933 . J circulars dated 17. 1. 0 I and 23. 2. 01 was to overrule the decision ofthe Tribunal in favour of the assessee, the High Court took the view that the impugned show cause notice dated 9. 5. 01 was liable to be set aside. Aggrieved by the said decision, the State (Department) has come to this Court by way of civil appeals. JO. The said Act is enacted to provide for levy of tax on sale or purchase ofgoods in U. P. Under Section 2(bb) of the Act "Trade Tax" means a tax payable on sale or purchase of goods.

Under Section 2(d) of the Act the word "goods" is defined to mean every kind or class of moveable property including all materials, commodities and articles involved in the execution of works contract. Un~er Section 2 (e-1) of the Act the word "manufacture" is defined to mean producing, mining, extracting, altering, finishing or otherwise processing, treating or adapting any goods. Under Section 2(gg) of the Act "purchase price" is defined to mean valuable consideration paid or payable by a person for purchase of goods less cash discount given by the seller. Under Section 2(h) of the Act "sale" is defined to mean any transfer of property in goods for cash or deferred payment or for other valuable consideration including transfer of property in goods (whether as goods or in some other forms) involved in the execution of a works contract.

Under Section 2(i) of the Act "turnover" is defined to mean the total amount for which goods are supplied or distributed by way of sale by a dealer on his own account or on account of others for cash or deferred payment or for any other valuable consideration. Under Section 2(ii) of the Act the expression "turnover of purchases" is defined to mean the total amount of purchase price paid or payable by a dealer in respect of purchases of goods made by him after stipulated production. Under Section 2(m) of the Act the expression "works contract" is defined to include any agreement for carrying out building construction, manufacture, processing, fabrication, erection, installation, repair 'r or commissioning of moveable or immoveable property for cash, deferred payment or in other valuable consideration. Section 2;n) of the Act defines the word "tax" to include additional tax and the composition money accepted under Section 7-D of the Act.

Section 3 of the Act imposes liability to tax under the Act. Section 4-8 refers to giving of special relief to certain category of manufacturers. It states that notwithstanding contained in Section 3, 3-A, 3-AAA and 3-D, where any goods are liable to tax under Section 3-D are purchased by a dealer who is liable to tax on the turnover of first purchases and the dealer holds a recognition certificate issued under sub-section (2) of Section 4-8 he shall be liable in respect of those goods to tax at concessional rate or to exemption subject to conditions and restrictions specified in that behalf by the State Government. Under Section 4-8(2) of the Act where a dealer requires any goods, referred to in Section 4-8(1), for or in the manufacture by him in the State of any notified goods and such notified goods are intended to be sold by him in the State or in the course of inter-State trade or commerce or in the course of export out India, such dealer may apply to the A. O.

in the prescribed form for grant of recognition certificate in respect thereof and if the applicant satisfies such requirements as may be prescribed, the A. O. shall grant to him in respect of such goods a recognition certificate. Under Section 4-8(2) there is also an Explanation which states that where goods are required for use in the manufacture of notified goods such goods shall mean raw-materials, processing materials, machinery, plant, equipment etc. and the word "notified goods" shall mean goods to be notified by the State Government in that behalf from time to time. In the present case, the aforestated raw-materials, namely, cement, sand, bitumen, furnace oil, HSD, Lubricant etc. are the raw-materials required by the assessee for the manufacture of Hot Mix in the Hot Mix Plant of the assessee. In the present case, recognition certificate was granted in respect of the said raw-materials which has been subsequently withdrawn in view of the circulars dated 17. 1. 0 I and 23. 2.

0 I issued by the Commissioner. Assessee has purchased the aforestated raw-materials at the concessional rate ofduty. This was pursuant to the recognition certificate given by the A. O. (issuing authority) which is subsequently cancelled on account of the aforestated two circulars dated 17. 1. 01 and 23. 2. 01. Hot Mix is a notified item. On 21. 5. 94 State ofU. P. have issued Notification No. TT-2-1623/XI-7(159)/91-U. P. Act-15/48-0rder-94 which stated that with effect from I . 6. 94 tax shall be payable at the rate of2 per cent, on the sale or purchase as the case may be, by a dealer holding a valid recognition certificate under Section 4-8(2) of any raw-material covered by such certificate which raw-material shall be used in the manufacture ofnotified goods. Similarly, by another Notification No. T. l. F. -2-2383/XI-9(25 l)/97-U. P. Actl5-48-0rder··98 dated 23. 11. 98 the tax became payable in respect ofdeclared goods'(cement) at 2 per cent and at the rate of 2.

5 per cent on other rawmaterials like sand, bitumen, furnace oil, HSD, Lubricant etc. Further under the said notification apart from chemical, fertilizer and electrical energy, all other goods were separately classified as notified goods. To the same effect is.. the Notification No. K. A. NI. -2~530/XI-7( l 59)/9l-U. P. Act-15-48-0rder 2000 dated 17. 2. 2000 which was subsequently am. ended by another Notification No. K. A. NI- 2-3348/Xl-7 (159)/91-U. P. Act-15-48-0rder~(67)-2001 dated 30. 10. 2001. Therefore, it is clear that recognition certificate granted to the assessee was in respect of the aforestated raw-materials which attracted concessional rate ofduty and it was granted to the assessee as the assessee had indicated in its application STATEOFU. P. v. P. N. C. CONSTRUCTIONCO. LTD. [KAPADIA,J. ] 935 ---. - manufacture, processing or commissioning of any moveable or immoveable property.

These two definitions have been inserted in the said Act in conformity with the Forty-sixth Amendment to the Constitution [See: Builders' Association ofIndia and Ors. v. Union ofIndia and Ors. , (1989] 2 SCC 645]. To the same effect is the ratio of the judgment of this Court in the case of Mis. Gannon Dunkerley andCo. andOrs. v. State ofRajasthan and Ors. , (1993] I SCC 364, in whi~h it has been held, vide para 36, that, if the legal fiction introduced by Article 366(29A)(b) of the Constitution is carried to its logical conclusion \ it follows that even in a single and indivisible contract there could be a "deemed sale" of the goods in the execution of a works contract. Such deemed sale has all the incidents of a "sale" in cases where the contract is >-divisible into two parts - one for sale of goods and the other for supply of labour and services. Similarly, in the case of State of Kera/a and Anr. v. Builders Association ofIndia and Ors.

, [1997] 2 SCC 183, it has been held that after the Forty-sixth Amendment goods transferred in the course of execution ofthe works contract is chargeable to tax under the Kerala General Sales Tax Act, 1963. 15. In the present case, as stated above, the notifications issued by the State Government from time to time show that different rates were prescribed for declared goods and other raw-materials. 'Cement' fell in the category of declared goods whereas sand, bitumen, furnace oil, HSD, Lubricant etc. fell in the category of other raw-materials. The said notifications also indicate notified goods. 'Hot Mix' fell in the category of notified goods.

Under Section 4-8(2) of the Act the recognition certificate enabled the assessee to buy the above raw-materials at concessional rate of duty provided they were used in the manufacture of notified goods and such notified goods were intended to be sold by the assessees in the State or in the course of inter-State trade or commerce or in the course of export out of India. Raw-materials came in the category of "goods" for the purposes of Section 4-8(2) of the Act. In the present case, the assessee has used cement, sand, bitumen, furnace oil, HSD, Lubricant etc. as raw-materials in the manufacture of Hot Mix. The show cause notice dated 9. 5. 01 impugned in the writ petition (before the High Court) proceeded on the basis that roads are not capable of being sold; that roads were not goods; and that roads were not moveables and, therefore, according to the Department the assessee was not entitled to the concessional rate of duty on purchase of raw-materials.

In our view, the impugned show cause notice dated 9. 5. 01 was based on complete misreading of the provisions of the said Act. Under Section 2(h) of the Act the word "Sale" is defined to mean any transfer of property in goods for cash or deferred payment or for value consideration. The definition of the word "Sale" includes transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. These words flow from the definition of the word "Sale" in the Act to Article 366(29A)(b) of the Constitution. The said words have been interpreted by this Court, as stated above, in the second · Gannon Dunkerley's case (Supra) in following words vide para 36: "36. If the legal fiction introduced by Article 366(29-A) 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 STATEOFU. P. v. P. N. C. CONSTRUCTIONCO. LTD. [KAPADIA,J. ] 939 --< ....

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. " 16. For the aforestated reasons, we are of the view that the- High Court was right in setting aside the above show cause notice dated 9. 5. 01 issued by the A. O. (issuing authority). The withdrawal of recognition certificate was erroneous as it was contrary to the definition of the word "sale" in Section 2(h) ofthe Act which had to be read with Section 4B(2) ofthe Act. Therefore, the aforestated two circulars dated 17. 1. 01 and 23. 2. 01 issued by the Commissioner, Trade Tax, U. P. , cannot constitute the basis for issuing the impugned show cause notice dated 9. 5. 01. mil_ \ 17 In the circumstances, the civil appeals filed by the State are dismissed with no order as to costs. RP. Appeals dismissed. . ; ,... ,