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Jamshedpur Contractors' Association And 5 Others v. The State Of Bihar And Ors.
Concise Analytical Summary of the Opinion (S. Roy, J.)
Factual and Procedural Background
Several writ petitions were filed seeking, inter alia, declarations that (a) the Constitution (46th Amendment) Act, 1982 (which introduced clause (29A) in Article 366) was illegal, unconstitutional and void and (b) the amendment to the Bihar Finance Act, 1981 insofar as it sought to impose sales tax on works-contracts was illegal and void. Those challenges to the 46th Amendment and the Finance Act amendment were foreclosed by the Supreme Court judgment in Builders Association of India v. Union of India.
The surviving issues in these petitions were: (i) the validity of Rule 13A introduced in the Bihar Sales Tax Rules by notification dated 8 October 1986 and (ii) the extent to which the petitioners (an association of contractors, its members, and other contractors) were liable to pay sales tax on works-contracts they entered into with employers (persons for whose benefit buildings, factories, etc. were constructed).
Facts relevant to the dispute: contractors executed works-contracts; following statutory amendments, contractors with annual gross turnover of Rs. 25,000 or above were required to register under the Bihar Finance Act and the State issued directions to deduct sales tax at source from contractors' bills on the total value of the contract. Assessments in the cases referred to had not been completed at the time of this opinion.
Legal Issues Presented
- Whether Rule 13A of the Bihar Sales Tax Rules (providing specified percentage deductions for presumed labour charges in various types of works-contracts) is valid or ultra vires.
- Whether contractors are chargeable to sales tax on labour charges in execution of works-contracts (in light of the Supreme Court judgment in Builders Association of India v. Union of India).
- Whether and to what extent a contractor is liable to pay sales tax where goods (e.g., cement, bricks, iron, steel) used in the works-contract are: (a) supplied by the contractor, or (b) supplied by the employer but the price of those goods is recovered from the contractor under an agreement between the parties.
- How State sales tax law must take account of Article 286 of the Constitution and the Central Sales Tax Act, 1956 (including section 15) in assessing taxable turnover in works-contracts (i.e., treatment of declared goods and inter-State sales).
Arguments of the Parties
Petitioners' Arguments
- Relying on Builders Association (supra), contractors are liable to pay tax only if there is a sale of goods during execution of a works-contract; labour component is not taxable.
- Rule 13A is ultra vires because it presumes specified percentages of labour cost and thus provides for deduction of only a certain percentage of the cost incurred on labour rather than allowing full deduction of actual labour expenditure.
- If goods used in execution are declared articles under the Central Sales Tax Act and the sale occurs in the course of inter-State trade, the respondents must give effect to the provisions of the Central Sales Tax Act.
- Contractors are liable to pay tax when they supply goods (like cement, bricks, iron and steel) themselves, but not when the employer supplies those goods for execution of the job.
Respondents' (State) Arguments
- Conceded that in view of Builders Association no sales tax is payable on labour, but argued Rule 13A does not speak only about labour and therefore the rule cannot be invalidated in toto.
- Contractors are liable to pay sales tax on goods which are supplied for value by the employers (e.g., cement, bricks, iron, steel) and used in execution of works-contracts.
- Relied on N.M. Goel & Co. v. Tax Officer, A.I.R. 1989 S.C. 285 as authority for taxation when materials are ultimately used by the contractor and price is recovered/deducted by the employer from contractor's bill.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Builders Association of India v. Union of India (73 (1989) S.T.C. 370 : 1989 PLJR (SC) 31) | Established that contractors are not liable to pay sales tax on labour component of works-contracts; relevant to treatment of works-contract taxation after the 46th Amendment to the Constitution. | The court treated Builders Association as dispositive on the question that labour is not taxable. The opinion accepts that, in view of that judgment, certain earlier challenges (to the 46th Amendment and related Finance Act provisions) were no longer available and that labour cannot be taxed. Assessing officers must take that law into account. |
| N.M. Goel & Co. v. Tax Officer, Rajnandgaon, A.I.R. 1989 S.C. 285 | Held that where there is an agreement that the employer will supply materials (to be consumed in execution) and the contractor is made liable to pay the price of those materials (e.g., by deduction from final bill), the contractor is deemed to have sold the goods to the employer and is liable to tax (decision involved entry/purchase tax issues). | The court acknowledged Goel & Co. as binding on the question of taxation where the contractual arrangement makes the contractor liable for the price of materials supplied by the employer. The court treated Goel & Co. as applicable to the extent it does not conflict with Builders Association (and noted some observations in Goel & Co. conflict with Builders Association because Goel did not consider the 46th Amendment). |
Court's Reasoning and Analysis
The court proceeded by identifying the legal landscape created by the Supreme Court's decision in Builders Association and by earlier authority in Goel & Co., and by examining the text and effect of Rule 13A.
Step-by-step analysis as reflected in the opinion:
- The court observed that Rule 13A prescribes specified percentages of presumed labour content for different types of works-contracts and provides for deduction of that presumed labour amount from gross turnover. Under the rule tax is effectively imposed on the labour charge because only the prescribed percentage is excluded; any actual labour expenditure in excess of the prescribed percentage cannot be deducted beyond the rule.
- The court explained that "labour" is not "goods" under the Act and that there is neither sale nor purchase of goods when a contractor spends on labour. Therefore, the correct approach is to exclude the total amount actually spent on labour from gross turnover when assessing tax; a rule that levies tax on labour charges by presuming fixed percentages is inconsistent with that legal position.
- Applying Builders Association, the court reiterated that labour component is not taxable. Given that Rule 13A taxably treats labour charges (by limiting deduction to prescribed percentages), the court concluded that Rule 13A cannot be sustained and must be held ultra vires.
- The court then considered the contention about materials used in works-contracts. It accepted the submission that a contractor is liable to pay tax where, in execution of a works-contract, he supplies goods (e.g., bricks, cement, iron, steel) that are used for completion and the employer pays the price to him (i.e., where the contractor supplies the goods).
- The court addressed the State's earlier concession in Builders Association that if the employer supplies goods for construction the value of those goods would not be included in taxable turnover. The court observed that a party's concession in one proceeding does not bind it in another, and thus it was necessary to decide afresh the legal position where there is an agreement that the employer will supply materials but the contractor is made liable to pay the price.
- The court examined Goel & Co. and noted that some observations in that case conflict with Builders Association because Goel & Co. did not consider the effect of the 46th Amendment. Nevertheless, Goel & Co. contains a holding directly relevant here: where the employer undertakes to supply materials for the construction but the contractor is made liable to pay the price of those materials (for example by deduction from the contractor's bill), the contractor is deemed to have sold the goods to the employer and is liable to pay tax under the Sales Tax law.
- The court reconciled authorities by directing that assessments must be carried out in accordance with Builders Association and Goel & Co. to the extent the latter is not in conflict with the former, and by applying the additional constitutional and statutory constraints: assessing officers must take notice of Article 286 of the Constitution and, where goods used are "declared goods" under the Central Sales Tax Act, must apply section 15 of the Central Sales Tax Act when passing the final order.
- Because assessments in the contested cases had not been completed, the court ordered that assessing authorities should proceed with assessment of concerned contractors (annual gross turnover Rs. 25,000 or above) keeping in view the legal positions summarized above.
Holding and Implications
Holding: The court held that Rule 13A of the Bihar Sales Tax Rules is ultra vires and cannot be sustained because it effectively levies tax on labour charges by presuming specified percentages of labour and limiting deductions, whereas labour is not a "good" and the labour component must be excluded from taxable turnover.
Implications and direct consequences:
- Contractors are not liable to pay sales tax on the labour component of works-contracts in light of Builders Association; Rule 13A's mechanism of taxing labour by prescribed percentage is invalid.
- Where a contractor supplies goods used for execution of the works-contract, the contractor is liable to tax on such supply.
- Where there is an agreement that the employer will supply materials but the contractor is made liable to pay the price of those materials (for example by deduction or recovery from the contractor), the contractor is deemed to have sold the goods to the employer and is liable to pay tax (as held in Goel & Co., to the extent not inconsistent with Builders Association).
- Assessing officers must, in assessing contractors' taxable turnover, take into account Article 286 and the provisions of the Central Sales Tax Act (including section 15) for declared goods and inter-State trade considerations.
- The assessing authorities were directed to proceed with assessment of the affected contractors (annual gross turnover Rs. 25,000 or above) in accordance with the principles set out in this opinion. The writ petitions were disposed of with these directions.
The opinion applies and reconciles existing precedents (Builders Association and Goel & Co.) and directs assessments accordingly; it does not, on the face of the record, purport to lay down a broader novel precedent beyond applying and reconciling those authorities to the facts before the court.
S. Roy, J.:— In all these cases, besides other reliefs, prayer was made for declaring the Constitution (46th Amendment) Act, 1982 by which clause (29A) was introduced in Article 366 of the Constitution, as illegal, unconstitutional and void. Consequential prayer was made for declaring that the amendment in the Bihar Finance Act, 1981 in so far as it seeks to impose sales tax on works-contract was illegal and void. In view of the judgment of the Supreme Court in Builders Association of India v. Union of India, 73 (1989) S.T.C 370 : 1989 PLJR (SC) 31 these points were no more available.
2. The points which survived were the validity of rule 13A which was introduced in the Bihar Sales Tax Rules by Notification dated 8th October, 1986 and how far the petitioners were liable to pay sales tax on works-contract entered into by and between them and the persons in whose benefit building, factory etc. were being constructed (hereinafter to be referred to as the employer’).
3. The petitioners are the Association of contractors, its members, and other contractors. The contractors entered into contracts known as works-contract with different employers for execution of various jobs. Consequent to the amendment in the Bihar Finance Act, 1981 (the Act) and Bihar Sales Tax Rules, 1983, the contractors whose annual gross turnover was Rs. 25,000/- or above were directed to get themselves registered under the Act. Direction was issued by the State Government to deduct sales tax at source from the bills of the contractors on the total value of the contract.
4. The submissions made on behalf of the petitioners are as follows:
5. In view of the judgment of the Supreme Court in Builders Association (supra) the contractors shall be liable to pay tax only in case there was sale of goods while executing a works-contract and no tax was payable on the value of the labour involved in its execution. Rule 13A was ultra vires as it provides for deduction of a certain percentage of cost incurred on labour and not the whole of the amount so incurred. The respondents were bound to give effect to the provisions of Central Sales Tax Act, 1956 (C.S.T Act) if the goods used in execution of the job were declared articles and also if the sale took place during the course of inter State trade. In works-contract, the contractors shall be liable to pay tax if the goods for execution of the works-contract, viz.: cement, bricks, iron and steel are supplied by them, but no tax shall be payable if these goods are supplied by the employer and are used for execution of the job.
6. These submissions were met on behalf of the State as follows:
7. It was conceded that in view of the judgment of the Supreme Court in Builders Association, no sales tax was payable on labour. But rule 13A did not speak about labour alone and, therefore it cannot be struck down as a whole. The contractors are liable to pay sales tax on such goods which are supplied for value by the employers, viz.: cement, bricks, iron steel etc. and used in execution of the works-contract. Reliance was placed in N.M Goel and Co. v. Tax Officer, Rajnandgaon, A.I.R 1989 S.C 285.
8. These were replied on behalf of the petitioners by submitting that rule 13A speaks about labour alone. The ratio decidendi in Goel & Co. (supra) has no application to these cases as in that case it was question of payment of entry tax. Further, ratio in Goel & Co. was not applicable to these cases, because it was conceded on behalf of the States in Builders Association that if goods had been supplied by the person for whose benefit, building, factory, etc. were being constructed for the purpose of such construction the value of those goods would not be included in the taxable turnover and the Supreme Court in that case did not adjudicate on this question.
9. It is settled law that State sales tax law must take notice of Article 286 of the Constitution, which prohibits the State to impose tax, inter alia, on sale or purchase of goods where such sale or purchase takes place out-side the State and restricts the quantum of tax on sale or purchase of goods declared under the C.S.T Act to be of special importance in inter-State trade or commerce. This will apply to works-contracts also. In view of this, it must be held that while assessing tax on the taxable turn-over of a contractor who has executed works-contract the assessing officer, for the purpose of assessment, must take notice of the fact whether any goods used in execution of the works-contract is a declared goods under C.S.T Act. If the finding is in the affirmative, he must take further notice of section 15 of C.S.T Act in passing final order.
10. Rule 13A of the Bihar Sales Tax Rules, reads as follows:
“13A. Deduction in case of works contract on account of labour charge.—Deduction under sub-clause (i) of clause (a) of sub-section (1) of section 21 on account of labour charges in case of works contract from gross turnover shall be equal to the following percentage in respect of different types of works contract.
Percentage
(1)(a) Earthwork in all types of soil and in all works on canals, road, embankments, small dams etc. by manual labour; and exclusive labour rate contracts. Percent 100 (b) Earthwork in all types of soil in all works on canals, roads, embankments, dams etc. by machines. 20 (c) Construction of Earth dams with earth moving machines. 25 (2)(a) Construction of masonry/concrete dams, barrages, bridges of more than 15 metres length, water towers and P.H.E.D installations and lift irrigation installations etc. 30 (b) Stone masonry in dams and other such works. 35 (3) Construction of canal structures, bridges upto 15 meters length, all types of buildings and lining of canals. 30 (4)(a) Construction of pucca roads (excluding earthwork). 15 (b) Construction of pucca reads (including earth-work in formation of new roads). 25 (5) River training and flood protection works involving boulder and brick pitching (excluding earthwork). 40 (6) In the case of electrical contracts. 20 (7) In the case of a structural contract. 30 (8) In the case of a sanitary contract. 33-1/3 (9) In the case of retreading contracts. 50 (10) In the case of textile dyeing and printing works contracts. 50 (11) In the case of photography and printing contract. 30 (12) In the case of sculptural contract or contracts relating to arts. 70 (13) In the case of refrigeration, air conditioning or other machinery, rolling shutters, cranes, installation contracts. 15 (14) In the case of other contracts. 30
11. Thus it will be noticed that the rule provides that for different types of works in works contract, different percentage of labour shall be presumed to have been used and amount spent to that extent shall be deducted from the gross turn-over. Tax is payable on labour charges under this rule. Under this rule even if the contractor might have spent more on labour charges than the prescribed percentage stated in the rule, the contractor shall not be entitled to claim deduction beyond what has been provided. In other words, tax is levied on labour charge. Neither sale nor purchase of any goods is involved when a contractor spends on account of labour. “Labour” cannot be said to be a goods even within the definition of “goods” in the Act. From the gross turnover, the total amount spent by the contractor as labour charges in execution of the works-contract shall have to be excluded. Rule 13A cannot be sustained and must be held to be ultra vires.
12. In view of the judgment in Builders Association, the parties agreed that a contractor is liable to pay tax if in execution of works contract, he supplied, goods, e.g bricks, cement etc. which were used for the completion of the contract and employer paid price of it.
13. On behalf of the petitioners our attention was drawn to the following submission made on behalf of the States in Builders Association, (supra):
“……If any goods had been supplied by the person for whose benefit a building, factory or bridge was being constructed for the purpose of such construction the value of those goods would not be included in the taxable turnover.”
14. In view of this, it was submitted that as the State had conceded before the Supreme Court that if any goods had been supplied by the employer for the purpose of construction of building, factory, etc. the value of those goods would not be included in the taxable turnover the respondents cannot now be heard to argue in these cases contrary to the submissions quoted above. It is true that in Builders Association, the Supreme Court has not expressed any opinion whether the aforesaid submission made on behalf of the State embodied the correct legal position. As because in an earlier case concession was made on behalf of a party on a legal question that party cannot be stopped from taking a different position in another proceeding. We are therefore, to decide whether in case where there is an agreement between the contractor who is executing the works contract and the employer that the employer will supply some goods viz. cement, bricks, iron and steel etc. which shall be used for completion of the job and the price of which shall be recovered from the contractor, the amount so paid will not be included in the taxable turnover.
15. From the judgment in Goel & Co. (supra) it appears that the Company was a building contractor and was registered as dealer under the Madhya Pradesh General Sales Tax Act. The tender of the Company for construction of Godown and ancilliary building was accepted by the Central Public Works Department (C.P.W.D). In the tender so submitted by the Company, the prices of the materials to be used for construction including cost of Iron, steel and cement were included. The C.P.W.D however had agreed to supply from its stores iron, steel and cement for construction work and to deduct the prices of materials so supplied and consumed in the construction from the final bill of the Company. The Company was assessed to purchase tax under the Madhya Pradesh General Sales Tax Act and was as such liable for payment of entry tax for iron, steel and cement, the entry for the same having been effected at the instance of the Company because it had ultimately used the materials for the construction work. Under the Madhya Pradesh General Sales Tax Act, it was assessed also to entry tax. The Company challenged the assessment of purchase tax and also assessment of entry tax and the matter came to the Supreme Court.
16. This case was decided earlier than the Builders Association. But the same was not brought to the notice of the Bench hearing the Builders Association case. Some observations made in Goel & Co. (Supra) are no doubt in conflict with the judgment of Builders Association as in the former the effect of 46th Amendment to the Constitution was not considered, viz. observation made in Goel & Co. that for building materials supplied by the contractor in works contract there is no question of sale or purchase, is directly in conflict with the judgment of Builders Association and that no more can be held to be a good law. However, in Goel & Co. it was held that if there is an agreement between the parties by which the employer undertakes to supply materials which are to be consumed for execution of the work contract and the price of which the contractor is made liable to pay, the contractor shall be deemed to have sold the goods to the employer and the contractor is liable to pay tax under the Sales Tax Act. In view of this legal position, notwithstanding the submission made on behalf of the States in Builders Association, it must be held that if there is an agreement between the contractor and the employer under which the employer agrees to supply building materials to the contractor to be used in the work, and the contractor is made liable to pay the price of those materials, there is sale of goods by the contractor and he shall be liable to pay tax on such sale. The legal position now is when there is a transfer of property in goods by the contractor in execution of works contract, sales tax law is attracted.
17. In none of the cases assessment has been completed. The assessing authority in all the cases of works-contract shall proceed with assessment of the contractors who have executed works contract of the annual gross turnover of Rs. 25,000/- or above keeping in view the law laid down by the Supreme Court in Builders Association, in Goel and Co. to the extent not in conflict with Builders Association as held above and also as laid down in this judgment.
18. With the aforesaid directions these writ petitions are disposed of.
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