Case Note & Summary
Background: The appellants, a German company and its Indian assignee, entered into a contract dated December 19, 1953 with Sinclair Fertilisers and Chemicals (Private) Ltd. to set up a complete coke oven battery and by-products plant at Sindri, Bihar, for an all-inclusive price of Rs. 2,31,50,000. The contract was split into a German section and an Indian section, with payments made partly in pounds sterling and partly in Indian currency. The works were completed in 1955, and payments were made. The dispute concerned the liability of the appellants to pay sales tax under the Bihar Sales Tax Act, 1947 on the value of materials used in execution of the works contract. The sales tax authorities treated the supply of materials as a sale under Section 2(g) of the Act, which defined sale to include a transfer of property in goods involved in the execution of a contract. On March 20, 1956, the Superintendent of Sales Tax issued a notice under Section 13(5) to the appellant for the periods 1952-53 to 1954-55, alleging wilful failure to register and proposing penalty. The appellants contended that they had only supplied materials in execution of a works contract, which was not a sale, and that the proceedings were illegal. The tax authorities, however, directed production of books for assessment. The appellants then filed writ petitions under Articles 226 and 227 of the Constitution before the Patna High Court to quash the proceedings. The High Court held that under clause 15(ii) of the contract, property in materials passed to the owner when brought on site, which amounted to a sale, but dismissed the petition on the ground that facts needed investigation by the tax authorities. On appeal to the Supreme Court, the majority (T.L. Venkatarama Aiyar, S.K. Das, J.L. Kapur, and M. Hidayatullah JJ.) held that the contract was entire and indivisible for the construction of specified works for a lump sum and not a contract of sale of materials. Consequently, the supply of materials could not be taxed as a sale under the Bihar Sales Tax Act. The court followed State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. and Peare Lal Hari Singh v. State of Punjab. On the maintainability of the writ petition, the court held that where proceedings are taken under a provision of law which is ultra vires, an aggrieved party can move under Article 226 for quashing them without waiting for final orders, relying on State of Bombay v. United Motors (India) Ltd., Himmatlal Harilal Mehta v. State of Madhya Pradesh, and Bengal Immunity Company Ltd. v. State of Bihar. The court held that the proceedings under Section 13(5) were illegal and must be quashed. Shah J. dissented, opining that the contract also included delivery and supply of accessories and articles, which could be a sale, and that investigation of facts was necessary before determining liability. The appeals were allowed, and the assessment proceedings against the appellants were quashed.
Headnote
A) Constitutional Law - Writ Jurisdiction - Maintainability of Writ Petition Against Ultra Vires Proceedings - Constitution of India, Article 226 - Where proceedings are taken before a tribunal under a provision of law which is ultra vires, an aggrieved party can move the court under Article 226 for quashing them without waiting for final orders. The court relied on State of Bombay v. United Motors (India) Ltd., Himmatlal Harilal Mehta v. State of Madhya Pradesh, and Bengal Immunity Company Ltd. v. State of Bihar. In the present case, the sales tax authorities sought to tax the supply of materials under an indivisible works contract as sale, which was without jurisdiction. Held that the proceedings under Section 13(5) of the Bihar Sales Tax Act, 1947 were illegal and must be quashed (Paras 7-9). B) Sales Tax - Works Contract - Supply of Materials in Entire and Indivisible Contract Not Taxable as Sale - Bihar Sales Tax Act, 1947, Sections 2(g), 2(b), 2(d), 2(h)(ii), 2(c), 2(1), 4, 5, 13(5) - The contract dated December 19, 1953 for construction of a coke oven battery and by-products plant for a lump sum was entire and indivisible; materials supplied in execution were not sold as goods, and the tax authorities could not impose sales tax on such supply. The court followed State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. and Peare Lal Hari Singh v. State of Punjab. Held that the assessment proceedings were without jurisdiction and must be quashed (Paras 4-6). C) Contract Law - Property in Materials - Clause 15(ii) Does Not Convert Works Contract into Sale - Bihar Sales Tax Act, 1947, Section 2(g) - The High Court's view that clause 15(ii) of the contract transferred property in materials upon being brought to the site and thus constituted a sale was erroneous. The transfer of property was incidental to the entire works contract and not a separate sale of goods. Held that no sale of materials occurred, and the sales tax authorities had no right to tax the supply of materials (Paras 5-6). D) Dissenting Opinion - Works Contract - Composite Contract Requires Investigation - Bihar Sales Tax Act, 1947, Section 2(g) - Shah J. dissented, holding that the contract included delivery and supply of accessories and articles, which could be a sale, and without investigation of the true nature of the transaction, the High Court could not decide whether it was a pure works contract or a composite contract. The taxing authorities must investigate the facts. Held that the High Court was right to decline to issue the writ (Paras 10-12).
Issue of Consideration
Whether the contract dated December 19, 1953 was an indivisible works contract or a contract of sale of materials, and whether the supply of materials thereunder could be taxed as sale under the Bihar Sales Tax Act, 1947; whether the writ petition under Articles 226 and 227 was maintainable to quash the sales tax proceedings without awaiting final assessment.
Final Decision
The Supreme Court allowed the appeals and quashed the proceedings initiated under Section 13(5) of the Bihar Sales Tax Act, 1947 against the appellants. The Court held that the contract dated December 19, 1953 was entire and indivisible for the construction of specified works for a lump sum and not a contract of sale of materials, and that the sales tax authorities had no jurisdiction to impose tax on the materials supplied in execution of that contract as if such supply were a sale.
Law Points
- In a contract for execution of works which is entire and indivisible
- supply of materials is not a sale of goods and cannot be taxed as such under a State law
- a writ petition under Article 226 is maintainable to quash proceedings under a provision which is ultra vires without waiting for final order
- property in materials transferred incidentally to a works contract does not convert the contract into a sale of goods.
