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					    LEVY OF TAX ON WORKS CONTRACT AND
    TRANSFER OF RIGHT TO USE THE GOODS
     (SPEECH DELIVERED IN THE SEMINAR SESSION OF 27TH U. P. TAX
       BAR CONFERENCE HELD AT FAIZABAD ON 6TH JNAURY 2007)
                                        By Justice Rajes Kumar
                                     Judge Allahabad High Court

     President of this Session, Shri Bharat Ji Agrawal, learned
Senior Advocate of Allahabad High Court, Chairman of the Conference
Shri Arvind Agrawal, convener of the conference Sri Anand Kumar
Singhal, V. N. Rai, the eminent speakers, ladies and gentleman.
      It is indeed a matter of proud and privilege for me to be with all of
you and to address the august gathering present here. Since I was
associated with the Advocates and the Chartered Accountants
practicing in tax side, therefore, an opportunity to meet all of you is a
matter of immense pleasure for me.
     I am very thankful for the organizer of the conference for inviting
me on the occasion and giving me an opportunity to speak few words.
       Subject of the Seminar “Levy of tax on Works Contract and
transfer of right to use the goods” though has become old by passage
of time but still has its significance due to the various unsettled issues
relating thereto. Through the Seminars we get an opportunity to educate
our self on the subject and to update our knowledge.
      In the case of State of Madras vs. Gannon Dunkerley & Company
and others, (Madras), reported in 9 STC, 353, Apex Court had a occasion
to consider whether in the building contract which was in the nature
of composite and indivisible works contract, there was a sale of goods.
Apex Court held that there was no sale of goods.
      Likewise, the goods provided on lease for use was not liable to
tax because it was not sale within the definition of Section 4 of the
Sale of Goods Act.
      After the decision in the case of State of Madras Vs. Gannon
Dunkerley & Company (supra), the matter with regard to taxability of
goods involved in the execution of works contract, was examined by
the Law Commission, in its 61st report.
      As a result of the recommendations by the Law’ Commission to
levy the tax on the goods used in the execution of the works contract
and on the leasing transactions, clause (29-A) has been added in Article
366 of the Constitution of India by the 46th Constitutional Amendment,
enlarging the definition of sale.
      As a result of the Constitutional Amendment States have also
amended their Trade Tax laws, and enlarge the definition of sale and
levied the tax on the value of the goods involved in the execution of the
works contract and transfer of right to use the goods. Under the U.P.
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Trade Tax Act definition of sale in section 2 (h) has been amended and
by Section 3-F of U.P. Trade Tax Act tax has been levied. The validity of
the Constitutional Amendment has been upheld by the Constitution
Bench of the Apex Court in the case of Builders Association of India vs.
Union of India, reported in 1989 UPTC, 645 (SC).
      In brief, Apex Court held that by fiction, indivisible contract has
been made as divisible contract and the value of the goods involved in
the execution of contract have been subjected to tax. Apex Court held
that under the law only the value of the goods used in the execution of
the works contract is liable to tax and not the building as a whole. It
has been further held that the levy would be subject to the restriction
and conditions mentioned in each clause or sub-clause of Article 286
of the Constitution of India.
     Law laid down by the Apex Court has been further elaborated by
the Constitution Bench of the Apex Court in the case of Gannon
Dunkerley and Co. vs. State of Rajasthan, reported in 1992 NTN (Vol. 1)
417J; 1993 UPTC 416.
      On the basis of the aforesaid decisions, Section 3-F of U.P. Trade
Tax Act which has been initially introduced has been held as ultra-
vires by the Division Bench of Allahabad High Court in the case of
V.K.Singhal Vs. State of U.P., reported in 1995 NTN (Vol. 6) 17; 1995
UPTC, 337, inasmuch as it purported to levy the tax on the inter State
transactions also. As a result of Division Bench decision of this Court,
Section 3-F has been amended with retrospective effect in the year
1995 by U.P. Act No.31 of 1995. Under the new amended Section 3-F of
the Act transactions relating to Sections 3, 4 and 5 of the Central
Sales Tax Act have been excluded.
      Initially only 15 works contracts have been subjected to tax by
the notification no. ST-II-2399 dated 27.04.1987. Subsequently, time
to time some more works contracts have been taxed. Now all the works
contracts have been subjected to tax.
      On the point of levy of tax on the inter-State transactions, several
decisions have been given by Allahabad High Court namely, Santosh &
Company vs. Commissioner of Trade Tax, reported in 1999 NTN (Vol. 15)
604 ; 1999 UPTC 823, Commissioner of Trade Tax Vs. S/S Indian Railway
Construction Company, Agra, reported in 2005 UPTC, 984. The law
appears to be settled but has to be applied on the facts of the case.
      It is made clear that aforesaid amendment applies to only
composite indivisible works contract, the concept of works contract as
laid down by the Apex Court in the case of State of Madras Vs. Gannon
Dunkerley & Company and others, (Madras), reported in 9 STC, 353,
Commissioner of Sales Tax, M.P. Vs. Purshottam Premji, reported in 26
STC 38, Hindustan Aeronautics Vs. State of Karnataka, reported in (1984)
1 SCC 707, Sentinel Rolling Shutters & Engineering Co. (P) Ltd. Vs.
Commissioner of Sales Tax, Maharashtra, reported in 1979 UPTC, 872,
Everest Copiers Vs. State of Tamil Nadu, reported in 1996 NTN (Vol.9)
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SC, 147 etc.
      Article 366 (12) has defined the words “goods” for the purpose of
the Constitution as including “All materials, commodities, and articles”.
The word “goods” has also been defined in Section 2 (7) of the Sales of
Goods Act, 1930 as meaning “every kind of movable property other than
actionable claims and money; and includes stock and shares, growing
crops, grass, and things attached to or forming part of the land are
agreed to be served before sale or under the contract of sale.” Goods
has been defined by Section 2 (d) of U.P. Trade Tax Act as follows:
     “every Kind Or Class of moveable property and includes all Materials
    Commodities and articles involved in the execution of a works
    contract and growing Crops Grass Tree and Things attached to or
    fastened to anything permanently attached to the earth which under
    the contract of sale are agreed to be severed but does not include
    actionable claims stocks shares securities or postal stationery sold
    by the Postal Department.”
      Thus, only the moveable properties are subject to tax and the
immovable properties are not liable to tax. In the case of M/s. Municipal
Board, Mussoorie vs. Trade Tax Tribunal, Dehradun and others (Supra)
Allahabad High Court has held that no tax can be levied under section
3-F of U.P. Trade Tax Act on immovable property.
       In the case of Tata Consultancy Services Vs. State of Andhra
Pradesh, Apex Court held that the goods may be a tangible property or
an intangible one. It would become goods provided it has the attributes
thereof having regard to ( a) its utility, (b) capable of being bought and
sold; and (c) capable of being transmitted, transferred, delivered, stored
and possessed. The above view has been followed by the Apex court in
the case of Bharat Sanchar Nigam Ltd. and another Vs. Union of India and
others, reported in 2006 NTN (Vol. 29) 307.
       Recently, a question came up for consideration before the Apex
Court in the case of builders, that if the land is provided by the land
owners to the builders for the construction of the flats and the builders
constructs the flats after the allotment and taking the money in
instalments, the Apex Court held that such contract would be works
contract and the value of the goods would be liable to tax in the case of
K.Raheja Development Corporation vs. State of Karnataka, reported in 2005
NTN (Vol. 27) 243; 2005 (5) SCC, 162. In the same case, it has been
held that where the agreement is made after the completion of the
flats, the value of the goods would not be liable to tax.
      In the case of Rainbow Colour Lab vs. State of M.P., reported in
2000 NTN (VoI.16), 210, Apex Court held that the job rendered by the
photographer in taking the photographs, developing and printing would
not amount to works contract and is only in the nature of service
contract not involving any sale of goods.
       In the case of Associated Cement Companies Ltd. Vs. Commissioner

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of Customs, reported in 2002 NTN (Vol. 20) 73; (2001) 4 SCC, 593 Apex
Court doubted the conclusion arrived at in the case of Rainbow Colour
Lab vs. State of M.P., (Supra) and has held that the same is contrary to
the provisions contained in Article 366 (29-A) and also to the
Constitution Bench decision of the Apex Court in the case of Builders
Association of India vs. Union of India (Surpa).
     In the case of C.K. Jidheesh vs. Union of India, reported in 2005 (8)
SCALE, 784 Apex Court held that the observation in the case of
Associated Cement Companies Ltd. referred
Here in above were obiter and the judgment in the case of Rainbow
Colour Lab (Supra) was still good law.
      The aforesaid decisions have been considered by the Apex Court
in the case of Bharat Sanchar Nigam Limited Vs. Union of India (Supra).
Apex Court held that after the 46th Constitutional Amendment the
sale element of those contracts
      Which are covered by the six sub-clauses of clause (29-A) of Article
366 are separable and may be subjected to sales tax by the States
under Entry 54 of List II and there is no question of the dominent
nature test applying. The decision in the case of Rainbow Colour Lab
(Supra) and C.K. Jidheesh vs. Union of India (Supra) has been held not
correct. The dominent object in a contract is held to be not relevant
and the value of the goods involved in a contract is held liable to tax
under Article 366 (29A) of the Constitution of India.
     Under the transfer of right to use the goods, the leasing
transactions are liable to tax.
Clause (d) of Article 366 (29-A), which is clause (a) of Section 3-F (1) of
the Act came up for consideration before the Constitution Bench of
the Apex Court in the case of 20th Century Finance Corporation Ltd. vs.
State of Maharashtra, reported in 2000 NTN (Vol. 16) 425; 2000 UPTC,
593, the Apex Court held as follows:
“As a result of the aforesaid discussion our conclusions are these:
(a)   The States in exercise of power under Entry 54 of List II read
      with Article 366 (29-A) (d) are not competent to levy sales tax on
      the transfer of right to use goods, which is deemed sale, if such
      sale takes place outside the State or is a sale in the course of
      inter-State trade or Commerce or is a sale in the course of import
      or export.
(b)   The appropriate Legislature by creating Legal fiction can fix situs
      of sale. In the. Absence of any such legal fiction the situs of sale
      in case of the transaction of transfer of right to use any goods
      would be the place where the property in goods passes, i.e. where
      the written agreement transferring the right to use is executed.
(c)   Where the goods are available for the transfer of right to use the
      taxable event on the transfer of right to use any goods is on the

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      transfer which results in the right to use and the situs of sale
      would be the place where the contract is executed and not where
      the goods are located for use.
(d)   In cases where goods are not in existence or where there is an
      oral or implied transfer of the right to use goods, such
      transactions may be effected by the delivery of the goods. In such
      cases the taxable event would be on the delivery of goods.
(e)   The transaction of transfer of right to use goods cannot be termed
      as contract of bailment as it is deemed sale within the meaning
      of legal fiction engrafted in Clause (29-A) (d) of Article 366 of the
      Constitution where the location or delivery of goods to put to use
      is immaterial. “
      After laying down the aforesaid law, the Apex Court examined
the provision of respective State relating to the transfer of right to use
the goods. The provisions of Section 2 (h) and Section 3-F of the Act
have also been examined. The Apex Court held as follows:
      “The aforesaid provisions shows that so far as the inter-State
      sales are concerned, in substance are not taxable, but no
      provision has been made for declared goods. Yet, there is another
      aspect. By virtue of Clause (ii) of Explanation 1 to Section 2 (h),
      the ambit of sale has been widen by including ’Outside sale’ as
      'inside sale' on mere location of goods for use within the state
      irrespective of the fact that the agreement for transfer of right to
      use has been executed out side the state or whether the sale is
      outside the State, the tax is chargeable within the State. And,
      further, on account of a special provision for rates of tax, the
      other provision such as single Point tax as well as exemption
      etc. is not Applicable to the transaction of transfer of right to use
      any goods. We find that Clause (ii) of Explanation I of Section 2
      (h) is in excess of legislative power under Entry 54, List-II of
      Seventh Schedule and, therefore, we direct that Clause (ii) of
      Explanation I of Section 2 (h) of the Act shall be read down to this
      effect that it would not be applicable to the transaction of transfer
      of right to use any goods if such deemed sale is (i) an outside
      sale, (ii) sale in course of the import of the goods into or export of
      the goods out of the territory of India and (iii) an inter State sale.”
      From the law laid down as above, it emerges that the State has
no jurisdiction to levy the tax on such deemed sale if such sale take
place outside the State or in the course of inter-State trade or commerce
or in the case of import or export; the legislature by creating fiction
can fix situs of sale in the absence of such legal fiction the situs would
be a place where the written agreement transferring the right to use
is executed; where the goods are available for the transfer of right to
use the taxable event on the transfer of right to use any goods is on
the transfer which results in right to use and the situs of sale would
be the place where the contract is executed and not where the goods

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are located for use; in case where the goods are not in existence or
where there is an oral or implied transfer of right to use the goods,
such transactions may be effected by the delivery of the goods and in
such cases the taxable event would be on the delivery of the goods.
       Clause (ii) of Explanation-I of Section 2 (h) of the Act is to be read
down to the effect that it would not be applicable to the transaction of
transfer of right to use any goods, if such deemed sale is (i) an outside
sale, (ii) sale in course of the import of the goods into or export of the
goods out of the territory of India and (iii) an inter-State sale.
      In the case of 20th Century Finance Corporation Ltd.vs State of
Maharashtra (Supra) Apex court has categorically held That the
appropriate Legislature by creating fiction can fix situs of sale and in
the absence of such legal fiction the situs would be a place where the
property in goods passes, i.e. written agreement right to use the goods
executed.
       In the case of M/s Goa Carobn Limited, Goa vs. CTT, reported in
2006 NTN (Vol.), 448. Following the decision of the Constitution Bench
of the Apex Court, Allahabad High Court has held that the fiction under
the U.P. Trade Tax Act by clause (2) of Explanation I of section 2(h) of
U.P. Trade Tax Act fixing the situs of sale in the State where the goods
are used, notwithstanding that the agreement for lease has been
entered into outside the State, is valid. The place of execution of the
agreement has been held irrelevant.
      Apex Court further held that Clause (ii) of Explanation-I of Section
2(h) of U.P. Trade Tax Act is to be read down to the effect that it would
not be applicable to the transaction of transfer of right to use any goods,
if such deemed sale is (i) an outside sale, (ii) sale in course of the
import of the goods into or export of the goods out of the territory of
India and (iii) an inter-State sale. Thus, the inter-State transactions
can not be subjected to tax under the transfer of right to use the goods.
The principle laid down by the Apex Court has to be applied on the facts
of the case.
      In the case of Bharat Sanchar Nigam Ltd. & another Versus Union
of India & others (Supra), the decision of the Apex Court in the case of
20th Century Finance Corporation Ltd and another Versus State of
Maharashtra (supra) came up for consideration. The quarrel was with
regard to the
      Observation of the Apex Court namely, “In our view, therefore, on
a plain reading of sub-section (d) of Clause (29-A) the taxable event is
transfer of right to use the goods regardless to say whether the goods are
delivered for use, what is required is that should be in existence so that
they may be used.” In view of the aforesaid observation, the State was
of the view that for the transfer of right to use the goods possession/
delivery of the goods was not necessary. This aspect of the matter has
been examined by the Apex Court in the case of Bharat Sanchar Nigam
Ltd. & another. Versus Union of India & others (supra).
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      Apex Court explained the above observation in the case of 20th
Century Finance Corporation Ltd. vs. State of Maharashtra (Supra) and
held as follows:
       In our opinion, the essence of the right under Article 366 (29A)
(d) is that it relates to user of goods. It may be that the
            Actual delivery of the goods is not necessary for effecting
the transfer of the right to use the goods but the goods must be
available at the time of transfer must be deliverable and delivered
at some state. It is assumed. at the time of execution of any
agreement to transfer the right to use. That the goods are available
and deliverable. If the goods. Or what is claimed to be goods by the
respondents. are not deliverable at all by the service providers to
the subscribers” the Question of the right to use those goods” would
not arise.
            In the same judgment, Hon’ble Dr.A.R.Lakshamanan, J.
further held as follows :
(a)   The transferee should have a legal right to use the goods
      consequently all legal consequences of such use including any
      permissions or licenses required therefore should be available
      to the transferee;
(b)   for the period during which the transferee has such legal right it
      has to be the exclusion to the transferor this is the necessary
      concomitant of the plain language of the statute viz a "transfer
      of the right to use" and not merely a licence to use the goods,
       Thus for being a transfer of right to use the goods the goods must
be deliverable and should be delivered at some stage thus delivery of
the goods at some stage is a condition precedent for the transfer of
right to use the goods .
     There are lot to say on the subject but due to my limitations it
may not be possible for me to express any opinion on the controversial
issues
      In the end , I once again express my gratitude to the organizer of
conference for inviting me and giving me an opportunity to speak few
words.
                              ---------------




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