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REPORTABLE IN THE SUPREME COURT OF INDIA  

CIVIL APPELLATE JURISDICTION

CIVIL  APPEAL NO. 8672    OF 2013 (Arising out of SLP(C) No.17741 of 2007)

M/s. Larsen & Toubro Limited & Anr.                ……  Appellants

   Versus

State of Karnataka & Anr.        ……Respondents

WITH

CIVIL  APPEAL NOS.          8673-8684    OF 2013   (Arising out of SLP(C) Nos. 30581-30592 of 2009)

WITH

CIVIL  APPEAL NO.   8685      OF 2013 (Arising out of SLP(C) No.17709 of 2012)

WITH

CIVIL  APPEAL NO.  8686       OF 2013 (Arising out of SLP(C) No.17738 of 2012)

WITH

CIVIL  APPEAL NO.  8687       OF 2013 (Arising out of SLP(C) No.21052 of 2012)

WITH

CIVIL  APPEAL NO.   8688      OF 2013 (Arising out of SLP(C) No.21863 of 2012)

WITH

CIVIL  APPEAL NO.   8690      OF 2013 (Arising out of SLP(C) No.26226 of 2012)

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WITH

CIVIL  APPEAL NO.  8691       OF 2013 (Arising out of SLP(C) No.476 of 2012)

WITH

CIVIL  APPEAL NO.   8692      OF 2013 (Arising out of SLP(C) No.29143 of 2012)

WITH

CIVIL  APPEAL NO.   8693      OF 2013 (Arising out of SLP(C) No.29145 of 2012)

WITH

CIVIL  APPEAL NO.   8695     OF 2013 (Arising out of SLP(C) No.29146 of 2012)

WITH

CIVIL  APPEAL NO.    8696 OF 2013 (Arising out of SLP(C) No.29147 of 2012)

WITH

CIVIL  APPEAL NO. 8697    OF 2013 (Arising out of SLP(C) No.29148 of 2012)

WITH

CIVIL  APPEAL NO.    8698    OF 2013 (Arising out of SLP(C) No.29149 of 2012)

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AND

CIVIL  APPEAL NO.   8699     OF 2013 (Arising out of SLP(C) No.29151 of 2012)

JUDGMENT

R.M. LODHA, J.  

Leave granted in all these special leave petitions.

2. Does the two-Judge Bench decision of this Court in  Raheja  

Development1 lay down the correct  legal  position? It  is  to consider this  

question that in Larsen and Toubro2 a two-Judge Bench of this Court has  

referred the matter for consideration by the larger Bench.  In the referral  

order  dated 19.8.2008,  the two-Judge Bench after  noticing the relevant  

provisions  of  the  Karnataka  Sales  Tax  Act,  1957  and  the  distinction  

between a contract of sale and a works contract  made the reference to the  

larger Bench by observing as follows :

“We  have  prima  facie some  difficulty  in  accepting  the  proposition laid down in Para 20 quoted above. Firstly, in our  view,  prima facie,  M/s Larsen & Toubro -  petitioner herein,  being a developer had undertaken the contract to develop the  property of Dinesh Ranka. Secondly, the Show Cause Notice  proceeds only on the basis that Tripartite Agreement is the  works contract. Thirdly, in the Show Cause Notice there is no  allegation  made  by  the  Department  that  there  is  monetary  consideration  involved  in  the  first  contract  which  is  the  Development Agreement.

1 K. Raheja Development Corporation v. State of Karnataka; (2005) 5 SCC 162   2 M/s. Larsen & Toubro Limited & Anr. v. State of Karnataka & Anr.; SLP(C) No. 17741 of 2007

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Be that as it may, apart from the disputes in hand, the point  which  we  have  to  examine  is  whether  the  ratio  of  the  judgment  of  the  Division  Bench  in  the  case  of  Raheja  Development Corporation (supra) as enunciated in Para 20, is  correct. If the Development Agreement is not a works contract  could the Department rely upon the second contract, which is  the  Tripartite  Agreement  and  interpret  it  to  be  a  works  contract, as defined under the 1957 Act.   The Department  has relied  upon only  the judgment  of  this  Court  in  Raheja  Development Corporation(supra) case because para 20 does  assist the Department. However, we are of the view that if the  ratio  of  Raheja  Development  case  is  to  be  accepted  then  there would be no difference between works contract and a  contract for sale of chattel as a chattel.   Lastly, could it be  said  that  petitioner  -  Company  was  the  contractor  for  prospective flat purchaser.     Under the definition of the term  "works contract" as quoted above the contractor must have  undertaken the work of construction for and on behalf of the  contractor  (sic.)  for  cash,  deferred  or  any  other  valuable  consideration.    According to the Department, Development  Agreement is not works contract but the Tripartite Agreement  is works contract which, prima facie, appears to be fallacious.  There is no allegation that the Tripartite Agreement is sham or  bogus.

For the aforestated reasons, we direct the Office to place this  matter  before  the  Hon'ble  Chief  Justice  for  appropriate  directions  in  this  regard,  as  we  are  of  the  view  that  the  judgment  of  Division  Bench  in  the  case  of  Raheja  Development  (supra)  needs  re-consideration  by  the  larger  Bench.”

3. Of the 26 appeals under consideration before us, 14 are from  

Karnataka and 12 from Maharashtra.  Insofar  as Karnataka appeals are  

concerned, it is appropriate that we take the facts from the leading case  

being  Larsen and Toubro2.  The ECC division of  Larsen and Toubro (for  

short, “L&T”) is engaged in property development along with the owners of  

vacant sites. On 19.10.1995, L&T entered into a development agreement  

with Dinesh Ranka, owner of the land bearing survey numbers 90/1, 91, 92  

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(Part), 94, 95 and 96/1 (Part) together measuring 34 acres all situated at  

Kothanur  Village,  Begur  Hobli,  Bangalore  South  Taluk,  Bangalore,  for  

construction  of  a  multi-storeyed apartment  complex.  The owner  was to  

contribute his land and L&T was to construct the apartment complex. After  

development, 25% of the total space  was to belong to the owner and 75%  

to L&T. A power of  attorney was executed by the owner of  the land in  

favour  of  L&T  to  enable  it  to  negotiate  and  book  orders  from  the  

prospective  purchasers  for  allotment  of  built  up area.  Accordingly,  L&T  

entered  into  agreements  of  sale  with  intended  purchasers.  The  

agreements  provided  that  on  completion  of  the  construction,  the  

apartments  would  be  handed  over  to  the  purchasers  who  will   get  an  

undivided interest  in the land also.  Sale deeds,  thus, were executed in  

favour of the intended purchasers by L&T and the owner.  

4. On 12.07.2005, the business premises of L&T were  inspected  

by the Deputy Commissioner of Commercial Taxes (Intelligence-1) South  

Zone,  Koramangala,  Bangalore  (hereinafter  referred  to  as  the  ‘Deputy  

Commissioner’)  and a  detailed  statement  of  the  Finance  Manager  was  

recorded.  

5. On 21.12.2005, the Deputy Commissioner called upon L&T to  

furnish  the  details  of  development  project.   L&T  furnished  details  on  

24.07.2005 and 26.09.2005.

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6. On  04.10.2005,  the  Deputy  Commissioner  served  a  show  

cause notice on L&T stating that it was liable to tax as per the decision of  

this Court in  Raheja Development1.   L&T responded to the show cause  

notice and submitted preliminary objections on 10.10.2005. By a further  

communication dated 10.11.2005, L&T objected to the assessment of tax  

for development of projects by it.  The  L&T inter alia  submitted that the  

development agreement was not a works contract per se on account of the  

reasons: (a) the agreement was to develop and market flats to customers;  

(b) the intent and purpose of the agreement was to develop property by the  

petitioners  on  the  one  hand  and  the  land  owner  on  the  other;  (c)  the  

construction  and  development  of  the  said   land  involved  no  monetary  

consideration; and (d) the only consideration was that upon the completion  

of the entire project,  L&T would be entitled to 75 per cent of the same.

7. Again on 04.01.2006, the business premises of L&T were inspected  

and  certain  documents  like  agreement  copies  and  other  documents  

relating to the transactions of the sale of flats were seized for the purposes  

of further investigation and verification.

8. On 02.02.2006, the Deputy Commissioner served upon L&T a  

further  notice  proposing  to  tax  the  sale  of  materials  used  in  the  

construction of flats on the ground that it was entitled to 75 per cent of the  

share of the projects. L&T filed detailed objections to this notice as well.

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9. On 03.07.2006, the Deputy Commissioner issued provisional  

assessment orders under Section 28(6) of the Karnataka Sales Tax Act,  

1957 (for short, ‘KST Act’) for the years 2000-01 to 2004-05. Along  with  

the  provisional  orders,  the  Deputy  Commissioner   also  issued demand  

notices raising a total   demand of  Rs. 3,99,28,636/-.

10. Initially,  L&T  preferred  a  writ  petition  before  this  Court  

challenging the above demands but that writ petition was withdrawn and a  

writ petition under Article 226 of the Constitution of India was filed before  

the Karnataka High Court.

11. The Single Judge of the Karnataka High Court noted that the  

controversy raised by the L&T was covered by the decision of this Court in  

Raheja  Development1  and,  accordingly,  dismissed  the  writ  petition  on  

10.07.2007 by observing as follows:

“From the aforesaid observations of the Apex Court it is very  much clear that as the petitioner No. 1 had entered into an  agreement  to  carry  out  construction  activity  on  behalf  of  someone else for cash or for deferred payment or for any  other valuable construction,  it would be carrying out works  contract and therefore would become liable to pay turnover  tax on the transfer involved in such work contracts.  It is also  not in dispute in this matter that the agreement of  sale is  entered into between the first petitioner and the buyers of the  flat  even  prior  to  completion  of  the  construction  of  the  building.  Under such circumstances, as has been held by  the  Apex  Court   in  the  RAHEJA  DEVELOPMENT  CORPORATION’s Case, the petitioners are liable to pay the  turnover tax on the transfer of goods involved in such ‘works  contract’.   In  view of  the  dictum laid  down by the  recent  judgment cited supra, this Court does not find any merit in  this writ petition.”

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12. L&T preferred an intra-court appeal.  The Division Bench of  

that Court concurred with the Single Judge and dismissed the writ appeal  

by expressing its opinion as follows:

“In  our  view,  so  far  as  the  definition  of  ‘work  contract’  in  almost similar situation as in the present case has been  well  considered by the Hon’ble Supreme Court in the case of K.  RAHEJA  DEVELOPMENT  CORPORATION  (supra).   The  question as to whether that judgment as per Article 141 of  the Constitution of India is the law of the land binding on all  the Courts in the Country.  Prima facie, we find that the facts  and   circumstances in that case are almost similar to the  present  case  and  as  such,  the  ratio  laid  down  in  the  RAHEJA’s  Case  and  relied  upon  by  the  learned  Single  Judge is, in our view, just and proper. So far as the other  pronouncements are concerned, if the appellant feels that it  is necessary to get the pronouncement in RAHEJA’s Case  reviewed, it is open for him to approach the Apex Court and  this Court cannot substitute its own findings on the questions  since the same has already been decided by the Apex Court  in RAHEJA’s case.”

13. Insofar  as  appeals  from  Maharashtra  are  concerned,  they  

arise from the judgment  of  the Bombay High Court.  The Bombay High  

Court was concerned with the  group of matters wherein challenge was  

laid to the constitutional validity of  Section 2(24) of the Maharashtra Value  

Added  Tax  Act,  2002  (for  short,  “MVAT  Act”)  as  amended  initially  by  

Maharashtra Act XXXII of 2006 and thereafter by Maharashtra Act XXV of  

2007 and Rule 58(1A) of the Maharashtra Value Added Tax Rules, 2005  

(for short, “MVAT Rules”).   

14. The Division Bench of the Bombay High Court on examination  

of rival contentions has, inter alia, held; (a) works contract have numerous  

variations and it is not possible to accept the contention either as a matter  

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of principle or as a matter of interpretation that a contract for works in the  

course of which title  is transferred to the flat purchaser would cease to be  

works contract;  (b) the provisions of MOFA recognise an interest of the  

purchaser of  the apartment,  not only in respect  of  the apartment  which  

forms the subject matter of the purchase, but also an undivided interest,  

described as a percentage in the common areas and  facilities;  (c) the  

amendment to Section 2(24)  clarifies the legislative intent that a transfer of  

property in goods involved in the execution of works contract including an  

agreement for building and construction of immovable property would fall  

within  the  description  of  a  sale  of  goods  within  the  meaning  of  that  

provision and it brings within the ambit of that expression “transactions of  

that nature” which are referable to Article 366 (29-A)(b); (d) by amended  

definition  of  the expression  “sale”  in  clause (b)(ii)  of  the explanation to  

Section 2(24),  the transactions which involve works contract have been  

covered;  (e)  the  amendment  in  Section  2(24)  does  not  transgress  the  

boundary set out in Article 366(29-A); (f) Rule 58(1A) of the MVAT Rules  

provides that in the case of construction contracts where the immovable  

property, land or as the case may be, interest therein is to be conveyed  

and the property involved in the execution of the construction contract is  

also transferred,  it  is  the latter  component  which is  brought  to  tax;  the  

value of the goods at the time of transfer is to be calculated after making  

the deductions which are specified under sub-rule (1);  and (g)  Rule  

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58(1A) provides for  a measure for the tax by excluding the cost of the  

land.  

15. The Division Bench of the Bombay High Court, thus, found no  

merit in the challenge to the constitutional validity of Section 2(24) of the  

MVAT Act and Rule 58(1A) of the MVAT Rules. The trade circulars and the  

notifications were also found to be legal and consequently writ  petitions  

were dismissed.  

16. We have heard learned senior  counsel  and counsel  for  the  

appellants  and  learned  senior  counsel  for  Karnataka  and  learned  

Advocate-General  and  learned  senior  counsel  for  Maharashtra  at  quite  

some length.   

17. Mr. Rohinton F. Nariman, learned senior counsel for L&T led  

the arguments on behalf of the appellants. His submission is that Raheja  

Development1 does not lay down correct law.  He submits  that insertion of  

clause 29-A (b) in Article 366 following the 61st Law Commission Report is  

intended to separate the goods component from the labour and services  

component of a composite works contract.  The amendment does not in  

any manner  undo  Gannon Dunkerley-I3 insofar  as that  decision defines  

what a works contract is. In this regard, learned senior counsel extensively  

referred to the decisions of this Court in Builders’ Association4 and Bharat   

3 State of Madras v. Gannon Dunkerley and Co.; (1959) SCR 379 4 Builders’ Association of India and others v. Union of India and others; (1989) 2 SCC 645  

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Sanchar5.   It  is  argued  by  him  that  in  Raheja  Development1   it  was  

incorrectly assumed that the definition of works contract was wide although  

the definition of works contract in KST Act and Madras General Sales Tax  

Act which was under consideration in Gannon Dunkerley-I3  was identical.  

18. Alternatively, it is argued by Mr. Rohinton F. Nariman that if it  

is accepted that the definition of ‘works contract’ in KST Act is wide which  

takes within its fold the contracts that are not commonly understood as  

works contract then this would be outside Entry 54 List II of the Seventh  

Schedule  of  the  Constitution  for  the  reason  that  “works  contract”  as  

understood in Gannon Dunkerley-I3  has not in any manner been upset by  

the constitutional amendment and would have to mean “works contract” as  

commonly understood.  

19. Criticizing  the  conclusions  drawn  in  paragraph  20  of  the  

judgment in Raheja Development1, it is argued by Mr. Rohinton F. Nariman  

that  these  conclusions  are  incorrect  for,  (a)  the  well  known  tests  to  

determine  as  to  whether  a  particular  contract  is  a  “works  contract”  or  

“contract of sale” have not been adverted to;  (b) the contract is not read as  

a whole. Its substance and the main object has not been looked at and one  

phrase is torn  out  of  context  without  adverting to any other  part  of  the  

contract and based on this reasoning the contract is said to be a works  

contract;  (c) though it is  noticed that construction/development is to be on  

5 Bharat Sanchar Nigam Limited and another v. Union of India and others; (2006) 3 SCC 1  

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payment  of  a  price  in  various  installments  but  does  not  draw  any  

conclusion from it; (d) it is noticed that developer has a lien on the property  

but incorrectly states that the lien is because they are not owners. The lien  

is obviously so that if monies are not recovered from the prospective flat  

purchasers, the lien can be exercised, showing thereby that the contract is  

a contract of an agreement to sell immovable property; (e) after noticing  

that developer can terminate the agreement if any one installment is not  

paid  and  can  forfeit  10%  of  the  amount  that  has  been  paid  and  can  

ultimately resell the flat, it is held that the presence of such a clause does  

not  mean  that  the  agreement  ceases  to  be  a  “works  contract”  without  

appreciating that such a clause would have no place in a works contract  

and can only be consistent with the contract  for the sale of  immovable  

property inasmuch as termination can take place if the entire consideration  

for  the  immovable  property  is  not  paid;  (f)  it  is  stated  that  if  there  is  

termination but there is no re-sale, there would be no works contract only  

to  that  extent  which is  again  wholly  incorrect  because post  termination  

what  happens  to  a  particular  flat  is  of  no  relevance  inasmuch  as  the  

prospective flat purchaser goes out of the picture;  and (g) the distinction  

between  a  flat  being  constructed  and  a  flat  under  construction  is  a  

distinction without  a difference for  the reason that the judgment  notices  

that if the agreement is entered into after the flat is already constructed,  

there would be no ‘sale’ and no ‘works contract’. This is obviously for the  

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reason that the flat has already been developed by the developer using his  

material and his plan and is sold as such to a purchaser.  

20. Mr. Rohinton F. Nariman extensively referred to the decisions  

of this Court in  B.C. Kame6 and  Hindustan Shipyard7.  With reference to  

paragraphs 7 to 16, 22 and 24 to 26 in Hindustan Shipyard7, it is submitted  

that in a somewhat similar fact situation, this Court came to conclusion that  

construction  of  various  ships  for  and  on  behalf  of  the  customer  would  

amount to a ‘sale’ and not to a ‘works contract’.  

21. Based on the various clauses of the tripartite agreement, it is  

argued that the main object  of the agreement read as a whole and the  

substance  of  the  agreement  is  to  sell  and  convey  fraction  of  the  land  

together with a fully constructed flat only when all installments have been  

fully paid. The work undertaken is for the joint development of the project  

as a whole, i.e., work is undertaken by the developer for himself and for  

the owner.  The construction is not  carried out  for  and on behalf  of  the  

purchaser, but it is carried out entirely by the owner/developer in order to  

exploit or get the best price for the land and the structure built thereon from  

various flat purchasers. The flat is to be sold as a flat and not an aggregate  

of its component parts. No work is carried out for the purchaser who gets  

title to the property only after all work is complete. Learned senior counsel  6The Assistant Sales Tax Officer and Others v. B.C. Kame, Proprietor Kame Photo Studio;   

 [(1977) 1 SCC   634] 7 Hindustan Shipyard Ltd. v. State of A.P.; [(2000) 6 SCC 579]

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argued that the ultimate test would be: if a suit for specific performance is  

filed by the flat purchaser against the owner/developer,  such suit  would  

invariably be for the conveyance of title and not for the construction of a  

building.  Conversely  a  suit  by  an  owner/developer  against  the  flat  

purchaser would be for payment of consideration of a flat/fractional interest  

in the land. Such suit  would never be for payment of work done at the  

behest of the flat purchaser and payment of consideration therefor. It is,  

thus, submitted that the judgment  in  Raheja Development1  does not lay  

down good law and deserves to be overruled.

22. Mr.  K.V.  Vishwanathan,  learned  senior  counsel  for  

Maharashtra  Chamber  of  Housing  Industries  elaborately  argued  based  

on  the  following contentions.  First,  that  to  attract  Article 366(29-A)(b)  

there has to be a “works contract”  and in the process of  executing the  

works contract if certain transfer of property occurs, such transfer would be  

deemed to be sale.  If there is no works contract, the question of applying  

Article  366(29-A)(b)  would  not  arise.  A  distinction  is  drawn  between  

“works” and “works contract”.  It is contended that an agreement for sale is  

an  agreement to  transfer  immovable  property  as an indivisible whole  

which will result in the execution of a conveyance.  There is no element of  

works  contract  involved.  Even if  for  the  purpose  of  complying  with  the  

obligations of an agreement for sale, a vendor carries out some works, it is  

not  on  account  of  any  works contract.  Even if  there  are  some “works”  

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involved,  there  is  no  “works  contract”  between  the  promoter  and  

purchaser.

23. Secondly, that the applicability of Article 366(29-A) read with  

Entry  54  of  List  II  will   arise  only  in  matters  which  are  otherwise  not  

covered under the ambit of sale and cannot apply to an agreement for sale  

of immovable property resulting in a conveyance. He pressed into service  

(i) test of enforceability (ii) common parlance test (view of the reasonable  

man)  (iii)  test  of  substance  of  the  contract  and   (iv)   assignment  test.  

Insofar as common parlance test and test of substance of the contract are  

concerned, Mr. K.V. Vishwanathan placed reliance upon Bharat Sanchar5.  

As regards assignment  test,  paragraph 36 of  the judgment  in  Builders’   

Association4 was referred to by the learned senior counsel.   

24. Thirdly,  that amended definition under Article 366(29-A) has  

not conferred on the States a larger freedom than what they had before the  

amendment in regard to their power to levy sales tax under Entry 54 of the  

State List. Paragraph 40 of the Builders’ Association4  is relied upon.  It is  

contended that an agreement to sell  entered into between the promoter  

and purchaser continues to remain an agreement to sell and the provisions  

of  MOFA does not change the nature of such agreement.  Reference is  

made to the  decision of this Court in Nahalchand Laloochand8.  

8 Nahalchand Laloochand Private Limited v. Panchali Cooperative Housing Society Limited; (2010) 9     SCC 536

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25. And fourthly, that if State’s submissions are accepted, Article  

366 (29-A)(b) has to be read as “a tax on the transfer of property (whether  

as goods or in some other form) involving works” which  will not only distort  

the amendment but will render the words “in goods” redundant. Article 366  

(29-A)(b) does not provide for such an interpretation. The phrase “in some  

other form” takes its colour from the preceding words  namely, “transfer of  

property  in  goods”  and “whether  as  goods”.  The said  phrase “in  some  

other  form”  cannot  and  would  not  mean  the  transfer  of  an  indivisible  

immovable property as a whole.  Reliance is placed on the  decision of this  

Court  in  Purshottam Premji9 to  differentiate  between  a  sale  and  works  

contract. It is contended that the distinguishing factors that have been laid  

down in Purshottam Premji9 which were relied on by the Law Commission  

should be considered as the only tests to differentiate a works contract and  

a contract for sale.  

26. Dr. Abhishek Manu Singhvi, learned senior counsel appearing  

for Promoters and Builders Association made brief oral submissions which  

were  followed  by  detailed  written  submissions.   The  principal  issue,  

according  to  him,  is,    whether  the agreement  entered  into  between a  

promoter/developer  and  a  flat  purchaser,  pursuant  to  the  provisions  of  

Section 4 read with Rule 5 and Form V of MOFA can be divided into two  

parts,  (i)  an  agreement  between  the  promoter/developer  and  the  flat  

9  Commissioner of Sales Tax, M.P. v. Purshottam Premji; [1970] 26 S.T.C. 38  

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purchaser  to  construct  a  flat;  and  (ii)  an  agreement  between  the  

promoter/developer  and the  flat  purchaser  to  eventually  sell  the  flat  so  

constructed and whether the first part of the said agreement can be treated  

as a works contract whereby the flat purchaser is accorded the status of a  

principal employer and the promoter/developer acts as a mere contractor  

for him and constructs the flat for and on behalf of the flat purchaser. While  

conceding that an integral  part of the transaction of sale of a flat is the  

activity of construction of the said flat but the moot question in his view is  

whether such activity of construction has the characteristics or elements of  

works  contract.  Learned  senior  counsel  highlighted  the  distinguishing  

features between “works contract”  and “contract  for  sale of  goods”  and  

having  regard  to  that  it  is  submitted  that  the  activity  of  construction  

undertaken by the promoter/developer cannot be said to be works contract  

for the reasons,  (i) that developer does not construct at the behest of the  

flat purchaser as on various occasions the flat is constructed without there  

being any booking for the said flat; (ii) the main intention of the agreement  

between the promoter/developer and the flat purchaser is the sale of flat  

and  not to appoint the developer as the contractor of the flat purchaser for  

the purposes of carrying out the construction of the flat for and on behalf of  

the  flat  purchaser;   (iii)  the  flat  purchaser  does  not  have  any  role  in  

conceptualizing the project of construction nor does he have any say in the  

designing and lay-out of the building to be constructed. The flat purchaser  

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does not have any control over the type and standard of the material to be  

used in  the construction  of  the building.   He does not  get  any right  to  

monitor  or  supervise  the  construction  activity;  (iv)  the ownership  in  the  

material used in the construction remains with the promoter/developer and  

the  said  ownership  passes  to  the  flat  purchaser  only  on  the  eventual  

conveyance of the flat; (v) the accretion to the goods happens in the hands  

of the promoter/developer  and not when the flat is conveyed to the flat  

purchaser;  and (vi) the construction linked  payment schedule is nothing  

but a method of payment in installments.  

27. It is the submission of Dr. Abhishek Manu Singhvi that Article  

366(29-A)(b) by a  deeming fiction only deems the transfer of property in  

goods in execution of a works contract as a sale but the said amendment  

does not contemplate a deemed  transfer of goods which actually does not  

happen at the time of execution of the contract.  The provisions of MOFA  

do not change the character of the transaction entered into between the  

promoter/developer  and  the  flat  purchaser  from  that  of  a  pure  sale  of  

immovable property to a works contract. Even in the absence of a statute  

like MOFA, the obligations and restrictions prescribed therein would still be  

present  as part  of  obligations under the Indian Contract  Act/Transfer  of  

Property  Act  and  its  penalties  for  breaching  the  same  would  still  be  

applicable under the penal statutes.

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28. While referring to Section 2(24) MVAT Act, it is submitted by  

the learned senior counsel that a plain reading of amended explanation  

b(ii) to Section 2(24) of that Act will show that the said provision  has not  

brought  within  its  scope  transactions  which  are  not  in  their  substance  

works  contract.  The amendment  brought  in  explanation  b(ii)  to  Section  

2(24)  is  merely  explanatory  in  nature.  Even  after  the  amendment  the  

transaction in which there is transfer of property in goods has to be works  

contract. The amendment cannot be interpreted to mean that transfer of  

property in goods in execution of any agreement even if it is not  a works  

contract  has  now  been  included  in  the  definition  of  sale.  Such  

interpretation  will  render  the  provision  unconstitutional.  Learned  senior  

counsel  submits  that  the  manner  in  which  the  State  Government  is  

expanding scope of Section 2(24) on the basis of the decision of this Court  

in  Raheja  Development1,  it has  rendered  the  said  provision  

unconstitutional.  According  to  Dr.  Abhishek  Manu  Singhvi,  Raheja  

Development1  therefore needs to be reconsidered and overruled.

29. As  regards  constitutional  validity  of  the  provisions  of  Rule  

58(1) and 58(1A) of  MVAT Rules, it  is submitted that these Rules and  

Rule 58(1-A) of the 2005 Rules include an element of profit earned by a  

promoter/developer on the sale of a flat. There are no provisions to take  

the profit element from arriving at the value of goods. As a result income  

earned by the promoter/developer from the profit on sale of the flat also  

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gets included in the value of goods and eventually the said income gets  

taxed. Imposition of such tax on the income of the promoter/developer is  

beyond the legislative competence of the State Government.  

30. Without  prejudice  to  the  above  arguments,  it  is  firstly  

submitted that assuming that the activity of construction undertaken by the  

developer is a works contract then the same would be a works contract  

only from the stage when the developer enters into a contract with the flat  

purchaser. Only the value addition made to the goods transferred after the  

agreement is entered into with the flat purchaser can be made chargeable  

under  MVAT Act.  VAT cannot  be  charged  on  the  entire  sale  price  as  

described  in  the  agreement  entered  into  between  developer  and  flat  

purchaser as sought to be done under the composition scheme.  Secondly,  

it is submitted that  assuming that the agreement entered into between the  

developer and the flat purchaser has two components, namely, a works  

contract and sale of proportionate share in the land then the  stamp duty  

on  such  transaction  should  be  levied  under  Article  25  (stamp  duty  for  

conveyance) only on the component sale of proportionate share in the land  

and the stamp duty on the value of construction carried out ought to be  

charged under Article 63 (stamp duty for works contract).

31. Mr.  N.  Venkatraman,  learned  senior  counsel  for  Builders  

Association while highlighting the background in which clause (29-A) came  

to  be  inserted  in  Article  366  and  drawing  distinction   between   a  

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conventional sale and a works contract submits that ‘transfer’ is imminent  

and indispensable requirement in both but in the case of a conventional  

sale, property in goods gets transferred as intended by the parties while in  

a works contract, property in goods get transferred through accretion.  Few  

illustrations have been referred to by him and it is submitted that ‘test of  

accretion’ which is  sine qua non for works contract is not satisfied in the  

agreements under consideration.  L&T II10 is referred which says, “once the  

work is assigned by L&T to its sub-contractor, L&T ceases to execute the  

works contract in the sense contemplated by Article 366 (29-A)(b) because  

property passes by accretion and there is no property in goods with the  

contractor which is capable of a re-transfer whether as goods or in some  

other form”.   

32. Learned  senior  counsel  contends  that  when  ultimately  the  

constructed flat is transferred or sold,  it becomes a sale of an immovable  

property at which point of time the question of transfer on accretion  does  

not arise.  The transfer of goods has to take place in the course of the  

construction of a building before becoming an immovable property though  

the contract may be indivisible contract for construction of a building in the  

form of an immovable property.  Once it becomes an immovable property,  

Article 366(29-A)(b) cannot be pressed into service to such a transaction.  

10  State of Andhra Pradesh & Ors. v. Larsen & Toubro Ltd. & Ors.; [(2008) 9 SCC 191]

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He submits that an agreement to sell is not a sale in its conventional sense  

and, therefore, cannot be a deemed sale also.

33. It is submitted by Mr. N. Venkatraman that Section 2(24) of  

MVAT Act  and Rules 58 and 58(1A) of MVAT Rules seek to redefine the  

taxable  event   by  moving  away from theory  of  accretion  to  transfer  of  

immovable  property  by  way  of  conveyance  and  that  renders  these  

provisions unconstitutional.

34. Mr. Vinod Bobde, learned senior counsel appearing on behalf  

of Promoters and Builders Association, Nasik argues that after insertion of  

clause 29-A in Article 366, the works contract which was an indivisible one  

has by a legal fiction altered into a contract which is divisible into one for  

sale  of  goods  and  the  other  for  supply  of  labour.  Thus,  the  goods  

component  is  exigible  to  sales  tax.  However,  the  amendment  has  not  

enlarged the meaning of “works contract” as commonly understood. With  

reference to  Section 2(24)  explanation (b)(ii)  of  the MVAT Act,  learned  

senior counsel submits that this provision aims at taxing the sale of goods  

involved in the execution of  a works contract.  In the case of  a building  

contract on land, the contractor must be carrying out the building activity  

for  consideration  which  obviously  means  that  he  should  be  receiving  

consideration from the person who has engaged him as contractor. The  

provision does not cover an owner or developer of land who is constructing  

a  building  for  the  purpose  of  ultimately  selling  the  flats  therein  to  

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purchasers. Such owner or developer does not receive any consideration  

from anyone for carrying out of the building activity; what he receives is  

simply  the  sale  price  of  the  flats  from  the  purchasers.  According  to  

Mr. Vinod Bobde, the provisions so read would not transgress Article 366  

(29-A) but if it is read as was done in  Raheja Development1, it would be  

unconstitutional.

35. It  is argued by Mr.  Vinod Bobde that an agreement of  sale  

whether simplicitor or in Form V under the MOFA is not a “works contract”.  

It only settles terms for the sale of property and the sale ultimately takes  

place in pursuance thereof unless the contract is terminated.  The “works”  

component and “goods” component are totally absent in the agreement.  

There is no question of taxing sale of goods in an agreement of sale. The  

buyer does pay the sales tax on the purchase of goods/material used in  

construction of the building. Such goods/materials are purchased from the  

dealers registered under the Act. What the taxing authorities seek to do by  

treating an agreement for sale of immovable property, namely, flat to be a  

“works contract” within the meaning of Section 2(24), explanation (b)(ii) is  

to again tax the goods used in the construction of the building. This cannot  

be done because the builder is not building as the contractor for the flat  

purchaser but for himself, and he cannot possibly transfer such goods to  

himself.

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36. Mr. Vinod Bobde submits that the High Court’s view that the  

element of sale of immovable property can be there in a works contract is  

clearly erroneous. The agreement of sale in Form V under the MOFA is not  

an agreement simpliciter and the aspect that   MOFA creates the right and  

interest in the flat as a measure for protecting prospective flat purchasers  

is irrelevant. With reference to Entries 25, 5 and 63 of the Bombay Stamp  

Act,  1958  which  provide  for  stamp  duty  on  conveyance  including  an  

agreement for sale of property, agreement or its record or memorandum of  

agreement and works contract respectively, it is submitted that State has  

been levying stamp duty on agreement  of  sale under Entry 25 and not  

under Entry 63 and hence the State does not consider an agreement for  

sale to be a works contract.  

37. Mr. Shivaji M. Jadhav learned counsel appearing for one of  

the appellants has broadly followed the above submissions.   He submits  

that  expression  “in  some  other  form”  in  Article  366(29-A)(b)  does  not  

mean immovable property but some other form of goods being movable  

property. According to him,  artificial rules or other enactments like MOFA,  

Bombay Stamp Act would not be relevant at all  in ascertaining whether  

transfer of property in goods has taken place in the execution of works  

contract.  Model  agreement  Form  V  in  MOFA  does  not  indicate  that  

construction of a flat by the developer/promoter is being carried on for and  

on behalf of the purchaser of the flat. Rather it supports the view that buyer  

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is interested in what is constructed as a flat and not the building material.  

MOFA ensures that the theory of accretion is not applicable and the flat  

purchaser is not left at the mercy of the builder.

38. Learned counsel also submits that if Section 2(24) explanation  

b(ii)  of the MVAT Act is read in the manner suggested by this Court  in  

Raheja  Development1,  such  provision  is  rendered  unconstitutional.  As  

regards  Rule  58(1)  and  Rule  58  (1-A),  the  submission  of  the  learned  

counsel is that these Rules  suffer from various infirmities and are unable  

to carry out the objectives of MVAT Act.

39. In  the  counter  arguments  advanced  on  behalf  of  the  two  

States – Karnataka and Maharashtra  -  Raheja Development1 has been  

stoutly  defended.   Mr.  K.N.  Bhat,  learned senior  counsel  for  Karnataka  

submits that view taken in  Raheja Development1  is correct and needs no  

reconsideration  –  both  on  merits  as  well  as  on  the  basis  of  binding  

precedents  on  the  principles  governing  reconsideration  of  an  earlier  

decision.  He  submits  that  Article  366(29-A)  uses  the  phraseology  

employed in Entry 54 of List II that reads, “taxes on sale or purchase of  

goods  ….”  For  the  purpose  of  Entry  54  List  II,  “taxes  on  the  sale  or  

purchase  of  goods”  includes  “tax  on  the  transfer  of  property  in  goods  

(whether  as goods or  in  some other  form) involved in the execution of  

works contract”. Transfer of property in goods is the essence of definition  

of ‘sale’  in Section 4 of the Sale of Goods Act.  Article 366(29-A)(b) can be  

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rephrased as “a tax on the sale of goods involved in the execution of a  

works contract” and in any case by the deeming fiction incorporated in the  

above provision, it  shall be deemed to be a sale of those goods by the  

person making the transfer and a purchase by a person to whom such  

transfer is made. The taxable event is the deemed sale of goods involved  

in the execution of works contract. Article 366 (29-A) has been inserted to  

remedy the situation arising from the decision in the Gannon Dunkerley-I3   

where  attempt  to  levy  sales  tax  on  the  sale  of  goods  involved  in  the  

execution of works contract was held to be unconstitutional. This was on  

the basis that a works contract  could not  be dissected into contract  for  

“works  and  services”  and  contract  for  “sale  of  goods”.   Mr.  K.N.  Bhat  

submits, relying upon para 41 in  Builders’ Association4, that definition of  

‘works contract’  KST Act does not go beyond what is contemplated in the  

Constitution.  

40. Mr. K.N. Bhat’s submission is that in order to sustain levy of  

sales tax on the goods deemed to have been sold in the execution of  

works contract the following conditions are to be met,  (a) there must be  

works contract, i.e., any contract to do construction, fabrication  and the  

like; (b) the goods deemed to have been sold should have been involved in  

the execution of a works contract; and (c) the property in those goods must  

be transferred  to a third party either as goods or in some other form.  The  

taxable event is deemed sale.  It is irrelevant whether transferee was  a  

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party to the works contract. All that is required to be enquired into is as to  

whether the goods were involved in the execution of the works. By Forty-

sixth  Constitutional  Amendment,  the  effect  of  Gannon  Dunkerley-I3  has  

been  neutralized.   Now  that  the  works  contract  which  was  indivisible  

according to Gannon Dunkerley-I3  are  divisible and the goods involved in  

the execution of works contract that were then not taxable are now taxable.  

41. The whole idea by insertion of clause 29-A(b)  in Article 366,  

Mr. K.N. Bhat submits, is to make the materials used in the building activity  

liable  to  sales  tax.  Any  other  interpretation  will  be  contrary  to  the  two  

decisions  of  the  Constitution  Benches  in  Builders’  Association4  and  

Gannon  Dunkerley-II11.   So  construed  works  contract  simply  means  a  

construction activity. If the building is retained by the builder himself, there  

is no deemed sale.   

42. Mr.K.N. Bhat, however, submits that the statement of law in  

Raheja Development1   that when a completed building is sold, there is no  

works  contract  and,  therefore,  no  liability  to  tax,  may  not  be  correct  

statement of law.  If the building was intended for sale and is in fact  sold,  

tax is attracted to the deemed sale. Even in such cases, goods used in the  

construction are deemed to have been sold by the builder (dealer)  to the  

purchaser.

11 M/s. Gannon Dunkerley & Co. and others v. State of Rajasthan and Others; [(1993) 1 SCC 364]

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43. It  also urged by Mr. K.N. Bhat that in  the referral order,  the  

Bench has entertained  certain doubts in respect of the decision of this  

Court in  Raheja Development1  . However, such doubts that a better view  

was possible is not good enough to reconsider the decision.  Relying upon  

decisions of this Court in Gannon Dunkerley-II11 and the earlier decision in  

Keshav Mills12, he submits  that while recommending reconsideration of an  

earlier  decision,   the  Bench must  first  come to  the conclusion  that  the  

earlier decision was clearly wrong for the reasons stated. According to him,  

within  the  settled  standards,  recommendation  to  consider  Raheja  

Development1 does not fall. Moreover, since Raheja Development1  in May,  

2005  almost  all  States  have  modified  their  laws  in  line  with  Raheja  

Development1   and the need for change in a settled practice is not made  

out.

44. Mr.  Darius  Khambata,  learned  Advocate  General  and  

Mr.  Shekhar  Naphade,  learned senior  counsel  advanced arguments  on  

behalf of Maharashtra.  It is argued that after insertion of  Article 366 (29-

A)(b)  in   the  Constitution,  the  transfer  of  movable  property  in  a  works  

contract is deemed to be sale even though it is not a sale as per the Sale  

of  Goods Act.  The works contract  is  now divisible.  Article  366(29-A)(b)  

clarifies that the transfer of the goods may be as goods or in some other  

form. Therefore, the goods may remain as goods or cease to be goods,  

12  Keshav Mills Co. Ltd. v. Commissioner of Income Tax, Bombay North, Ahmedabad; [AIR 1965 SC       1636]  

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i.e.,  they may merge into immovable property.  In this regard,  extensive  

reference has been made to Builders’ Association4 and it is submitted that  

the same submissions made by the States which were rejected by this  

Court  in  Builders’  Association4  are  now sought  to  be  raised  almost  on  

similar lines by the appellants which have been rightly rejected by the High  

Court.

45. Learned  Advocate  General  and  learned  senior  counsel  for  

Maharashtra submit that the term “works contract” is nothing but a contract  

in which one of the parties is obliged to undertake or to execute works. The  

expression  “works”  is  extremely  wide  and  can  either  mean  the  act  of  

bestowing labour or that on which the labour is bestowed. In this regard,  

the  two decisions of this Court (i)  Dewan Joynal Abedin13 and (ii) Kartar   

Singh14 have been referred.  It  is  submitted that  the term “works”  would  

include  the  final  product  and,  therefore,  a  works  contract  cannot  be  

confined to a contract to provide labour and services but is a contract for  

undertaking or for bringing into existence some “works”. Nothing in Article  

366(29-A)(b)  limits the term “works contract”.   Although,  works contract  

usually have only two elements, i.e., labour and services as well as sale of  

goods  but  the  addition  of  few  other  elements  does  not  denude  such  

contract being  works contract. It is possible that there could be a works  

contract  coupled  with  the  sale  of  immovable  property.  The  transaction  

13  Dewan Joynal Abedin v. Abdul Wazed; [(1988) Supp SCC 580] 14  Kartar Singh Bhadana v. Hari Singh Nalwa & Ors.; [(2001) 4 SCC 661]

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does not cease to be a works contract merely because it may include other  

obligations.

46. Learned Advocate General argues that even in the case of a  

works contract,  the ownership of the goods need not pass only by way of  

accretion or accession to the owner of the immovable property to which  

they are affixed or upon which the building is built; property can pass under  

the terms of a contract or by statute.  He submits that the tests laid down in  

judgments prior to Forty-sixth Constitutional  Amendment  for determining  

whether a contract is a works contract or a sale of goods are no longer  

applicable. There is no question of ascertaining the dominant intention of  

the contract now since the sale of goods element is a deemed sale under  

Article 366(29-A)(b) and can be taxed separately. Hindustan Shipyard7 was  

distinguished and it was submitted that in  Associated Cement15  a three-

Judge Bench of this Court has overruled the decision in Rainbow Colour   

Lab16 and  it  has  been  expressly  noted  that  cases  such  as  Hindustan  

Shipyard7  relate to the situation prior to Forty-sixth Amendment where the  

court had no jurisdiction to bifurcate a works contract and impose sales tax  

on  the  transfer  of  property  in  goods  involved  in  the  execution  of  the  

contract.  Reference was also made to a decision of this Court in P.N.C.  

Construction17.  According to learned Advocate General, it has now  15  Associated Cement Companies Ltd. v. Commissioner of Customs; [(2001) 4 SCC 593] 16  Rainbow Colour Lab & Anr. v. State of M.P. & Ors.;  [(2000) 2 SCC 385] 17 State of U.P. & Ors. v. P.N.C. Construction Co. Ltd. & Ors.; [(2007) 7 SCC 320]

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become possible for the States to levy sales tax on the value of the goods  

involved in the works contract in the same way in which the sales tax was  

leviable on the price of the goods supplied in a building contract. This is  

where the concept of “value addition” comes in. It is on account of Forty-

sixth  Amendment  to  the  Constitution  that  the  State  Government  is  

empowered to levy sales tax on the contract value which earlier was not  

possible.

47. Mr.  Darius  Khambata  submits  that  a  composite  contract  

comprising both a works contract  and a transfer  of  immovable property  

does not denude it of its character as a works contract. According to him,  

Article  366(29-A)(b)  provides  for  a  situation  where  the  goods  are  

transferred in the form of immovable property. He referred to an Australian  

case,  M.R. Hornibrook18 in this regard which has been approved by this  

Court in Builders’ Association4.

48. Learned Advocate General has also pressed into service the  

aspect theory of legislation. His submission is that different aspects of the  

same  transaction  can  involve  more  than  one  taxable  event.  There  is  

nothing to prevent the taxation of different aspects of the same transaction  

as  separate  taxable  events.  This  would  not  constitute  a  splitting  of  an  

indivisible contract. Reference is made to a decision of this Court in  

18  M.R. Hornibrook (Pty.) Ltd. v. The Federal Commissioner of Taxation; [(1939) 62 C.L.R. 272

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Federation  of  Hotel  &  Restaurant19.   The  submission  of  the   learned  

Advocate General is  that transfer of immovable property cannot be taxed  

as a sale of goods but there is no constitutional bar to tax only the sale of  

goods  element  and  separately  tax  the  transfer  of  immovable  property.  

Taxing the sale of goods element in a works contract  under Article 366  

(29-A)(b)  read  with  Entry  54  List  II  is  permissible,  provided  the  tax  is  

directed to the value of the goods and does not purport to tax the transfer  

of immovable property.  

49. Stoutly defending the impugned judgment of the Bombay High  

Court,  learned Advocate General submits that Section 2(24) explanation  

b(ii)  of  MVAT  Act  has  been  rightly  held  to  be  constitutional   as  the  

provisions in the MVAT Act offer diverse options for valuation of the sale of  

goods element in a works contract.  Each of these options is consistent  

with the methods approved of by this Court in Gannon Dunkerley-II11.

50. As regards challenge to the constitutional validity of Rule 58A  

and Rule 58(1A), it is submitted by   learned Advocate General that these  

provisions  are  consistent  with  the  principles  laid  down  in  Gannon  

Dunkerley-II11.  The  measure  of  tax  is  not  determinative  of  its  essential  

character or of the competence of the legislature. He sought to dispel the  

impression that Rule 58(1A) may result in double taxation. Distinguishing  

19  Federation of Hotel & Restaurant Association  of India, etc. v. Union of India & Ors.; [(1989) 3 SCC       634]

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the  decision  of  this  Court  in  Larsen  &  Toubro-II20,  learned  Advocate  

General submits that the observations made in para 19 does not apply to  

Maharashtra inasmuch as Section 45(4) of the MVAT Act ensures that it is  

either the builder or the sub-contractor who pays the tax (being treated as  

one and jointly/severally liable). In any case all claims of alleged double  

taxation will be determined in the process of assessment of each individual  

case.

51. Highlighting  the  MOFA  agreement  in  prescribed  Form  V,  

learned Advocate General argues that the clauses therein indicate that it  

comprises of a works contract along with the agreement for sale. There is  

no reason to deny the applicability of Article 366(29-A) to such a works  

contract. His argument is that sale of goods element in the works contract  

contained  in  a  MOFA  agreement  is  taxable  under  Section  2(24)  

explanation b(ii) of the MVAT Act.  As long  as there is an obligation to  

construct  under  the  agreement  between  the  promoter  and  the  flat  

purchaser  (in  the  case  of  Maharashtra  being  an  agreement  under  the  

MOFA) the deemed sale of  goods involved in the execution of  such a  

works contract can be taxed even after incorporation of the goods in the  

works and when the property passes as between the promoter and the flat  

purchaser. It is  submitted that what is at issue before this Court is not the  

20 State of Andhra Pradesh & Ors.v. Larsen & Toubro Ltd. & Ors.; [(2008) 9 SCC 191]  

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determination of when the taxable event takes place but the exigibility to  

tax of a deemed sale of goods in a composite contract.       

52. Prior  to  Forty-sixth  Amendment  in  the  Constitution,  levy  of  

sales  tax  on  the  sale  of  goods  involved in  the  execution  of  the  works  

contract was held to be unconstitutional in Gannon Dunkerley-I3. That was  

a case where the assessee (Gannon Dunkerley) was carrying on business  

as engineers and contractors. Its business consisted mainly of execution of  

contracts for construction of buildings, bridges, dams, roads and structural  

contracts  of  all  kinds. During the assessment  year under consideration,  

the return filed  by the assessee showed as many as 47 contracts most of  

which were building contracts which were executed by it. From the total of  

the amount which the assessee received in respect of sanitary contracts  

and  other  contracts  20  per  cent  and  30  per  cent  respectively  were  

deducted  for  labour  and the balance was taken as the  turnover  of  the  

assessee for the assessment year in question. Sales tax was levied on the  

said  balance  treating  it  as  taxable  turnover  under  the  Madras  General  

Sales Tax Act, 1939. Assessee questioned the  levy of sales tax  on the  

ground  that  there  was  no  sale  of  goods  as  understood  in  India  and,  

therefore, no sales tax could be levied on any portion of the amount which  

was received by the assessee from the persons for whose benefit it had  

constructed  buildings.  The  Madras  High  Court  concluded  that  the  

transactions in question were not contracts for sale of goods as defined  

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under the provisions of the Sale of Goods Act, 1930 which was in force on  

the  date  on  which the Constitution  came into  force  and,  therefore,  the  

assessee was not liable to pay sales tax on the amounts received by it  

from the persons for whom it had constructed buildings during the year of  

assessment. It is from this judgment that the matter reached this Court.  

The Constitution Bench of this  Court held that in a building contract where  

the  agreement  between  the  parties  was  that  the  contractor  should  

construct  the  building  according  to  the  specifications  contained  in  the  

agreement and in consideration received payment  as provided therein,  

there was neither a contract to sell the materials used in the construction  

nor the property passed therein as movables. It was held that in a building  

contract which was one (entire and indivisible) there was no sale of goods  

and it was not within the competence  of the Provincial State Legislature to  

impose tax on the supply of the materials used in such a contract treating it  

as  a  sale.  The  Constitution  Bench  said,   “……..when  the  work  to  be  

executed is, as in the present case, a house, the construction imbedded on  

the land becomes an accretion to  it  on the principle  quicquid  plantatur   

solo, solo cedit, and it vests in the other party not as a result of the contract  

but as the owner of the land. Vide Hudson on Building Contracts, 7th Edn.,  

p. 386………”  It was further stated, “…..that exception does not apply to  

buildings which are constructed in execution of a works contract, and the  

law with reference to them is that the title to the same passes to the owner  

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of the land as an accretion thereto. Accordingly, there can be no question  

of title to the materials passing as movables in favour of the other party to  

the contract…….”   

53. In  Gannon  Dunkerley-I3,  this  Court  held  that  in  a  building  

contract  which was one, entirely indivisible, there was no sale of goods  

and it was not within the competence of the provincial State legislature to  

impose tax on the supply of materials used in such a contract treating it as  

a sale.  The above statement was founded on the premise that the works  

contract  was a composite  contract  which is  inseparable  and indivisible.  

Entry 48 of List II of Schedule Seven of the Government of India Act, 1935  

was under consideration before this Court in  Gannon Dunkerley-I3.  It is  

observed that the expression “sale of goods” in that entry has the same  

meaning as the said expression had in the Sale of Goods Act, 1930.  In  

other  words,  the  essential  ingredients  of  sale  of  goods  are  (i)  an  

agreement to sell  movables for a price and (ii) property passing therein  

pursuant to that agreement.   

54. The problems connected with powers of  States to levy tax,  

inter  alia,  on  goods  involved  in  execution  of  works  contract  following  

Gannon Dunkerley-I3 was elaborately examined by the Law Commission of  

India.   In  its  61st Report,  Chapter  1A,  the Law Commission specifically  

examined the taxability of works contract.  The Law Commission noted the  

essential nature and features of the building contracts and the difference  

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between contract of works and contract for sale.  It examined the question  

whether the power to tax indivisible contracts of works should be conferred  

on  the  States.  The  Law  Commission  suggested  three  alternatives  (a)  

amendment  in the State List, Entry 54, or (b) adding a fresh entry in the  

State List, or (c) insertion in Article 366  a wide definition of “sale” so as to  

include works contract.   It  preferred the last one, as, in its opinion, this  

would avoid multiple amendments.  

55. Having  regard  to  the  above  recommendation  of  the  Law  

Commission,  the  Constitution  Bill  No.52  of  1981 was introduced  in  the  

Parliament.∗  

   *The relevant portion of statement of objects and reasons reads :

“STATEMENT OF OBJECTS AND REASONS Sales  tax  laws enacted in pursuance of the Government of India  Act,1935  as   

also the laws relating to sales tax passed after the  coming into  force  of  the Constitution  proceeded on the  footing  that the expression  "sale  of  goods", having regard to the rule  as    to broad interpretation  of  entries in the legislative lists,  would be given a wider   connotation.  However,  in  Gannon  Dunkerley's case  (A.I.R. 1958  S.C.  560),  the  Supreme Court  held that  the expression "sale of  goods" as  used in the entries  in the  Seventh Schedule to the Constitution has the same meaning as in the Sale of Goods Act,  1930.   This   decision related to works contracts.

2.  By a series of subsequent decisions, the Supreme Court has, on the basis of  the  decision  in  Gannon  Dunkerley's  case,  held  various  other  transactions  which   resemble,  in substance, transactions by  way   of sales, to be not liable to sales tax.  As a  result of these decisions, a  transaction, in order to be subject to the levy of sales tax   under  entry  92A of  the  Union  List  or  entry  54  of  the  State  List,  should  have  the    following  ingredients,  namely,  parties  competent  to    contract,  mutual  assent  and   transfer  of property in goods from  one   of  the parties to the contract to the other party  thereto for a price.

5.   The various problems connected with the power of the  States  to levy  a  tax  on the sale of goods and with the Central Sales Tax  Act, 1956  were  referred to the Law  Commission of India.   The    Commission considered these matters in their Sixty-first  Report  and,  recommended,  inter alia,  certain  amendments  in  the  Constitution if  as  a  matter of  administrative  policy it  is  decided  to levy tax on transactions of  the nature  mentioned in the preceding paragraphs.

9.   It is, therefore, proposed to suitably amend the Constitution  to include in  article 366 a definition of "tax on the sale or purchase of goods"  by  inserting  a  new   clause  (29A).     The  definition  would  specifically  include  within  the  scope  of  that  expression tax on---

(i) transfer for consideration of controlled commodities;

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56. The  Parliament  then  enacted  the  Constitution  (Forty-sixth  

Amendment)  Act,  1982  which  received  the  assent  of  the  President  on  

02.02.1983.  Accordingly, clause 29-A was inserted in Article 366 of the  

Constitution which is set out as below.∗∗

(ii)  the transfer of property in goods involved in the execution of a works  contract;

(iii)  delivery of goods on hire-purchase  or any system of payment  by  instalments;

(iv)  transfer  of  the  right  to  use  any  goods  for  any  purpose  for  cash,  deferred payment or other valuable consideration;

(v)  the  supply of  goods by an unincorporated  association or  body  of  persons  to  a  member  thereof for cash, deferred  payment   or  other valuable  consideration;

(vi)  the supply, by way of or as part of any service, of food or  any drink   for  cash,  deferred payment or other  valuable   consideration.  

12.   Clause  (3) of article 286 is proposed to be amended  to  enable Parliament   to specify, by law, restrictions and conditions in  regard to  the  system of levy, rates and  other incidents of the tax  on  the transfer  of  goods involved in the execution of a works  contract,  on the  delivery  of  goods on hire-purchase  or  any system of  payment  by  instalments and on the right to use any goods.   

13.   The  proposed amendments would help in the augmentation  of  the State   revenues to a considerable extent.  Clause 6 of the Bill  seeks to  validate  laws  levying   tax  on  the  supply  of  food  or    drink  for  consideration  and  also  the  collection  or  recoveries  made by way of tax under  any such law.  However,  no sales  tax will  be  payable on food or drink  supplied  by a hotelier to a person lodged in the hotel  during  the  period from the date of the judgment in the Associated Hotels  of India  case  and the  commencement  of  the present  Amendment  Act  if  the conditions  mentioned  in sub- clause (2) of clause 6 of the  Bill  are satisfied.   In the case of food or drink supplied by  restaurants  this relief will  be available only in respect  of the period after  the date of   judgment  in the Northern India Caterers (India) Limited case  and the commencement of  the present Amendment Act.”  

  ∗∗ (29-A) “tax on the sale or purchase of goods” includes— (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for   

cash, deferred payment or other valuable consideration; (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) a tax on the delivery of goods on hire-purchase or any system of payment by instalments; (d) a tax on the transfer  of the right to use any goods for  any purpose (whether  or not for a   

specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member  

thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of  

goods, being food or any ‘other article for human consumption or any drink (whether or not intoxicating),  where such supply or service, is for cash, deferred payment or other valuable consideration,  

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by   the person making the transfer, delivery or supply and a purchase of those goods by the person to whom  such transfer, delivery or supply is made;’.

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57. Following the above amendment in the Constitution, the sales  

tax legislations in various States were amended and provisions were made  

for imposition of sales tax in relation to works contract. The constitutional  

validity  of  the  Forty-sixth  Amendment  by  which  the  legislatures  of  the  

States were empowered to levy sales tax on certain transactions described  

in clauses (a) to (f) of clause 29-A of Article 366 of the Constitution as well  

as  the  amendments  made  in  the  State  legislations  were  challenged  in  

Builders’ Association4.   The Constitution Bench of this Court upheld the  

constitutionality of the Forty-sixth Amendment.  The Court observed that  

the object of the new definition introduced in clause 29-A of Article 366 of  

the Constitution was to enlarge the scope of the expression “tax of sale or  

purchase of goods” wherever it occurs in the Constitution so that it may  

include within its scope any transfer, delivery or supply of goods that may  

take place under any of the transactions referred to in sub-clauses (a) to  

(f). The Constitution Bench∗∗∗  explained that clause 29-A refers to a tax on  

∗∗  ***36. ……..After the 46th Amendment the works contract which was an indivisible one is by a legal  fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labour  and services. After the 46th Amendment, it has become possible for the States to levy sales tax on the value  of goods involved in a works contract in the same way in which the sales tax was leviable on the price of   the goods and materials supplied in a building contract which had been entered into in two distinct and  separate parts as stated above…….

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………. 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   

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the transfer of property in goods (whether as goods or in some other form)  

involved in the execution  of  a  works contract.  The emphasis  is  on the  

transfer of property in goods – whether as goods or in some other form. A  

transfer  of  property  in  goods  under  sub-clause  (b)  of  clause  29-A  is  

deemed to be a sale of the goods involved in the execution of a works  

contract by the person making the transfer and a purchase of those goods  

by a person to whom such transfer was made.

58. Article  286  puts  certain  restrictions  upon  the  power  of  the  

State to enact laws concerning imposition of sales tax.  It lays down that no  

law of a State shall impose or authorise the imposition of a tax on the sale  

or purchase of goods where such sale or purchase takes place (a) outside  

the State, or (b) in the course of import of the goods into, or export of the  

goods out of the territory of India.  Sub-clause (2) of Article 286 enables  

the Parliament to enact law formulating principles for determining when a  

sale or purchase of goods takes place in any of the ways mentioned in  

clause (1).  As regards inter-state trade and commerce, clause (3) puts two  

restrictions.  It provides that any law of a State shall, insofar as it imposes,  

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…..  

41. ……… The case-book is full of the illustrations of the infinite variety of the manifestation of  ‘works  contracts’.  Whatever  might  be the situational  differences  of  individual  cases,  the constitutional   limitations on the taxing power of the State as are applicable to ‘works contracts’ represented by “building  contracts”  in  the  context  of  the  expanded  concept  of  “tax  on  the  sale  or  purchase  of  goods”  as  constitutionally defined under Article 366(29-A), would equally apply to other species of ‘works contracts’  with the requisite situational modifications.

42. The constitutional amendment in Article 366(29-A) read with the relevant taxation entries has  enabled  the  State  to  exert  its  taxing  power  in  an  important  area  of  social  and  economic  life  of  the   community……….

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or authorises the imposition of (a) a tax on the sale or purchase of goods  

declared by Parliament by law to be of special importance in inter-state  

trade or commerce; (b) a tax on the sale or purchase of goods, being a tax  

of the nature referred to in sub-clause (b), sub-clause (c) and sub-clause  

(d)  of  clause  29-A  of  Article  366,  be  subject  to  such  restrictions  and  

conditions in regard to the system of levy, rates and other incidents of tax  

as  the  Parliament  may by law specify.   Clause (3)  was substituted  by  

Constitution Forty-sixth Amendment Act, 1982 with effect from 02.02.1983.  

59. Clause  29-A  was  inserted  in  Article  366  by  the  Forty-sixth  

Amendment with effect from 02.02.1983.  Entry 54 of List II  (State List)  

enables the State to make laws relating to taxes on the sale or purchase of  

goods other than the newspapers, subject to the provisions of Entry 92-A  

of List I.  Entry 63 of List II enables the States to provide rates of stamp  

duty in respect of documents other than those specified in provisions of  

List I with regard to the rates of stamp duty.  Entry 92-A of List I deals with  

taxes  on the sale or purchase of goods other than newspapers where  

such sale or  purchase takes place in the course of  inter-state trade or  

commerce. Entry 6 of List III deals with the subjects, “transfer of property  

other than the agricultural land; registration of deeds and documents”.  

60. It is important to ascertain  the meaning of sub-clause (b) of  

clause 29-A of Article 366 of the Constitution.  As the very title of Article  

366  shows,  it  is  the  definition  clause.  It  starts  by  saying  that  in  the  

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Constitution unless the context otherwise requires the expressions defined  

in that article shall have the meanings respectively assigned to them in the  

article. The definition of expression “tax on sale or purchase of the goods”  

is contained in clause (29-A).  If the first part of clause 29-A is read with  

sub-clause (b) along with latter part of this clause, it reads like this: tax on  

the  sale  or  purchaser  of  the  goods”  includes  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 and such transfer, delivery or supply of any  

goods shall be deemed to be a sale of those goods by the person making  

the  transfer,  delivery  or  supply  and a  purchase of  those goods  by  the  

person to whom such transfer, delivery or supply is made.  The definition  

of “goods” in clause 12 is inclusive.  It includes all materials, commodities  

and  articles.  The  expression,  ‘goods’  has  a  broader  meaning  than  

merchandise.  Chattels  or  movables  are  goods  within  the  meaning  

of  clause 12.  Sub-clause (b) refers to transfer of  property  in  goods  

(whether  as  goods  or  in  some  other  form)  involved  in  the  execution  

of  a works contract.  The  expression  “in some other form” in the bracket  

is of utmost significance as by this expression the ordinary understanding  

of  the term ‘goods’  has been enlarged by bringing within its fold goods  

in a form other than  goods.   Goods in some  other  form  would thus  

mean  goods  which  have  ceased  to  be  chattels  or  movables  or  

merchandise and become attached or embedded to earth.  In other words,  

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goods which have by incorporation become part of immovable property are  

deemed as goods. The definition of ‘tax on the sale or purchase of goods’  

includes a tax on the transfer or property in the goods as goods or which  

have lost its form as goods and have acquired some other form involved in  

the execution of a works contract.

61. Viewed  thus,  a  transfer  of  property  in  goods  under  clause  

29-A(b) of Article 366 is deemed to be a sale of the goods involved in the  

execution of a works contract by the person making the transfer and the  

purchase of those goods by the person to whom such transfer is made.

62. The States have now been conferred with the power to tax  

indivisible contracts of works. This has been done by enlarging the scope  

of  “tax  on  sale  or  purchase  of  goods”  wherever  it  occurs  in  the  

Constitution. Accordingly, the expression “tax on the sale or purchase of  

goods”  in  Entry  54  of  List  II  of  Seventh  Schedule  when read with  the  

definition clause 29-A, includes a tax on the transfer of property in goods  

whether as goods or in the form other than goods involved in the execution  

of works contract. The taxable event is deemed sale.  

63. Gannon  Dunkerley-I3 and  few  other  decisions  following  

Gannon Dunkerley-I3   wherein the expression “sale” was given restricted  

meaning by adopting the definition of the word “sale” contained in the Sale  

of  Goods  Act  has  been  undone  by  the  Forty-sixth  Constitutional  

Amendment so as to include works contract. The meaning of sub-clause  

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(b) of clause 29-A of Article 366 of the Constitution also stands settled by  

the Constitution Bench of this Court in Builders’ Association4.  As a result  

of clause 29-A of Article 366, tax on the sale or purchase of goods may  

include a tax on the transfer in goods as goods or in a form other than  

goods involved in the execution of the works contract.  It  is open to the  

States to divide the works contract into two separate contracts by  legal  

fiction: (i) contract for sale of goods involved in the works contract and (ii)  

for  supply of  labour and service.  By the Forty-sixth Amendment,  States  

have been empowered to bifurcate the contract and to levy sales tax on  

the value of the material in the execution of the works contract.

64. Whether  contract involved a dominant intention to transfer the  

property in goods, in our view,  is not at all material. It is not necessary to  

ascertain  what  is  the  dominant  intention  of  the  contract.  Even  if  the  

dominant intention of the contract is not to transfer the property in goods  

and  rather  it  is  the  rendering  of  service  or  the  ultimate  transaction  is  

transfer of immovable property, then also it is open to the States to levy  

sales  tax  on  the  materials  used  in  such  contract  if  it  otherwise  has  

elements of works contract.  The view taken by a two-Judge Bench of this  

Court in Rainbow Colour Lab16 that the division of the contract after Forty-

sixth  Amendment  can  be  made  only  if  the  works  contract  involved  a  

dominant intention to transfer the property in goods and not in contracts  

where the transfer of property  takes place as an incident of  contract  of  

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service is no longer good law,  Rainbow Colour Lab16  has been expressly  

overruled by a three-Judge Bench in Associated Cement15.

65. Although, in  Bharat Sanchar5, the Court was concerned with  

sub-clause (d)  of  clause 29-A of  Article  366 but  while dealing  with the  

question as to whether the nature of transaction by which mobile phone  

connections  are  enjoyed  is  a  sale  or  service  or  both,  the  three-Judge  

Bench did consider the scope of definition in clause 29-A of Article 366.  

With reference to sub-clause (b) it said: “……. sub-clause (b) covers cases  

relating to works contract. This was the particular fact situation which the  

Court was faced with in  Gannon Dunkerley-I3   and which the Court had  

held was not a sale. The effect in law of a transfer of property in goods  

involved in the execution of the works contract  was by this amendment  

deemed to be a sale. To that extent the decision in Gannon Dunkerley-I3   

was directly overcome”. It then went on to say that all the sub-clauses of  

Article 366(29-A) serve to bring transactions where essential ingredients of  

a ‘sale’ as defined in the Sale of Goods Act, 1930 are absent, within the  

ambit of purchase or sale for the purposes of levy of sales tax.  

66. It then clarified that  Gannon Dunkerley-I3  survived the Forty-

sixth Constitutional Amendment in two respects. First, with regard to the  

definition of “sale” for the purposes of the Constitution in general and for  

the purposes of Entry 54 of List II in particular except to the extent that the  

clauses in Article 366(29-A) operate and second, the dominant nature test  

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would be confined to a composite transaction not covered by Article 366  

(29-A).  In other words, in Bharat Sanchar5, this Court reiterated what was  

stated by this Court in Associated Cement15  that dominant nature test has  

no application to a composite transaction covered by the clauses of Article  

366(29-A).  Leaving  no  ambiguity,  it  said  that  after  the  Forty-sixth  

Amendment, the sale element of those contracts which are covered by 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 dominant nature test applying.

67. In view of the statement of law in  Associated Cement15  and  

Bharat Sanchar5, the argument advanced on behalf of the appellants that  

dominant  nature  test  must  be  applied  to  find  out  the  true  nature  of  

transaction  as  to  whether  there  is  a  contract  for  sale  of  goods  or  the  

contract of service in a composite transaction covered by the clauses of  

Article 366 (29-A) has no merit and the same is rejected.    

68. In Gannon Dunkerley-II11, this Court, inter alia, established the  

five following propositions : (i) as a result  of Forty-sixth Amendment the  

contract which was single and indivisible has been altered by a legal fiction  

into a contract which is divisible into one for sale of goods and the other for  

supply of labour and service and as a result of such contract which was  

single and indivisible has been brought on par with a contract containing  

two separate agreements; (ii) if the legal fiction introduced by Article 366  

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(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  the 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; (iii) in view of  sub-clause (b) of  

clause 29-A of Article 366, the State legislatures are competent to impose  

tax on the transfer of property in goods involved in the execution of works  

contract.  Under  Article  286(3)(b),  Parliament  has  been  empowered  to  

make a law specifying restrictions and conditions in regard to the system of  

levy, rates or incidents of such tax. This does not mean that the legislative  

power of the State cannot be exercised till the enactment of the law under  

Article 286(3)(b) by the Parliament. It only means that in the event of law  

having been made by Parliament under Article 286(3)(b), the exercise of  

the legislative power of the State under Entry 54 in List II to impose tax of  

the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of  

Article 366 would be subject to restrictions and conditions in regard to the  

system of levy, rates and other incidents of tax contained in the said law;  

(iv) while enacting  law imposing a tax on sale or purchase of goods under  

Entry 54 of the State List read with Article 366 (29-A)(b), it is permissible  

for the State legislature to make a law imposing tax on such a deemed  

sale  which  constitutes  a  sale  in  the  course  of  the  inter-state  trade  or  

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commerce under Section 3 of the Central Sales Tax Act or outside under  

Section 4 of the Central Sales Tax Act or sale in the course of import or  

export under Section 5 of the Central Sales Tax Act; and (v)  measure for  

the levy of tax contemplated by Article 366 (29-A)(b) is the value of the  

goods involved in the execution of  a works contract.  Though the tax is  

imposed on the transfer of property in goods involved in the execution of a  

works contract, the measure for levy of such imposition is the value of the  

goods involved in the execution of  a works contract.  Since, the taxable  

event is the transfer of property in goods involved in the execution of a  

works contract and the said transfer of property in such goods takes place  

when the goods are incorporated  in the works,  the value of  the goods  

which can constitute the measure for the levy of the tax has to be the value  

of the goods at the time of incorporation of the goods in works and not the  

cost of acquisition of the goods by the contractor.

69. In  Gannon Dunkerley-II11, sub-section (3) of Section 5 of the  

Rajasthan Sales Tax Act and Rule 29(2)(1) of the Rajasthan Sales Tax  

Rules  were  declared  as  unconstitutional  and  void.  It  was  so  declared  

because the Court found that Section 5(3) transgressed the limits of the  

legislative power conferred on the State legislature under Entry 54 of the  

State List. However, insofar as legal position after Forty-sixth Amendment  

is concerned,  Gannon Dunkerley-II11  holds unambiguously that the States  

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have now legislative power to impose tax on transfer of property in goods  

as goods or in some other form in the execution of works contract.

70. The Forty-sixth Amendment leaves no manner of doubt that  

the States have power to bifurcate the contract and levy sales tax on the  

value of the material involved in the execution of the works contract. The  

States are now empowered to levy sales tax on the material used in such  

contract. In other words, clause 29-A of Article 366 empowers the States to  

levy tax on the deemed sale.  

71. Now, if by legal fiction provided in clause (29-A)(b) of Article  

366,  the  works  contract  becomes  separable  and  divisible,  one  for  the  

materials and the other for services and for the work done, whatever has  

been said by this Court in Gannon Dunkerley-I3 with regard to the definition  

of  works contract  in  Section 2(i)  of  the Madras General  Sales Tax Act  

pales into insignificance insofar  as ambit  and scope of  the term “works  

contract” within the meaning of Article 366(29-A) is concerned. To say that  

insertion  of  clause  (29-A)  in  Article  366  has  not  undone  Gannon  

Dunkerley-I3  in  any  manner,  in  our  view,  is  not  correct.  The  narrow  

meaning given to the term “works contract” in Gannon Dunkerley-I3 now no  

longer survives.  

72. There is no doubt that to attract Article 366(29-A)(b) there has  

to be a works contract  but then what is its meaning.   The term “works  

contract” needs to be understood in a manner that the Parliament had in its  

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view at the time of Forty-sixth Amendment and which is more appropriate  

to Article 366(29-A)(b).    

73. The ordinary dictionary meaning of the word “work” means a  

structure or apparatus of some kind; architecture or engineering structure,  

a building edifice. When it is used in the plural, i.e., as works, it means  

architectural  or  engineering  operations,  a  fortified  building,  a  defensive  

structure,  fortification  or  any  of  the  several  parts  of  such structures.  In  

Webster Comprehensive Dictionary, International Edition the term  “work”  

is  stated  to  be,  ………  (2)   that  upon  which  labor  is  expended;  an  

undertaking task. (3) that which is produced by or as by labor, specifically,  

an engineering structure;……...... In the same dictionary, the term  “works”  

is  stated  as  a  manufacturing  establishment  including  buildings  and  

equipment.

74. In  Radha Raman21,  Allahabad High Court stated (although in  

the context of Section 40 of the Land Acquisition Act, 1894) that the “work”  

has a very wide meaning.  It is really used in two senses of bestowing  

labour  and that  upon which  labour  has been  bestowed.  When used in  

plural the word certainly means some outstanding or important result of the  

labour  that  has  been  bestowed  and  large  industrial  and  scientific  

establishments are called “works”.

21  Radha Raman v. State of Uttar Pradesh & Ors.; [AIR (1954) Allahabad 700]

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75. Hudson’s  ‘Building  Engineering  Contracts’,  Eleventh  edition,  

Volume 1, for the purposes of that book, starts by saying that a building or  

engineering  contract  may  be  defined  as  an  agreement  under  which  a  

person (called builder or contractor) undertakes for reward to  carry out for  

another (building owner or employer), works of building or civil engineering  

character.   It  continues to say that in the typical case, the work will  be  

carried out  upon the land of  the employer or  building owner,  though in  

some special cases obligations to build may arise by contract where this is  

not so, for example,  under building leases and contracts for the sale of  

land with a house in the course of erection upon it.  The above statement  

by Hudson indicates that in a typical case work (structure, building etc.) will  

be carried out upon the land of the employer or building owner though in  

some special cases an obligation to build may arise by contract where this  

is not so.  Hudson gives an example of building leases and contracts for  

the sale of land with a house in the course of erection upon it.    

76. In our opinion, the term ‘works contract’ in Article 366(29-A)(b)  

is amply wide and cannot be confined to a particular understanding of the  

term or  to a particular  form.  The term encompasses a wide range and  

many  varieties  of  contract.  The  Parliament  had  such  wide  meaning  of  

“works  contract”  in  its  view at  the  time of  Forty-sixth  Amendment.  The  

object of insertion of clause 29-A in Article 366 was to enlarge the scope of  

the expression “tax of sale or purchase of goods” and overcome Gannon  

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Dunkerley-I3.  Seen thus, even if in a contract, besides the obligations of  

supply of goods and materials and performance of labour and services,  

some additional obligations are imposed, such contract does not cease to  

be works contract. The additional obligations in the contract would not alter  

the nature of contract so long as the contract provides for a contract for  

works and satisfies the primary description of  works contract.  Once the  

characteristics  or  elements  of  works contract  are satisfied in a contract  

then irrespective of additional obligations, such contract would be covered  

by the term ‘works contract’. Nothing in Article 366(29-A)(b) limits the term  

“works contract” to contract for labour and service only. Learned Advocate  

General for Maharashtra was right in his submission that the term “works  

contract” cannot be confined to a contract to provide labour and services  

but is a contract for undertaking or bringing into existence some “works”.  

We are also in agreement with the submission of Mr. K.N. Bhat that the  

term “works contract” in Article 366(29-A)(b) takes within its fold all genre  

of works contract and is not restricted to one specie of contract to provide  

for  labour  and services above.   The Parliament  had all  genre of  works  

contract in view when clause 29-A was inserted in Article 366.  

77. The difference between a contract for work (or service) and a  

contract  for  sale  (of  goods)  has  come up for  consideration  before  this  

Court  on  more  than  one  occasion.  Before  we  consider  some  of  the  

decisions of this Court in this regard, it  is of interest to refer to two old  

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decisions of English courts.  In  Lee22,  it  was laid down that if  a contract  

would  result  in  the  transaction  of  property  in  goods  from one  party  to  

another then it must be a contract of sale.

78. However, the statement of law in  Lee21 did not find favour in  

Robinson23 where it was held that if the substance of the contract required  

skill and labour for the production of the articles then it would not make any  

difference that there would pass some materials in addition to the skill.  

79. In Chandra Bhan Gosain24, this Court exposited that for finding  

out whether a contract is one of work done and materials found or one for  

sale of goods depends on its essence. If not of its essence that a chattel  

should be produced and transferred as a chattel, then it may be a contract  

for work done and materials found and not a contract for sale of goods.

80. In  Purshottam Premji9, the difference between a contract for  

work and a contract for sale was explained like this: The primary difference  

between a contract for work or service and a contract for sale of goods is  

that  in  the  former  there  is  in  the  person  performing  work  or  rendering  

service no property in the thing produced as a whole notwithstanding that a  

part or even the whole of the materials used by him may have been its  

property. In a case of contract for sale, the thing produced as a whole has  

individual existence as the sole property of the party who produced it at  

22  Lee v. Griffin; [(1861) 1 B. & S. 272] 23  Robinson v. Graves; [(1935) 1 KB 579] 24  Chandra Bhan Gosain v. State of Orissa and Others; [(1964) 2 SCR 879

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some time before delivery and the property therein passes only under the  

contract relating thereto to other party for price. Mere transfer of property in  

goods  used  in  the  performance  of  the  contract  is  not  sufficient;  to  

constitute a sale there must be an agreement express or implied relating to  

the sale of goods and completion of the agreement by passing of title in  

the  very  goods  contracted  to  be  sold.  Ultimately  the  true  effect  of  an  

accretion made pursuant to a contract has to be judged, not by an artificial  

rule  that  the  accretion  may be presumed to  have become by virtue  of  

affixing to  a chattel  of  part  of  that  chattel  but  from the intention of  the  

parties to the contract.

81. The  factors  highlighted   in  Purshottam  Premji9  which  

distinguish a contract for work from a contract for sale are relevant but not  

exhaustive.  It is not correct to say that these factors should be considered  

as the only factors to differentiate a works contract and a contract for sale.  

In our view, there are not and there  cannot be absolute tests to distinguish  

a sale and works contract.     

82. This  Court  in  Associated  Hotels25,  stated  that  the  

determination  as  to  whether  the  contract  involved  in  a  transaction  

constitutes a contract of sale or a contract of work or service depends in  

each case upon its facts and circumstances. Mere passing of property in  

article  or  commodity  during  the  course  of  the  performance  of  the  

25  The State of Punjab v. M/s. Associated Hotels of India Ltd.; [(1972) 1 SCC 472]

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transaction does not render it a transaction of sale. For even in a contract  

purely of work or service, it is possible that articles may have to be used by  

the  person  executing  the  work  and  property  in  such  cases  articles  or  

materials  where  passed  to  the  other  party.  That  would  not  necessarily  

convert  the  contract  into  one of  sale  of  those materials.  It  is  stated  in  

Associated Hotels25   that in every case the Court will have to find out what  

is the primary object of the transaction and the intention of the parties while  

entering upon it.  It has been clarified that in some cases it may be that  

even while entering into a contract of work or even service, parties might  

enter into separate agreements, one of work and service and the other of  

sale and purchase of materials to be used in the course of executing the  

work or performing the service. But, then in such cases the transaction will  

not be one and indivisible but will fall into the two separate agreements  

one of work or service and the other of sale.

83. Halsbury’s Laws of England, Third Edition, Vol. 41, para 603,  

while distinguishing a contract of sale from a contract for work and labour,  

has highlighted the test thus: whether or not the work and labour bestowed  

end in anything that can properly become the subject of sale; neither the  

ownership of materials, nor the value of the skill and labour as compared  

with the value of the materials, is conclusive, although such matters may  

be  taken  into  consideration  in  determining,  in  the  circumstances  of  a  

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particular  case,  whether  the contract  is  in  substance one for  work  and  

labour or one for the sale of a chattel.

84. In  B.C.  Kame6,  the  Court  following  Associated  Hotels24   

observed  that  determination  of  the  question  whether  a  contract  is  a  

contract for ‘work and labour’  or a contract for ‘sale’ was not free from  

difficulty, particularly, when the contract is a composite one.  Having said  

that the Court applied the  test stated in Halsbury’s Laws of England.

85. In  Hindustan  Aeronautics26,  the  Court  noted  the  difference  

between contract for service and contract for sale of goods in these words:  

“13. It is well settled that the difference between contract of  service and contract for sale of goods, is, that in the former,  there is in the person performing work or rendering service  no  property  in  the  things  produced  as  a  whole  notwithstanding that a part or even the whole of materials  used by him had been his property. In the case of a contract  for  sale,  the  thing  produced  as  a  whole  has  individual  existence as the sole property of the party who produced it  some time before delivery and the property therein passed  only under the contract relating thereto to the other party for  price. It is necessary, therefore, in every case for the courts  to find out whether in essence there was any agreement to  work for a stipulated consideration…………”

86. The Court went on to say further in  Hindustan Aeronautics25  

as follows;

“18. It cannot be said as a general proposition that in every  case of works contract, there is necessarily implied the sale  of the component parts which go to make up the repair. That  question  would  naturally  depend  upon  the  facts  and  circumstances of each case. Mere passing of property in an  article or commodity during the course of performance of the  

26  Hindustan Aeronautics Ltd. v. State of Karnataka; [(1984) 1 SCC 706]

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transaction in question does not render the transaction to be  transaction of  sale.  Even in  a contract  purely  of  works or  service, it is possible that articles may have to be used by  the person executing the work, and property in such articles  or  materials  may pass to  the other  party.  That  would not  necessarily  convert  the contract  into  one of  sale  of  those  materials……”

87. In  Kone Elevators27,  the Court again highlighted the tests to  

distinguish a works contract and a contract for sale of goods. The Court  

said;

“5. It can be treated as well settled that there is no standard  formula by which one can distinguish a “contract for  sale”  from a “works contract”. The question is largely one of fact  depending  upon  the  terms  of  the  contract  including  the  nature of the obligations to be discharged thereunder and  the surrounding circumstances. If the intention is to transfer  for a price a chattel in which the transferee had no previous  property, then the contract is a contract for sale. Ultimately,  the true effect of an accretion made pursuant to a contract  has to be judged not by artificial rules but from the intention  of the parties to the contract. In a “contract of sale”, the main  object is the transfer of property and delivery of possession  of the property, whereas the main object in a “contract for  work” is not the transfer of the property but it is one for work  and labour. Another test often to be applied is:  when and  how the property of the dealer in such a transaction passes  to the customer: is it by transfer at the time of delivery of the  finished  article  as  a  chattel  or  by  accession  during  the  procession of work on fusion to the movable property of the  customer? If it is the former, it is a “sale”; if it is the latter, it is  a  “works  contract”.  Therefore,  in  judging  whether  the  contract is for a “sale” or for “work and labour”, the essence  of the contract or the reality of the transaction as a whole  has to be taken into consideration. The predominant object  of  the  contract,  the  circumstances  of  the  case  and  the  custom of  the  trade  provide  a  guide  in  deciding  whether  transaction is a “sale” or a “works contract”. Essentially, the  question is of interpretation of the “contract”. It is settled law  that  the  substance  and  not  the  form  of  the  contract  is  material in determining the nature of transaction. No definite  rule  can  be  formulated  to  determine  the  question  as  to  

27  State of A.P. v. Kone Elevators (India) Ltd.; [(2005) 3 SCC 389]

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whether a particular given contract is a contract for sale of  goods or is a works contract. Ultimately, the terms of a given  contract  would  be  determinative  of  the  nature  of  the  transaction,  whether  it  is  a  “sale”  or  a  “works  contract”.  Therefore, this question has to be ascertained on facts of  each case, on proper construction of terms and conditions of  the contract between the parties.”

88. In Hindustan Shipyard7, this Court stated that it was difficult to  

lay down an absolute rule to distinguish a contract for sale and a contract  

for labour. The question under consideration in that case was whether the  

transactions  involved in manufacture  and supply  of  ships  by Hindustan  

Shipyard to its customers are “sale” as defined in clause (n) of Section 2 of  

Andhra  Pradesh  General  Sales  Tax  Act,  1957  or  a  works  contract  as  

defined in clause (t) of Section 2 of that Act. While dealing with the above  

question, the Court in para 6 stated, “the distinction between a contract of  

sale and works contract is not free from difficulty and has been the subject  

matter of several judicial decisions. No straitjacket formula can be made  

available nor can such quick-witted tests be devised as would be infallible.  

It is all a question of determining the intention of the parties by culling out  

the same on an overall reading of the several terms and conditions of a  

contract…….” The Court did note the observations made in Variety Body  

Builders28, that there is no standard formula by which one can distinguish a  

contract of sale from a contract for work and labour. There may be many  

common  features  in  both  the  contracts,  some  neutral  in  a  particular  

28  State of Gujarat (Commissioner of Sales Tax, Ahmedabad) v. M/s.Variety Body Builders; [(1976) 3 SCC 500]

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contract, and yet certain clinching in a given case may fortify conclusion  

one way or the other.    

89. The Court then analysed the recitals and terms and conditions  

of  the contract  and also took into consideration para 603 of  Halsbury’s  

Laws of England, Fourth Edition, Volume 41, Benjamin’s Sale of Goods,  

Fourth Edition, Para 1.042 and Pollock and Mulla on Sale of Goods [1990,  

Fifth Edition, Page 53] and summed up the legal position in sub-para 2 and  

sub-para 3 of para 14 (pgs. 591-592) as under :

“(2) Transfer of property of goods for a price is the linchpin of  the definition of sale. Whether a particular contract is one of  sale of goods or for work and labour depends upon the main  object of the parties found out from an overview of the terms  of the contract,  the circumstances of  the transactions and  the custom of the trade. It is the substance of the contract  document/s,  and  not  merely  the  form,  which  has  to  be  looked into. The court may form an opinion that the contract  is one whose main object is transfer of property in a chattel  as a chattel to the buyer, though some work may be required  to be done under the contract as ancillary or incidental to the  sale, then it is a sale. If the primary object of the contract is  the carrying out of work by bestowal of labour and services  and materials are incidentally used in execution of such work  then the contract is one for work and labour.

(3) If the thing to be delivered has any individual existence  before the delivery as the sole property of the party who is to  deliver it, then it is a sale. If ‘A’ may transfer property for a  price in a thing in which ‘B’ had no previous property then  the contract is a contract for sale. On the other hand where  the main object of work undertaken by the payee of the price  is not the transfer of a chattel qua chattel, the contract is one  for work and labour.”

90. The  Court  in  Hindustan  Shipyard7  also  set  out  three  

categories: (a) the contract may be for work to be done, for remuneration  

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and  for  supply  of  materials  used  in  the  execution  of  work  for  a  price,  

(b)  contract  for  work in  which the use of  the materials  is  accessory  or  

incidental to the execution of the work and (c) contract for supply of goods  

where some work is required to be done as incidental to the sale. Having  

regard to the recitals of the contract,  the Court then concluded that the  

contracts  in  question  involved  sale  of  respective  vessels  within  the  

meaning of clause (m) of the Andhra Pradesh General Sales Tax Act and  

were not merely the works contract as defined in clause (t) thereof.

91. In our opinion, the tests laid down in Hindustan Shipyard7 after  

Forty-sixth  Amendment  are  not  of  much help  in  determining  whether  a  

contract  is  a  works  contract  or  sale  of  goods.  In  any  case,  Hindustan  

Shipyard7 also  says  that  there  is  no  absolute  rule  for  distinguishing  a  

contract for sale (of goods) and a contract for labour (or services).

92. It  seems to  us  (and that  is  the  view taken in  some of  the  

decisions) that a contract may involve both a contract of work and labour  

and a contract  of sale of goods. In our opinion, the distinction between  

contract for sale of goods and contract for work (or service) has almost  

diminished in the matters of composite contract involving both (a contract  

of  work/labour  and  a  contract  for  sale  for  the  purposes  of  Article  366  

(29-A)(b).  Now by legal fiction under Article 366(29-A)(b), it is permissible  

to make such contract divisible by separating the transfer of property in  

goods  as  goods  or  in  some other  form from the  contract  of  work  and  

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labour. A transfer of property in goods under clause 29(A)(b) of Article 366  

is  deemed to be a sale of  goods involved in the execution of  a works  

contract  by  the  person  making  the  transfer  and the  purchase  of  those  

goods by the person to whom such transfer is made.  For this reason, the  

traditional decisions which hold that the substance of the contract must be  

seen have lost their significance. What was viewed traditionally has to be  

now understood in light of the philosophy of Article 366(29-A).  

93. The  question  is:  Whether  taxing  sale  of  goods  in  an  

agreement  for  sale  of  flat  which  is  to  be  constructed  by  the  

developer/promoter  is  permissible  under  the  Constitution?  When  the  

agreement between the promoter/developer and the flat  purchaser is to  

construct a flat and eventually sell  the flat with the fraction of land, it is  

obvious that such transaction involves the activity of construction inasmuch  

as it  is only when the flat  is constructed then it  can be conveyed.  We,  

therefore, think that there is no reason why such activity of construction is  

not  covered  by  the  term  “works  contract”.  After  all,  the  term  “works  

contract” is nothing but a contract in which one of the parties is obliged to  

undertake or to execute works. Such activity of  construction has all  the  

characteristics  or  elements  of  works contract.   The ultimate transaction  

between  the  parties  may be  sale  of  flat  but  it  cannot  be  said  that  the  

characteristics of works contract are not involved in that transaction.  When  

the transaction involves the activity of construction, the factors such as, the  

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flat purchaser has no control over the type and standard of the material to  

be used in the construction of building or  he does not get any right to  

monitor  or  supervise  the  construction  activity  or  he  has  no  say  in  the  

designing  or  lay-out  of  the  building,  in  our  view,  are  not  of  much  

significance and in any case these factors do not detract the contract being  

works contract insofar as construction part is concerned.  

94. For sustaining the levy of tax on the goods deemed to have  

been sold in execution of a works contract, in our opinion, three conditions  

must be fulfilled: (i) there must be a works contract, (ii) the goods should  

have  been  involved  in  the  execution  of  a  works  contract,  and  (iii)  the  

property in those goods must be transferred to a third party either as goods  

or  in  some  other  form.  In  a  building  contract  or  any  contract  to  do  

construction, the above three things are fully met.  In a contract to build a  

flat there will  necessarily be a sale of goods element.   Works contracts  

also  include  building  contracts  and  therefore  without  any  fear  of  

contradiction it  can be stated that  building contracts  are species of  the  

works contract.    

95. Ordinarily in the case of a works contract the property in the  

goods used in the construction of the building passes to the owner of the  

land on which the building is constructed when the goods and materials  

used are incorporated in the building.  But there may be contract  to the  

contrary or a statute may provide otherwise.  Therefore, it cannot be said  

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to be an absolute proposition in law that the ownership of the goods must  

pass  by  way  of  accretion  or  exertion  to  the  owner  of  the  immovable  

property to which they are affixed or upon which the building is built.  

96. Value addition as a concept after Forty-sixth Amendment to  

the Constitution has been accepted by this Court in P.N.C. Construction17.  

While dealing with this  concept,  the Court  said that  value addition was  

important concept which had arisen after the Forty-sixth Amendment by  

insertion  of  sub-clause  (b)  of  clause  (29-A)  in  Article  366.  It  has  now  

become 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 of the goods in a building contract. On account of the  

Forty-sixth  Amendment  in  the  Constitution  the  State  Governments  are  

empowered to levy sales tax on the contract value which earlier was not  

possible.

97. Where a contract comprises of both a works contract and a  

transfer  of  immovable property,  such contract  does not  denude it  of  its  

character  as  works  contract.   Article  366(29-A)(b)  does  contemplate  a  

situation where the goods may not be transferred in the form of goods but  

may be transferred in some other form which may even be in the form of  

immovable property.  The decision of  the Australian High Court  in  M.R.  

Hornibrook18 is worth noticing in this regard.  Section 3(4) of the Australian  

Sales Tax Assessment Act, 1930 was brought in by way of amendment by  

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the  Legislature  in  1932  which  reads,  “For  the  purposes  of  this  Act,  a  

person shall be deemed to have sold goods if, in the performance of any  

contract under which he has received, or is entitled to receive, valuable  

consideration, he supplies goods the property in which whether as goods  

(or in some other form) passes, under the terms of the contract, to some  

other person”.  The question for consideration before the Australian High  

Court in light of the above provision was whether the contractor was liable  

to pay sales tax on the transfer of goods involved in a works contract. The  

majority judgment held as follows:

“In  my opinion the commissioner is right  in his  contention  that this provision applies to the present case. The appellant  company,  in  the  performance  of  a  contract  for  building  a  bridge under which contract  it  was entitled to  receive and  doubtless has received valuable consideration, has supplied  goods,  namely,  reinforced  concrete  piles.  Such  piles  are  plainly manufactured articles.  They are chattels. They were  intended  to  be  incorporated  in  a  structure  and  were  so  incorporated.  They  lost  their  identity  as  goods  in  that  structure. But this fact does not prevent the piles from being  goods any more than it prevents bricks or stones or nuts and  bolts  from  being  goods. The  fact  that  the  goods  were  specially  manufactured  and  designed  for  a  particular  purpose cannot be held to deprive them of the character of  goods.” (Emphasis supplied)

98. M.R. Hornibrook18 has been followed by this Court in Builders’   

Association4. This Court said that sub-clause (b) of clause (29-A) of Article  

366 of the Constitution of India had more or less adopted the language  

used in Section 3(4) of the Australian Act.

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99. Learned  Advocate  General  for  Maharashtra  vehemently  

argued that there was nothing to prevent the taxation of different aspects  

of the same transaction as separate taxable events. Pressing into service  

the  aspects  theory,  he  argued  that  a  contract  for  carrying  out  works  

coupled with the sale of immovable property may be taxed by both, the  

State  legislatures  and the  Parliament  within  their  respective  spheres  of  

legislative competence as there is deemed sale of goods involved in works  

contracts.  The  works  contract  aspect  can  be  taxed  by  the  State  

legislatures under Entry 54 of List II of Seventh Schedule read with Article  

366 (29-A)(b) of the Constitution. The transfer of immovable property can  

be  taxed  by  the  Parliament  under  Entry  97  of  List  I.   Mr.  K.V.  

Vishwanathan, however, argued that the aspect theory has no application  

as the State legislatures inherently lack the legislative competence to tax  

the transfer of an immovable property. According to him, the aspect theory  

would apply when a tax is sought to be imposed on more than one distinct  

field of legislation in relation to the same matter provided that there exists  

in the States/Union legislative competence/legislative power to levy a tax  

under each distinct head.

100. We have no doubt that the State legislatures lack legislative  

power to levy tax on the transfer of immovable property under Entry 54 of  

List II of the Seventh Schedule. However, the States do have competence  

to levy sales tax on the sale of goods in an agreement of sale of flat which  

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also has a component of a deemed sale of goods. Aspects theory though  

does not allow the State legislature to entrench upon the Union List and  

tax services by including the cost of such service in the value of goods but  

that does not detract the State to tax the sale of goods element involved in  

the execution of works contract in a composite contract like contract for  

construction of building and sale of a flat therein.  In para 88 of  Bharat   

Sanchar5, the Court stated:  “the aspects theory does not however allow  

the State to entrench upon the Union List and tax services by including the  

cost of such service in the value of the goods. Even in those composite  

contracts which are by legal fiction deemed to be divisible under Article  

366(29-A), the value of the goods involved in the execution of the whole  

transaction cannot be assessed to sales tax”. Having said that, the Court  

also  stated  that  the  States  were  not  competent  to  include  the  cost  of  

service in the value of the goods sold (i.e. the sim card) nor the Parliament  

could include the value of  the sim card in the cost of services. But the  

statement in para  92(C) of the Report is clear that it is upto the States to  

tax the sale of goods element in a composite contract of sale and service.  

Bharat Sanchar5  thus supports the view that taxation of different aspects of  

the same transaction as separate taxable events is permissible.

101. In light of the above discussion, we may summarise the legal  

position, as follows:  

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(i) For sustaining the levy of tax on the goods deemed to have  

been  sold  in  execution  of  a  works  contract,  three  conditions  must  be  

fulfilled: (one) there must be a works contract, (two) the goods should have  

been involved in the execution of a works contract and (three) the property  

in those goods must be transferred to a third party either as goods or in  

some other form.  

(ii) For the purposes of Article 366(29-A)(b), in a building contract  

or  any  contract  to  do  construction,  if  the  developer  has  received  or  is  

entitled to receive valuable consideration, the above three things are fully  

met. It is so because in the performance of a contract for construction of  

building, the goods (chattels) like cement, concrete, steel, bricks etc. are  

intended to be incorporated in the structure and even though they lost their  

identity as goods but this factor does not prevent them from being goods.

(iii) Where a contract comprises of both a works contract and  a  

transfer  of  immovable property,  such contract  does not  denude it  of  its  

character as works contract.  The term “works contract” in Article 366 (29-

A)(b) takes within its fold all genre of works contract and is not restricted to  

one specie of contract to provide for labour and services alone. Nothing in  

Article 366(29-A)(b) limits the term “works contract”.  

(iv) Building contracts are species of the works contract.  

(v) A contract may involve both a contract of work and labour and  

a contract  for  sale.  In such composite  contract,  the distinction between  

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contract  for  sale of  goods and contract  for  work (or  service)  is virtually  

diminished.  

(vi) The dominant nature test has no application and the traditional  

decisions which have held that the substance of the contract must be seen  

have  lost  their  significance  where  transactions  are  of  the  nature  

contemplated in Article 366(29-A). Even if  the dominant  intention of the  

contract is not to transfer the property in goods and rather it is rendering of  

service or the ultimate transaction is transfer of immovable property, then  

also it is open to the States to levy sales tax on the materials used in such  

contract  if  such contract  otherwise has elements of works contract.  The  

enforceability test is also not determinative.

(vii) A transfer of property in goods under clause 29-A(b)  of Article  

366 is deemed to be a sale of the goods involved in the execution of a  

works contract  by the person making the transfer  and the purchase of  

those goods by the person to whom such transfer is made.  

(viii) Even in a single and indivisible works contract, by virtue of the  

legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of  

goods which are involved in the execution of the works contract. Such a  

deemed sale has all  the incidents  of  the sale of  goods involved in the  

execution of a works contract where the contract is divisible into one for  

the sale of goods and the other for supply of labour and services. In other  

words, the single and indivisible contract, now by Forty-sixth Amendment  

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has  been  brought  on  par  with  a  contract  containing  two  separate  

agreements and States have now power to levy sales tax on the value of  

the material in the execution of works contract.  

(ix) The expression “tax on the sale or purchase of goods” in Entry  

54 in List II of Seventh Schedule when read with the definition clause 29-A  

of Article 366 includes a tax on the transfer of property in goods whether  

as  goods  or  in  the form other  than goods involved in the execution of  

works contract.   

(x) Article  366(29-A)(b)  serves  to  bring  transactions  where  

essential ingredients of ‘sale’ defined in the Sale of Goods Act, 1930 are  

absent  within the ambit  of  sale or purchase for the purposes of levy of  

sales tax. In other words, transfer of movable property in a works contract  

is deemed to be sale even though it may not be sale within the meaning of  

the Sale of Goods Act.

(xi) Taxing the sale of goods element in a works contract under  

Article  366(29-A)(b)  read with Entry  54 List  II  is  permissible  even after  

incorporation of goods provided tax is directed to the value of goods and  

does not purport to tax the transfer of immovable property.   The value of  

the goods which can constitute the measure for the levy of the tax has to  

be the value of the goods at the time of incorporation of the goods in works  

even  though  property  passes  as  between  the  developer  and  the  flat  

purchaser after incorporation of goods.   

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102. The  crucial  question  would  now  remain:  whether  the  view  

taken  in  Raheja  Development1  with  reference  to  definition  of  “works  

contract” in KST Act is legally unjustified? The following definition of “works  

contract”  was  under  consideration  before  this  Court  in  Raheja  

Development1: “works contract” includes any agreement for carrying out for  

cash,  deferred  payment  or  other  valuable  consideration,  the  building,  

construction,  manufacture,  processing,  fabrication,  erection,  installation,  

fitting  out,  improvement,  modification,  repair  or  commissioning  of  any  

moveable or immovable property”.  

103. The Court also noticed the definition of “dealer” and “taxable  

turn over ”.  

104. The broad facts in Raheja Development1 were these:

• Raheja  Development  carried  on  the  business  of  real  estate  development and allied contracts;

• Raheja Development entered into development agreements with  the owners of land;

• Raheja  Development  entered  into  agreements  of  sale  with  intended purchasers. The agreements provided that on completion  of the construction, the residential apartments or the commercial  complexes would be handed over to the purchasers who would get  an undivided interest in the land also;  

• The owners of the land would then transfer the ownership directly  to  the  society  formed  under  the  Karnataka  Ownership  Flat  (Regulation of the Promotion of Construction, Sale, Management  and Transfer) Act, 1972 (for short, ‘KOFA’).

105. In  light  of  the  above  facts  and  the  definition  of  “works  

contract”, the question before this Court was whether Raheja Development  

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were  liable  to  pay  turnover  tax  on  the  value  of  goods  involved  in  the  

execution of the works contract.

106. Section 5-B of the KST Act provides for levy of tax on transfer  

of property in goods (whether as goods or in some other form) involved in  

the execution of works contract.  

107. On consideration of the arguments that were put forth by the  

parties, the Court in Raheja Development1 held as under:

(i) The definition of  the term “works contract”  in  the Act  is  an  inclusive definition.

(ii) It  is  a  wide  definition  which  includes  “any  agreement”  for  carrying out building or construction activity for cash, deferred payment or  other valuable consideration.

(iii) The definition of works contract does not make a distinction  based on who carries on the construction activity. Even an owner of the  property may be said to be carrying on a works contract if he enters into an  agreement  to  construct  for  cash,  deferred  payment  or  other  valuable  consideration.  

(iv) The developers had undertaken to build for the prospective  purchaser.

(v) Such construction/development  was to be on payment  of  a  price in various installments set out in the agreement.

(vi) The developers were not the owners. They claimed lien on the  property. They had right to terminate the agreement and dispose of the  unit if a breach was committed by the purchaser. A clause like this does  not mean that the agreement ceases to be “works contract”. So long as  there  is  no  termination,  the  construction  is  for  and  on  behalf  of  the  purchaser and it remains a “works contract”.

(vii) If there is a termination and a particular unit is not resold but  retained by the developer, there would be no works contract to that extent.

(viii) If the agreement is entered into after the flat or unit is already  constructed then there would be no works contract.  But, so long as the  agreement is entered into before the construction is complete it would be  works contract.

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108. The correctness of  the view taken in  Raheja Development1   

has been doubted in the referral order principally for the reasons: (a) the  

developer  had  undertaken  the  contract  to  develop  the  property  of  the  

owner.  It  is  not  alleged  by  the  department  that  there  is  monetary  

consideration involved in the development agreement. If the development  

agreement  is not  a works contract,  could the department  rely  upon the  

second contract which is the tripartite agreement and interpret it to be a  

works contract; (b)if  the ratio in  Raheja Development1  is  to be accepted  

then there would be no difference between works contract and a contract  

for sale of chattel as a chattel and (c) from the definition of works contract,  

the contractor must have undertaken the work of construction for and on  

behalf  of  the  flat  purchaser  for  cash,  deferred  or  any  other  valuable  

consideration but could it  be said that  developer was contractor  for the  

prospective flat purchaser.

109. In  Raheja  Development1,  the  Court  on  consideration  of  the  

clauses (q)  and (r)  of  the recitals  and clauses (1),  5(c)  and (vii)  of  the  

agreement between the flat purchaser, developer and owner of the land  

observed that the agreement had an element for carrying out building and  

construction  activity  for  cash,  deferred  payment  or  other  valuable  

consideration. The developer had undertaken to build for the prospective  

purchaser. Having regard to the various clauses of the recitals and also the  

clauses of the agreement, the Court was of the view that such agreement  

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was a typical agreement and so long as there was no termination of the  

contract,  the  construction  is  for  and  on  behalf  of  the  purchaser  and  it  

remains a “works contract”.  

110. The  argument  on  behalf  of  the  developers  that  the  flat  

purchaser is entitled to transfer of flat and conveyance of fraction of land  

only when all  installments have been fully paid and that shows that the  

agreement between the developer and the flat purchaser is the sale of flat  

and not to appoint the developer as the contractor of the flat purchaser for  

the purposes of carrying out the construction of the flat for and on behalf of  

the  flat  purchaser  has  no  merit.  The  submission  overlooks  the  typical  

nature  of  the  development  agreement  which  is  followed  by  a  tripartite  

agreement  between  the  owner  of  the  land,  the  developer  and  the  flat  

purchaser.  Effectively and de facto it is the developer who constructs the  

building  for  the  flat  purchaser.  The  developer  does  so  for  monetary  

consideration.  The label of payment is not decisive but the factum of the  

payment is.  The construction is done on payment of price as agreed upon  

between  the  developer  and  the  flat  purchaser.  It  is  not  necessary  to  

recapitulate all clauses of the agreement under KOFA or for that matter  

under MOFA. Raheja Development1 takes note of relevant clauses of the  

recitals  and  the  agreement  under  KOFA.  We  need  not  repeat  them.  

Similarly, Form V of the Maharashtra Ownership Flat Rules contains recital  

such as,  ‘as a result  of  the Development  agreement  the promoters are  

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entitled and enjoined upon to construct buildings on the said land’. One of  

the relevant clauses (omitting unnecessary portion) in Form V reads, “the  

promoter shall construct the said building/s….in accordance with the plans,  

designs, specifications …..which have been seen and approved by the flat  

purchaser  with  the  owner,  such  variations  and  modifications  as  the  

promoter may consider necessary or as may be required by the concerned  

local authority/the government…..provided that the promoter shall have to  

obtain prior consent in writing to the flat purchaser in respect of variations  

or modifications which may adversely affect the flat of the purchaser”. It is,  

thus, not correct to say that the work is undertaken by the developer for  

himself and for the owner and the construction is not carried for and on  

behalf of the purchaser.  

111. In the development agreement between the owner of the land  

and the developer, direct monetary consideration may not be involved but  

such agreement cannot be seen in isolation to the terms contained therein  

and  following development agreement, the agreement  in the nature of the  

tripartite agreement between the owner of the land, the developer  and  the  

flat purchaser whereunder the developer has undertaken to construct for  

the flat purchaser for monetary consideration.  Seen thus, there is nothing  

wrong  if  the  transaction  is  treated  as  a  composite  contract  comprising  

of both a works contract and a transfer of immovable property and levy  

sales  tax  on  the  value  of  the  material  involved  in  execution  of  the  

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works contract.   The observation in the referral  order that if  the ratio in  

Raheja Development1 is to be accepted then there would be no difference  

between  works  contract  and  a  contract  for  sale  of  chattel  as  chattel  

overlooks the legal position which we have summarized above.    

112. The  argument  that  flat  is  to  be  sold  as  a  flat  and  not  an  

aggregate of its component parts is already negated by the Constitution  

Bench in the case of Builders’ Association4. As a matter of fact, in Builders’   

Association4,  this  argument  was  advanced  on  behalf  of  the  States.  

Repelling  the  argument,  the  Constitution  Bench  observed  that  it  was  

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 works contract, but a conglomerate,  

that is the entire building which is actually constructed.

113. Yet another argument advanced on behalf of the appellants is  

that in Raheja Development1, it is noticed that the builder has a lien on the  

property but incorrectly states that lien is because they are not owners.  It  

is argued that lien is because if the monies are not recovered from the  

prospective flat purchasers, the lien can be exercised and this would show  

that the contract is a contract of an agreement to sell immovable property.  

The argument is insignificant because if the developer has undertaken to  

build  for  the  prospective  purchaser  for  cash  or  deferred  payment  or  a  

valuable  consideration  pursuant  to  a  contract  then  to  that  extent,  the  

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contract is works contract and there is deemed sale of material  (goods)  

used in the construction of building and merely because the builder has a  

right  of  lien  in  the  event  due  monies  are  not  paid  does  not  alter  the  

character of contract being works contract.  

114. In  Article  366(29-A)(b),  the  term ‘works  contract’  covers  all  

genre of works contract and it is not limited to one specie of the contract. In  

Raheja Development1,  the definition of “works contract”  in KST Act was  

under  consideration.  That  definition  of  “works contract”  is  inclusive and  

refers to building contracts and diverse construction activities for monetary  

consideration  viz;  for  cash,  deferred  payment  or  other  valuable  

consideration as works contract. Having regard to the factual position, inter   

alia,  Raheja Development1 entered into development agreements with the  

owners of the land and it also entered into agreements for sale with the flat  

purchasers, the consideration being payment in installments and also the  

clauses of the agreement the Court  held that developer had undertaken to  

build for the flat purchaser and so long as there was no termination of the  

contract,  the  construction  is  for  and  on  behalf  of  the  purchaser  and  it  

remains a “works contract”. The legal position summarized by us and the  

foregoing discussion would justify the view taken by the two Judge Bench  

in Raheja Development1.

115. It  may,  however,  be  clarified  that  activity  of  construction  

undertaken by the developer would be works contract only from the stage  

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the developer enters into a contract  with the flat purchaser.   The value  

addition made to the goods transferred after the agreement is entered into  

with the flat purchaser can only be made chargeable to tax by the State  

Government.  

116. The reasons stated in the referral order for reconsideration of  

Raheja Development1  do not make out any good ground for taking a view  

different from what has been taken by this Court in Raheja Development1.  

We are in agreement with the submission of   Mr. K.N. Bhat that since  

Raheja Development1  in May, 2005 almost all States have modified their  

laws  in  line  with  Raheja  Development1 and  there  is  no  justification  for  

change in the position settled after the decision of this Court in  Raheja  

Development1.  

117. The  submission  of  Mr.  K.N.  Bhat  that  the  view  in  Raheja  

Development1  that  when a completed building is  sold,  there is no work  

contract and, therefore, no liability to tax is not correct statement of law,  

does  not  appeal  to  us.   If  at  the  time  of  construction  and  until  the  

construction was completed, there was no contract for construction of the  

building with the flat purchaser, the goods used in the construction cannot  

be deemed to have been sold by the builder since at that time there is no  

purchaser.   That  the  building  is  intended  for  sale  ultimately  after  

construction does not make any difference.   

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118. We are  clearly  of  the  view  that  Raheja  Development1  lays  

down the correct legal position and we approve the same.

119. There is challenge to the constitutional validity of explanation  

(b)(ii) to Section 2(24) which was brought by amendment with effect from  

20.06.2006 in MVAT Act and sub-rule (1A) which was inserted into Rule 58  

of the MVAT Rules by a notification dated 01.06.2009.

120. Clause (24)∗∗∗∗ of  Section 2 defines sale to mean a sale of  

goods  made  within  the  State  for  cash  or  deferred  payment  or  other  

valuable  consideration but does not  include a mortgage,  hypothecation,  

charge of pledge; and the words “sell”, “buy” and “purchase”, with all their  

grammatical  variations  and  cognate  expressions.  An  explanation  is  

appended to this clause. Clause (b)∗∗∗∗∗ of the explanation to Section 2(24)  

defines what would be a sale for the purpose of the clause and brought in  

its  ambit  the  transactions  mentioned  therein.  Explanation  (b)(ii)  was  

amended with effect from 20.06.2006 by inserting the following words after  

 ∗∗∗∗ “2(24)  “sale” means a sale of goods made within the State for cash or deferred payment or other   valuable  consideration but does not include a mortgage,  hypothecation,  charge  or  pledge;  and the  words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions,  shall be construed accordingly.”

 ∗∗∗∗∗ “(b)(i)  the transfer of property in any goods, otherwise than in pursuance of a contract,  for cash,  deferred payment or other valuable consideration; (ii) the transfer  of  property  in  goods (whether  as  goods or  in  some other  form)  

involved in the execution of a works contract….. (iii) a delivery of goods on hire-purchase or any system of payment by instalments; (iv) the transfer of the right to use any goods for any propose (whether or not for a   

specified period) for cash, deferred payment or other valuable consideration; (v) the supply of goods by any association or body of persons incorporated or not,  

to a member thereof for cash, deferred payment or other valuable consideration; (vi) the  supply,  by  way  of  or  as  part  of  any  service  or  in  any  other  manner  

whatsoever,  of goods, being food or any other article for human consumption or any  drink (whether or not intoxicating), where such supply or service is made or given for  cash, deferred payment or other valuable consideration;”

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the words “works contract”: “including, an agreement for carrying out for  

cash,  deferred  payment  or  other  valuable  consideration,  the  building,  

construction,  manufacture,  processing,  fabrication,  erection,  installation,  

fitting  out,  improvement,  modification,  repair  or  commissioning  of  any  

movable or immovable property”.    

121. There  is  no  doubt  in  our  mind  that  the  amendment  in  

explanation b(ii) to Section 2(24) was brought because of the judgment of  

this  Court  in  Raheja  Development1.  We have already  held  that  Raheja  

Development1  lays down the correct legal position.   Thus,  in our view,  

there  is  no  merit  in  the  challenge  to  the  constitutional  validity  to  the  

provisions  of  explanation  (b)(ii)  to  Section  2(24)  of  MVAT which  were  

amended with effect from 20.06.2006. The Division Bench of the Bombay  

High Court  took the view that the provision under challenge was not in  

breach of any constitutional boundaries. This is what it said:

“34.  The amended definition of the expression sale in clause b(ii)  of the Explanation to Section 2(24) brings within the ambit of that  expression transactions of that nature which are referable to Article  366(29A)(b).  The transactions which  the  legislature  had in  mind  involve works contracts. What the state legislatures can tax under  the expanded definition contained in clause b of Article 366 (29A)  must meet the governing requirements of that clause. There must  be a transfer of property in goods involved in the execution of a  works  contract.  The  relevant  clause  in  Section  2(24)  is  valid  because it  does not  transgress the boundaries set  out  in Article  366(29A). Indeed, after the 46th Amendment, State legislation must  confine itself to the limits set out even in the expanded concept of  what constitutes a sale or purchase of goods in Article 366(29A).  State legislation cannot expand the ambit of what constitutes a tax  on  the  sale  or  purchase  of  goods  beyond  the  constitutional  frontiers. In order that Section 2(24) remains within constitutional  boundaries, in the context of works contracts, it must be read to  

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cover  those  cases  which  fall  within  the  expanded  definition  as  elaborated after  the  46th Amendment.  Whether  there  is  a  works  contract in a given case is for assessing authorities to determine.  As noted earlier, it is not possible to provide a comprehensive or all  encompassing  list  of  what  contracts  constitute  works  contracts.  Section  2(24)  properly  construed,  even  after  its  amendment,  reaches out to those cases which fall  within the ambit  of  Article  366(29A). Explanation b(ii) to Section 2(24) in other words covers  those transactions where there is a transfer of property in goods,  whether as goods or in any other form, involved in the execution of  a works contract. Once those parameters are met, the amended  definition in  the State  legislation  in  the  present  case provides a  clarification  or  clarificatory  instances.  When  constitutional  norms  govern state legislation such as those provided in Article 366(29A)  in  this  case,  the  legislation  must  be  construed in  the context  of  those norms which it cannot transgress. The law is valid because it  does  not  breach  those  boundaries.   There  is  no  breach  of  constitutional boundaries.”    

122. We are in agreement with the above view and reject challenge  

to amendment to the provisions of explanation (b)(ii)  to Section 2(24) of  

MVAT Act.

123. Sub-rule (1A)∗∗∗∗∗∗ was inserted into Rule 58 by a notification  

dated 01.06.2009.  As a matter  of  fact,  Rule 58(1)   of  the MVAT Rules  

provides  that  the value  of  the goods  at  the time of  the transfer  of  the  

property in goods involved in the execution of a works contract may be  

determined by effecting  certain  deductions  from the value of  the entire   ∗∗∗∗∗∗ “(1A)  In case of a construction contract, where along with the immovable property, the land or,   

as the case may be, interest in the land, underlying the immovable property is to be conveyed, and the  property in the goods (whether as goods or in some other form) involved in the execution of the  construction contract is also transferred to the purchaser such transfer is liable to tax under this rule.   The value of the said goods at the time of the transfer shall be calculated after making the deductions   under sub-rule (1) and the cost of the land from the total agreement value.

The cost of the land shall be determined in accordance with the guidelines appended to the Annual  Statement  of  Rates  prepared  under the provisions of  the Bombay Stamp (Determination of  True  Market Value of Property) Rules, 1995, as applicable on the 1st January of the year in which the  agreement to sell the property is registered:

Provided that, deduction towards cost of land under this sub-rule shall not exceed 70% of the   agreement value.”

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contract insofar as the amounts relating to deductions pertain to the said  

works contract. The challenge was laid to Rule 58(1A) of the MVAT Rules  

before the Bombay High Court. The Division Bench of the Bombay High  

Court found that there was nothing to show that the proviso to the said  

provision was arbitrary. It held that the Legislature was acting within the  

field  of  the  legislative  powers  in  devising  a   measure  for  the  tax  by  

excluding the cost of the land. The Division Bench recorded the following  

reasons in repelling the challenge to Rule 58(1A).

“35.  The challenge to Rule 58(1A), may now be considered. The  Rule has provided that in the case of construction contracts where  the  immovable  property,  land  or  as  the  case  may  be,  interest  therein is to be conveyed and the property involved in the execution  of  the  construction  contract  is  also  transferred,  it  is  the  latter  component which is brought to tax. The value of the goods at the  time  of  transfer  is  to  be  calculated  after  making  the  deductions  which are specified under sub-rule (1). The judgment in the second  Gannon Dunkerley specifies the nature of such deductions which  can be made from the entire value of the works contracts. This was  permitted to the States as a convenient mode for determining the  value of the goods in the execution of the works contract. Similarly,  the  cost  of  the  land  is  required  to  be  excluded  from  the  total  agreement  value.  Sub-rule  (1A)  stipulates  that  the cost  shall  be  determined  in  accordance  with  the  guidelines  appended  to  the  Annual Statement of Rates prepared under the provisions of the  Bombay Stamp (Determination of True Market Value of Property)  Rules, 1995 as applicable on 1 January of the year in which the  agreement to sell the property is registered. The Proviso stipulates  that deduction towards the cost of land under the sub-rule shall not  exceed  70%  of  the  agreement  value.  The  petitioners  have  not  brought on the record any material to indicate that the proviso to  sub-rule (1A) of Rule 58 is arbitrary. Rule 58(1A) provides for the  measure  of  the  tax.  The  measure  of  the  tax,  as  held  by  the  Supreme Court  in its decision in Union of India v.  Bombay Tyre  International Ltd. [(1984) 1 SCC 467], must be distinguished from  the charge of tax and the incidence of tax.  The Legislature was  acting within the filed of its legislative powers in devising a measure  for the tax by excluding the cost of the land.”     

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124. The value of the goods which can constitute the measure of  

the  levy  of  the  tax  has  to  be  the  value  of  the  goods  at  the  time  of  

incorporation of goods in the works even though property in goods passes  

later. Taxing the sale of goods element in a works contract is permissible  

even after incorporation of goods provided tax is directed to the value of  

goods at the time of incorporation and does not purport to tax the transfer  

of immovable property.  The mode of valuation of goods provided in Rule  

58(1A) has to be read in the manner that meets this criteria and we read  

down Rule 58(1-A) accordingly. The Maharashtra Government has to bring  

clarity in Rule 58 (1-A) as indicated above. Subject to this, validity of Rule  

58(1-A) of MVAT Rules is sustained.  

125. Once we have held that Raheja Development1 lays down the  

correct law, in our opinion, nothing turns on the circular dated 07.02.2007  

and  the  notification  dated  09.07.2010.   The  circular  is  a  trade  circular  

which is clarificatory in nature only.  The notification enables the registered  

dealer to opt for a composition scheme.  The  High Court has dealt with the  

circular and notification.  We do not find any error in the view of the High  

Court  in  this  regard.   Moreover,  the Advocate General  for  Maharashtra  

clearly stated before us that implementation of Rule 58(1-A) shall not result  

in double taxation and in any case all claims of alleged double taxation will  

be determined in the process of assessment of each individual case.   

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126. After  having  given  answer  to  the  reference,  we  send  the  

matters back to the Regular Bench for final disposal.   

……………………….J. (R.M.  Lodha)  

……………………….J. (J. Chelameswar)

……………………….J. (Madan B. Lokur)

New Delhi, September 26, 2013.

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