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CASE NO.: Appeal (civil)  7256 of 2005

PETITIONER: State of U.P. and others

RESPONDENT: M/s. P.N.C. Construction Co. Ltd. & others

DATE OF JUDGMENT: 08/08/2007

BENCH: S. H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

With Civil Appeal Nos.7257, 7258, 7259, 7260, 7261, 7262, 7263, 7264 of 2005 Civil Appeal No.3553 of  2007 arising out of S.L.P. (C) No.13316 of 2005 Civil Appeal No.3555  of 2007 arising out of S.L.P. (C) No.13951 of 2005

KAPADIA, J.

       Leave granted in Special leave petitions.

2       This batch of civil appeals is directed against the judgment and order  dated 14.3.02 passed by the Allahabad High Court in Writ Petition No.741  of 2001.

3       Civil Appeal No.7256 of 2005 is the lead case in which the facts are  as follow.

4       M/s. P.N.C. Construction Co. Ltd. (assessee) is a public limited  company incorporated under the Companies Act, 1956.  It is registered  under the U.P. Trade Tax Act, 1948.  It entered into a contract with National  Highway Authority of India, New Delhi, for construction 4/6 lane of  national highways of north, south, east and west of the Agra-Gwalior section  of NH-3 and for laning of 24 to 41 kms. of  Agra-Bholpur section of NH-3  in the State of U.P.  Assessee was awarded work by the Construction  Division, Agra and Mathura, for widening the roads, maintenance and  repairs.   

5       Assessee applied for grant of ’recognition certificate’ under Section 4- B of the U.P. Trade Tax Act, 1948 (for short, ’the Act’) for purchase of raw- materials for manufacture of Hot Mix.  The Trade Tax Officer rejected the  request of the assessee.  Aggrieved by the said decision, an appeal was  preferred before Dy. Commissioner (Appeals) which was also dismissed  vide order dated 24.4.97.  Aggrieved by the decision, the assessee preferred  Second Appeal No.75 of 1997 before the Trade Tax Tribunal, Agra, which  came to the conclusion that Hot Mix was manufactured by the assessee in  the plant from cement, sand, bitumen, furnace oil, HSD, Lubricant etc. for  the construction of roads.  The Tribunal found that the A.O. had in fact  granted recognition certificate to M/s. National Highway Construction  Company, Mathura and M/s. Oriental Construction Engineers Ltd., Mathura,  for manufacturing of Hot Mix.  Therefore, the Tribunal allowed the  assessee’s appeal and directed the A.O. to grant recognition certificate for  the purchase of cement, sand, bitumen, furnace oil, HSD, Lubricant etc.  (raw-materials) against Form No.3-B at a concessional rate of tax.   Consequently, the A.O. issued recognition certificate in favour of the  assessee for the purchase of the aforestated raw-materials.  Pursuant to the  recognition certificate, assessee purchased the said raw-materials against  Form No.3B.

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6       However, on 17.1.2001 the Commissioner, Trade Tax, U.P. issued a  circular stating that purchase of raw-materials used in the construction of  roads, cannot be made against Form No.3B.  This circular dated 17.1.01 was  followed by another circular dated 23.2.01 to the effect that recognition  certificate under Section 4B of the Act with regard to purchase of bitumen,  chemical compound etc. against Form No.3B should be reviewed by the  A.O. (issuing authority).  Pursuant to the aforestated two circulars dated  17.1.01 and 23.2.01 (impugned circulars), show cause notice was issued on  9.5.01 to the assessee herein as to why the recognition certificate earlier  granted to the assessee should not be revoked.  The impugned notice dated  9.5.01 as well as the aforestated two impugned circulars dated 17.1.01 and  23.2.01 were challenged by the assessee before the High Court vide Writ  Petition No.741 of 2001.   

7       The main contention of the assessee before the High Court was that  the raw-materials used by the assessee in execution of works contract  constituted ’deemed sale’ under Article 366(29A) of the Constitution of  India and, therefore, the assessee was entitled to the benefit of concessional  rate of duty on the purchase of aforestated raw-materials.  Before the High  Court, assessee further contended that it was open to the State to challenge  the order of the Tribunal directing the A.O. to grant recognition certificate to  the assessee; that the State did not challenge the decision of the Tribunal  and, therefore, the impugned circulars dated 17.1.01 and 23.2.01 constituted  colourable exercise of power by the Commissioner in order to get over the  judgment of the Tribunal which was against the Department.   

8       That, it was not open to the issuing authority to cancel the recognition  certificate granted to the assessee by invoking the aforestated impugned  circulars dated 17.1.01 and 23.2.01.  At this stage, we may point out that the  assessee did challenge the validity of the said circulars dated 17.1.01 and  23.2.01 before the High Court.  However, the High Court has focused its  attention only to the validity of the show cause notice dated 9.5.01 by the  A.O. threatening withdrawal of the recognition certificate.  Before the High  Court, it was contended on behalf of the State (Department) that the writ  petition was premature and that the appropriate remedy available to the  assessee was to raise the contentions in adjudication before the assessing  authority.  The Department further contended that in the meantime assessee  was not entitled to sell Hot Mix either in the State or in the course of inter- State trade as provided under Section 4-B(2) of the Act as the final product  was not the Hot Mix but the road to be constructed from the Hot Mix  manufactured by the assessee.  On behalf of the Department, it was  submitted that road was the end product; that it was not saleable; that it was  not the notified product and, therefore, assessee was not entitled to claim the  benefit of concessional rate of duty on purchase of raw-materials under  Section 4-B of the Act.

9       By the impugned judgment, the High Court came to the conclusion  that the impugned notice dated 9.5.01 came to be issued on account of  aforestated two circulars dated 17.1.01 and 23.2.01 issued by the  Commissioner, Trade Tax, U.P.  The High Court further held that there was  no allegation, in the show cause notice dated 9.5.01, of the assessee having  violated any terms or conditions of the recognition certificate.  According to  the High Court, the impugned notice dated 9.5.01 was issued only on the  basis of the aforestated two circulars dated 17.1.01 and 23.2.01 much after  the grant of recognition certificate and since the object behind the issuance  of the aforestated two circulars dated 17.1.01 and 23.2.01 was to overrule  the decision of the Tribunal in favour of the assessee, the High Court took  the view that the impugned show cause notice dated 9.5.01 was liable to be  set aside.  Aggrieved by the said decision, the State (Department) has come  to this Court by way of civil appeals.   

10      The said Act is enacted to provide for levy of tax on sale or purchase  of goods in U.P.  Under Section 2(bb) of the Act "Trade Tax" means a tax  payable on sale or purchase of goods.  Under Section 2(d) of the Act the

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word "goods" is defined to mean every kind or class of moveable property  including all materials, commodities and articles involved in the execution  of works contract.  Under Section 2 (e-1) of the Act the word "manufacture"  is defined to mean producing, mining, extracting, altering, finishing or  otherwise processing, treating or adapting any goods.  Under Section 2(gg)  of the Act "purchase price" is defined to mean valuable consideration paid  or payable by a person for purchase of goods less cash discount given by the  seller.  Under Section 2(h) of the Act "sale" is defined to mean any transfer  of property in goods for cash or deferred payment or for other valuable  consideration including transfer of property in goods (whether as goods or in  some other forms) involved in the execution of a works contract.  Under  Section 2(i) of the Act "turnover" is defined to mean the total amount for  which goods are supplied or distributed by way of sale by a dealer on his  own account or on account of others for cash or deferred payment or for any  other valuable consideration.  Under Section 2(ii) of the Act the expression  "turnover of purchases" is defined to mean the total amount of purchase  price paid or payable by a dealer in respect of purchases of goods made by  him after stipulated production.  Under Section 2 (m) of the Act the  expression "works contract" is defined to include any agreement for carrying  out building construction, manufacture, processing, fabrication, erection,  installation, repair or commissioning of moveable or immoveable property  for cash, deferred payment or in other valuable consideration.  Section 2(n)  of the Act defines the word "tax" to include additional tax and the  composition money accepted under Section 7-D of the Act.  Section 3 of the  Act imposes liability to tax under the Act.  Section 4-B refers to giving of  special relief to certain category of manufacturers.  It states that  notwithstanding contained in Section 3, 3-A, 3-AAA and 3-D, where any  goods are liable to tax under Section 3-D are purchased by a dealer who is  liable to tax on the turnover of first purchases and the dealer holds a  recognition certificate issued under sub-section (2) of Section 4-B he shall  be liable in respect of those goods to tax at concessional rate or to exemption  subject to conditions and restrictions specified in that behalf by the State  Government.  Under Section 4-B(2) of the Act where a dealer requires any  goods, referred to in Section 4-B(1), for or in the manufacture by him in the  State of any notified goods and such notified goods are intended to be sold  by him in the State or in the course of inter-State trade or commerce or in the  course of export out India, such dealer may apply to the A.O. in the  prescribed form for grant of recognition certificate in respect thereof and if  the applicant satisfies such requirements as may be prescribed, the A.O.  shall grant to him in respect of such goods a recognition certificate.  Under  Section 4-B(2) there is also an Explanation which states that where goods  are required for use in the manufacture of notified goods such goods shall  mean raw-materials, processing materials, machinery, plant, equipment etc.  and the word "notified goods" shall mean goods to be notified by the State  Government in that behalf from time to time.  In the present case, the  aforestated raw-materials, namely, cement, sand, bitumen, furnace oil, HSD,  Lubricant etc. are the raw-materials required by the assessee for the  manufacture of Hot Mix in the Hot Mix Plant of the assessee.  In the present  case, recognition certificate was granted in respect of the said raw-materials  which has been subsequently withdrawn in view of the circulars dated  17.1.01 and 23.2.01 issued by the Commissioner.  Assessee has purchased  the aforestated raw-materials at the concessional rate of duty.  This was  pursuant to the recognition certificate given by the A.O. (issuing authority)  which is subsequently cancelled on account of the aforestated two circulars  dated 17.1.01 and 23.2.01.  Hot Mix is a notified item.  On 21.5.94 State of  U.P. have issued Notification No.TT-2-1623/XI-7(159)/91-U.P.Act-15/48- Order-94 which stated that with effect from 1.6.94 tax shall be payable at the  rate of 2 per cent, on the sale or purchase as the case may be, by a dealer  holding a valid recognition certificate under Section 4-B(2) of any raw- material covered by such certificate which raw-material shall be used in the  manufacture of notified goods.  Similarly, by another Notification No.T.I.F.- 2-2383/XI-9(251)/97-U.P. Act-15-48-Order-98 dated 23.11.98 the tax  became payable in respect of declared goods (cement) at 2 per cent and at  the rate of 2.5 per cent on other raw-materials like sand, bitumen, furnace  oil, HSD, Lubricant etc.  Further under the said notification apart from

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chemical, fertilizer and electrical energy, all other goods were separately  classified as notified goods. To the same effect is the Notification  No.K.A.NI.-2-530/XI-7(159)/91-U.P.Act-15-48-Order 2000 dated 17.2.2000  which was subsequently amended by another Notification No.K.A.NI-2- 3348/XI-7 (159)/91-U.P. Act-15-48-Order-(67)-2001 dated 30.10.2001.   Therefore, it is clear that recognition certificate granted to the assessee was  in respect of the aforestated raw-materials which attracted concessional rate  of duty and it was granted to the assessee as the assessee had indicated in its  application that they required the raw-materials for manufacture of Hot Mix  which was a notified item under the above notifications.   

11      The main contention advanced on behalf of the Department by Mr.  Sunil Gupta, learned senior counsel, was that the High Court should not  have interfered at the stage of show cause notice; that the question as to  whether use of the above raw-materials in execution of the works contract  constituted transfer of property in goods needed to be established by the  assessee in the adjudication proceedings and, therefore, the High Court  should have allowed the Department to proceed with the show cause notice.   Learned counsel submitted that under the scheme of Section 4-B(2) of the  said Act notified goods are goods which are intended to be sold in the State  and since "roads" did not constitute notified goods and nor did they  constitute saleable product, the Department was right in issuing show cause  notice dated 9.5.01 for cancellation of the recognition certificate.  Learned  counsel submitted that in the present case the Commissioner had issued the  aforestated circulars dated 17.1.01 and 23.2.01 as the assessees in the State  of U.P. were using the aforestated raw-materials for the construction of  roads.  Learned counsel submitted that roads cannot constitute a notified  item and use of raw-materials for construction of roads in the State cannot  constitute a "deemed sale" as there was no transfer of property in the goods.   Learned counsel urged that under the Act the word "sale" is defined to mean  transfer of property in goods and it includes a transfer of property in goods  involved in the execution of works contract.  Learned counsel urged that by  no stretch of imagination "roads" can constitute a notified item.  It cannot  also come in the definition of the word "goods" and, therefore, the assessee  was not entitled to the recognition certificate under the Act.  Learned  counsel submitted that goods used in the works contract for construction of  roads cannot come within the concept of "deemed sale" under Article  366(29A) of the Constitution of India.  Learned counsel further submitted  that in the present case the Department is not invoking the provisions of the  Constitution.  Learned counsel submitted that limited question involved in  these civil appeals is : whether the case of the assessees came within Section  4-B(2) of the said Act.  Learned counsel submitted that the very purpose of  granting of recognition certificate is to give the benefit of concessional rate  of duty to the assessee who buys raw-materials for the manufacture of goods  like doors, windows etc.  Learned counsel submitted that in the present case  the assessees are buying the aforestated raw-materials for construction of  roads which cannot by any stretch of imagination be treated as goods.   Learned counsel further submitted that roads are not saleable commodities.   In the circumstances, learned counsel submitted that the assessees were not  entitled to the benefit of the concessional rate of duty.  Learned counsel  further submitted that consumption and use of Hot Mix in the manufacture  of roads cannot fall under Section 4-B(2) of the Act as the said section  contemplates goods (raw-materials) to be used in the manufacture of notified  goods and such notified goods should be intended to be sold in the State.   Learned counsel urged that roads cannot be sold in the State; that roads are  not notified goods; that roads are not goods even by way of definition of  goods under Section 2(d) and in the circumstances the assessees were not  extended to recognition certificate under Section 4-B(2) of the Act.  In the  alternative, learned counsel submitted that if it is the case of the assessees  that the raw-materials, referred to above, were used/consumed in the  manufacture of Hot Mix then that question was required to be looked into by  the A.O. by way of adjudication and, therefore, the High Court should not  have interfered under Article 226 of the Constitution at the stage of show  cause notice.

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12      We find no merit in the civil appeals filed by the State (Department).   At the outset, we may state that there are no disputed facts which warrant  adjudication.  Assessee has entered into a contract to construct roads.  In  execution of the contract assessee is required to buy aforestated raw- materials which are used in the manufacture of Hot Mix.  The said Hot Mix  is used for construction of roads.  The show cause notice dated 9.5.01 relies  upon the aforestated two circulars dated 17.1.01 and 23.2.01 issued by the  Commissioner.  According to the Commissioner, if any contractor  manufactures doors, windows, grills etc. from cement (one of the raw- materials herein) then such manufacturer would be entitled to avail of the  facility of concessional rate of duty under Section 4-B of the Act.   According to the Commissioner, doors, windows, grills and frames are self- manufactured goods which were taxable as sale and, therefore, Section 4- B(2) of the Act covers such type of goods and not roads.  According to the  Commissioner, if the contractor utilizes the said raw-materials for  construction of the roads then the contractor-assessee would not be entitled  to the benefit of Section 4-B of the Act.   Further, according to the  Commissioner, the contracted road  is an immoveable property whereas  under Section 4-B of the Act the facility of buying raw-materials was  permissible only to the manufacturing who sold the manufactured  commodity and since roads were not saleable the manufacture-assessee was  not entitled to the benefit of Section 4-B.   

13      In the present case, raw-materials are bought by the assessee which  are used in the manufacture of Hot Mix which is utilized for road  construction.  These facts are not in dispute.  The question before us is :  whether on the said facts the Department was right in denying the benefit of  Section 4-B of the Act to the assessee?  Therefore, there was no need for  adjudication.

14      "Value Addition" is an important concept which has arisen after the  Forty-sixth Amendment to the Constitution.  Prior to the said Amendment  this Court had taken the view in State of Madras v. Gannon Dunkerley &  Co. (Madras) Ltd. \026 AIR 1958 SC 560, that "works contract" was an  indivisible contract and the turnover of the goods used in the execution of  the works contract could not, therefore, become exigible to sales tax.  To  overcome the effect of the said decision, the concept of "deemed sale" was  introduced by the Parliament by introducing sub-clause (b) of Clause 29A in  Article 366 of the Constitution which states that the tax on sale or purchase  of goods would include a tax on transfer of property in goods involved in the  execution of works contract.  The emphasis is on the expression "transfer of  property in goods (whether goods as such or in some other form)".   Therefore, after the Forty-sixth Amendment to the Constitution, the works  contract which was an indivisible contract is, by a legal fiction, divided into  two parts \026 one for sale of goods and the other for supply of labour and  services.  Therefore, after the Forty-sixth Amendment, it became possible  for the States to levy sales tax on the value of the goods involved in a works  contract in the same way in which the sales tax was leviable on the price of  the goods supplied in a building contract.  This is where the concept of  "Value Addition" comes in.  It is on account of the Forty-sixth Amendment  to the Constitution that the State Government is empowered to levy sales tax  on the contract value which earlier was not possible.  In the present case, the  assessee has paid the tax under the scheme of composition at a stipulated  percentage of the contract value.  The assessee has paid the tax as defined  under Section 2(n) of the Act.  As stated above, "works contract" has been  defined under Section 2(m) of the Act to include any agreement for carrying  out building construction, manufacture, processing or commissioning of any  moveable or immoveable property.  These two definitions have been  inserted in the said Act in conformity with the Forty-sixth Amendment to the  Constitution [See: Builders’ Association of India and others v. Union of  India and others \026 (1989) 2 SCC 645].  To the same effect is the ratio of  the judgment of this Court in the case of M/s. Gannon Dunkerley and Co.  and others v. State of Rajasthan and others \026 (1993) 1 SCC 364, in which  it has been held, vide para 36, that, if the legal fiction introduced by Article  366(29A)(b) of the Constitution is carried to its logical conclusion it follows

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that even in a single and indivisible contract there could be a "deemed sale"  of the goods in the execution of a works contract.  Such a deemed sale has  all the incidents of a "sale" in cases where the contract is divisible into two  parts \026 one for sale of goods and the other for supply of labour and services.   Similarly, in the case of State of Kerala and another v.  Builders  Association of India and others \026 (1997) 2 SCC 183, it has been held that  after the Forty-sixth Amendment goods transferred in the course of  execution of the works contract is chargeable to tax under the Kerala  General Sales Tax Act, 1963.   

15      In the present case, as stated above, the notifications issued by the  State Government from time to time show that different rates were  prescribed for declared goods and other raw-materials.  ’Cement’ fell in the  category of declared goods whereas sand, bitumen, furnace oil, HSD,  Lubricant etc. fell in the category of other raw-materials.  The said  notifications also indicate notified goods.  ’Hot Mix’ fell in the category of  notified goods.  Under Section 4-B(2) of the Act the recognition certificate  enabled the assessee to buy the above raw-materials at concessional rate of  duty provided they were used in the manufacture of notified goods and such  notified goods were intended to be sold by the assessees in the State or in the  course of inter-State trade or commerce or in the course of export out of  India.  Raw-materials came in the category of "goods" for the purposes of  Section 4-B(2) of the Act.  In the present case, the assessee has used cement,  sand, bitumen, furnace oil, HSD, Lubricant etc. as raw-materials in the  manufacture of Hot Mix.  The show cause notice dated 9.5.01 impugned in  the writ petition (before the High Court) proceeded on the basis that roads  are not capable of being sold; that roads were not goods; and that roads were  not moveables and, therefore, according to the Department the assessee was  not entitled to the concessional rate of duty on purchase of raw-materials.  In  our view, the impugned show cause notice dated 9.5.01 was based on  complete misreading of the provisions of the said Act.  Under Section 2(h)  of the Act the word "Sale" is defined to mean any transfer of property in  goods for cash or deferred payment or for value consideration.  The  definition of the word "Sale" includes transfer of property in goods (whether  as goods or in some other form) involved in the execution of a works  contract.  These words flow from the definition of the word "Sale" in the Act  to Article 366(29A)(b) of the Constitution.  The said words have been  interpreted by this Court, as stated above, in the second Gannon  Dunkerley’s case (Supra) in following words vide para 36:

"36. If the legal fiction introduced by Article 366(29-A)  is carried to its logical end it follows that even in a single  and indivisible works contract there is a deemed sale of  the goods which are involved in the execution of a works  contract. Such a deemed sale has all the incidents of a  sale of goods involved in the execution of a works  contract where the contract is divisible into one for sale  of goods and the other for supply of labour and services."

16      For the aforestated reasons, we are of the view that the High Court  was right in setting aside the above show cause notice dated 9.5.01 issued by  the A.O. (issuing authority).  The withdrawal of recognition certificate was  erroneous as it was contrary to the definition of the word "sale" in Section  2(h) of the Act which had to be read with Section 4B(2) of the Act.     Therefore, the aforestated two circulars dated 17.1.01 and 23.2.01 issued by  the Commissioner, Trade Tax, U.P., cannot constitute the basis for issuing  the impugned show cause notice dated 9.5.01.

17      In the circumstances, the civil appeals filed by the State are dismissed  with no order as to costs.