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CASE NO.: Appeal (civil)  8540-8544 of 2001

PETITIONER: Karya Palak Engineer, CPWD, Bikaner                         

RESPONDENT: Rajasthan Taxation Board, Ajmer & Ors.                 

DATE OF JUDGMENT: 12/08/2004

BENCH: N. Santosh Hegde,S.B. Sinha & A.K. Mathur  

JUDGMENT: J U D G M E N T With  C.A. Nos. 8545-8552/2001,  C.A. Nos. 1996-1997/2002, C.A. Nos. 194-195/2004, C.A. Nos. 5270-5271/2003,  C.A. Nos. 5272-5273/2003,  C.A. Nos. 6614-6615/2003, C.A. Nos. 6977-6980/2003,  C.A. Nos. 6983-6987/2003, C.A. Nos. 8940-8955/2003,  C.A. No.  9025/2003,  C.A. Nos. 9026-9028/2003,  C.A. Nos. 4651-4661/2004   and  C.A. Nos. 4634-4640/2004.  

SANTOSH HEGDE, J.

       These appeals involving similar questions of law are preferred   against  the judgment  of the High Court of Judicature for Rajasthan  at  Jodhpur made in different Sales Tax, Revision Petitions, Writ Petitions  and Review Petitions  filed before  it challenging the demand of Sales Tax  made  under Rajasthan Sales Tax Act,  1994 ( the ’local Act’) .          In these petitions  certain  issues  pertaining  to interpretation   of   provision of Article 285  of  the Constitution of India, as  also  the  interpretations  of the provisions  in the local  Sales Tax Act are raised.  The High Court  having rejected  the contentions  of the appellants in this  regard, the appellants are in appeal before us.   

       These matters came to be referred to a larger bench  by an order of  two Judge Bench on 25-9-2003. Since, according to the said Bench the  question involved in the appeals are of an important nature.  

The constitutional question  involved  in these petitions pertains to  the authority  of the State to levy  Sales Tax on the Union on its  transaction  of supply of materials  to its contractors.  The contentions  is  based on the exemption  granted under Article 285 of the Constitution.  

       The statutory question involved  in these appeals  pertains to the  question whether a supply  of materials  by the Union  of India to its  contractors under agreements of works contract would amount to a sale so  as to attract the provision of the Sales Tax Act.  

       Since the appeals before us involve similar questions, we will refer  to the facts in  C.A. Nos. 8540-8544 of 2001 for brevity.  The Union  through its agency Central Public Works Department (CPWD) undertook   the work of erection  of barbed wire fencing along Indo Pak boarder from

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1991 onwards in the State of Rajasthan.  In order to get  the construction  work done  the appellant  awarded  contracts to various contractors  and  under the terms and conditions  of the said contract it had agreed to supply  the contractors  materials  such as cement, barbed wire,  M.S. angles etc.   It is pleaded  that the appellant purchased the materials  from various  reputed concerns  on payment of consideration and the said transactions  were  subjected to Sales Tax leviable at that stage.  It is further stated that  the very same goods  were in turn supplied to the contractors  and value of  the said goods  were adjusted in the final bills of the contractors, it is  contended that since the appellant  issued materials  to the contractors at  fixed issue rates,  the said supply did not amount to "Sale"  because the  contractor  never became  owner  of such materials but remained  only as  a "Custodian" of such materials  and used them on creation of immovable   properties  for completing  the contracted job.  In such circumstances, it is  contended  that there is no element  of sale, therefore, the appellant Union   can not be  treated as a ’dealer’  under the Act  nor it can be  subjected to  the levy  of Sale Tax. The next contention  in this regard  is assuming for  argument sake  there would be some sort of a sale, the property  so  transferred being the property  of the Union of India, under Article 285 of  the Constitution of India the State has no authority  to impose a tax on the  property of the Union.

       By the impugned judgment and orders  the High Court  of  Rajasthan  has rejected both the contentions  advanced  on behalf of the  appellants and has held that  the transfer in question amounted to sale as  defined under the Act and the State tax  being not a direct tax on the  property  of the Union  as contemplated  under Article  285 of the  Constitution the same is liable for levy of Sales Tax.

       In these appeals number of  Advocates appearing for the appellants  have commonly  contended  that in view of the exemption provided  in  Article  285 of the Constitution, it is not open to the State to tax the  property of the Union, therefore, the transferred material being the  property of the Union of India, the same is not exigible to any State  taxation.  

       The argument  that  supply of materials  to the contractors  does not  amount  a sale  is based on the language of clause 10 of the agreement  which the appellant contends  clearly indicates  that these transactions  do  not  amount to sale even under  the provisions of the local Act. Hence no  Sales Tax can be levied  on these transactions.  

In support of their contentions, the learned counsel  for the  appellants relied on various judgments  of this Court both pertaining  to  the bar of tax on Union property under Article  285 of the Constitution of  India as also  in regard to the nature of the transaction between the  appellants and the contractors concerned.   

Shri T.S. Doabia, learned senior Advocate  appearing for the Union  of India in C.A. Nos. 8540-8544 of 2001 strongly relied on the judgment  of this Court in the case of  New Delhi Municipal Council   Vs. State of  Punjab & Ors.  1997 (7) SCC 339,  Shri Nikhil Nayyar, learned counsel   appearing for the appellant in C.A. Nos. 5270-5271 of 2003 relied  on the  judgment of this Court in  Hindustan Aeronautics Ltd.  Vs.  State of  Orissa 1984 (2) SCC 16  to contend that the transfer in question did not  amount to  sale attracting the levy of Sales Tax under the local statute.  He  also contended in the alternative  that assuming the transactions are sales  even then under the local Act,  the levy being  single point  tax and  appellant having suffered the levy when it purchased the same  there  could not have been a second demand on a transfer  made by it to  its  contractor, the same being a second sale.  Shri Krishnamani, learned  senior counsel  appearing  in C.A. Nos. 1996-1997/2003, C.A. Nos. 4634- 4640/2004 and C.A. Nos. 4651-4661/2004  contended apart from the fact  that  the transfer involving a property of the Union of India  can not be  taxed under Section 285 even under the local Act, the Union of India can

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not be a dealer  under Section 2 (14) of the said Act.  The other Advocates   appearing in other appeals  mostly adopted the arguments  of the above  referred  counsel.

 Having heard the learned counsel  for the parties and having  perused  the judgment of the High Court and the relevant clause  in the  agreement  between the appellant  and their  contractors concerned  we  are satisfied  that the question involved  in these appeals are no more res- integra. This Court as far back as  in the year 1963 in a presidential  reference case under  Sea Clustoms Act held;

"The bar  of Article  289 of the Constitution  of  India does not apply to indirect tax like  Customs  duty, Central Excise duty, Sales Tax etc."  

       In the said case it was held  that exemption  of property  from tax  contemplated in Article  289 was confined  to direct tax on property and  not to the levy  of indirect taxes.  The ratio of the said judgment though  delivered in context of Article  289,  applies to the exemption in favour of  the Union of India   under Article  285  in all force.  

Judgment in Sea Customs Case (supra) was followed by this Court  in the case of    New Delhi Municipal Council   Vs. State of Punjab &  Ors.  1997 (7) SCC 339,   wherein this Court  by majority judgment at  para 148 held :- "It would be  appropriate  at this stage  to notice  the ratio   of two judgments of this  Court dealing with Article 289. In   Sea Customs  Act, Re, a Special Bench of nine  learned  Judges, by a majority, laid down the  following  propositions  : (a) clause (1)  of Article  289 provides  for exemption  of  property  and income of the States  only from taxes imposed  directly upon  them; it has no application to indirect taxes   like duties  of excise and customs (b)  duties  of excise  and  customs  are not taxes on property  or  income; they  are  taxes on manufacture/production  of goods and on   import/export of goods, as the case may be,  and hence,  outside the purview of clause (1) of Article  289\005\005\005"

In the case of Collector of Customs and Anr. Vs. State of West  Bengal and Anr. 1999 (1) SCC 192 this Court dealt with the contention  involving  Article 285 directly.  The question involved in that case  pertained to  the levy of Sales Tax on goods sold by the Collector of  Customs  and a challenge made to the decision of West Bengal Taxation  Tribunal holding the appellant (Union of India)  therein to be a dealer  under the provision of the West Bengal Finance (Sales Tax) Act, 1941  was negatived  by this Court holding thus ; "Only one contention is advanced before us by learned  counsel on behalf of the appellants, and it is, that Article 285  of the Constitution debars the imposition of tax upon  property belonging to the appellants.

Reliance in this behalf is placed on the judgment of two  learned Judges of this Court in State of Punjab V. Union of  India.  The Punjab High Court in that matter had answered  the two questions before it in favour of the Union of India.   The second question was whether no sales tax could be  levied in view of the provisions of Article 285 of the  Constitution on goods purchased by the Railways and sold  by the Railways in their Catering Department.  This Court  said that at the time of their sale, the goods belonged to the  Railways.  The tax had been imposed on such sale.  In view  of the provisions of Article 285, such sale was immune from  taxation under the State law.

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It would appear that no real arguments were advanced  before this Court by the appellant-State and the judgment of  this Court in Sea Customs Act (1878), S. 20(2), AIR 1963 SC  1760  (1964) 3 SCR 787 was not pointed out.  In the Sea  Customs Act case a nine-Judge Bench of this Court opined  by a majority, that Article 285 envisaged immunity from  direct taxes and not from indirect taxes such as sales tax.   With specific reference to sales tax, this Court said:-

"We may in this conection contrast sales tax  which is also imposed with reference to goods sold,   where the taxable event is the act of sale.  Therefore, though both excise duty and sales tax  are levied with reference to goods, the two are very  different imposts;  in one case the imposition is on  the act of  manufacture or production while in the  other it is on the act of sale.  In neither case  therefore can it be said that the excise duty or sales  tax is a tax directly on the goods for in that event  they will really become the same tax."

The decision in the Sea Customs Act case was considered  by another nine-Judge Bench in the case of New Delhi  Municipal Council V. State of Punjab and was affirmed."

From the above judgment of this Court, it is clear  that Union is not  exempted  from the levy of indirect tax under Article 285 of the  Constitution.  The above  discussion  also  shows reliance  placed  on the  judgment  of this Court in the case of New Delhi Municipal Council   (supra) by one of the learned counsel for the appellants is wholly   misconceived  and is opposed to his contention  with reference  to  Article 285 of the Constitution.

The next contention urged on behalf of the appellant in the  alternative  is  that on the facts of the cases in hand, there is no   transaction of sale  involved.  For this strong  reliance was  placed on the  relevant  clauses  of the agreement  between the parties. In the  case of  appellants  in C.A. Nos. 8540-8544/2001 the same is found  in clause 10  of the agreement. According  to the learned counsel  for the appellants, as  per the terms in  the above said clause the materials supplied to the  contractors  remained to be  the absolute   property of the Union  and the   same  could not be  removed   on any account from the site of the work  and was at all times  open to  inspection  by the concerned authorities, it is  also submitted  that any materials supplied,  remaining  unused  in the  works contract, were to be returned  to the authority concerned and the  contractors  at all given point of time was only a ‘custodian’  of  the  material so supplied to him.  On the basis of the above, it was contended  that the title  in the  property  supplied to the contractor  never ever got  transferred  nor any specific consideration  has passed  for the supply of  the goods.  

This Court had an occasion to deal with a similar clause where the  Union of India entered into an agreement  for the construction of certain  works,  wherein it agreed to supply materials such as Cement, Steel etc.  (as is the case in hand) in the said case of M/s N.M. Goel & Co. Vs. Sales  Tax Officer, Rajnandgaon and Anr.  1989 (1)  SCC 335 this Court      held :-  

"In order to be sale taxable  to duty,  there should be an   independent  contract  -- separate and distinct \026 apart from  passing  of the property,  where a party purchases  or  procures goods from the Government.  Mere passing  of  property would not suffice.  There must be  sale of goods. The   primary object of the bargain judged in its entirety must  be  viewed. In the instant, case, Clause 10 is significant.  Though

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in a transaction  of this type there is no inherent sale but a sale  inheres from the transaction.  Clause 10 read  in the  proper  light  indicates that position.  By use or consumption  of  materials in the work  of construction, there was  passing  of  the property in the goods to the assessee from the PWD.  By  appropriation  and by the  agreement, there was a sale as  envisaged  in terms  of Clause 10 of the contract."   

       In the case of  Rashtriya Ispat Nigam Ltd. Vs. State of A.P. 1998  (8) SCC 439   this Court  relying on the said judgment of M/s N.M. Goel  & Co. (supra) held :-  

"For the purpose of performance, the contractor  was bound   to procure materials.  But in order to ensure that  quality   materials  are  procured, the PWD undertook to supply such  materials  and stores  as from time to time  required  by the  contractor to be used for the purpose of performing  the  contract only.  The value  of such quantity  of materials and  stores  so supplied was specified  at a rate  and got set off or  deducted  from any sum due or to become due thereafter to  the contractor\005\005..."

       An attempt to distinguish  the judgment in ’Goyal’s case on facts  came to be rejected by this Court in the above case of Rashtriya Ispat  Nigam Ltd.

       In the instant case also by the use or consumption of material  supplied in the work  of construction, there was passing of property and  by virtue of receipt of value of such transferred property by way of   adjustment  in bills  the consideration has also passed  which in our  opinion  satisfies  the definition of  ’sale’  in the local Sales Tax Act.  

       In Cooch Behar Contractors Association Vs. State of West Bengal  and Ors.  this Court  followed the decision in M/s N.M. Goel & Co.    (supra) and considering  a similar  clause as is found in the appeal before  us this Court held that the goods supplied to the contractor by the  contractee  and price recovered from the contractor by way of adjustment   of value  of such goods was held to be a contractual  transferred price  which is liable to levy  of Sales Tax.  Therefore, we do not find any merit  in the argument  that even on facts that there was no sale in the transfer of  materials supplied made by the appellant to its contractors.   

       Consequently, even the argument that in terms of the language of  the definition of the dealer under Section 2 (14) of the Rajasthan Act  appellants can not be  a dealer will also have to be  rejected.   

       In view of the reliance placed by us on the judgments referred to  hereinabove, it is unnecessary  for us to refer to the other judgments relied  upon by the learned counsel for the parties.  

This leaves us to consider  the argument  advanced  by Shri Nikhil  Nayyar, learned counsel  on behalf  of one of the appellants  in C.A. Nos.  5270-5271 of 2003  wherein the learned counsel contended that the levy  under the local Act being a single point tax  and the appellant having  suffered the same when it purchased the material  in question and same  material cannot be  subjected to another levy on its transfer to the  contractor.  This  argument requires consideration  of factual matrix of the  case concerned,  whether the levy in question is a single point tax and  material purchased by the appellants had suffered the levy at the point of  purchase by appellants or not are matters to be decided by the   authorities   concerned and if the same is not already decided and has not become  final, it will be open to the appellants  to urge this question before the said  authorities.   

For the reasons stated above these appeals fail  and are dismissed.

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