A recall on States taxation powers - Part II

April 13,2017
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P. V. Srinivasan (Corporate Advisor)

Continued from Part I

The journey is chartered ahead discussing the Constitution Bench judgement in the case of State of Madras vs. Gannon Dunkerley and Co. [AIR 1958 SC 560] which pertained to the execution of works contracts. The question involved was as to whether there could be levy of sales tax on the sale of goods involved in the execution of such works contracts. The assessee was carrying on business as Engineering Contractors and executing the contracts pertaining to construction of building projects, dams, roads and structural contracts of all kinds. In respect of sanitary contracts, 20% was deducted for labour and balance was taken as a turnover of the assessee for the purposes of levying sales tax by the assessing authority. Likewise, in respect of other contracts, 30% was deducted for labour and on balance amount, sales tax was levied treating it as turnover of the assessee under the Madras General Sales Tax Act, 1939. The question which arose for consideration was as to whether there was any sale of goods. The Constitution Bench held that building contract was in the nature of works contract and there was no element of sale of goods in such a contract. 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 Court, thus, proceeded on the basis that a building contract was indivisible and composite wherein there was no sale of goods and, therefore, the State Legislature was not competent to impose sales tax on the supply of material used in such a contract treating it as a sale. Since, Entry 48 of the List II of Schedule VII in the Government of India Act, 1935 was under consideration that empowers State Government to levy tax on “sale of goods”, the Court held that the expression “sale of goods” in the said Entry is to be given the same meaning as given under the Sale of Goods Act, 1930. That would mean that it would be sale of goods only if the two essential ingredients, namely: (i) an agreement to sell movables for a price, and (ii) property passing therein pursuant to that agreement, are satisfied. Thus, it was held that, to constitute a valid sale, there must a concurrence of the following elements, viz. (a) parties competent to contract; (b) mutual consent; (c) a thing, the absolute or general property which is transferred from the seller to the buyer; and (d) a price in money paid or promised.

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