When India gained freedom and independence from the British on 15th August 1947, the political and economic unity of States still remained an unfinished battle. The Hon’ble Supreme Court has summarily highlighted the situation prevailing then in the case of Atiabari Tea Co. Ltd. vs. The State of Assam & Ors. in AIR 1961 SC 232 stating that before the commencement of the Constitution, about two-third of India was directly under British rule and was called “British India” and the remaining about one third was being directly ruled by the Princes and was known as “Native States”. There were a large number of them with varying degrees of sovereignty vested in them. Those rulers had the trappings of a sovereign State with power to impose taxes and to regulate the flow of trade, commerce and intercourse. It is a notorious fact that many of the States had erected trade barriers severely impeding the free flow of trade, commerce and intercourse, not only shutting out but also shutting in commodities meant for mass consumption. Thus, prior to 1950 the flow of trade and commerce was impeded at several points which constituted the boundaries of Indian States. After India attained political freedom in 1947 and before the Constitution was adopted, the process of the merger and integration of the several Indian states with the rest of the country was speedily accomplished. This merger or integration of Indian States with the Union of India was preceded by the merger and consolidation of some of the States interests between themselves.
The political unity attained through the Constitution could not have been sustained without economic unity which made the Constitution-makers frame the Articles in Part XIII of the Constitution. This was endorsed by the Supreme Court in the case of Atiabari, stating that free movement and exchange of goods throughout the territory of India is essential for the economy of the nation and for sustaining and improving licensing standards of the country. The provision contained in Article 301 guaranteeing the freedom of trade, commerce and intercourse is not a declaration of mere platitude, or the expression of a pious hope of a declaratory character; it is not also a mere statement of direction principle of state policy; it embodies and enshrines a principle of paramount importance that the economic unity of the country will provide the main sustaining force for the stability and progress of the political and cultural unity of the country.
The autonomy exercised by the States in claiming the right to tax the same transaction for a variety of reasons, which existed prior to independence, continued that way till the decision of the Supreme Court in case of State of Bombay & Anr. vs. The United Motors (India) Ltd. & Ors. Union: 1953 SCR 1069 came. The Court interpreted Article 286 to hold that in the case of sales-tax, it is not necessary that the sale or purchase should take place within the territorial limits of the State in the sense that all the ingredients of a sale like the agreement to sell, the passing of title, delivery of the goods, etc., should have a territorial connection with the State. This proved detrimental to consumers and traders, both. Thus, Article 286 which intended to narrow down the powers of the States by stating that no State can impose a tax on a sale or purchase which takes place outside the State was amended in the year 1956 vide Constitution (Seventh Amendment) Act, 1956 to remove the difficulties in levy and administration of tax on transactions surpassing the territories of the respective State.
The hurdle in the next level of the game was qua levy of tax on works’ contract. The Supreme Court, in the State of Madras vs. Gannon Dunkerley & Co.(Madras) Ltd.: (1959) SCR 379 held, that in a building contract which is one, entire and indivisible, there is no sale of goods and it is not within the competence of the Provincial Legislature under Entry 48 of List II in Schedule VII of the Government of India Act, 1935, to impose a tax on the supply of the materials used in such a contract treating it as a sale. The observations in Gannon Dunkerley case were made in connection with materials utilised in the construction of buildings, roads, bridges etc. It was pointed out that there must at least be an agreement between the parties, express or implied, in respect of some ‘goods’ as ‘goods’ and the levy of the tax on building materials was struck down because there is no agreement to sell materials as such, and that property in them does not pass as movables.
After the decision of this Court in Gannon Dunkerley case, the States suffered losses as a result of avoidance of Central Sales Tax Act leviable on inter-State sales of goods. Thereafter, a catena of judgements rendered to the same effect snowballed the issue which finally led the matter being referred to the Law Commission of India. The Law Commission, after considering the matters referred to, made certain recommendations suggesting amendments in the Constitution in order to augment the revenue of the States. In the light of recommendations of the Law Commission, Parliament passed Constitution (Forty-Sixth Amendment) Act 1983, whereby a new clause (29A) was inserted in Article 366 of the Constitution.
The case in Indian Steel and Wire Products Ltd. vs. State of Madras: AIR 1968 SC 478 is interesting. The assessee was assessed to sales tax under the Madras General Sales Tax Act 1939 on the turnover of steel products supplied by it in pursuance of the orders of the Controller under the Iron and Steel (Control of Production and Distribution) Order, 1941 issued under the Defence of India Act, 1939. The assessee contended that as it was the controller who determined the persons to whom the goods were to be supplied, the price at which they were to be supplied, the manner in which they were to be transported, and the mode in which the payment of the price was to be made, there was nothing left for the parties to determine by agreement, and, therefore, the transactions could not be considered as “sales”. The Supreme Court did not accept the contention, observing that while the Controller fixed the base price of the steel products and determined the buyers, the parties were free to decide the remaining terms of the contract by consent. It was open to the assessee to agree with its customers as to the dates on which the goods were to be supplied. All orders booked were subject to the assessee's terms of business in force at the time, and It was also open to the assessee to fix the time and mode of payment of the price of the goods supplied. Accordingly, it could not be said, observed the Court, that the transactions were completely regulated and controlled by the controller leaving no room for mutual assent.
It was held that it would be incorrect to contend that because law imposes some restrictions on freedom to contract, there is no contract at all. The freedom of contract is not materially impaired merely because the legislation requires a dealer to enter into a contract of sale with another. A sale under the compulsion of a statute is still a sale. It is not unknown that legislation itself should supply some of the terms of a contract. Instances are not uncommon where the legislature has intervened to modify the customary terms of a contract or to inject new elements into it. So long as the essential contractual base is not impaired no serious violence is done to the freedom of contract. Modern jurists conceive of the law as a powerful instrument of social engineering. They point out that in a social order where the doctrine of laissez-faire has yielded place to the concept of a welfare society, the movement appears to proceed once again from contract of status. The development is normal and inevitable when the absolutism of individual rights has begun to give way to the play of wider social interests. Indeed, it is too late in the day to permit the values of a rapidly withering philosophy to influence and contain the growth of socially progressive forces. So long as these considerations can operate within the basic and primary fundamentals of the law, so long as they reflect progressive social trends consistent with the principles expressed in the Constitution, the approach which the Courts must adopt today when considering them becomes increasingly clear. A too rigid approach, valid when the values of a different social order dominated society, can result in stultifying the aspirations and objectives expressed in the Constitution, which carefully balances individual right against the social good.
The next landmark decision worth mentioning is the case of UOI & Ors. vs. Bombay Tyre International Ltd.: (1984) 1 SCR 347. The same was on the measure of the value for levy of excise duty which, initially placed as Entry 45 of List I of the Seventh Schedule to the Government of India Act, 1935, was later enshrined under Entry 84 of List I of the Seventh Schedule to the Constitution. The Supreme Court, contextually observing that exclusion of post manufacturing expenses and post manufacturing profits is a matter pertaining to the ascertainment of ‘value’ of the excisable article, and not to the nature of the excise duty, outlined the fundamental criterion for computing the value of an excisable article. The value was held to be the price at which the excisable article or an article of the like kind and quality is sold or is capable of being sold by the manufacturer and it is not the bare manufacturing cost and manufacturing profit which constitutes the basis for determining such value. This principle was widely applied later to levy excise duty with reference to MRP.
The landmark Supreme Court decision in the case of McDowell & Co Ltd vs CTO in 1985 SCR (3) 791/[TS-1-SC-1985-O] had dealt with concepts of tax planning, tax avoidance and tax evasion. It was a case of sale-tax avoidance, which is a tax on transactions of sales. But the judgment was applied more in direct tax rulings.
The issue of works contract and the subsequent Constitutional amendment which took a triennium did not conclude and the challenge laid to the aforesaid amendment was repelled by the Supreme Court in the case of Builders Association of India & Ors. vs. UOI & Ors.: (1989) 2 SCC 645. This judgement bestowed the States with the power of hair-splitting the works contract. The Constitution bench of the Supreme Court in the case of Gannon Dunkerley and Company and others Vs. State of Rajasthan and others in (1993) 88 STC 204 (SC) also held that each class of works contract is a class of goods in itself for the purpose of levy of tax of goods involved in the execution of works contracts. Consequently, if the rates of tax are not specified for each class of contract, the value of each of the commodity involved in the execution of works contract shall be determined and applying the rate of tax for such commodity under the Act the tax liability shall be determined.
Much later in the year 2014, the Supreme Court further explained the law in Larsen and Toubro Limited and Anr. vs. State of Karnataka & Anr. in (2014) 1 SCC 708, holding that the term “works contract” in Article 366(29A)(b) of the Constitution of India, is amply wide and cannot be confined to a particular understanding of term, or to a particular form. Once characteristics or elements of works contract are satisfied in a contract, then irrespective of additional obligations, such contract would be covered by term 'works contract'. The term 'works contract' in Article 366(29A)(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. For sustaining levy of tax on goods, deemed to have been sold in execution of a works contract, three conditions must be fulfilled; (i) there must be a works contract, (ii) goods should have been involved in execution of a works contract, and (iii) property in those goods must be transferred to a third party, either as goods or in some other form. The building contracts are species of works’ contract. A contract may involve both, a contract of work and labour, and a contract for sale. A transfer of property in goods under clause 29A(b) of Article 366, is deemed to be a sale of goods involved in execution of a works contract by person making transfer and purchase of those goods to a person, to whom such transfer is made. A single and indivisible contract, now, by Forty-Sixth Amendment, has been brought on par with a contract containing two separate agreements and the States have now power to levy sales tax on value of material in execution of works contract.
The five Judges’ Constitutional Bench of the Supreme Court, in the case of Kone Elevator India Pvt. Ltd. vs. State of Tamil Nadu and Ors. in (2014) 7 SCC 1 held that the term “works contract” as used in clause (29A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone. If the contract is a composite one which falls under the definition of works’ contracts as engrafted under clause (29A)(b) of Article 366 of the Constitution, the incidental part as regards labour and service pales into total insignificance for the purpose of determining the nature of the contract.
The millennium year also witnessed the decision rendered in the case of 20th Century Finance Corporation Limited vs. State of Maharashtra in (2000) 6 SCC 12 which, in context of a lease agreement, fixed the situs of contract as the place of sale, completely losing sight of relevance of the subject matter of the contract. Four years hence, the Supreme Court in the case of Ashok Leland Ltd. vs. State of Tamil Nadu & Anr.: CA No. 976-979/2001 took a view that while defining sale, the situs of sale can be fixed by the Parliament which having regard to Article 286 is within its exclusive domain and in the context of Article 269(3) having regard to the following factors –
· Place where agreement of sale is concluded;
· Passing of property in the goods;
· Where the parties to the contract reside; and
· Goods are located or manufactured.
It was held that once the situs of sale either by way of legal fiction or otherwise is determined, the State Legislature will be denuded of its power to fix another situs having regard to the fact that the Parliament alone has the exclusive jurisdiction therefore. A sale may have several elements and all of them need not necessarily take place in one State and in that view of the matter a presumption had to be provided for by a deeming provision as a logical corollary of the principles laid down by a law of Parliament.
The clock ticked to the 21st century which was distinguishable from the previous century on many counts. The century, inter alia, also marked the advent of the digital era and solutions were required to address the Y2K problems.
The distinction between a corporeal right and an incorporeal right was succinctly carved out in the case of Tata Consultancy Services vs. State of Andhra Pradesh: (2004) 137 STC 620/[TS-5018-SC-2004-O] . The Supreme Court adjudicated that software incorporated on a media is goods and therefore liable to sales tax. It was held that intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become ‘goods’. The Supreme Court applied the well-known test of whether the item is capable of abstraction, consumption and use and whether it could be transmitted, transferred, delivered, stored, possessed etc. It was explained that sale is not just of the media which by itself has very little value. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e., the paper or cassette or disc or CD. A transaction of sale of computer software was held to be a sale of ‘goods’ within the meaning of the term as defined in the Andhra Pradesh General Sales Tax Act, 1957 as well as in Article 366(12) of the Constitution. This decision, was a silver lining for the assessees engaged in the sale and purchase of software since the same, though in context of the provisions of Sales Tax Act, held a persuasive value for application in context of other legislations as well.
The Supreme Court in the case of Bharat Sanchar Nigam Ltd. vs. UOI in (2006) 3 SCC 1/[TS-5003-SC-2006-O], adjudicated in context of activities carried on by telecommunication service provider. A three-Judge Bench was concerned with the question of the nature of the transaction with regard to whether mobile phone connections which are enjoyed, is a sale or is a service or both. It was held that the contract between the telecom service provider and its subscribers through a technologically advanced system is not “goods”. The Supreme Court also held that after the Forty-Sixth Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29-A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying.
It would be wrong to conclude without mentioning the historic nine-Judges’ Bench decision in Jindal Stainless Ltd. & Anr. vs. State of Haryana & Ors.: CA No. 3453/2002/[TS-5008-SC-2006-O] . The question of law involved was whether States have the power to levy Entry Tax on entry of goods in the States. It was held that that ‘tax’ per se, is not an impediment for freedom of conducting trade within the territory of India. It has been held that Part-XIII of the Constitution, which consists of Articles on trade and commerce within the territory of India, has never contemplated “taxes simpliciter” within its fold and the interpretation of Part-XIII must ensure that the autonomy of the States in the fields assigned to them is kept intact. The judgment delivered just before entry into force of GST is now buried in the sand dune of GST which ushered in principles of co-operative federalism in India all over again.
There cannot be a better tribute to our Constitution-makers!!
When India gained freedom and independence from the British on 15th August 1947, the political and economic unity of States still remained an unfinished battle. The Hon’ble Supreme Court has summarily highlighted the situation prevailing then in the case of Atiabari Tea Co. Ltd. vs. The State of Assam & Ors. in AIR 1961 SC 232 stating that before the commencement of the Constitution, about two-third of India was directly under British rule and was called “British India” and the remaining about one third was being directly ruled by the Princes and was known as “Native States”. There were a large number of them with varying degrees
of sovereignty vested in them. Those rulers had the trappings of a sovereign State with power to impose taxes and to regulate the flow of trade, commerce and intercourse. It is a notorious fact that many of the States had erected trade barriers severely impeding the free flow of trade, commerce and intercourse, not only shutting out but also shutting in commodities meant for mass consumption. Thus, prior to 1950 the flow of trade and commerce was impeded at several points which constituted the boundaries of Indian States. After India attained political freedom in 1947 and before the Constitution was adopted, the process of the merger and integration of the several Indian states with the rest of the country was speedily accomplished. This merger or integration of Indian States with the Union of India was preceded by the merger and consolidation of some of the States interests between themselves.
The political unity attained through the Constitution could not have been sustained without economic unity which made the Constitution-makers frame the Articles in Part XIII of the Constitution. This was endorsed by the Supreme Court in the case of Atiabari, stating that free movement and exchange of goods throughout the territory of India is essential for the economy of the nation and for sustaining and improving licensing standards of the country. The provision contained in Article 301 guaranteeing the freedom of trade, commerce and intercourse is not a declaration of mere platitude, or the expression of a pious hope of a declaratory character; it is not also a mere statement of direction principle of state policy; it embodies and enshrines a principle of paramount importance that the economic unity of the country will provide the main
sustaining force for the stability and progress of the political and cultural unity of the country.
The autonomy exercised by the States in claiming the right to tax the same transaction for a variety of reasons, which existed prior to independence, continued that way till the decision of the Supreme Court in case of State of Bombay & Anr. vs. The United Motors (India) Ltd. & Ors. Union: 1953 SCR 1069 came. The Court interpreted Article 286 to hold that in the case of sales-tax, it is not necessary that the sale or purchase should take place within the territorial limits of the State in the sense that all the ingredients of a sale like the agreement to sell, the passing of title, delivery of the goods, etc.,
...
should have a territorial connection with the State. This proved detrimental to consumers and traders, both. Thus, Article 286 which intended to narrow down the powers of the States by stating that no State can impose a tax on a sale or purchase which takes place outside the State was amended in the year 1956 vide Constitution (Seventh Amendment) Act, 1956 to remove the difficulties in levy and administration of tax on transactions surpassing the territories of the respective State.
The hurdle in the next level of the game was qua levy of tax on works’ contract. The Supreme Court, in the State of Madras vs. Gannon Dunkerley & Co.(Madras) Ltd.: (1959) SCR 379 held, that in a building contract which is one, entire and indivisible, there is no sale of goods and it is not within the competence of the Provincial Legislature under Entry 48 of List II in Schedule VII of the Government of India Act, 1935, to impose a tax on the supply of the materials used in such a contract treating it as a sale. The observations in Gannon Dunkerley case were made in connection with materials utilised in the construction of buildings, roads, bridges etc. It was pointed out that there must at least be an agreement between the parties, express or implied, in respect of some ‘goods’ as ‘goods’ and the levy of the tax on building
materials was struck down because there is no agreement to sell materials as such, and that property in them does not pass as movables.
After the decision of this Court in Gannon Dunkerley case, the States suffered losses as a result of avoidance of Central Sales Tax Act leviable on inter-State sales of goods. Thereafter, a catena of judgements rendered to the same effect snowballed the issue which finally led the matter being referred to the Law Commission of India. The Law Commission, after considering the matters referred to, made certain recommendations suggesting amendments in the Constitution in order to augment the revenue of the States. In the light of recommendations of the Law Commission, Parliament passed Constitution (Forty-Sixth Amendment) Act 1983, whereby a new clause (29A) was inserted in Article 366 of the Constitution.
The case in Indian Steel and Wire Products Ltd. vs. State of Madras: AIR 1968 SC 478 is interesting. The assessee was assessed to sales tax under the Madras General Sales Tax Act 1939 on the turnover of steel products supplied by it in pursuance of the orders of the Controller under the Iron and Steel (Control of Production and Distribution) Order, 1941 issued under the Defence of India Act, 1939. The assessee contended that as it was the controller who determined the persons to whom the goods were to be supplied, the price at which they were to be supplied, the manner in which they were to be transported, and the mode in which the payment of the price was to be made, there was nothing left for the parties to determine by agreement, and, therefore, the transactions could not be considered as “sales”.
...
The Supreme Court did not accept the contention, observing that while the Controller fixed the base price of the steel products and determined the buyers, the parties were free to decide the remaining terms of the contract by consent. It was open to the assessee to agree with its customers as to the dates on which the goods were to be supplied. All orders booked were subject to the assessee's terms of business in force at the time, and It was also open to the assessee to fix the time and mode of payment of the price of the goods supplied. Accordingly, it could not be said, observed the Court, that the transactions were completely regulated and controlled by the controller leaving no room for mutual assent.
It was held that it would be incorrect to contend that because law imposes some restrictions on freedom to contract, there is no contract at all. The freedom of contract is not materially impaired merely because the legislation requires a dealer to enter into a contract of sale with another. A sale under the compulsion of a statute is still a sale. It is not unknown that legislation itself should supply some of the terms of a contract. Instances are not uncommon where the legislature has intervened to modify the customary terms of a contract or to inject new elements into it. So long as the essential contractual base is not impaired no serious violence is done to the freedom of contract. Modern jurists conceive of the law as a powerful instrument of social
engineering. They point out that in a social order where the doctrine of laissez-faire has yielded place to the concept of a welfare society, the movement appears to proceed once again from contract of status. The development is normal and inevitable when the absolutism of individual rights has begun to give way to the play of wider social interests. Indeed, it is too late in the day to permit the values of a rapidly withering philosophy to influence and contain the growth of socially progressive forces. So long as these considerations can operate within the basic and primary fundamentals of the law, so long as they reflect progressive social trends consistent with the principles expressed in the Constitution, the approach which the Courts must adopt today when considering them becomes increasingly clear. A too rigid approach, valid when the values of a different social order dominated society, can result in stultifying the aspirations and objectives expressed in the Constitution, which carefully balances
individual right against the social good.
The next landmark decision worth mentioning is the case of UOI & Ors. vs. Bombay Tyre International Ltd.: (1984) 1 SCR 347. The same was on the measure of the value for levy of excise duty which, initially placed as Entry 45 of List I of the Seventh Schedule to the Government of India Act, 1935, was later enshrined under Entry 84 of List I of the Seventh Schedule to the Constitution.
...
The Supreme Court, contextually observing that exclusion of post manufacturing expenses and post manufacturing profits is a matter pertaining to the ascertainment of ‘value’ of the excisable article, and not to the nature of the excise duty, outlined the fundamental criterion for computing the value of an excisable article. The value was held to be the price at which the excisable article or an article of the like kind and quality is sold or is capable of being sold by the manufacturer and it is not the bare manufacturing cost and manufacturing profit which constitutes the basis for determining such value. This principle was widely applied later to levy excise duty with reference to MRP.
The landmark Supreme Court decision in the case of McDowell & Co Ltd vs CTO in 1985 SCR (3) 791/[TS-1-SC-1985-O] had dealt with concepts of tax planning, tax avoidance and tax evasion. It was a case of sale-tax avoidance, which is a tax on transactions of sales. But the judgment was applied more in direct tax rulings.
The issue of works contract and the subsequent Constitutional amendment which took a triennium did not conclude and the challenge laid to the aforesaid amendment was repelled by the Supreme Court in the case of Builders Association of India & Ors. vs. UOI & Ors.: (1989) 2 SCC 645. This judgement bestowed the States with the power of hair-splitting the works contract. The Constitution bench of the Supreme Court in the case of Gannon Dunkerley and Company and others Vs. State of Rajasthan and others in (1993) 88 STC 204 (SC) also held that each class of works contract is a class of goods in itself for the purpose of levy of tax of goods involved in the execution of works contracts. Consequently, if the rates of tax are not specified for each class of contract, the value of each of the commodity involved in the execution of works
contract shall be determined and applying the rate of tax for such commodity under the Act the tax liability shall be determined.
Much later in the year 2014, the Supreme Court further explained the law in Larsen and Toubro Limited and Anr. vs. State of Karnataka & Anr. in (2014) 1 SCC 708, holding that the term “works contract” in Article 366(29A)(b) of the Constitution of India, is amply wide and cannot be confined to a particular understanding of term, or to a particular form.
...
Once characteristics or elements of works contract are satisfied in a contract, then irrespective of additional obligations, such contract would be covered by term 'works contract'. The term 'works contract' in Article 366(29A)(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. For sustaining levy of tax on goods, deemed to have been sold in execution of a works contract, three conditions must be fulfilled; (i) there must be a works contract, (ii) goods should have been involved in execution of a works contract, and (iii) property in those goods must be transferred to a third party, either as goods or in some other form. The building contracts are species of works’ contract. A contract may involve both, a contract of work and labour, and a contract for sale. A transfer of property in goods under clause 29A(b) of Article 366, is deemed to be a sale of goods involved in execution of a works contract
by person making transfer and purchase of those goods to a person, to whom such transfer is made. A single and indivisible contract, now, by Forty-Sixth Amendment, has been brought on par with a contract containing two separate agreements and the States have now power to levy sales tax on value of material in execution of works contract.
The five Judges’ Constitutional Bench of the Supreme Court, in the case of Kone Elevator India Pvt. Ltd. vs. State of Tamil Nadu and Ors. in (2014) 7 SCC 1 held that the term “works contract” as used in clause (29A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone. If the contract is a composite one which falls under the definition of works’ contracts as engrafted under clause (29A)(b) of Article 366 of the Constitution, the incidental part as regards labour and service pales into total insignificance for the purpose of determining the nature of the contract.
The millennium year also witnessed the decision rendered in the case of 20th Century Finance Corporation Limited vs. State of Maharashtra in (2000) 6 SCC 12 which, in context of a lease agreement, fixed the situs of contract as the place of sale, completely losing sight of relevance of the subject matter of the contract. Four years hence, the Supreme Court in the case of Ashok Leland Ltd. vs. State of Tamil Nadu & Anr.: CA No. 976-979/2001 took a view that while defining sale, the situs of sale can be fixed by the Parliament which having regard to Article 286 is within its exclusive domain and in the context of Article 269(3) having regard to the following factors –
· Place where agreement of sale is concluded;
· Passing of property in the goods;
· Where the parties to the contract reside; and
· Goods are located or manufactured.
It was held that once the situs of sale either by way of legal fiction or otherwise is determined, the State Legislature will be denuded of its power to fix another situs having regard to the fact that the Parliament alone has the exclusive jurisdiction therefore.
...
A sale may have several elements and all of them need not necessarily take place in one State and in that view of the matter a presumption had to be provided for by a deeming provision as a logical corollary of the principles laid down by a law of Parliament.
The clock ticked to the 21st century which was distinguishable from the previous century on many counts. The century, inter alia, also marked the advent of the digital era and solutions were required to address the Y2K problems.
The distinction between a corporeal right and an incorporeal right was succinctly carved out in the case of Tata Consultancy Services vs. State of Andhra Pradesh: (2004) 137 STC 620/[TS-5018-SC-2004-O] . The Supreme Court adjudicated that software incorporated on a media is goods and therefore liable to sales tax. It was held that intellectual
property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become ‘goods’. The Supreme Court applied the well-known test of whether the item is capable of abstraction, consumption and use and whether it could be transmitted, transferred, delivered, stored, possessed etc. It was explained that sale is not just of the media which by itself has very little value. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e., the paper or cassette or disc or CD. A transaction of sale of computer software was held to be a sale of ‘goods’ within the meaning of the term as defined in the Andhra Pradesh General Sales Tax Act, 1957 as well as in Article 366(12) of the Constitution. This decision, was a silver lining for the assessees engaged in the sale and purchase of software
since the same, though in context of the provisions of Sales Tax Act, held a persuasive value for application in context of other legislations as well.
The Supreme Court in the case of Bharat Sanchar Nigam Ltd. vs. UOI in (2006) 3 SCC 1/[TS-5003-SC-2006-O], adjudicated in context of activities carried on by telecommunication service provider. A three-Judge Bench was concerned with the question of the nature of the transaction with regard to whether mobile phone connections which are enjoyed, is a sale or is a service or both. It was held that the contract between the telecom service provider
and its subscribers through a technologically advanced system is not “goods”. The Supreme Court also held that after the Forty-Sixth Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29-A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying.
...
It would be wrong to conclude without mentioning the historic nine-Judges’ Bench decision in Jindal Stainless Ltd. & Anr. vs. State of Haryana & Ors.: CA No. 3453/2002/[TS-5008-SC-2006-O] . The question of law involved was whether States have the power to levy Entry Tax on entry of goods in the States. It was held that that ‘tax’ per se, is not an impediment for freedom of conducting trade within the territory of India. It has been held
that Part-XIII of the Constitution, which consists of Articles on trade and commerce within the territory of India, has never contemplated “taxes simpliciter” within its fold and the interpretation of Part-XIII must ensure that the autonomy of the States in the fields assigned to them is kept intact. The judgment delivered just before entry into force of GST is now buried in the sand dune of GST which ushered in principles of co-operative federalism in India all over again.
There cannot be a better tribute to our Constitution-makers!!
Anish Thacker on Aug 15,2017
Brilliant article, PVS Sir. Jai Hind!