STATE OF ORISSA versus M/S. B. ENGINEERS & BUILDERS LTD. & ORS. on 5 June 2020

[2020] 6 S.C.R. 801

STATE OF ORISSA

v.

M/s. B. ENGINEERS & BUILDERS LTD. & ORS.

(Civil Appeal No. 2516 of 2020)

JUNE 05, 2020

[A. M. KHANWILKAR, INDIRA BANERJEE ANDDINESH MAHESHWARI, JJ.]

Orissa Sales Tax Act, 1947 – ss.2(g),(jj) & 5(2)(AA) –Amendment in 1947 Act for levying sales tax on works contracts –Circular dated 04.11.1986 issued for reimbursement of sales taxpaid by contractor in case of works contracts executed on or after07.04.1984 on production of proof thereof – Works contractsexecuted by respondent no.1 – Sales tax levied for 1998-99 to 2000-01 on the taxable turnover – Respondent claimed reimbursement –In the meantime, in view of another Circular, it was directed that noreimbursement of sales tax be made under Clause 45.2 of GeneralConditions of Contract (GCC) until further clarification – Byimpugned Circular dated 07.11.2001, State Govt. instructed not toreimburse the sales tax levied on cement, steel etc. and directed forits recovery wherever reimbursed – Quashed by High Court – Held:Grounds on which the appellant resists respondent’s claim forreimbursement, i.e., w.r.t the expression”completed item of work” inClause 45.2, stipulations contained in Clauses 13.3 of Instructionsto Bidders (ITB) and 45.1 of GCC, are untenable – Contents ofinitial Circular dated 04.11.1986 issued by State Govt. closelyfollowing the amendment of 1947 Act aimed at facilitating the levyof sales tax on the goods involved in a works contract – In saidCircular, the State Govt. issued directions for reimbursement of salestax w.r.t the existing work contracts; and also directed that anysuch clause for reimbursement be not included in future contracts –Second set of instructions of the said Circular was obviously meantfor future contracts and fortifies the conclusion that State Govt.was fully conscious of its obligation to make reimbursement w.r.tthe existing contracts carrying such reimbursement clause/s – HighCourt rightly allowed the writ petition filed by respondent no.1 –Propositions in ill-advised Circular dated 07.11.2001 stand

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Adisapproved – Constitution (Forty-sixth Amendment) Act, 1982 –Art.366(29-A) – Orissa Sales Tax (Amendment) Act, 1984 – OrissaSales Tax (Amendment) Act, 1985 – Contract.

Dismissing the appeal, the Court

HELD 1.1 In the Circular dated 04.11.1986, the StateBGovernment expressed the view that the reimbursement inquestion was required to be allowed in terms of Clause 45.2 ofGCC but later on, in the Circular dated 07.11.2001, the StateGovernment took a diametrically opposite view to say that suchreimbursement was not to be allowed in relation to the worksCcontract. Obviously, the said Circulars had been based on thegiven day understanding of the State Government on the operationof the relevant provisions of law and the terms of contract. Suchvacillating understanding on the part of the State Governmentcannot be determinative of the contractual obligations of theparties, which are required to be decided with reference to theDprinciples of law applicable and on true construction of the termsof contract. [Paras 11][829-A-D]

1.2 As per Clause 45.2 of GCC, the amount of sales tax oncompleted items of works of the contract, as might have beenlevied upon, and paid by, the contractor, except the penalty leviedEfor contractor’s own fault, was to be reimbursed to the contractoron proof of payment and assessment. It was also provided inClause 45.2 itself that, during the course of contract period,deductions of sales tax on works contract turnover would be madefrom the running bills at the prescribed rates and conditions. ItFis not in dispute that while making payment of various runningbills in the course of execution of contracts by the respondentNo. 1, deductions were indeed made towards the amount of salestax and such deducted amount of sales tax was deposited withthe Sales Tax Department of the Government of Orissa. Suchdeductions and deposits with Sales Tax Department had clearlyGbeen in accordance with the stipulation contained in the secondpart of Clause 45.2 ibid. However, and even after makingdeductions in terms of the second part of Clause 45.2, the appellantState seeks to deny the operation of first part of this Clause 45.2(whereby the contractor is entitled to reimbursement of theHamount of sales tax). Taking up the main plank of the case of the appellant about the nature, extent and implication of the levy ofsales tax in relation to a works contract, it could be usefullyrecapitulated that in view of the forty–sixth amendment to theConstitution of India, Clause (29-A) came to be inserted to Article366; and, by virtue of sub-clause (b) thereof, it became permissiblefor the States to levy sales tax on the price of goods and materialsused in works contracts as if there was a sale of such goods andmaterials. Thus, after the forty-sixth amendment to theConstitution, the works contract is divided into two parts by alegal fiction: one for sale of goods/materials and other for supplyof labour/services; and it is possible for the States to levy salestax on the value of goods/materials involved in such workscontract. [Paras 12,13][829-D-H; 830-B-D]

1.3 As regards the relevant provisions of the Stateenactment, it is at once clear that after the aforesaid forty-sixthamendment to the Constitution, the State of Orissa also proceededto carry out the necessary amendment to the Act of 1947 andprovided for levy of sales tax in relation to a works contract, interalia, by expanding the definition of “Sale” so as to include thereinthe transfer of property in goods involved in the execution of aworks contract; and by specifying that “taxable turnover” inrespect of works contract shall be deemed to be the gross valuereceived or receivable by dealer for carrying out such contractless the amount of labour and service charges incurred inexecution of the contract. On their essence and intent, what turnsout of these amended provisions of the Act of 1947 is that inrelation to a works contract, there would be deemed to be thesale of goods involved in execution thereof; and sales tax wouldbe leviable on the taxable turnover (and not on the grossturnover) of such works contract. Contextually read, it is butapparent that the expression “completed item of work” in Clause45.2 ibid., signifies the intent that reimbursement would bepermissible only after execution of a particular item of work hasbeen completed and accomplished. This expression is clearlyintended to contradistinguish the cases where any item of workremains incomplete and yet any claim for reimbursement of thesales tax levied is sought for. This expression cannot be read tomean as if signifying the levy of sales tax itself on the completeditem of work because such reading of this expression would be AB

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Atotally disjunct from the context and would be entirely detachedfrom the real intent. Viewed from another angle, it would appearthat if the contention on the part of the appellant as regardsinterpretation of the first part of Clause 45.2 is accepted, it wouldpractically result in holding that the said Clause 45.2 is not at allapplicable to a works contract. Such a result cannot beBcountenanced for two major reasons: First, that if such a clausewas not to be applied to the works contract, there was no reasonto have retained the same in relation to the works contractsawarded to the respondent No. 1. When such a stipulation formsthe part of contract, it would be rather preposterous to say thatCthe same would stand but would not operate. Secondly, and moresignificantly, in the second part of this very Clause 45.2, it hasspecifically been provided that deductions of sales tax on workscontract turnover at source shall be made from each bill. It is notfar to seek, and is rather evident on a bare reading of Clause45.2 in its entirety, that it is to apply in relation to the sales tax onDworks contract too. The second part of Clause 45.2 had indeedbeen applied and enforced by the appellant and its offices byregularly making deduction of the amount of sales tax in therunning payments of the respondent no.1 and by regularlydepositing the same with the Sales Tax Department. It wouldEagain be preposterous, nay absurd, to say that the second part ofClause 45.2 entitling the appellant and its offices to makededuction of sales tax on works contract turnover at source couldbe enforced but when it comes to reimbursement, the first partof this very Clause 45.2 would not apply to a works contract.[Paras 13.1, 14.1 and 14.2][830-E-H; 831-G-H; 832-A-E]F

1.4 The terms of contract bind the parties thereto and unlessthere be any case of ambiguity or violation of law, ordinarily, theterms of contract, revealing the intent of parties, are required tobe given effect to. By virtue of Clause 45.2 of GCC, the contractorcompany is rightfully entitled to claim reimbursement of theGamount of sales tax levied on the taxable turnover of the workscontracts executed by it. A fortiori, the grounds on which theappellant seeks to resist the claim of the contractor company forsuch reimbursement, i.e., with reference to the expression“completed item of work” in the said Clause 45.2 and withHreference to the stipulations contained in Clauses 13.3 of ITB

and 45.1 of GCC, are wholly untenable and the appellant and itscontracting offices are under obligation to honour the claim somade by the contractor company. [Paras 15, 16, 17][833-B; 834-E-G]

1.5 The basic reason for which the Court feels impelled torefer to these Circulars now and at this concluding stage is borneout of the contents of the Circular dated 04.11.1986, which wasissued by the State Government closely following the amendmentof the Act of 1947 with insertion of the provisions aimed atfacilitating the levy of sales tax on the goods involved in a workscontract. Being aware of its obligation in terms of the said Clause45.2 of GCC (or similar clause/s in other contracts), theinstructions were issued by the State Government in the saidCircular dated 04.11.1986 for: (a) making reimbursement of theamount of sales tax actually paid by the contractor on productionof necessary documentary evidence of such payment; (b) notmaking reimbursement against the amount of penalty, if any,levied upon the contractor; and (c) obtaining undertaking fromthe contractor to refund the excess amount of reimbursement, incase of reduction of its liability towards sales tax in appeal orrevision [vide sub-paragraphs (i) to (iii) of paragraph 2 of theCircular dated 04.11.1986]. However, the significant feature isthat in the second set of instructions in this very Circular, ascontained in sub-paragraph (iv) of paragraph 2 thereof, theEngineers-incharge were instructed that no such clause forreimbursement of sales tax or payment of such tax by thedepartment to the contractor be inserted in the Notice InvitingTenders or Tender document; and no tender containing anyclause or condition to that effect be accepted. The said secondset of instructions in sub-paragraph (iv) of paragraph 2 of thisCircular was, obviously, meant for future contracts, but, itscontrast with the first set of instructions in the preceding sub-paragraphs fortifies the conclusion that the State Governmentwas fully conscious of its obligation to make reimbursement inrelation to the existing contracts which carried suchreimbursement clause/s. Evidently, the doubts at the later stage,as indicated in the Circular dated 27.01.2000, and conversedecision against the obligation of reimbursement, as stated inthe Circular dated 07.11.2001, had only been of unwarranted A

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Aattempts to wriggle out of the contractual obligations with ratherperverse construction of the plain terms of the existing contracts.The propositions in the said ill-advised Circular dated 07.11.2001stand disapproved with the conclusions reached by ushereinbefore. [Paras 17.1, 17.3][835-B-G; 836-C-D]

BBuilders’ Association of India and Ors. v. Union of Indiaand Ors. (1989) 2 SCC 645 : [1989] 2 SCR 320;Gannon Dunkerley and Co. and Ors. v. State ofRajasthan and Ors.: (1993) 1 SCC 364 : [1992] 3 Suppl.SCR 103; State of U.P. and Ors. v. P.N.C. ConstructionC. Ltd. and Ors. (2007) 7 SCC 320 : [2007] 8 SCRC927 – referred to.

From the Judgment and Order dated 05.08.2008 of the High CourtEof Orissa at Cuttack in W.P.(C) No.8857 of 2003.

Maninder Singh, Sr. Adv., Shibashish Misra, S. Debabrata Reddy,Chandan Kumar Mandal, Advs. for the Appellant.

Sukumar Pattjoshi, Sr. Adv., Durga Datta, Mushtaq Ahmad, Mrs.Kirti Renu Mishra, Ms. Apurva Upmanyu, Ms. C.K. Sucharita, Advs.Ffor the Respondents.

The Judgment of the Court was delivered by DINESH MAHESHWARI, J.

1. Before entering into the subject matter, we may notice at theGoutset that this petition for special leave to appeal is barred by limitationby a period of 274 days. Though objections have been raised on behalfof the contesting respondent against the prayer for condonation of delaybut, the record shows that notices on the application seeking condonationof delay as also on the petition for leave to appeal were issued way backon 18.11.2011 and for a long time, the matter remained pending whileH

awaiting service on the respondents. Ultimately, after completion ofservice, we had heard learned counsel for the contesting parties on merits.Having regard to the circumstances of the case and after having heardthe contesting parties on merits, we find no reason to close the matteronly on the ground of delay. Accordingly, delay in filing is condoned.

1.1. Leave granted.

2. This appeal by special leave is directed against the judgmentand order dated 05.08.2008 as passed by the Orissa High Court at Cuttackin W.P. (C) No. 8857 of 2003, whereby the High Court accepted theclaim of the respondent No. 1 of present appeal[1], for reimbursement ofthe amount of sales tax levied in respect of the works contracts executedby it. The High Court also directed the Opposite Parties to grantappropriate reimbursement as claimed by the writ petitioner in terms ofClause 45.2 of the General Conditions of Contract[2] under the NationalCompetitive Bidding Contract[3] while quashing the clarification Circulardated 07.11.2001 issued by the Government of Orissa in its Departmentof Water Resources.

2.1. The appellant State of Orissa has challenged the order sopassed by the High Court while essentially raising the questions concerningthe nature and implication of the sales tax, levied in relation to the workscontracts executed by the writ petitioner, under the Orissa Sales TaxAct, 1947[4] as amended in terms of the Constitution (Forty-sixthAmendment) Act, 1982[5]; and concerning the operation and import ofthe relevant stipulations in the contracts in question.

3. The factual and background aspects of the matter, being not ofmuch dispute and confined to a narrow compass, may be noticed, inbrief, as follows:

3.1. The respondent No. 1 of this appeal, said to be a company ofengineers and builders, who had been engaged in undertaking variousworks contracts, responded to the tenders floated by the respondentNos. 6 to 18 (various offices of the Government of Orissa) and, on beingdetermined as the lowest tenderer, was awarded the contracts fromtime to time.

1 Hereinafter also referred to as ‘the writ petitioner’ or ‘the contractor company’.

2 ‘GCC’ for short3 ‘NCB’ for short4 Hereinafter also referred to as ‘the Act of 1947’

5 Hereinafter also referred to as ‘the forty-sixth amendment’

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A3.2. It is not in dispute that the aforesaid contracts awarded to therespondent No. 1 carried the stipulations regarding taxes in Clause 45 ofGCC. The claim of the respondent No. 1 for reimbursement of sales taxhad been essentially based on Clause 45.2 of GCC, which carried thestipulation that any Central or State sales tax and other taxes on completeditems of works (excluding penalty), as may be levied and paid by theBcontractor shall be reimbursed by the employer on proof of payment(and) on production of assessment certificate.

3.3. The sales tax regime in the State of Orissa is primarily governedby the Act of 1947. By way of the Orissa Sales Tax (Amendment) Act,1984 and the Orissa Sales Tax (Amendment) Act, 1985[6], the amendmentsCwere brought about in the Act of 1947 with effect from 07.04.1984whereby, inter alia, the definition of expression “Works contract” wasinserted; the definition of the expression “Sale” was expanded so as toinclude therein the transfer of property in goods involved in the executionof a works contract; and specific meaning was also assigned to theDexpression “taxable turnover” in respect of a works contract for thepurpose of the rate of tax payable by a dealer. The rate of tax payableby a dealer on the “taxable turnover” in respect of “works contract”was fixed at 4%.

3.4. On 04.11.1986, the Government of Orissa, in its DepartmentEof Irrigation and Power, issued a Circular to the effect that in case ofworks contract executed on or after 07.04.1984, containing the specificclause for reimbursement of sales tax, the Department of Irrigation andPower would be liable for reimbursement of the amount of sales taxactually paid by the concerned contractor on production of necessarydocumentary evidence. Pursuant to these observations and directions,Freimbursement of the sales tax paid by the contractor company in respectof assessment years 1995-1996 to 1997-1998 was allowed.

3.5. Later on, the State Government issued a notification underSection 5 of the Act of 1947 whereby, the rate of tax payable by a dealeron the taxable turnover in respect of the works contract was increasedGto 8%. Thereafter, by way of the orders of assessment for the years1998-1999 to 2000-2001, the Assessing Authority levied sales tax @ 8%

6 These amendments were introduced after the forty-sixth amendment of the Constitutionwhereby, Clause (29-A) was inserted to Article 366 and it was, inter alia, provided thatthe expression “tax on the sale or purchase of goods” includes a tax on the transfer ofHproperty in goods involved in the execution of a works contract.

on the taxable turnover in respect of the works contracts executed bythe contractor company. With reference to such assessments, thecontractor company claimed reimbursement of the sales tax paid inrespect of the works contracts executed by it.

3.6. However, in the meantime, the Government of Orissa, in itsDepartment of Water Resources, issued another Circular dated27.01.2000 to the Engineers-incharge of various offices and projectsthat the question as to whether sales tax deducted from the bills of thecontractor and paid to the sales tax officer will be again reimbursed tothe contractor whose quoted price was inclusive of all taxes as per Clause13.3 of the Instructions to Bidders[7], was under active consideration; andit was directed that no reimbursement of sales tax be made under Clause45.2 of GCC until clarification was communicated in that regard.

3.7. Thereafter, on 07.11.2001, the State Government, in itsDepartment of Water Resources, issued the impugned Circular, said tobe a clarificatory one, stating that a completed item of works, for whichthe contractor had entered into an agreement with the department, waseither an immovable property or a works contract and in either case,was not exigible to sales tax; and therefore, the question of payment ofsales tax on such immovable property or works contract andconsequential reimbursement by the department as per Clause 45.2 ofthe General Conditions of Contract, or similar provision in other contracts,did not arise. Accordingly, the State Government instructed its Engineers-incharge not to reimburse the sales tax levied on cement, steel etc.; andalso directed for recovery of the amount from the contractor whereverany such amount of sales tax had been reimbursed. These directions ofthe Government were followed up by another Circular dated 19.06.2002to the same effect.

3.8. In view of the aforementioned Circulars dated 07.11.2001and 19.06.2002, its claim, for reimbursement of the sales tax paid, beingin jeopardy and rather, the proposition for recovery of the amount alreadyreimbursed looming large, the contractor company preferred the writpetition leading to this appeal, while seeking the following reliefs: –

“(i) Issue a Rule Nisi Calling upon the Opposite Parties to showcause as to why the alleged clarification dated 07.11.2001 underAnnexure-1, and the subsequent direction for recovery of the 7 ‘ITB’ for short A

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amount earlier reimbursed, vide letter dated 19.6.2002 underAnnexure-3 ought not to be declared illegal, invalid and non-est inthe eyes of law;

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(ii) issue a further Rule Nisi Calling upon the Opp. Parties toshow cause as to why the reimbursement claims made by thepetitioner under Annexure-5 series may not be granted with aperiod stipulated by this Hon’ble Court; B

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(iii) in the event the Opp. Parties fail to show cause or showinsufficient cause make the said Rule Nisi absolute and issue anappropriate writ of Mandamus or a writ of certiorari in line withthe aforesaid Rule Nisi; C

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(iv) further be pleased to direct either of the Opp. Parties i.e., thecontracting parties (Opp. Parties 6-18) or the Sales-tax Authorities(Opp. Parties 3-5) to effect reimbursement or refund along withinterest from the date of deposit of tax;

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(v) to pass any other writ/writs, order/orders as this Hon’ble Courtmay deem just and proper.”

4. The High Court in its impugned order dated 05.08.2008,examined the contentions of the parties and granted the prayers of thewrit petitioner while observing and holding, inter alia, as under:- F

“8…… The petitioner now claims reimbursement of tax paid by iton actual turnover of the works contract and not on the tax paidby it on the materials procured by it, which have gone into for thepurpose of execution of the works contract. The further admittedfact that O.Ps. 6 to 18 have, in fact, deducted the sales tax atGsource from the bills raised by the petitioner from time to time indue progress of the work and the same have in turn been depositedwith the Sales Tax Department.

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10. Now Annexure-1, which is sought to be quashed, is aclarification but not in supersession of Annexure-10, as it isprojected by the State Government. The said clarification cannottake away the effect of the statutory provision. The orders ofassessment in Annexure-4 series indicate that after deducting thelabour charges, services charges, amount of tax paid, materialsused in the execution of works contract, from the gross turn overof the assessment year, the balance has been put to tax by theSales Tax Authority. The tax, as we find, has been imposed in thelight of the decision in Gannon Dunkerly (supra).

From the discussion made above, the irresistible conclusionis that the sales tax has been levied in the orders of assessment inrespect of the amount received pertaining to items of workcompleted during the financial year. The clarification in Annexure-1, which unilaterally takes away the claim of the petitioner forreimbursement, is contrary to Clause-45.2 of the GeneralConditions of the Contract and Section 5 (2) (AA) of the OrissaSales Tax Act as well as the decision of the apex Court in GannonDunkerly (supra). Accordingly, the clarification letter dated7.11.2001 (Annexure-1) issued by the Financial Adviser-cum-Additional Secretary to Government, Department of WaterResources is quashed and the O.Ps. are directed to grantappropriate reimbursement in terms of Clause-45.2 of the GeneralConditions of Contract, as claimed by the petitioner.”

5. Assailing the order so passed by the High Court, learned seniorcounsel for the appellant has strenuously argued that the impugned orderis contrary to the facts of the case as also the principles of law applicableand hence, deserves to be set aside.

5.1. The learned senior counsel for the appellant has referred toClause (29-A) of Article 366 of the Constitution of India; and the principlesenunciated by this Court in the cases of Builders’ Association of Indiaand Ors. v. Union of India and Ors.: (1989) 2 SCC 645 and GannonDunkerley and Co. and Ors. v. State of Rajasthan and Ors.: (1993)1 SCC 364 to submit that by the forty-sixth amendment of Constitution,a fiction was created for treating the works contract as deemed sale onwhich, sales tax would be leviable but, only on the value of goods whichwent into the execution of any works contract.

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A5.2. Further, with reference to the definitions of “sale”, “goods”and “works contract” as contained in the Act of 1947 as also Section5(2)(AA) thereof and the relevant clauses governing the contracts inquestion, the learned counsel has submitted that any payment againstthe monthly running bill to the contractor does not constitute paymentfor any “completed item of work”; and the only meaning of theBnomenclature “completed item of work” is the completion of the workscontract as such. Learned counsel would maintain that sales tax is notleviable on the “completed item of work” in a works contract but, thecontractor is bound to pay sales tax on “taxable turnover” which, for thepurpose of sales tax, could only be on the value of goods utilised inCcompletion of the works contract.

5.3. The learned senior counsel has elaborated on the aforesaidaspects with the submissions that every amount of sales tax on the“taxable turnover”, which is required to be paid by the contractor, isachieved either by deduction of such amount of sales tax from the monthlyDrunning bills by the employer for deposit of the same with the Sales TaxDepartment or by way of payment by the contractor directly to theSales Tax Department. According to the learned counsel, where theamount payable as sales tax by the contractor is deducted by the employerat the time of making payment of monthly running bills and is depositedby the employer with the Sales Tax Department, there would not ariseEany question of making any reimbursement of the amount so deductedand paid to the Sales Tax Department back to the contractor becausethe liability to pay sales tax on the value of material/goods utilised in anyworks contract is that of the contractor; and the claim for itsreimbursement is entirely impermissible.F

5.4. The learned senior counsel for the appellant has strenuouslyargued that the High Court has failed to examine the import and effectof Clause 13.3 of the Instructions to Bidders and Clause 45.1 of theGeneral Conditions of Contract which make it clear that the bid pricequoted by the contractor is inclusive of all duties, taxes and other levies,Gincluding royalties on all materials to be used in performance of theworks contract. Hence, according to the learned counsel, when salestax on the goods/materials forms a part of contract price, the claim forreimbursement has rightly been denied by the Government.

5.5. As regards Clause 45.2 of the General Conditions of Contract,Hthe learned counsel would re-emphasise that thereunder, reimbursement

is permissible when there is any sales tax levied on a “completed item ofwork” but in the context of a works contract in a construction project,there is no sales tax on the “completed item of work” which is animmovable property. The learned counsel would submit that earlier, theCircular dated 04.11.1986 came to be issued on an erroneousunderstanding of Clause 45.2 in relation to works contract but subsequently,clarificatory Circulars dated 07.11.2001 and 19.06.2002 were issued,stating the correct position of law that the said Clause 45.2 applied onlyto the sales tax on “completed item of work”; and the sales tax levied interms of Section 5(2)(AA) of the Act of 1947 was not reimbursable andhad to be borne by the contractor in view of clear stipulation in Clause45.1 of the General Conditions of Contract. According to the learnedcounsel, reliance on the Circular dated 04.11.1986 on behalf of therespondent No. 1 is entirely misplaced and the said Circular, by no means,could be construed as that of amending the contractual terms as also theliability of the contractor in terms of Section 5(2)(AA) of the Act of1947.

6. Per contra, learned senior counsel for the contractor company(the respondent No. 1 herein) has duly supported the order impugnedwith reference to the reasonings therein.

6.1. Learned senior counsel for the contractor company hascontended that the argument made on behalf of the appellant, that thededuction in the running bills had only been of the sales tax payable onvarious items, is contrary to the record because the deductions weremade on a deemed sale on turnover basis and not item-wise and such arecovery of sales tax is squarely covered by Clause 45.2 of GCCwhereunder, the contractor company is entitled to the claimedreimbursement.

6.2. The learned senior counsel has again referred to the decisionof this Court in the case of Gannon Dunkerley (supra) and the provisionscontained in Section 5 (2) (AA) of the Act of 1947 as also the saidClause 45.2 of GCC and the Circular dated 04.11.1986 to submit thatdeduction of sales tax on turnover basis pre-supposes the existence ofsale and therefore, the contractor company is entitled to thereimbursement as claimed. According to the learned counsel, the Circulardated 07.11.2001 had been directly against the statutory provisions asalso the contractual stipulations and the same has rightly been disapprovedby the High Court. The learned counsel has also referred to various A

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Adecisions including that in the case of State of U.P. and Ors. v. P.N.C.Construction C. Ltd. and Ors.:(2007) 7 SCC 320.

7. We have heard learned counsel for the parties at sufficientlength and have examined the record with reference to the law applicable.

8. Having regard to the issues raised, appropriate it would be toBtake note of the relevant provisions of law; the referred conditionsgoverning the contractual relations of the parties; and the referredCirculars issued by the Government of Orissa.

8.1. By way of the Constitution (Forty-sixth Amendment) Act,1982, Clause (29-A) came to be inserted to Article 366 of the ConstitutionCof India, providing for inclusive definition of the expression “tax on thesale or purchase of goods” in relation to various transactions and dealings.As regards “works contract”, the said expression came to be assignedthe meaning in sub-clause (b) thereof, which reads as under:- “(29-A) “tax on the sale or purchase of goods” includes- D

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(b) a tax on the transfer of property in goods (whetheras goods or in some other form) involved in the executionof a works contract;

(c) to (f) … … …”

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8.1.1. The constitutional validity of the aforementioned provisionsby which the legislatures of the States were empowered to levy salestax on certain transactions described in sub-clauses (a) to (f) of Clause(29-A) of Article 366 of the Constitution as also the question, as to whetherFthe power of the State legislature to levy tax on the transfer of propertyin goods involved in the execution of works contracts is subject to therestrictions and conditions contained in Article 286 of the Constitution,were considered and decided by the Constitution Bench of this Court inthe case of Builders’ Association (supra). Therein, while upholding theconstitutional validity of the aforementioned provisions, the ConstitutionGBench explained the unique features of a composite contract relating towork and materials; and expounded on the meaning, effect and amplitudeas also contours of the provisions pertaining to the taxing power of theStates in relation to works contract in the following words: - “38. In Benjamin’s Sale of Goods (3rd Edn.) in para 43 at p. 36Hit is stated thus:

“Chattel to be affixed to land or another chattel.—Wherework is to be done on the land of the employer or on a chattelbelonging to him, which involves the use or affixing of materialsbelonging to the person employed, the contract will ordinarilybe one for work and materials, the property in the latter passingto the employer by accession and not under any contract ofsale. Sometimes, however, there may instead be a sale of anarticle with an additional and subsidiary agreement to affix it.The property then passes before the article is affixed, by virtueof the contract of sale itself or an appropriation made underit.”

39. In view of the foregoing statements with regard to the passingof the property in goods which are involved in works contract andthe legal fiction created by clause (29-A) of Article 366 of theConstitution it is difficult to agree with the contention of the Statesthat the properties that are transferred to the owner in the executionof a works contract are not the goods involved in the execution ofthe works contract, but a conglomerate, that is the entire buildingthat is actually constructed. After the 46th Amendment it is notpossible to accede to the plea of the States that what is transferredin a works contract is the right in the immovable property.

40. We are surprised at the attitude of the States which have putforward the plea that on the passing of the 46th Amendment theConstitution had conferred on the States a larger freedom thanwhat they had before in regard to their power to levy sales taxunder Entry 54 of the State List. The 46th Amendment does nomore than making it possible for the States to levy sales tax on theprice of goods and materials used in works contracts as if therewas a sale of such goods and materials.We do not accept theargument that sub-clause (b) of Article 366(29-A) should be readas being equivalent to a separate entry in List II of the SeventhSchedule to the Constitution enabling the States to levy tax onsales and purchases independent of Entry 54 thereof. As theConstitution exists today the power of the States to levy taxes onsales and purchases of goods including the “deemed” sales andpurchases of goods under clause (29-A) of Article 366 is to befound only in Entry 54 and not outside it. We may recapitulatehere the observations of the Constitution Bench in the case of A

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G

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A

A

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ABengal Immunity Co. Ltd. [AIR 1955 SC 661 in which this Courthas held that the operative provisions of the several parts of Article286 which imposes restrictions on the levy of sales tax by theStates are intended to deal with different topics and one could notbe projected or read into another and each one of them has to beobeyed while any sale or purchase is taxed under Entry 54 of theBState List.”

8.1.2. In the case of Gannon Dunkerley (supra), while dealingwith the scope of the legislative power of State under Entry 54 of theCState List contained in Seventh Schedule to the Constitution, particularlyin the context of inter-State trade or commerce, another ConstitutionBench of this Court found no reason to reopen the issues covered by thedecision in Builders’ Association case (supra) and held on the limitationsof the powers of State legislature as under:- D“31…..the legislative power conferred under Entry 54 of the StateList does not extend to imposing tax on a sale or purchase ofgoods which takes place outside the State or which takes place inthe course of import or export of goods. In view of the aforesaidlimitations imposed by the Constitution on the legislative power ofthe States under Entry 54 of the State List, it is beyond theEcompetence of the State Legislature to make a law imposing orauthorising the imposition of a tax on transfer of property in goodsinvolved in the execution of a works contract, with the aid of sub-clause (b) of clause (29-A) of Article 366, in respect of transactionswhich take place in the course of inter-State trade or commerceor transactions which constitute sales outside the State or sales inFthe course of import or export.

D

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41. It must, therefore, be held that while enacting a law imposinga tax on sale or purchase of goods under Entry 54 of the StateGList read with sub-clause (b) of clause (29-A) of Article 366 ofthe Constitution, it is not permissible for the State Legislature tomake a law imposing tax on such a deemed sale which constitutesa sale in the course of inter-State trade or commerce under Section3 of the Central Sales Tax Act or an outside sale under Section 4of the Central Sales Tax Act or sale in the course of import orH

export under Section 5 of the Central Sales Tax Act. So also it isnot permissible for the State Legislature to impose a tax on goodsdeclared to be of special importance in inter-State trade orcommerce under Section 14 of the Central Sales Tax Act exceptin accordance with the restrictions and conditions contained inSection 15 of the Central Sales Tax Act.”

8.1.3. In the said case of Gannon Dunkerley, the ConstitutionBench explained the purport and effect of the legal fiction introduced bysub-clause (b) of Clause (29-A) of Article 366 of the Constitution andalso enunciated the principles for its operation as follows: - “36. If the legal fiction introduced by Article 366(29-A)(b) iscarried to its logical end it follows that even in a single andindivisible works contract there is a deemed sale of the goodswhich are involved in the execution of a works contract. Such adeemed sale has all the incidents of a sale of goods involved in theexecution of a works contract where the contract is divisible intoone for sale of goods and the other for supply of labour andservices.

************

47……..The value of the goods involved in the execution of aworks contract will, therefore, have to be determined by takinginto account the value of the entire works contract and deductingtherefrom the charges towards labour and serviceswhich wouldcover—

(a) Labour charges for execution of the works; (b) amount paid to a sub-contractor for labour and services;

(c) charges for planning, designing and architect’s fees; (d) charges for obtaining on hire or otherwise machinery and toolsused for the execution of the works contract;

(e) cost of consumables such as water, electricity, fuel, etc. usedin the execution of the works contract the property in which is nottransferred in the course of execution of a works contract; and (f) cost of establishment of the contractor to the extent it is relatableto supply of labour and services; A

B

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E

F

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A(g) other similar expenses relatable to supply of labour andservices; (h) profit earned by the contractor to the extent it is relatable tosupply of labour and services.

The amounts deductible under these heads will have to beBdetermined in the light of the facts of a particular case on thebasis of the material produced by the contractor.”

8.1.4. The salient features of the legal fiction introduced by sub-Cclause (b) of Clause (29-A) of Article 366 of the Constitution and theco-related concept of “value addition” came to be succinctly explainedby this Court in the case of P.N.C. Construction Co. (supra) in thefollowing words: - “21. “Value addition” is an important concept which has arisenDafter the Forty-sixth Amendment to the Constitution. Prior to thesaid Amendment this Court had taken the view in State of Madrasv. Gannon Dunkerley & Co. (Madras) Ltd [AIR 1958 SC 560]that “works contract” was an indivisible contract and the turnoverof the goods used in the execution of the works contract couldnot, therefore, become exigible to sales tax. To overcome theEeffect of the said decision, the concept of “deemed sale” wasintroduced by Parliament by introducing sub-clause (b) of Clause29-A in Article 366 of the Constitution which states that the taxon sale or purchase of goods would include a tax on transfer ofproperty in goods involved in the execution of works contract.The emphasis is on the expression “transfer of property in goodsF(whether goods as such or in some other form)”. Therefore, after-the Fortysixth Amendment to the Constitution, the works contractwhich was an indivisible contract is, by a legal fiction, divided into—two partsone for sale of goods and the other for supply of labour-and services. Therefore, after the Fortysixth Amendment, itGbecame possible for the States to levy sales tax on the value ofthe goods involved in a works contract in the same way in whichthe sales tax was leviable on the price of the goods supplied in abuilding contract.This is where the concept of “value addition”comes in. It is on account of the Forty-sixth Amendment to the H

Constitution that the State Government is empowered to levy salestax on the contract value which earlier was not possible.”

8.2. Having thus noticed the source of power of the State legislatureto levy sales tax in relation to the works contract but only on the value ofthe goods/materials involved therein, we may also take note of the relevantamended provisions of the Orissa Sales Tax Act, 1947, which read asunder:- “Section 2(g) “Sale” means with all its grammatical variationsand cognate expression, any transfer of property in goods forcash or deferred, payment or other valuable consideration andincludes,—

(i) … … …

(ii) (ii) transfer of property in goods (whether as goods or in someother form) involved in the execution of a works contract;

(iii) to (vi) … … …

Section 2(jj)- “Works Contract” includes any agreement forcarrying out, for cash or deferred payment or other valuableconsideration, the building, construction, manufacture, processing,fabrication, erection, installation, fitting out, improvement,modification, repair or commissioning of any moveable orimmoveable property.

S.5(2)(AA)- Notwithstanding anything contained in sub-section(2)(A), “taxable turnover” in respect of:

(i) ‘works contract’ shall be deemed to be the gross value receivedor receivable by dealer for carrying out such contract, less theamount of labour charges and service charges incurred for theexecution of this contract… … …”

8.3. As noticed, the claim for reimbursement made by thecontractor company is based on Clause 45.2 of GCC whereas this claimis being resisted by the appellant State with reference to Clause 13.3 ofITB and Clause 45.1 of GCC. The referred clauses, as placed before usfor consideration, read as under: - A

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AClause 13.3 of ITB

“13.3 All duties, taxes and other levies including royalty payableby the contractor under the contract or for any other cause shallbe included in the rates, price and total bid price submitted by thebidder.”

BClauses 45.1 and 45.2 of GCC

“45.1 The rates quoted by the contractor shall be deemed to beinclusive of the sales and other taxes including royalties on allmaterials that the contractor will have to purchase for performanceof this contract.C

45.2 Any Central or State Sales Tax and other taxes on completeditems of works of this contract as may be levied excluding penaltylevied for Contractor’s fault and paid by the Contractor shall bereimbursed by the Employer to the Contractor on proof of paymenton production of assessment certificate on every financial year.DDuring the course of contract period, deductions of sales tax onworks contract turnover at the source, shall be made from eachbill at such rate and conditions as may be required under theprovisions of Orissa Sales Tax Act and Rules.”(sic)

8.4. Now, the three Circulars issued by the Government of OrissaEin regard to the acceptance and then denial of the claim for reimbursementof sales tax in works contract, which form the part of controversy herein,may also be noticed.

8.4.1. In its initial Circular dated 04.11.1986, the State Governmentissued directions and guidance for such reimbursement of sales tax inFrelation to the existing work contracts; and also directed that any suchclause for reimbursement be not included in future contracts.. ThisCircular dated 04.11.1986 reads as under:- “Government of OrissaIrrigation and Power DepartmentG48154/Dated 4[th] No November, 1986

No. FA-1-11/86

From

Shri P.K. Das

H

Financial Adviser-cum-

Joint Secretary to Government

To

The Engineer-in-Chief, Irrigation, Orissa/Chief Engineer, Deltaand Flood Control/ Chief Engineer, Medium Irrigation-I/ChiefEngineer, Medium Irrigation-II/Chief Engineer, Rengali, Gohiraand Samkoi Projects/ Chief Engineer, Rengali Irrigation Project,Samal/ Chief Engineer, Mahanadi Birupa Barrage Project/ChiefEngineer, Upper Kolab Project, Bariniput/Chief Engineer, PotteruIrrigation Project/Chief Engineer, Electricity-cum-Chief Engineer,Electrical Projects, Orissa/General Manager, Upper IndravatiProject/Chief Engineer (Ele.) Upper Kolab Hydro Ele. Project.

Sub: RE-IMBURSEMENT OF SALES TAX ON WORKSCONTRACTS

Sir,

1. I am directed to say that in accordance with the Orissa SalesTax (Amendment) Act, 1984 read with Orissa Sales Tax(Amendment) Ordinance, 1985, Sales Tax has becomepayable on the turn over of Works Contracts with effect from07.04.1984.

2. Under the Law, Sales Tax is payable by the concernedcontractor/dealer, and not by this Department. Yet, a questionarose as to whether this Department was legally liable toreimburse the amount of sale tax actually paid or payable bythe Contractor/dealers in so far as the contracts relating tothis Department are concerned. After due consideration ofthe legal aspects of the problem, the following instructionsare issued for information and guidance of all concerned.

(i) In case of Works- Contracts executed on or after07.04.1984 which contained specific clauses forreimbursement of Sales Tax, this Department is liable toreimburse the amount of sale tax actually paid by theconcerned contractor on production of necessarydocumentary evidence in token of making such payment,after obtaining an undertaking from the concernedcontractor to the following effect:- A

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A

If the Contractor prefers or has preferred appeal/revision before the concerned appellate authority underthe Sales Tax Law for remission of the Sales Tax duespaid by him and said appeal/revision results in anyreduction of such dues, the differential amount, theamount of Sales Tax reimbursed and the amount of SalesTax reimbursed and the amount of Sales Tax payable asdecided on appeal/revision will be refunded back toGovernment by the Contractor.

B

(ii) Similar reimbursement will also be permissible and inthe same manner as indicated in Sl. (i) above in case ofCcontracts executed prior to 07.04.1984 where the workwas in progress beyond that date, which containedspecific clause for such reimbursement.

(iii) The amount of penalty levied if any, under the Sales TaxLaw on any count and paid by the Contractor-dealerDshall not be reimbursed by the Department to theconcerned Contractor.

(iv) No clause either for reimbursement for Sales Tax orpayment of such Tax by the department to theContractor should be inserted in the Notice InvitingETenders or Tender document and no tender containingany clause or condition to the above effect should beaccepted.

3. I am to request that the above guideline may be brought tothe notice of all concerned.F

4. If any amount of Sales Tax has been reimbursed/paid to anyContractor in any case, not in conformity with the guidelinesas noted vide paragraph-2 above, a proposal should befurnished to this Department seeking Government approvalto that effect, furnishing full facts and figures on that score,Gclearly indicating the extent and manner of deviation fromany of the guidelines as noted above Sls. (i) to (iv) ofParagraph-2 above. This may please be treated as urgentand the proposal(s) should be submitted to Government in allsuch cases by 30.11.1986 at latest. If there is no need forfurnishing any proposal on the above score, a Nil report shouldHbe submitted by the aforesaid target date.

STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.& ORS. [DINESH MAHESHWARI, J.]

5. Receipt of the letter may please be acknowledged by returnof post.

Yours faithfully

Sd/- 04.11.1986

FA-cum-Joint Secretary to Govt.”

8.4.2. However, in the Circular dated 27.01.2000, the StateGovernment asked the Engineers-incharge to await its decision on thequeries raised on the issue pertaining to such reimbursement of theamount of sales tax in relation to the works contracts. This Circulardated 27.01.2000 reads as under:- “Government of Orissa Department of Water Resources No. IIT-RVN-11/2000-5295

Dated: 27.01.2000

From

Shri N. Behera,

FA-cum-Addl. Secretary to Government

To

The Engineer-in-Chief, Water Resources/

Engineer-in-Chief, Planning & Designs/Engineer-in-Chief, Rengali Irrigation Project/All the Chief Engineers & Basin Manages/

All the Chief Engineers/

All the Chief Construction Engineers/

Director, Ground Water Survey and Investigation Sub: Reimbursement of Sales Tax on Works contract.

Sir,

I am directed to say that clause 13.3 of ITB of the NCBbid document approved by World Bank stipulates that “All duties,taxes and other levies including royalty payable by the contractor A

B

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A

under the contract or for any other cause shall be included in therates, prices and total bid price submitted by the Bidder.”

The clause 45.2 at G.C.C. of the said document stipulatesthat “Any Central or State Sales Tax and other Taxes on completeditem of work of this contract as may be levied excluding penaltylevied for contractor’s default and paid by the contractors shallbe reimbursed by the employer to the contractor on proof ofpayment. During the course of contract period deduction of SalesTax on works contract turn over at the sources shall be madefrom each bill at such rate and conditions as may be requiredunder the provision of Orissa Sales Tax Act and Rules.”

B

C

Some Chief Engineers have sought for clarification as towhether Sales Tax deducted from the bills of the contractor andpaid to the sales tax officer will be again reimbursed to thecontractor whose quoted price is inclusive of all taxes as per clause13.3 of ITB. In some cases, A. G. Audit has raised objection againstDsuch reimbursement. This is under active consideration of govt.for issuing necessary clarification.

Therefore, you are hereby instructed that no reimbursementof sales tax should be made under clause 45.2 of G. C. C. of NCBagreements for World Bank works and works covered underEsimilar contracts till clarification is communicated by Government.

This may please be brought to the notice of all SubordinateOfficers under your control.

Receipt of the letter may please be acknowledged.

F

Yours faithfully

Sd/-

FA-cum-Addl. Secretary to Government”

8.4.3. Thereafter, by the impugned Circular dated 07.11.2001, theState Government purportedly came out with the clarification but, ineffect, issued directions squarely opposite to those contained in the earlierCircular dated 04.11.1986, while asserting that no such claim forreimbursement of the amount of sales tax pertaining to works contractwas admissible. This Circular dated 07.11.2001 reads as under: - G

H

STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.& ORS. [DINESH MAHESHWARI, J.]

“Government of OrissaDepartment of Water Resources No. IIT RVN. 11/2000-42711/UR

Dated 07.11.2001

From

Shri B. Pradhan,FA-cum-Addl. Secretary to Government.

To

The Engineer in Chief, Water Resources/

Engineer in Chief, Planning and Designs/

Engineer in Chief, Rengali Irrigation Project/

All the Chief Engineers and Basin Manager/

All the Chief Engineers/

All the Chief Construction Engineer/

Director, Ground Water Survey and Investigation.

Sub:Clarification on reimbursement of sales tax in respect ofworks contracts Sir,

In continuation of this Department letter no.5295 dt.5295dt.27.01.2000 on the subject mentioned above, I am directed tosay that as per Orissa Sales Tax Act transfer of property inexecution of works contracts (Whether as goods or in some otherform) is subject to levy of Sales Tax. When a building, a bridge, aroad, a canal, a plant etc., is constructed, the ingredients likecement, iron & steel, bricks, stones etc. involved in execution ofthe contract are subject to levy of sales tax. The completed itemi.e., a bridge, a building, a road, or a canal, as the case may be, isnot subjected to levy of sales tax because after construction thesebecome immovable property not susceptible to transfer of propertyfor the purpose of sales tax assessment.

As per clause 13.3 of I.T.B. of the NCB bid document read withclause 45.1 of the general conditions of the contract the ratesquoted by the contractor shall be deemed to be inclusive of sales

A

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Aand other taxes including royalties on all materials that thecontractor will have to purchase for performance of the contract.

Clause 45.2 of the G.C.C. speaks that any Central or State SalesTax and other taxes on completed items of work of the contractas may be levied, excluding penalty levied for contractors defaultBand paid by the contractor shall be reimbursed by the employer tothe contractor on proof of payment. It is clarified that a completeditem of work for which the contractor has entered into agreementwith the department is either immovable property or a workscontract and in either case is not exigible to sales tax. Therefore,the question of payment of sales tax on such immovable propertyCand consequential reimbursement of the sales tax by the departmentas per clause 45.2 of the G.C.C. or similar provision existing inother contracts does not arise. A contractor may, however, haveto pay sales tax as assessed by the sales tax officer on itemswhich go into construction of the work. This tax is not reimbursableDsince the contractor is expected to have built it into his rates.

In view of the above, you are hereby instructed not to reimbursesales tax levied on cement, steel etc., misinterpreting clause 45.2of the G.C.C. of N.C.B. agreement for World Bank assisted worksand the works covered under other agreement containing similarEclause. Besides if any amount of sales tax has already beenreimbursed, immediate steps should be taken for recovery of theamount from the contractors.

This has been concurred in by Finance Department in theirU.O.R.No.3896/ SF. Dt. 24.09.2001.

F

Yours faithfully,

Sd/-

Financial Adviser-cum-Addl. Secretary to Government”

G9. Now, while taking up the points arising for determination, wemay usefully summarise the relevant aspects pertaining to this case.

9.1. It is evident that the contractor company (respondent No. 1herein) seeks to assert its right to claim reimbursement of the amount ofsales tax levied in respect of the works contracts executed by it on theHstrength of the stipulations contained in Clause 45.2 of GCC of NCB bid

documents. On the other hand, the appellant State seeks to resist theright so claimed by the contractor company with reference to theprinciples enunciated in the cited decisions that after the forty-sixthamendment and insertion of sub-clause (b) of Clause (29-A) to Article366, the State could levy sales tax on the price of goods and materialsused in works contract as if there was a sale of such goods and materialsand then, on two-fold assertions on that basis: one, that in the context ofa works contract, there is no sales tax on the “completed item of work”which is an immovable property and, therefore, question of anyreimbursement does not arise; and second, that in works contract, thecontractor may have to pay sales tax assessed on the items which gointo the construction but, such amount of sales tax is not reimbursablebecause the contractor is supposed to have provided for the same in itsrates, as envisaged by Clauses 13.3 of ITB and 45.1 of GCC.

9.2. So far as the basic factual aspects are concerned, it is not indispute that the respondent No. 1 indeed undertook execution of variousworks contracts with the respective offices of the appellant State ofOrissa. It remains indisputable that in relation to such contracts, Clause13.3 of ITB stipulated that all duties, taxes and other levies includingroyalties payable by the contractor were to be included in the bid priceand Clause 45.1 of GCC specifically provided that the rates quoted bythe contractor shall be deemed to be inclusive of the sales and othertaxes including royalties on all materials that the contractor was topurchase for performance of the contract. However, and at the sametime, it is also indisputable that as per Clause 45.2 of GCC, any Centralor State Sales Tax and other taxes on “completed items of works” of thecontract as might be levied upon, and paid by, the contractor (excludingpenalty levied for contractor’s fault) were to be reimbursed to thecontractor on proof of payment and assessment. This Clause 45.2 furtherenvisaged that during the course of contract period, deductions of salestax on “works contract turnover” was to be made at the source, fromeach bill as per the rate and conditions prescribed under the provisionsof Act of 1947. It is also not in dispute that in the course of execution ofsuch contracts, various running bill payments were made to the respondentNo. 1 and while making such payments, deductions were indeed madetowards the amount of sales tax; and such deducted amount of sales taxwas deposited with the Sales Tax Department of the Government ofOrissa. Further, it is also borne out that reimbursement of the sales taxso levied upon, and paid by, the respondent No. 1 in respect of the AB

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Aassessments for the years 1995-1996 to 1997-1998 was allowed; butsuch claim for reimbursement by the respondent No. 1 in respect of theassessments for the years 1998-1999 to 2000-2001 was declined.

9.3. As noticed, after the amendments were brought about in theAct of 1947 for levying sales tax on works contract with effect fromB07.04.1984, the Circular dated 04.11.1986 was issued by the Governmentof Orissa to the effect that in case of works contract executed on orafter 07.04.1984, containing the specific clause for reimbursement ofsales tax, the Department of Irrigation and Power would be liable forreimbursement of the amount of sales tax actually paid by the concernedcontractor on production of necessary documentary evidence. TheCaforementioned reimbursements were allowed to the respondent No. 1pursuant to these observations and directions in the Circular dated04.11.1986. However, by way of the subsequent Circular dated07.11.2001, the Government of Orissa came out with total volte-face onits opinion in relation to the claim for reimbursement of sales tax paid byDthe contractors while stating that a “completed item of work” in relationto a works contract was not exigible to sales tax and, as regards thesales tax on the items which go into the work, the contractor is expectedto have included the same in the rates. It was, therefore, observed thatthe question of reimbursement as per Clause 45.2 of GCC or similarprovision in other contracts did not arise.E

9.4. The High Court, in its impugned order dated 05.08.2008, hasrejected the contentions of the appellant State and has disapproved theaforesaid Circular dated 07.11.2001 essentially with reference to thefact that the claim for reimbursement was being made of the tax thatwas levied on the turnover of the works contracts and not of the tax paidFby the contractor on the materials procured by it. The High Court hasalso found that the sales tax was levied after necessary deductions andin accordance with the decision in Gannon Dunkerley (supra) for which,the contractor was entitled to claim reimbursement under Clause 45.2of GCC and that the clarification Circular dated 07.11.2001 cannot takeGaway the effect of statutory provisions.

10. Having taken all the relevant aspects in comprehension andhaving examined the matter in its totality, we are clearly of the view thatthe High Court has rightly allowed the writ petition filed by the respondentNo. 1 and no case for interference in this appeal is made out.

H

11. Before proceeding further, we may at once observe that sofar as the aforesaid Circulars are concerned, neither of them could bedecisive of the issues at hand. As noticed, in the Circular dated 04.11.1986,the State Government expressed the view that the reimbursement inquestion was required to be allowed in terms of Clause 45.2 of GCC butlater on, in the Circular dated 07.11.2001, the State Government took adiametrically opposite view to say that such reimbursement was not tobe allowed in relation to the works contract. Obviously, the said Circularshad been based on the given day understanding of the State Governmenton the operation of the relevant provisions of law and the terms ofcontract. Such vacillating understanding on the part of the StateGovernment cannot be determinative of the contractual obligations ofthe parties, which are required to be decided with reference to theprinciples of law applicable and on true construction of the terms ofcontract. Therefore, we would ignore the said Circulars while dealingwith the principal issues involved in this matter but shall refer to them ata later and appropriate stage.

12. Reverting to the core issues, it remains rather indisputablethat as per Clause 45.2 of GCC, the amount of sales tax on completeditems of works of the contract, as might have been levied upon, and paidby, the contractor, except the penalty levied for contractor’s own fault,was to be reimbursed to the contractor on proof of payment andassessment. It was also provided in Clause 45.2 itself that, during thecourse of contract period, deductions of sales tax on works contractturnover would be made from the running bills at the prescribed ratesand conditions. As noticed, it is not in dispute that while making paymentof various running bills in the course of execution of contracts by therespondent No. 1, deductions were indeed made towards the amount ofsales tax and such deducted amount of sales tax was deposited with theSales Tax Department of the Government of Orissa. Such deductionsand deposits with Sales Tax Department had clearly been in accordancewith the stipulation contained in the second part of Clause 45.2 ibid.However, and even after making deductions in terms of the second partof Clause 45.2, the appellant State seeks to deny the operation of firstpart of this Clause 45.2 (whereby the contractor is entitled toreimbursement of the amount of sales tax) on the grounds that: (a) thereimbursement is envisaged of the sales tax levied on the “completeditem of work” but, in works contract, such “completed item” is not exigibleto sales tax and hence, the question of reimbursement does not arise; AB

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Aand (b) that as per Clause 45.1 of GCC read with Clause 13.3 of ITB,the contractor is deemed to have provided for the leviable amount ofsales tax on goods/materials in its rates and hence, the contractor cannotclaim any reimbursement thereof. The question is as to whether suchcontentions of the appellant against the operation of first part of Clause45.2 of GCC could be countenanced? In our view, the answer couldBonly be in the negative.

13. Taking up the main plank of the case of the appellant aboutthe nature, extent and implication of the levy of sales tax in relation to aworks contract, it could be usefully recapitulated that in view of theforty–sixth amendment to the Constitution of India, Clause (29-A) cameCto be inserted to Article 366; and, by virtue of sub-clause (b) thereof, itbecame permissible for the States to levy sales tax on the price of goodsand materials used in works contracts as if there was a sale of suchgoods and materials. In other words, after the forty-sixth amendment tothe Constitution, the works contract is divided into two parts by a legalDfiction: one for sale of goods/materials and other for supply of labour/services; and it is possible for the States to levy sales tax on the value ofgoods/materials involved in such works contract. These features havebeen expounded and explained by this Court in the referred cases ofBuilders’ Association, Gannon Dunkerley and P.N.C. ConstructionCo. (supra) and need no further enlargement.E

13.1. As regards the relevant provisions of the State enactment,it is at once clear that after the aforesaid forty-sixth amendment to theConstitution, the State of Orissa also proceeded to carry out the necessaryamendment to the Act of 1947 and provided for levy of sales tax inrelation to a works contract, inter alia, by expanding the definition ofF“Sale” so as to include therein the transfer of property in goods involvedin the execution of a works contract; and by specifying that “taxableturnover” in respect of works contract shall be deemed to be the grossvalue received or receivable by dealer for carrying out such contractless the amount of labour and service charges incurred in execution ofGthe contract. On their essence and intent, what turns out of these amendedprovisions of the Act of 1947 is that in relation to a works contract, therewould be deemed to be the sale of goods involved in execution thereof;and sales tax would be leviable on the taxable turnover (and not on thegross turnover) of such works contract.

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13.2. As noticed, it has been the consistent case of the respondentNo. 1 that in the running bill payments, the amount of sales tax wasdeducted and the same was deposited with the Sales Tax Department.It has also been the consistent case of the respondent No. 1 that in thereferred orders of assessment, sales tax was levied on the applicablerates on the “taxable turnover” in respect of the works contracts executedby it and the claim for reimbursement was made of the amount of salestax so levied and paid. The High Court has also recorded a categoricalfinding that after deducting the labour charges, service charges and thetax paid from the gross turnover, the balance had been put to tax by theAssessing Authority. These assertions of the respondent No. 1 as alsothe findings of the High Court are not the subject matter of dispute. Thatbeing the position, it is but evident that in relation to the works contractsexecuted by the respondent No. 1, the appellant and its offices haveindeed levied the sales tax on the taxable turnover that was arrived atafter due deduction of labour/service charges, in conformity with Section5(2)(AA) of the Act of 1947. There had neither been any levy of thesales tax on the entire turnover of the works contracts nor any such levycould have been effected because, as noticed, the taxing event of sale ina works contract is confined to the use of the goods/materials in executionof the contract.

14. While the aforesaid legal and factual aspects remain more orless indisputable, what the appellant seeks to contend is that thereimbursement envisaged by the first part of Clause 45.2 of GCC is ofthe tax levied on the “completed item of work” but in a works contract,sales tax is not levied on the completed item of work because suchcompleted item in a works contract becomes an immovable property.Such a contention of the appellant remains wholly untenable in view ofthe scheme of levy of sales tax in a works contract as also the schemeof reimbursement envisaged by Clause 45.2 of GCC.

14.1. Contextually read, it is but apparent that the expression“completed item of work” in Clause 45.2 ibid., signifies the intent thatreimbursement would be permissible only after execution of a particularitem of work has been completed and accomplished. In other words,this expression is clearly intended to contradistinguish the cases whereany item of work remains incomplete and yet any claim for reimbursementof the sales tax levied is sought for. This expression cannot be read tomean as if signifying the levy of sales tax itself on the completed item of A

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Awork because such reading of this expression would be totally disjunctfrom the context and would be entirely detached from the real intent.

14.2. Viewed from another angle, it would appear that if thecontention on the part of the appellant as regards interpretation of thefirst part of Clause 45.2 is accepted, it would practically result in holdingBthat the said Clause 45.2 is not at all applicable to a works contract.Such a result cannot be countenanced for two major reasons: First, thatif such a clause was not to be applied to the works contract, there wasno reason to have retained the same in relation to the works contractsawarded to the respondent No. 1. When such a stipulation forms thepart of contract, it would be rather preposterous to say that the sameCwould stand but would not operate. Secondly, and more significantly, inthe second part of this very Clause 45.2, it has specifically been providedthat deductions of sales tax on works contract turnover at sourceshall be made from each bill. It is not far to seek, and is rather evidenton a bare reading of Clause 45.2 in its entirety, that it is to apply inDrelation to the sales tax on works contract too. As noticed, the secondpart of Clause 45.2 had indeed been applied and enforced by the appellantand its offices by regularly making deduction of the amount of sales taxin the running payments of the respondent no. 1 and by regularly depositingthe same with the Sales Tax Department. It would again be preposterous,nay absurd, to say that the second part of Clause 45.2 entitling the appellantEand its offices to make deduction of sales tax on works contract turnoverat source could be enforced but when it comes to reimbursement, thefirst part of this very Clause 45.2 would not apply to a works contract.

14.3. Viewed from any angle, we are satisfied that heavy relianceon behalf of the appellant on the expression “completed item of work”,Fas occurring in the first part of Clause 45.2, is entirely misplaced. Theonly implication of this expression is that a claim for reimbursement ofsales tax cannot be made in relation to a particular work or item whoseexecution is pending or is in progress and has not been completed. Sofar the levy of sales tax in relation to a works contract is concerned, theGsame is on “taxable turnover” and not on the entire turnover. It followsnecessarily that the claim for reimbursement could only be made of theamount of sales tax that had been levied; and had been paid by thecontractor. Hence, the suggestion as if the expression “completed itemof work” refers to the end-product of a works contract is without anysubstance. The contentions urged in that regard are required to be, andHare, rejected.

15. We may now take up the other line of argument on behalf ofthe appellant that as per Clause 45.1 of GCC read with Clause 13.3 ofITB, the contractor is deemed to have provided for the leviable amountof sales tax on goods/materials in its rates and hence, the contractorcannot claim any reimbursement thereof.

15.1. It remains trite that the terms of contract bind the partiesthereto and unless there be any case of ambiguity or violation of law,ordinarily, the terms of contract, revealing the intent of parties, are requiredto be given effect to. The submission on the part of the appellant, thatfirst part of Clause 45.2 of GCC would not operate because of Clause45.1 of GCC read with Clause 13.3 of ITB, remains entirely baselessand appears to be of a desperate attempt to wriggle out of the contractualobligations. Even when the contractors were given instructions in thesaid Clause 13.3 of ITB to include all duties taxes and other levies in thebid price and even when the said Clause 45.1 of GCC provided that therates quoted by the contractor shall be deemed to be inclusive of thetaxes and royalties on all the materials which were to be procured forperformance of the contract, it was yet provided in the first part ofClause 45.2 of GCC that the sales tax and other taxes on completeditems of work, as may be levied upon, and paid by, the contractor shallbe reimbursed to the contractor on proof of payment/on production ofassessment certificate. It is, therefore, crystal clear that even when thecontract provided that the rates quoted by the contractor shall be deemedto be inclusive of sales and other taxes and royalties on the materials, itwas agreed to between the parties that sales tax and other taxes undercompleted items of work, as paid by the contractor were to be reimbursed.

15.2. It would at once appear that if the contention on the part ofthe appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCCis accepted in the manner that when the rates quoted by the contractorare inclusive of the taxes on the goods/materials to be used in performanceof the contract, reimbursement of the sales tax levied upon, and paid by,the contractor is not to be allowed, it would practically result in renderingthe first part of Clause 45.2 otiose and redundant. Neither that had beenthe intent of the parties nor could the terms of contract be construed inthis manner.

15.3. In our view, the implication and effect of Clauses 13.3 ofITB and 45.1 of GCC had only been that while making the bid andquoting the rates, the contractor was supposed to include the taxes, duties, A

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Aroyalties etc. payable by it over the materials to be procured and utilisedin performance of the contract and hence, while raising the bills, thecontractor was not entitled to claim any amount towards any such tax/duty/royalty paid by it on the materials purchased for performance ofthe contract. These clauses, i.e., Clause 13.3 of ITB and 45.1 of GCC,which prohibit the contractor from demanding taxes, duties, royaltiesBetc. on the materials procured by it for performance of the contract donot, and cannot, conversely operate over the sales tax which is leviedupon the contractor and which is primarily recovered with deductionsfrom the running bill payments. In other words, in our view, on a plainreading of the aforesaid relevant terms of the contract, it is clear thatCwhile the contractor cannot claim any payment towards the taxes/duties/royalties etc. on the goods/materials purchased by it for performance ofthe contract but that does not disentitle the contractor from claimingreimbursement of the sales tax levied upon it by the employer, of courseafter proof of payment/assessment. It is also pertinent to mention that

the respondent No.1 only claimed reimbursement of the sales tax paidDby it on the turnover of the works contract and not of any tax or duty orroyalty paid by it on the material procured for the purpose of executionof the works contract. Therefore, the contentions urged on behalf of theappellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC overthe claim of the contractor also deserve to be, and are, rejected.E16. To summarise the discussion in the preceding paragraphs, weare clearly of the view that by virtue of Clause 45.2 of GCC, the contractorcompany is rightfully entitled to claim reimbursement of the amount ofsales tax levied on the taxable turnover of the works contracts executedby it. A fortiori, the grounds on which the appellant seeks to resist theFclaim of the contractor company for such reimbursement, i.e., withreference to the expression “completed item of work” in the said Clause45.2 and with reference to the stipulations contained in Clauses 13.3 ofITB and 45.1 of GCC, are wholly untenable and the appellant and itscontracting offices are under obligation to honour the claim so made by the contractor company.G

17. Before finally concluding on this matter, we are inclined tomake a few comments as regards the Circulars issued by the StateGovernment pertaining to the subject of reimbursement of sales tax inworks contracts. While noticing that diametrically opposite views wereexpressed by the State Government in the two main Circulars datedH

04.11.1986 and 07.11.2001, we had observed in the earlier part of thisjudgment that the said Circulars were based on the given dayunderstanding of the State Government but such vacillating understandingof the State Government was not determinative of the matter; and hence,we had ignored the said Circulars while dealing with the principal issuesinvolved in this matter, but had also indicated that we shall refer to thesaid Circulars at a later and appropriate stage.

17.1. The basic reason for which we feel impelled to refer tothese Circulars now and at this concluding stage is borne out of thecontents of the Circular dated 04.11.1986, which was issued by the StateGovernment closely following the amendment of the Act of 1947 withinsertion of the provisions aimed at facilitating the levy of sales tax onthe goods involved in a works contract. Being aware of its obligation interms of the said Clause 45.2 of GCC (or similar clause/s in othercontracts), the instructions were issued by the State Government in thesaid Circular dated 04.11.1986 for: (a) making reimbursement of theamount of sales tax actually paid by the contractor on production ofnecessary documentary evidence of such payment; (b) not makingreimbursement against the amount of penalty, if any, levied upon thecontractor; and (c) obtaining undertaking from the contractor to refundthe excess amount of reimbursement, in case of reduction of its liabilitytowards sales tax in appeal or revision [vide sub-paragraphs (i) to (iii) ofparagraph 2 of the Circular dated 04.11.1986]. However, the significantfeature is that in the second set of instructions in this very Circular, ascontained in sub-paragraph (iv) of paragraph 2 thereof, the Engineers-incharge were instructed that no such clause for reimbursement of salestax or payment of such tax by the department to the contractor be insertedin the Notice Inviting Tenders or Tender document; and no tendercontaining any clause or condition to that effect be accepted. The saidsecond set of instructions in sub-paragraph (iv) of paragraph 2 of thisCircular was, obviously, meant for future contracts, but, its contrast withthe first set of instructions in the preceding sub-paragraphs fortifies theconclusion that the State Government was fully conscious of its obligationto make reimbursement in relation to the existing contracts which carriedsuch reimbursement clause/s.

17.2. As to what stipulations, terms and conditions are to form thepart of contract remains a matter essentially in the domain of thecontracting parties (of course, subject to the applicable requirements of

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Alaw) and no comments as regards future contracts are requisite hereinbut, on a comprehensive reading of the Circular dated 04.11.1986, it isevident that the State Government was fully conscious of its obligationtowards reimbursement under the existing terms of contracts and hence,issued directions for due discharge of such obligation with necessarysafeguards and, at the same time, provided that henceforth, neither suchBa clause be inserted in the contract documents nor any tender containingsuch a clause or condition be accepted.

17.3. Evidently, the doubts at the later stage, as indicated in theCircular dated 27.01.2000, and converse decision against the obligationof reimbursement, as stated in the Circular dated 07.11.2001, had onlyCbeen of unwarranted attempts to wriggle out of the contractual obligationswith rather perverse construction of the plain terms of the existingcontracts. Be that as it may, the propositions in the said ill-advised Circulardated 07.11.2001 stand disapproved with the conclusions reached by ushereinbefore. We say no more.

D18. In the result, this appeal fails and is, therefore, dismissed withno order as to costs. Pending interlocutory applications also stand disposedof.

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Divya Pandey

Appeal dismissed.

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