State of Orissa v. M/S. B. Engineers & Builders Ltd. & Ors.
DINESH MAHESHWARI, J.
1. Before entering into the subject matter, we may noti ce at the
outset that this petition for special leave to appeal is barred by limitation
by a period of 274 days. Though objections have been raised on behalf
of the contesting respondent against the prayer for condonation of delay
but, the record shows that notices on the application seeking condonation
of delay as also on the petition for leave to appeal were issued way back
on 18.11.2011 and for a long time, the matter remained pending while
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awaiting service on the respondents. Ultimately, after compl etion of
service, we had heard learned counsel for the contesting parties on merits.
Having regard to the circumstances of the case and after havi ng heard
the contesting parties on merits, we find no reason to clo se the matter
only on the ground of delay. Accordingly, delay in filing is condoned.
1.1. Leave granted.
2. This appeal by special leave is directed against th e judgment
and order dated 05.08.2008 as passed by the Orissa High Court at Cuttack
in W.P. (C) No. 8857 of 2003, whereby the High Court accepted the
claim of the respondent No. 1 of present appeal 1, for reimbursement of
the amount of sales tax levied in respect of the works contracts executed
by it. The High Court also directed the Opposite Part ies to grant
appropriate reimbursement as claimed by the writ petitioner in terms of
Clause 45.2 of the General Conditions of Contract 2 under the National
Competitive Bidding Contract 3 while quashing the clarification Circular
dated 07.11.2001 issued by the Government of Orissa in its Department
of Water Resources.
2.1. The appellant State of Orissa has challenged the order so
passed by the High Court while essentially raising the questions concerning
the nature and implication of the sales tax, levied in relation to the works
contracts executed by the writ petitioner, under the Orissa Sales Tax
Act, 1947 4 as amended in terms of the Constitution (Forty-six th
Amendment) Act, 1982 5; and concerning the operation and import of
the relevant stipulations in the contracts in question.
3. The factual and background aspects of the matter, being not of
much dispute and confined to a narrow compass, may be noticed, i n
brief, as follows:
3.1. The respondent No. 1 of this appeal, said to be a company of
engineers and builders, who had been engaged in undertaking vario us
works contracts, responded to the tenders floated by the respondent
Nos. 6 to 18 (various offices of the Government of Orissa) and, on being
determined as the lowest tenderer, was awarded the cont racts from
time to time.
1 Hereinafter also referred to as ‘the writ petitione r’ or ‘the contractor company’.
2 ‘GCC’ for short
3 ‘NCB’ for short
4 Hereinafter also referred to as ‘the Act of 1947’
5 Hereinafter also referred to as ‘the forty-sixth am endment’
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
3.2. It is not in dispute that the aforesaid contracts awarded to the
respondent No. 1 carried the stipulations regarding taxes in Clause 45 of
GCC. The claim of the respondent No. 1 for reimbursement of sales tax
had been essentially based on Clause 45.2 of GCC, which carrie d the
stipulation that any Central or State sales tax and other taxes on completed
items of works (excluding penalty), as may be levied and pai d by the
contractor 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 governed
by the Act of 1947. By way of the Orissa Sales Tax (Amendment) Act,
1984 and the Orissa Sales Tax (Amendment) Act, 1985 6, the amendments
were brought about in the Act of 1947 with effect from 07.04.1984
whereby, inter alia , the definition of expression “Works contract” was
inserted; the definition of the expression “Sale” was expanded so as to
include therein the transfer of property in goods involved in the execution
of a works contract; and specific meaning was also assi gned to the
expression “taxable turnover” in respect of a works contrac t for the
purpose of the rate of tax payable by a dealer. The rate of tax payable
by a dealer on the “taxable turnover” in respect of “work s contract”
was fixed at 4%.
3.4. On 04.11.1986, the Government of Orissa, in its Department
of Irrigation and Power, issued a Circular to the effect that in case of
works contract executed on or after 07.04.1984, containing the specific
clause for reimbursement of sales tax, the Department of Irrigation and
Power would be liable for reimbursement of the amount of sal es tax
actually paid by the concerned contractor on production of neces sary
documentary evidence. Pursuant to these observations and dir ections,
reimbursement of the sales tax paid by the contractor company in respect
of assessment years 1995-1996 to 1997-1998 was allowed.
3.5. Later on, the State Government issued a notification under
Section 5 of the Act of 1947 whereby, the rate of tax payable by a dealer
on the taxable turnover in respect of the works contract was increased
to 8%. Thereafter, by way of the orders of assessment for t he years
1998-1999 to 2000-2001, the Assessing Authority levied sales tax @ 8%
6 These amendments were introduced after the forty-sixth amendment of the Constitution
whereby, Clause (29-A) was inserted to Article 366 and it was, inter alia , provided that
the expression “tax on the sale or purchase of good s” includes a tax on the transfer of
property in goods involved in the execution of a wo rks contract.
809
on the taxable turnover in respect of the works contracts ex ecuted by
the contractor company. With reference to such asse ssments, the
contractor company claimed reimbursement of the sales t ax paid in
respect of the works contracts executed by it.
3.6. However, in the meantime, the Government of Orissa, in its
Department of Water Resources, issued another Circu lar dated
27.01.2000 to the Engineers-incharge of various offices and projects
that the question as to whether sales tax deducted from the bills of the
contractor and paid to the sales tax officer will be again reim bursed to
the contractor whose quoted price was inclusive of all taxes as per Clause
13.3 of the Instructions to Bidders 7, was under active consideration; and
it was directed that no reimbursement of sales tax be made under Clause
45.2 of GCC until clarification was communicated in that regard.
3.7. Thereafter, on 07.11.2001, the State Government, in its
Department of Water Resources, issued the impugned Circular, said to
be a clarificatory one, stating that a completed item of works, for which
the contractor had entered into an agreement with the department, was
either an immovable property or a works contract and i n either case,
was not exigible to sales tax; and therefore, the question of payment of
sales tax on such immovable property or works contr act and
consequential reimbursement by the department as per Clause 45.2 of
the 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.; and
also directed for recovery of the amount from the contractor wherever
any such amount of sales tax had been reimbursed. These directions of
the Government were followed up by another Circular dated 19.06.2002
to the same effect.
3.8. In view of the aforementioned Circulars dated 07.11.2001
and 19.06.2002, its claim, for reimbursement of the sales tax paid, being
in jeopardy and rather, the proposition for recovery of the amount already
reimbursed looming large, the contractor company preferr ed the writ
petition leading to this appeal, while seeking the following reliefs: –
“(i) Issue a Rule Nisi Calling upon the Opposite Parties to show
cause as to why the alleged clarification dated 07.11.2001 under
Annexure-1, and the subsequent direction for recovery of the
7 ‘ITB’ for short
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
amount earlier reimbursed, vide letter dated 19.6.2002 under
Annexure-3 ought not to be declared illegal, invalid and non-est in
the eyes of law;
And
(ii) issue a further Rule Nisi Calling upon the Opp. Partie s to
show cause as to why the reimbursement claims made by the
petitioner under Annexure-5 series may not be granted with a
period stipulated by this Hon’ble Court;
And
(iii) in the event the Opp. Parties fail to show cause or show
insufficient cause make the said Rule Nisi absolute and issue an
appropriate writ of Mandamus or a writ of certiorari in line with
the aforesaid Rule Nisi;
And/or
(iv) further be pleased to direct either of the Opp. Parties i.e., the
contracting parties (Opp. Parties 6-18) or the Sales-tax Authorities
(Opp. Parties 3-5) to effect reimbursement or refund along with
interest from the date of deposit of tax;
And
(v) to pass any other writ/writs, order/orders as this Hon’ble Court
may deem just and proper.”
4. The High Court in its impugned order dated 05.08.2 008,
examined the contentions of the parties and granted the prayer s of the
writ petitioner while observing and holding, inter alia , as under:-
“8…… The petitioner now claims reimbursement of tax paid by it
on actual turnover of the works contract and not on the tax paid
by it on the materials procured by it, which have gone into for the
purpose of execution of the works contract. The further admitted
fact that O.Ps. 6 to 18 have, in fact, deducted the sales t ax at
source from the bills raised by the petitioner from time to time in
due progress of the work and the same have in turn been deposited
with the Sales Tax Department.
**** **** ****
811
10. Now Annexure-1, which is sought to be quashed, is a
clarification but not in supersession of Annexure-10, as it is
projected by the State Government. The said clarification cannot
take away the effect of the statutory provision. The orders of
assessment in Annexure-4 series indicate that after deducting the
labour charges, services charges, amount of tax paid, materia ls
used in the execution of works contract, from the gross turn over
of the assessment year, the balance has been put to tax by the
Sales Tax Authority. The tax, as we find, has been imposed in the
light of the decision in Gannon Dunkerly (supra).
From the discussion made above, the irresistible conclusion
is that the sales tax has been levied in the orders of assessment in
respect of the amount received pertaining to items o f work
completed during the financial year. The clarification in Annexure-
1, which unilaterally takes away the claim of the peti tioner for
reimbursement, is contrary to Clause-45.2 of the Ge neral
Conditions of the Contract and Section 5 (2) (AA) of the Orissa
Sales Tax Act as well as the decision of the apex Court in Gannon
Dunkerly (supra). Accordingly, the clarification lett er dated
7.11.2001 (Annexure-1) issued by the Financial Adviser-cum-
Additional Secretary to Government, Department of W ater
Resources is quashed and the O.Ps. are directed to grant
appropriate reimbursement in terms of Clause-45.2 of the General
Conditions of Contract, as claimed by the petitioner.”
5. Assailing the order so passed by the High Court, learned senior
counsel for the appellant has strenuously argued that the impugned order
is contrary to the facts of the case as also the principles of law applicable
and hence, deserves to be set aside.
5.1. The learned senior counsel for the appellant has referred to
Clause (29-A) of Article 366 of the Constitution of India; and the principles
enunciated by this Court in the cases of Builders’ Association of India
and Ors. v. Union of India and Ors.: (1989) 2 SCC 645 and Gannon
Dunkerley 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 on
which, sales tax would be leviable but, only on the value of goods which
went into the execution of any works contract.
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
5.2. Further, with reference to the definitions of “sale”, “goods”
and “works contract” as contained in the Act of 1947 as also S ection
5(2)(AA) thereof and the relevant clauses governing the contract s in
question, the learned counsel has submitted that any payment against
the monthly running bill to the contractor does not constitute payme nt
for any “completed item of work”; and the only meani ng of the
nomenclature “completed item of work” is the completion of the works
contract as such. Learned counsel would maintain that sales t ax is not
leviable on the “completed item of work” in a works contract but, the
contractor is bound to pay sales tax on “taxable turnover” which, for the
purpose of sales tax, could only be on the value of goods util ised in
completion of the works contract.
5.3. The learned senior counsel has elaborated on the aforesaid
aspects with the submissions that every amount of sales tax on the
“taxable turnover”, which is required to be paid by the contract or, is
achieved either by deduction of such amount of sales tax from the monthly
running bills by the employer for deposit of the same with the Sales Tax
Department or by way of payment by the contractor direct ly to the
Sales Tax Department. According to the learned counsel, where the
amount payable as sales tax by the contractor is deducted by the employer
at the time of making payment of monthly running bills and is deposited
by the employer with the Sales Tax Department, there would not ar ise
any question of making any reimbursement of the amount so deducted
and paid to the Sales Tax Department back to the contractor b ecause
the liability to pay sales tax on the value of material/goods utilised in any
works contract is that of the contractor; and the c laim for its
reimbursement is entirely impermissible.
5.4. The learned senior counsel for the appellant has strenuously
argued that the High Court has failed to examine the import and effect
of Clause 13.3 of the Instructions to Bidders and Clause 45.1 of the
General Conditions of Contract which make it clear that the b id price
quoted by the contractor is inclusive of all duties, taxes and other levies,
including royalties on all materials to be used in performance of the
works contract. Hence, according to the learned counsel, when s ales
tax on the goods/materials forms a part of contract price, t he claim for
reimbursement has rightly been denied by the Government.
5.5. As regards Clause 45.2 of the General Conditions of Contract,
the learned counsel would re-emphasise that thereunder, reimbursement
813
is permissible when there is any sales tax levied on a “completed item of
work” 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 an
immovable property. The learned counsel would submit that earlier, the
Circular dated 04.11.1986 came to be issued on an e rroneous
understanding 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 only
to the sales tax on “completed item of work”; and the sales tax levied in
terms of Section 5(2)(AA) of the Act of 1947 was not reimbursable and
had to be borne by the contractor in view of clear stipulation in Clause
45.1 of the General Conditions of Contract. According to the lear ned
counsel, reliance on the Circular dated 04.11.1986 on behalf of the
respondent No. 1 is entirely misplaced and the said Circular, by no means,
could be construed as that of amending the contractual terms as also the
liability of the contractor in terms of Section 5(2)(AA) of the Act of
1947.
6. Per contra , learned senior counsel for the contractor company
(the respondent No. 1 herein) has duly supported the order impugne d
with reference to the reasonings therein.
6.1. Learned senior counsel for the contractor company h as
contended that the argument made on behalf of the appella nt, that the
deduction in the running bills had only been of the sales tax payable on
various items, is contrary to the record because the deduc tions were
made on a deemed sale on turnover basis and not item-wise and such a
recovery of sales tax is squarely covered by Clause 45. 2 of GCC
whereunder, the contractor company is entitled to t he claimed
reimbursement.
6.2. The learned senior counsel has again referred to the decision
of this Court in the case of Gannon Dunkerley (supra) and the provisions
contained in Section 5 (2) (AA) of the Act of 1947 as also the s aid
Clause 45.2 of GCC and the Circular dated 04.11.1986 to submit tha t
deduction of sales tax on turnover basis pre-supposes the exist ence of
sale and therefore, the contractor company is entit led to the
reimbursement as claimed. According to the learned counsel, the Circular
dated 07.11.2001 had been directly against the statutory provisions as
also the contractual stipulations and the same has rightly been disapproved
by the High Court. The learned counsel has also referred to var ious
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
decisions 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 suffic ient
length and have examined the record with reference to the law applicable.
8. Having regard to the issues raised, appropriate it would be t o
take note of the relevant provisions of law; the referred c onditions
governing the contractual relations of the parties; and the referred
Circulars 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 Constitution
of India, providing for inclusive definition of the expression “tax on the
sale or purchase of goods” in relation to various transactions and dealings.
As regards “works contract”, the said expression came to b e assigned
the meaning in sub-clause ( b) thereof, which reads as under:-
“(29-A) “tax on the sale or purchase of goods” includes-
(a)… … …
(b) a tax on the transfer of property in goods (whether
as goods or in some other form) involved in the execution
of a works contract;
(c) to (f) … … …”
8.1.1. The constitutional validity of the aforementioned provisions
by which the legislatures of the States were empowered to levy sales
tax 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 whether
the power of the State legislature to levy tax on the transfer of property
in goods involved in the execution of works contracts is subject to the
restrictions and conditions contained in Article 286 of the Constitution,
were considered and decided by the Constitution Bench of this Court in
the case of Builders’ Association (supra). Therein, while upholding the
constitutional validity of the aforementioned provisions, the Constitution
Bench explained the unique features of a composite contract relating to
work and materials; and expounded on the meaning, effect and amplitude
as also contours of the provisions pertaining to the taxing power of the
States in relation to works contract in the following words: -
“38. In Benjamin’s Sale of Goods (3rd Edn.) in para 43 at p. 36
it is stated thus:
815
“Chattel to be affixed to land or another chattel .—Where
work is to be done on the land of the employer or on a chattel
belonging to him, which involves the use or affixing of materials
belonging to the person employed, the contract will ordinarily
be one for work and materials, the property in the latter passing
to the employer by accession and not under any contract of
sale. Sometimes, however, there may instead be a sale of an
article with an additional and subsidiary agreement to affix it.
The property then passes before the article is affixed, by virtue
of the contract of sale itself or an appropriation made under
it.”
39. In view of the foregoing statements with regard to the passing
of the property in goods which are involved in works contract and
the legal fiction created by clause (29-A) of Article 3 66 of the
Constitution it is difficult to agree with the contention of the States
that the properties that are transferred to the owner in the execution
of a works contract are not the goods involved in the execution of
the works contract, but a conglomerate, that is the entire building
that is actually constructed. After the 46th Amendment it is not
possible to accede to the plea of the States that what is transferred
in a works contract is the right in the immovable property.
40. We are surprised at the attitude of the States which have put
forward the plea that on the passing of the 46th Amendment the
Constitution had conferred on the States a larger freedom than
what they had before in regard to their power to levy sales tax
under Entry 54 of the State List. The 46th Amendment does no
more than making it possible for the States to levy sales tax on the
price of goods and materials used in works contracts as if there
was a sale of such goods and materials. We do not accept the
argument that sub-clause ( b) of Article 366(29-A) should be read
as being equivalent to a separate entry in List II of th e Seventh
Schedule to the Constitution enabling the States to levy tax on
sales and purchases independent of Entry 54 thereof. A s the
Constitution exists today the power of the States to levy taxes on
sales and purchases of goods including the “deemed” sales and
purchases of goods under clause (29-A) of Article 366 is to be
found only in Entry 54 and not outside it. We may recapitulate
here the observations of the Constitution Bench in the case of
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
Bengal Immunity Co. Ltd. [AIR 1955 SC 661 in which this Court
has held that the operative provisions of the several parts of Article
286 which imposes restrictions on the levy of sales tax by the
States are intended to deal with different topics and one could not
be projected or read into another and each one of them has to be
obeyed while any sale or purchase is taxed under Entry 54 of the
State List.”
(emphasis supplied)
8.1.2. In the case of Gannon Dunkerley (supra), while dealing
with the scope of the legislative power of State under E ntry 54 of the
State List contained in Seventh Schedule to the Constitution, particularly
in the context of inter-State trade or commerce, another Cons titution
Bench of this Court found no reason to reopen the issues covered by the
decision in Builders’ Association case (supra) and held on the limitations
of the powers of State legislature as under:-
“31…..the legislative power conferred under Entry 54 of the State
List does not extend to imposing tax on a sale or purchase of
goods which takes place outside the State or which takes place in
the course of import or export of goods. In view of the aforesaid
limitations imposed by the Constitution on the legislative power of
the States under Entry 54 of the State List, it is beyon d the
competence of the State Legislature to make a law imposi ng or
authorising the imposition of a tax on transfer of property in goods
involved in the execution of a works contract, with the aid of sub-
clause ( b) of clause (29-A) of Article 366, in respect of transactions
which take place in the course of inter-State trade or commer ce
or transactions which constitute sales outside the State or sales in
the course of import or export.
**** **** ****
41. It must, therefore, be held that while enacting a law imposing
a tax on sale or purchase of goods under Entry 54 of the State
List read with sub-clause ( b) of clause (29-A) of Article 366 of
the Constitution, it is not permissible for the State Legislature to
make a law imposing tax on such a deemed sale which constitutes
a sale in the course of inter-State trade or commerce under Section
3 of the Central Sales Tax Act or an outside sale under Section 4
of the Central Sales Tax Act or sale in the course of i mport or
817
export under Section 5 of the Central Sales Tax Act. So also it is
not permissible for the State Legislature to impose a tax on goods
declared to be of special importance in inter-State trade or
commerce under Section 14 of the Central Sales Tax Act except
in accordance with the restrictions and conditions contained in
Section 15 of the Central Sales Tax Act.”
8.1.3. In the said case of Gannon Dunkerley , the Constitution
Bench explained the purport and effect of the legal fiction introduced by
sub-clause ( b) of Clause (29-A) of Article 366 of the Constitution and
also enunciated the principles for its operation as follows: -
“36. If the legal fiction introduced by Article 366(29-A)(b ) is
carried to its logical end it follows that even in a s ingle and
indivisible works contract there is a deemed sale of the goo ds
which are involved in the execution of a works contract . Such a
deemed sale has all the incidents of a sale of goods involved in the
execution of a works contract where the contract is divisible into
one for sale of goods and the other for supply of labour and
services.
**** **** ****
47……..The value of the goods involved in the execution of a
works contract will, therefore, have to be determined by tak ing
into account the value of the entire works contract and deducting
therefrom the charges towards labour and services which would
cover—
(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 tools
used for the execution of the works contract;
(e) cost of consumables such as water, electricity, fuel, etc. used
in the execution of the works contract the property in which is not
transferred in the course of execution of a works contract; and
(f) cost of establishment of the contractor to the extent it is relatable
to supply of labour and services;
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
(g) other similar expenses relatable to supply of labo ur and
services;
(h) profit earned by the contractor to the extent it is rel atable to
supply of labour and services.
The amounts deductible under these heads will have t o be
determined in the light of the facts of a particular case on the
basis of the material produced by the contractor.”
(emphasis supplied)
8.1.4. The salient features of the legal fiction introduced by sub-
clause ( b) of Clause (29-A) of Article 366 of the Constitution and the
co-related concept of “value addition” came to be succinctly explained
by this Court in the case of P.N.C. Construction Co. (supra) in the
following words: -
“21. “Value addition” is an important concept which has arisen
after the Forty-sixth Amendment to the Constitution. Prior to the
said Amendment this Court had taken the view in State of Madras
v. Gannon Dunkerley & Co. (Madras) Ltd [AIR 1958 SC 560]
that “works contract” was an indivisible contract and the turnover
of the goods used in the execution of the works contract could
not, therefore, become exigible to sales tax. To overcome the
effect of the said decision, the concept of “deemed sale” was
introduced by Parliament by introducing sub-clause ( b) of Clause
29-A in Article 366 of the Constitution which states that the tax
on sale or purchase of goods would include a tax on transfer of
property in goods involved in the execution of works contract.
The emphasis is on the expression “transfer of property in goods
(whether goods as such or in some other form )”. Therefore, after
the Forty-sixth Amendment to the Constitution, the works contract
which was an indivisible contract is, by a legal fiction, divided into
two parts—one for sale of goods and the other for supply of labour
and services. Therefore, after the Forty-sixth Amendmen t, it
became possible for the States to levy sales tax on the v alue of
the goods involved in a works contract in the same way in which
the sales tax was leviable on the price of the goods supplied in a
building contract. This is where the concept of “value addition”
comes in. It is on account of the Forty-sixth Amendment to the
819
Constitution that the State Government is empowered to levy sales
tax on the contract value which earlier was not possible.”
(emphasis supplied)
8.2. Having thus noticed the source of power of the State legislature
to levy sales tax in relation to the works contract but only on the value of
the goods/materials involved therein, we may also take note of the relevant
amended provisions of the Orissa Sales Tax Act, 1947, which rea d as
under:-
“Section 2(g) “Sale” means with all its grammatical variations
and cognate expression, any transfer of property in goods fo r
cash or deferred, payment or other valuable consideration and
includes,—
(i) … … …
(ii) (ii) transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract;
(iii) to (vi) … … …
Section 2(jj)- “Works Contract” includes any agreement for
carrying out, for cash or deferred payment or other valu able
consideration, the building, construction, manufacture, processing,
fabrication, erection, installation, fitting out, i mprovement,
modification, repair or commissioning of any moveab le or
immoveable 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 received
or receivable by dealer for carrying out such contract, less the
amount of labour charges and service charges incurred for the
execution of this contract… … …”
8.3. As noticed, the claim for reimbursement made b y the
contractor company is based on Clause 45.2 of GCC whereas this claim
is being resisted by the appellant State with reference to Clause 13.3 of
ITB and Clause 45.1 of GCC. The referred clauses, as placed before us
for consideration, read as under: -
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
Clause 13.3 of ITB
“13.3 All duties, taxes and other levies including royalty payable
by the contractor under the contract or for any other cause shall
be included in the rates, price and total bid price submitted by the
bidder.”
Clauses 45.1 and 45.2 of GCC
“45.1 The rates quoted by the contractor shall be deemed to be
inclusive of the sales and other taxes including royalties on a ll
materials that the contractor will have to purchase for performance
of this contract.
45.2 Any Central or State Sales Tax and other taxes on completed
items of works of this contract as may be levied excluding penalty
levied for Contractor’s fault and paid by the Contractor shall be
reimbursed by the Employer to the Contractor on proof of payment
on production of assessment certificate on every financial year.
During the course of contract period, deductions of sales tax on
works contract turnover at the source, shall be made from each
bill at such rate and conditions as may be required under the
provisions of Orissa Sales Tax Act and Rules.”( sic )
8.4. Now, the three Circulars issued by the Government of Orissa
in regard to the acceptance and then denial of the claim for reimbursement
of 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 Government
issued directions and guidance for such reimbursement of sales tax in
relation to the existing work contracts; and also directed that any s uch
clause for reimbursement be not included in future contracts.. This
Circular dated 04.11.1986 reads as under:-
“Government of Orissa
Irrigation and Power Department
48154/Dated 4 th No November, 1986
No. FA-1-11/86
From
Shri P .K. Das
821
Financial Adviser-cum-
Joint Secretary to Government
To
The Engineer-in-Chief, Irrigation, Orissa/Chief Engineer, Delta
and Flood Control/ Chief Engineer, Medium Irrigation-I/Chief
Engineer, Medium Irrigation-II/Chief Engineer, Rengali, Gohira
and Samkoi Projects/ Chief Engineer, Rengali Irrigation Project,
Samal/ Chief Engineer, Mahanadi Birupa Barrage Project/Chief
Engineer, Upper Kolab Project, Bariniput/Chief Engineer, Potteru
Irrigation Project/Chief Engineer, Electricity-cum-Chief Engineer,
Electrical Projects, Orissa/General Manager, Upper I ndravati
Project/Chief Engineer (Ele.) Upper Kolab Hydro Ele. Project.
Sub: RE-IMBURSEMENT OF SALES TAX ON WORKS
CONTRACTS
Sir,
1. I am directed to say that in accordance with the Orissa Sales
Tax (Amendment) Act, 1984 read with Orissa Sales Tax
(Amendment) Ordinance, 1985, Sales Tax has become
payable on the turn over of Works Contracts with effect from
07.04.1984.
2. Under the Law, Sales Tax is payable by the concer ned
contractor/dealer, and not by this Department. Yet, a question
arose as to whether this Department was legally liable to
reimburse the amount of sale tax actually paid or payable by
the Contractor/dealers in so far as the contracts relati ng to
this Department are concerned. After due consideration of
the legal aspects of the problem, the following instructi ons
are issued for information and guidance of all concerned.
(i) In case of Works- Contracts executed on or after
07.04.1984 which contained specific clauses for
reimbursement of Sales Tax, this Department is liable to
reimburse the amount of sale tax actually paid by the
concerned contractor on production of necessary
documentary evidence in token of making such payment,
after obtaining an undertaking from the concerned
contractor to the following effect:-
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
If the Contractor prefers or has preferred appeal/
revision before the concerned appellate authority under
the Sales Tax Law for remission of the Sales Tax dues
paid by him and said appeal/revision results in any
reduction of such dues, the differential amount, the
amount of Sales Tax reimbursed and the amount of Sales
Tax reimbursed and the amount of Sales Tax payable as
decided on appeal/revision will be refunded back to
Government by the Contractor.
(ii) Similar reimbursement will also be permissible and i n
the same manner as indicated in Sl. (i) above in case of
contracts executed prior to 07.04.1984 where the work
was in progress beyond that date, which contained
specific clause for such reimbursement.
(iii) The amount of penalty levied if any, under the Sales Tax
Law on any count and paid by the Contractor-dealer
shall not be reimbursed by the Department to the
concerned Contractor.
(iv) No clause either for reimbursement for Sales Tax or
payment of such Tax by the department to the
Contractor should be inserted in the Notice Inviting
Tenders or Tender document and no tender containing
any clause or condition to the above effect should be
accepted.
3. I am to request that the above guideline may be brought to
the notice of all concerned.
4. If any amount of Sales Tax has been reimbursed/paid to any
Contractor in any case, not in conformity with the guidelines
as noted vide paragraph-2 above, a proposal should be
furnished to this Department seeking Government approval
to that effect, furnishing full facts and figures on that score,
clearly indicating the extent and manner of deviation from
any of the guidelines as noted above Sls. (i) to (i v) of
Paragraph-2 above. This may please be treated as urgent
and the proposal(s) should be submitted to Government in all
such cases by 30.11.1986 at latest. If there is no need for
furnishing any proposal on the above score, a Nil report should
be submitted by the aforesaid target date.
823
5. Receipt of the letter may please be acknowledged by retu rn
of 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 S tate
Government asked the Engineers-incharge to await its deci sion on the
queries raised on the issue pertaining to such reimbursement of the
amount of sales tax in relation to the works contracts. This Cir cular
dated 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 NCB
bid document approved by World Bank stipulates that “All duties,
taxes and other levies including royalty payable by the contractor
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
under the contract or for any other cause shall be included in the
rates, prices and total bid price submitted by the Bidder.”
The clause 45.2 at G .C.C. of the said document stipulates
that “Any Central or State Sales Tax and other Taxes on completed
item of work of this contract as may be levied excluding penalty
levied for contractor’s default and paid by the contractors shall
be reimbursed by the employer to the contractor on proof o f
payment. During the course of contract period deduction of Sales
Tax on works contract turn over at the sources shall be made
from each bill at such rate and conditions as may be requi red
under the provision of Orissa Sales Tax Act and Rules.”
Some Chief Engineers have sought for clarification as to
whether Sales Tax deducted from the bills of the contractor and
paid to the sales tax officer will be again reimbursed to the
contractor whose quoted price is inclusive of all taxes as per clause
13.3 of ITB. In some cases, A. G . Audit has raised objection against
such reimbursement. This is under active consideration of govt.
for issuing necessary clarification.
Therefore, you are hereby instructed that no reimbursement
of sales tax should be made under clause 45.2 of G . C. C. of NCB
agreements for World Bank works and works covered under
similar contracts till clarification is communicated by Government.
This may please be brought to the notice of all Subordinate
Officers under your control.
Receipt of the letter may please be acknowledged.
Yours faithfully
Sd/-
FA-cum-Addl. Secretary to Government”
8.4.3. Thereafter, by the impugned Circular dated 07.11.2001, the
State Government purportedly came out with the clarification but, in
effect, issued directions squarely opposite to those contained in the earlier
Circular dated 04.11.1986, while asserting that no s uch claim for
reimbursement of the amount of sales tax pertaining to works co ntract
was admissible. This Circular dated 07.11.2001 reads as under: -
825
“Government of Orissa
Department 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 of
works contracts
Sir,
In continuation of this Department letter no.5295 d t.5295
dt.27.01.2000 on the subject mentioned above, I am directed to
say that as per Orissa Sales Tax Act transfer of pro perty in
execution of works contracts (Whether as goods or in some other
form) is subject to levy of Sales Tax. When a building, a bridge, a
road, a canal, a plant etc., is constructed, the ingredients lik e
cement, iron & steel, bricks, stones etc. involved in execution of
the contract are subject to levy of sales tax. The comple ted item
i.e., a bridge, a building, a road, or a canal, as the case may be, is
not subjected to levy of sales tax because after construction these
become immovable property not susceptible to transfer of property
for the purpose of sales tax assessment.
As per clause 13.3 of I.T.B. of the NCB bid document read with
clause 45.1 of the general conditions of the contract the rates
quoted by the contractor shall be deemed to be inclusive of sales
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
and other taxes including royalties on all materials that the
contractor will have to purchase for performance of the contract.
Clause 45.2 of the G .C.C. speaks that any Central or State Sales
Tax and other taxes on completed items of work of the contract
as may be levied, excluding penalty levied for contractors default
and paid by the contractor shall be reimbursed by the employer to
the contractor on proof of payment. It is clarified that a completed
item of work for which the contractor has entered into agreement
with the department is either immovable property or a works
contract and in either case is not exigible to sales tax. Therefore,
the question of payment of sales tax on such immovable property
and consequential reimbursement of the sales tax by the department
as per clause 45.2 of the G.C.C. or similar provision exis ting in
other contracts does not arise. A contractor may, however, have
to pay sales tax as assessed by the sales tax officer on items
which go into construction of the work. This tax is not reimbursable
since the contractor is expected to have built it into his rates.
In view of the above, you are hereby instructed not to reimburse
sales tax levied on cement, steel etc., misinterpreting clause 45.2
of the G .C.C. of N.C.B. agreement for World Bank assisted works
and the works covered under other agreement containing similar
clause. Besides if any amount of sales tax has alread y been
reimbursed, immediate steps should be taken for recovery of the
amount from the contractors.
This has been concurred in by Finance Department in their
U.O.R.No.3896/ SF. Dt. 24.09.2001.
Yours faithfully,
Sd/-
Financial Adviser-cum-Addl. Secretary to Government”
9. Now, while taking up the points arising for determination, we
may usefully summarise the relevant aspects pertaining to this case.
9.1. It is evident that the contractor company (respondent No. 1
herein) seeks to assert its right to claim reimbursement of the amount of
sales tax levied in respect of the works contracts executed b y it on the
strength of the stipulations contained in Clause 45.2 of GCC of NCB bid
827
documents. On the other hand, the appellant State seeks to resist the
right so claimed by the contractor company with ref erence to the
principles enunciated in the cited decisions that after the forty-sixth
amendment and insertion of sub-clause ( b) of Clause (29-A) to Article
366, the State could levy sales tax on the price of goods and mat erials
used in works contract as if there was a sale of such goods and materials
and then, on two-fold assertions on that basis: one, that in the context of
a works contract, there is no sales tax on the “completed item of work”
which is an immovable property and, therefore, ques tion of any
reimbursement does not arise; and second, that in works contrac t, the
contractor may have to pay sales tax assessed on the items which go
into the construction but, such amount of sales tax is not reimbursab le
because the contractor is supposed to have provided for the same in its
rates, 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 in
dispute that the respondent No. 1 indeed undertook execution of various
works contracts with the respective offices of the appe llant State of
Orissa. It remains indisputable that in relation to such contracts, Clause
13.3 of ITB stipulated that all duties, taxes and other levies i ncluding
royalties payable by the contractor were to be included in the bid price
and Clause 45.1 of GCC specifically provided that the rates quo ted by
the contractor shall be deemed to be inclusive of the sales and other
taxes including royalties on all materials that the contra ctor was to
purchase for performance of the contract. However, and at th e same
time, it is also indisputable that as per Clause 45.2 of GCC, any Central
or State Sales Tax and other taxes on “completed items of works” of the
contract as might be levied upon, and paid by, the contractor (excluding
penalty levied for contractor’s fault) were to be reim bursed to the
contractor on proof of payment and assessment. This Clause 45.2 further
envisaged that during the course of contract period, deductions of sales
tax on “works contract turnover” was to be made at the sourc e, from
each bill as per the rate and conditions prescribed under the provisions
of Act of 1947. It is also not in dispute that in the course of execution of
such contracts, various running bill payments were made to the respondent
No. 1 and while making such payments, deductions were indeed made
towards the amount of sales tax; and such deducted amount of sales tax
was deposited with the Sales Tax Department of the Governme nt of
Orissa. Further, it is also borne out that reimbursement of the sales tax
so levied upon, and paid by, the respondent No. 1 in respect of the
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
assessments for the years 1995-1996 to 1997-1998 was allowed; but
such claim for reimbursement by the respondent No. 1 in respect of the
assessments for the years 1998-1999 to 2000-2001 was declined.
9.3. As noticed, after the amendments were brought about in the
Act of 1947 for levying sales tax on works contract with effe ct from
07.04.1984, the Circular dated 04.11.1986 was issued by the Government
of Orissa to the effect that in case of works contract e xecuted on or
after 07.04.1984, containing the specific clause for reimburseme nt of
sales tax, the Department of Irrigation and Power would b e liable for
reimbursement of the amount of sales tax actually paid by the concerned
contractor on production of necessary documentary eviden ce. The
aforementioned reimbursements were allowed to the respondent No. 1
pursuant to these observations and directions in the Ci rcular dated
04.11.1986. However, by way of the subsequent Circul ar dated
07.11.2001, the Government of Orissa came out with total volte-face on
its opinion in relation to the claim for reimbursement of sales tax paid by
the contractors while stating that a “completed item of work” in relation
to a works contract was not exigible to sales tax and, as re gards the
sales tax on the items which go into the work, the contractor is expected
to have included the same in the rates. It was, therefore, observe d that
the question of reimbursement as per Clause 45.2 of GCC or si milar
provision in other contracts did not arise.
9.4. The High Court, in its impugned order dated 05.08.2008, has
rejected the contentions of the appellant State and has disapproved the
aforesaid Circular dated 07.11.2001 essentially with referenc e to the
fact that the claim for reimbursement was being made of th e tax that
was levied on the turnover of the works contracts and not of the tax paid
by the contractor on the materials procured by it. The Hig h Court has
also found that the sales tax was levied after necessary deduc tions and
in accordance with the decision in Gannon Dunkerley (supra) for which,
the contractor was entitled to claim reimbursement under Cla use 45.2
of GCC and that the clarification Circular dated 07.11.2001 cannot take
away the effect of statutory provisions.
10. Having taken all the relevant aspects in comprehension and
having examined the matter in its totality, we are clearly of the view that
the High Court has rightly allowed the writ petition filed by the respondent
No. 1 and no case for interference in this appeal is made out.
829
11. Before proceeding further, we may at once observe that s o
far as the aforesaid Circulars are concerned, neither of them could be
decisive of the issues at hand. As noticed, in the Circular dated 04.11.1986,
the State Government expressed the view that the reimburse ment in
question was required to be allowed in terms of Clause 45.2 of GCC but
later on, in the Circular dated 07.11.2001, the State Government took a
diametrically opposite view to say that such reimbursement was not to
be allowed in relation to the works contract. Obviously, the said Circulars
had been based on the given day understanding of the State Government
on the operation of the relevant provisions of law and the te rms of
contract. Such vacillating understanding on the par t of the State
Government cannot be determinative of the contractual oblig ations of
the parties, which are required to be decided with ref erence to the
principles of law applicable and on true construction of th e terms of
contract. Therefore, we would ignore the said Circulars whil e dealing
with the principal issues involved in this matter but shall refer to them at
a later and appropriate stage.
12. Reverting to the core issues, it remains rather indisput able
that as per Clause 45.2 of GCC, the amount of sales tax on comple ted
items of works of the contract, as might have been levied upon, and paid
by, the contractor, except the penalty levied for contractor’s own fault,
was to be reimbursed to the contractor on proof of payment and
assessment. It was also provided in Clause 45.2 itself that, during the
course of contract period, deductions of sales tax on works contr act
turnover would be made from the running bills at the prescribe d rates
and conditions. As noticed, it is not in dispute that while making payment
of various running bills in the course of execution of contracts by the
respondent No. 1, deductions were indeed made towards the amount of
sales tax and such deducted amount of sales tax was deposited with the
Sales Tax Department of the Government of Orissa. Such deduct ions
and deposits with Sales Tax Department had clearly been in accordance
with the stipulation contained in the second part of Clause 45.2 ibid.
However, and even after making deductions in terms of the second part
of Clause 45.2, the appellant State seeks to deny the operati on of first
part of this Clause 45.2 (whereby the contractor is entitled to
reimbursement of the amount of sales tax) on the grounds that: (a) the
reimbursement is envisaged of the sales tax levied on the “completed
item of work” but, in works contract, such “completed item” is not exigible
to sales tax and hence, the question of reimbursement does not arise;
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
and (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 of
sales tax on goods/materials in its rates and hence, the contractor cannot
claim any reimbursement thereof. The question is as to whet her such
contentions of the appellant against the operation of first part of Clause
45.2 of GCC could be countenanced? In our view, the answer could
only be in the negative.
13. Taking up the main plank of the case of the appellant abo ut
the nature, extent and implication of the levy of sales tax in relation to a
works contract, it could be usefully recapitulated that in vi ew of the
forty–sixth amendment to the Constitution of India, Clause (29-A) came
to be inserted to Article 366; and, by virtue of sub-clause (b) thereof, it
became permissible for the States to levy sales tax on the price of goods
and materials used in works contracts as if there was a sa le of such
goods and materials. In other words, after the forty-sixth amendment to
the Constitution, the works contract is divided into two parts by a legal
fiction: 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 of
goods/materials involved in such works contract. These featur es have
been expounded and explained by this Court in the referred cas es of
Builders’ Association, Gannon Dunkerley and P.N.C. Construction
Co. (supra) and need no further enlargement.
13.1. As regards the relevant provisions of the State enactmen t,
it is at once clear that after the aforesaid forty-sixth ame ndment to the
Constitution, the State of Orissa also proceeded to carry out the necessary
amendment to the Act of 1947 and provided for levy of sales tax in
relation to a works contract , inter alia , by expanding the definition of
“Sale” so as to include therein the transfer of property in goods involved
in the execution of a works contract; and by specifying that “taxable
turnover” in respect of works contract shall be deemed to be the gros s
value received or receivable by dealer for carrying out such c ontract
less the amount of labour and service charges incurred in execut ion of
the contract. On their essence and intent, what turns out of these amended
provisions of the Act of 1947 is that in relation to a works contract, there
would 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 the
gross turnover) of such works contract.
831
13.2. As noticed, it has been the consistent case of the respondent
No. 1 that in the running bill payments, the amount of sales tax w as
deducted and the same was deposited with the Sales Tax Departme nt.
It has also been the consistent case of the respondent No. 1 tha t in the
referred orders of assessment, sales tax was levied on the applicable
rates on the “taxable turnover” in respect of the works contracts executed
by it and the claim for reimbursement was made of the amount of sales
tax so levied and paid. The High Court has also recorded a categoric al
finding that after deducting the labour charges, service charges and the
tax paid from the gross turnover, the balance had been put to tax by the
Assessing Authority. These assertions of the respondent No. 1 as a lso
the findings of the High Court are not the subject matter of dispute. That
being the position, it is but evident that in relation to the works contracts
executed by the respondent No. 1, the appellant and its offi ces have
indeed levied the sales tax on the taxable turnover that wa s arrived at
after due deduction of labour/service charges, in conformity with Section
5(2)(AA) of the Act of 1947. There had neither been any levy of the
sales tax on the entire turnover of the works contracts nor any such levy
could have been effected because, as noticed, the taxing event of sale in
a works contract is confined to the use of the goods/materials in execution
of the contract.
14. While the aforesaid legal and factual aspects remain more or
less indisputable, what the appellant seeks to cont end is that the
reimbursement envisaged by the first part of Clause 45.2 of G CC is of
the 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 s uch
completed item in a works contract becomes an immovable property.
Such a contention of the appellant remains wholly untenable in view of
the scheme of levy of sales tax in a works contract as al so the scheme
of reimbursement envisaged by Clause 45.2 of GCC.
14.1. Contextually read, it is but apparent that the expres sion
“completed item of work” in Clause 45.2 ibid., signifies the intent that
reimbursement would be permissible only after execution of a particular
item of work has been completed and accomplished. In other words,
this expression is clearly intended to contradistinguish the cases where
any item of work remains incomplete and yet any claim for reimbursement
of the sales tax levied is sought for. This expression cannot be read to
mean as if signifying the levy of sales tax itself on the completed item of
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
work because such reading of this expression would be totally disjunct
from the context and would be entirely detached from the real intent.
14.2. Viewed from another angle, it would appear that if the
contention on the part of the appellant as regards interpr etation of the
first part of Clause 45.2 is accepted, it would practically result in holding
that the said Clause 45.2 is not at all applicable to a wor ks contract.
Such a result cannot be countenanced for two major reasons: First, that
if such a clause was not to be applied to the works contract, t here was
no reason to have retained the same in relation to the work s contracts
awarded to the respondent No. 1. When such a stipulation forms the
part of contract, it would be rather preposterous to say that the same
would stand but would not operate. Secondly, and more significantly, in
the second part of this very Clause 45.2, it has specifically been provided
that deductions of sales tax on works contract turnover at source
shall be made from each bill . It is not far to seek, and is rather evident
on a bare reading of Clause 45.2 in its entirety, that it is to apply in
relation to the sales tax on works contract too. As noticed, t he second
part of Clause 45.2 had indeed been applied and enforced by the appellant
and its offices by regularly making deduction of the amount of sales tax
in the running payments of the respondent no. 1 and by regularly depositing
the 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 appellant
and its offices to make deduction of sales tax on works contract turnover
at source could be enforced but when it comes to reimbursemen t, the
first 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 reliance
on behalf of the appellant on the expression “completed item of work”,
as occurring in the first part of Clause 45.2, is entirely misplac ed. The
only implication of this expression is that a claim for reimbursement of
sales tax cannot be made in relation to a particular work or item whose
execution is pending or is in progress and has not been complet ed. So
far the levy of sales tax in relation to a works contract is concerned, the
same is on “taxable turnover” and not on the entire turnover. It follows
necessarily that the claim for reimbursement could only be made of the
amount of sales tax that had been levied; and had been paid b y the
contractor. Hence, the suggestion as if the expression “completed item
of work” refers to the end-product of a works contract is wi thout any
substance. The contentions urged in that regard are required to be, and
are, rejected.
833
15. We may now take up the other line of argument on behalf of
the appellant 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
of sales tax on goods/materials in its rates and hence, the contra ctor
cannot claim any reimbursement thereof.
15.1. It remains trite that the terms of contract bind the p arties
thereto and unless there be any case of ambiguity or violati on of law,
ordinarily, the terms of contract, revealing the intent of parties, are required
to be given effect to. The submission on the part of the appe llant, that
first part of Clause 45.2 of GCC would not operate because of Clause
45.1 of GCC read with Clause 13.3 of ITB, remains entirely ba seless
and appears to be of a desperate attempt to wriggle out of the contractual
obligations. Even when the contractors were given instruct ions in the
said Clause 13.3 of ITB to include all duties taxes and other levies in the
bid price and even when the said Clause 45.1 of GCC provided that the
rates quoted by the contractor shall be deemed to be inclusive of the
taxes and royalties on all the materials which were to be pr ocured for
performance of the contract, it was yet provided in the fi rst part of
Clause 45.2 of GCC that the sales tax and other taxes on complet ed
items of work, as may be levied upon, and paid by, the contractor shall
be reimbursed to the contractor on proof of payment/on production of
assessment certificate. It is, therefore, crystal clear tha t even when the
contract provided that the rates quoted by the contractor shall be deemed
to be inclusive of sales and other taxes and royalties on the materials, it
was agreed to between the parties that sales tax and other taxes under
completed 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 of
the appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC
is accepted in the manner that when the rates quoted by the contractor
are inclusive of the taxes on the goods/materials to be used in performance
of the contract, reimbursement of the sales tax levied upon, and paid by,
the contractor is not to be allowed, it would practically result in rendering
the first part of Clause 45.2 otiose and redundant. Neither that had been
the intent of the parties nor could the terms of contract be construed in
this manner.
15.3. In our view, the implication and effect of Clauses 13.3 of
ITB and 45.1 of GCC had only been that while making the bid and
quoting the rates, the contractor was supposed to include the taxes, duties,
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
royalties etc. payable by it over the materials to be procured and utilised
in performance of the contract and hence, while raising the bil ls, the
contractor was not entitled to claim any amount towards any such tax/
duty/royalty paid by it on the materials purchased for perform ance of
the contract. These clauses, i.e., Clause 13.3 of ITB and 45.1 of GCC,
which prohibit the contractor from demanding taxes, duties, royalti es
etc. on the materials procured by it for performance of the contract do
not, and cannot, conversely operate over the sales tax whic h is levied
upon the contractor and which is primarily recovered with deduc tions
from the running bill payments. In other words, in our view, on a plain
reading of the aforesaid relevant terms of the contract, it is clear that
while the contractor cannot claim any payment towards the taxes/duties/
royalties etc. on the goods/materials purchased by it for performance of
the contract but that does not disentitle the contractor from cl aiming
reimbursement of the sales tax levied upon it by the employer, of course
after proof of payment/assessment. It is also pertinent to mention that
the respondent No.1 only claimed reimbursement of the sales tax paid
by it on the turnover of the works contract and not of any tax or duty or
royalty paid by it on the material procured for the purpose of execution
of the works contract. Therefore, the contentions urged on behalf of the
appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC over
the claim of the contractor also deserve to be, and are, reject ed.
16. To summarise the discussion in the preceding paragraphs, we
are clearly of the view that by virtue of Clause 45.2 of GCC, the contractor
company is rightfully entitled to claim reimbursement of the amount of
sales tax levied on the taxable turnover of the works contracts executed
by it. A fortiori , the grounds on which the appellant seeks to resist the
claim of the contractor company for such reimbursement, i.e., with
reference to the expression “completed item of work” in the said Clause
45.2 and with reference to the stipulations contained in Clauses 13.3 of
ITB and 45.1 of GCC, are wholly untenable and the appellant and it s
contracting offices are under obligation to honour the claim so made by
the contractor company.
17. Before finally concluding on this matter, we are inclined t o
make a few comments as regards the Circulars issued by the State
Government pertaining to the subject of reimbursement of sales tax in
works contracts. While noticing that diametrically opposite views were
expressed by the State Government in the two main Circula rs dated
835
04.11.1986 and 07.11.2001, we had observed in the earlier part of this
judgment that the said Circulars were based on the given day
understanding of the State Government but such vacillating understanding
of the State Government was not determinative of the matter; and hence,
we had ignored the said Circulars while dealing with the principal issues
involved in this matter, but had also indicated that we shall refer to the
said Circulars at a later and appropriate stage.
17.1. The basic reason for which we feel impelled to refer to
these Circulars now and at this concluding stage is borne out of the
contents of the Circular dated 04.11.1986, which was issued by the State
Government closely following the amendment of the Act of 1947 with
insertion of the provisions aimed at facilitating the levy of sales tax on
the goods involved in a works contract. Being aware of its obligation in
terms of the said Clause 45.2 of GCC (or similar clause /s in other
contracts), the instructions were issued by the State Government in the
said Circular dated 04.11.1986 for: (a) making reimbursement of t he
amount of sales tax actually paid by the contractor on producti on of
necessary documentary evidence of such payment; (b) not making
reimbursement against the amount of penalty, if any, levie d upon the
contractor; and (c) obtaining undertaking from the contractor to refund
the excess amount of reimbursement, in case of reduction of its liability
towards sales tax in appeal or revision [ vide sub-paragraphs (i) to (iii) of
paragraph 2 of the Circular dated 04.11.1986]. However, the significant
feature is that in the second set of instructions in this very Circul ar, as
contained in sub-paragraph (iv) of paragraph 2 thereof, the Enginee rs-
incharge were instructed that no such clause for reimbursement of sales
tax or payment of such tax by the department to the contractor be inserted
in the Notice Inviting Tenders or Tender document; and no tender
containing any clause or condition to that effect be accepted. The sai d
second set of instructions in sub-paragraph (iv) of paragraph 2 of this
Circular was, obviously, meant for future contracts, but, its contrast with
the first set of instructions in the preceding sub-paragraphs fortifies the
conclusion that the State Government was fully conscious of its obligation
to make reimbursement in relation to the existing contracts which carried
such reimbursement clause/s.
17.2. As to what stipulations, terms and conditions are to form the
part of contract remains a matter essentially in th e domain of the
contracting parties (of course, subject to the applicable requirements of
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD.
& ORS. [DINESH MAHESHWARI, J.]
law) and no comments as regards future contracts are requisit e herein
but, on a comprehensive reading of the Circular dated 04.11.1986, it is
evident that the State Government was fully conscious of its obligation
towards reimbursement under the existing terms of contracts and hence,
issued directions for due discharge of such obligation with ne cessary
safeguards and, at the same time, provided that henceforth, neither such
a clause be inserted in the contract documents nor any tender containing
such a clause or condition be accepted.
17.3. Evidently, the doubts at the later stage, as indicated i n the
Circular dated 27.01.2000, and converse decision against the obligation
of reimbursement, as stated in the Circular dated 07.11.2001, had only
been of unwarranted attempts to wriggle out of the contractual obligations
with rather perverse construction of the plain terms of the existing
contracts. Be that as it may, the propositions in the said ill-advised Circular
dated 07.11.2001 stand disapproved with the conclusions reached by us
hereinbefore. We say no more.
18. In the result, this appeal fails and is, therefore, dismissed with
no order as to costs. Pending interlocutory applications also stand disposed
of.
Divya Pandey Appeal dismissed.