1992 INSC 0708
                                 M/s. Gannon Dunkerley And Co. and Others

                                                           Vs

                                           State of Rajasthan and Others

                                               Larsen and Toubro Ltd

                                                           Vs

                                             Union of India and Others

               Civil Appeal Nos. 4861-64 of 1992 and Civil Writ Petition No. 197 of 1991

          (CJI M.M. Kania, J.S. Verma, S.C. Agarwal, Yogeshwar Dayal, Dr. A.S. Anand JJ)

                                                      17.11.1992

                                                     JUDGMENT

S. C. AGRAWAL, J.

1. Having heard learned counsel in SLP(C) Nos. 3365-68 of 1992, we hereby grant special leave to
appeal and proceed to dispose of the appeals.

2. These appeal arising from the judgment of the Rajasthan High Court dated September 3, 1991
and the connected writ petition filed under Article 32 of the Constitution raise questions relating to
imposition of tax on the transfer of property in gook involved in the execution of works contracts.
The power to impose this tax became available to the State Legislature as a result of the
amendments introduced in the constitution by the Constitution (Forty-sixth Amendment) Act, 1982
hereinafter referred to as the 'Forty-sixth Amendment'. The validity of the said amendment has been
upheld by this Court in Builders Associations of India v. Union of India((1989) 2 SCC 645: 1989
SCC (Tax) 317: (1989) 2 SCR 320) wherein this Court has also considered the scope and ambit of
the legislative power to impose the said tax.

3. The relevant historical background leading to the enactment of the Forty-sixth Amendment has
been set out in detail in Builders Association case. We would, therefore only make brief reference to
the circumstances which led to the said amendment.

4. Under Entry 48 in List II of Seventh Schedule to the Government of India Act 1935 the
legislative power to impose "taxes on sale of goods and on advertisements" was conferred on the
Provincial Legislatures. Under the Constitution as adopted the said taxing power and divided
between Parliament and the State Legislature. Under Entry 92 in List I of the Seventh Schedule to
the Constitution Parliament was empowered to impose "taxes on the sale or purchase of newspapers
and on advertisements published therein" under Entry 54 in List II the State Legislatures were
empowered to impose "taxes on the sale or purchase of goods other than newspapers". With regard
to imposition of sales tax on goods involved inn execution of works contracts where the contract
was singled and indivisible, the question arose whether there is a 'sale' of those materials with the
meaning of that word on Entry 48 in List II of the Seventh Schedule on the Government of India
Act 1935 and Entry 54 in List II of the Seventh Schedule to the Constitution. There was sharp
cleavage of opinion among the High Courts on that question. The High Court of Madras in Gannon
Dunkerley & Co. (Madras) Ltd. v. State of Madras(AIR 1945 Mad 1130 : (1955) 1 MLJ 87 : (1954
5 STC 216) took the view that the expression sale of goods in Entry 48 in List II of the Government
of India Act 1935 and Entry 54 List II of the Constitution had the same meaning as it has in the Sale
of Goods Act 1930 and that construction works contracts were not contracts for sale of the materials
used term and that the contract being entire and indivisible could not be broken into a contract for
sale of materials and a contract for payment for work done. On that view it was held that the
provisions of the amendments introduced by the Amendment Act of 1947 in Madras General Sales
Tax Act 1939 whereby the definition of sale was enlarged to include "a transfer of property in goods
involved in the execution of a works contract" and thereby impose sales tax on such transfers were
declared as ultra vires the powers of the Provincial Legislature. The same view was taken by the
Hyderabad High Court in Jubilee Engineering Co. Ltd. v. STO(AIR 1956 Hyd 79 : (1956) 7 STC
423). The Kerala High Court in Cannon Dunkerley & Co. Madras (P.) Ltd. v. STO(AIR 1957 Ker
146 : (1957) 8 STC 347) and the Mysore High Court in Mohammed Khasim v. State of
Mysore((1955) 6 STC 211 (Mys)) took the contrary view and upheld the power of the State to
impose sales tax on the turnover relating to construction works. The Nagpur High Court in Pandit
Banarasi Das v. State of M.P.((1955) 6 STC 93 (Nag)) while declining to follow the decision of the
Madras High Court expressed the view that the State Legislature could pick out a sale from the
composite transactions of a building contract which included transfer of property in materials and
could make the portion attributable to the cost such materials subject to payment of sales tax in
exercise of its undoubted and plenary powers. The Rajasthan High Court in Bhuramal v. State of
Rajasthan(AIR 1957 Raj 104 : (1957) 8 STC 463) took a similar view.

5. This conflict was resolved by this Court in State of Madras v. Gannon Dunkerley & Co. (Madras)
Ltd.(1959 SCR 379 : AIR 1958 SC 560 : (1958) 9 STC 353) wherein the decision of the Madras
High Court was affirmed and it was held that the expression sale goods in Entry 48 in List II of
Seventh Schedule to the Government of India Act 1935 had the same meaning a the said expression
had in the Sale of goods Act 1930 its essential ingredients being an agreement to sell movable for a
price and property passing therein pursuant to that agreement. It was further held that in a building
contract, which is entire and indivisible there is no sale of goods because in such a contract the
agreement between the parties is that the contractor should construct the building according to the
specifications contained in the agreement and in consideration therefore receive payment as
provided therein and in such an agreement, there was neither a contract to sell the materials used in
the constructions nor does the property pass therein as movables. This Court, therefore laid down
that it was not within the competence of the Provincial Legislature under Entry 48 in List II of
Seventh Schedule to the Government of India Act 1935 to impose tax on the supply of materials
used in such a contract treating it as a sale. The said decision though rendered in the context of
Entry 48 in List II of the Seventh Schedule to the Government of India Act 1935 was equally
applicable to the provisions found in Entry 54 in List II of the Seventh Schedule to Constitution. In
the Gannon Dunkerley case it was made clear that the above mentioned conclusions had reference to
works contract which were entire and indivisible and the Court has observed: (SCR p. 427)

                  "It is possible that the parties might enter into distinct and separate contracts one for
                  the transfer of materials for money consideration and the other for payment of
                  remuneration for services and for work done. In such a case there are really two
                  agreements though there is single instrument embodying them and the power of the
                  State to separate the agreement to sell from the agreement to do work and render
                  service and to impose a tax thereon cannot be questioned and will stand untouched by
                  the present judgment."

6. It may also be mentioned that in Mithan Lal v. State of Delhi(1959 SCR 445 : AIR 1958 SC 682 :
(1958) 9 STC 417) 1959 SCR 444; AIR 1958 SC 682; (1958) 9 STC 417 this Court in the context
of a law made by Parliament in relation to Part C States under Article 246(4) of the Constitution has
held that Parliament could impose a tax on the supply of materials in buildings contracts and to
impose it under the name of sales tax because the said power of Parliament was plenary and
absolute and was untrammeled by the limitations prescribed by Article 246 clauses (2) and (3) and
Entry 54 in List II and that the decision in Gannon Dunkerley case 1959 SCR 379; AIR 1958 560;
(1958) 9 STC 353 which was given on a statute passed by the Provincial Legislature under the
Government of India Act 1935, had not application to such a case (SCR p. 451)

7. After the decision in Gannon Dunkerley case the matter with regard to taxability of goods
involved in execution of works contracts was examined by the Law Commission. In its 61st Report
the Law Commission after considering the legal position including the decision in Gannon
Dunkerley case expressed the view;

                  "Before the judgments of the Supreme Court, however sale was usually regarded as
                  including a works contract. The question is ultimately one of policy but the
                  Commission would prefer restoration of the power to the States.

                  Narrow interpretation of the expression sale was not the practice before the Supreme
                  Court judgments. Entries in the legislative list should receive a board interpretation.
                  Fine nuances need not be material. The transactions resemble sale in substance.
                  Hence the power should be give to the States.

                  If this alterative is adopted there are several drafting devices open e.g.;

                  (a) amending State List Entry 54 or

                  (b) adding a fresh entry in the State List, or

                  (c) inserting in Article 366 a wide definition of Sale so as to include works contracts.

                  The commission prefers the last one. It would avoid multiple amendments".

8. Keeping in view the said recommendation of the law Commissions the Constitution was amended
by the Forty-sixth Amendment. By the said amendment clauses (29-A) was inserted in Article 366
and clause (3) of Article 286 was substituted. The other amendments introduce by it are not relevant
for this case. Clause (29-A) of Article 366 is in the following terms;

                  "(29-A) tax on the sale or purchase of goods includes -

                  (a) a tax on the transfer otherwise than in pursuance of a contract of property in any
                  goods for cash deferred payment or other valuation consideration;

                  (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) a tax on the delivery of goods on hire-purchase or any system of payment by
                  installments;

                  (d) a tax on the transfer of the right to use any goods for any purpose (whether or not
                  for a specified period) for cash, deferred payment or other valuable consideration;

                  (e) a tax on the supply of goods by any unincorporated association or body of person
                  to a member thereof for cash deferred payment or other valuable consideration;

                  (f) a tax on the supply by way of or as part of any service or in any other manner
                  whatsoever of goods being food or any other article for human consumption or any
                  drink (whether or not intoxicating) where such supply or service is for cash deferred
                  payment or other valuable consideration,

                  and such transfer delivery or supply of any goods shall be deemed to be a sale of
                  those goods by the person making the transfer delivery or supply and a purchase of
                  those goods by the persons to whom such transfer delivery or supply in made."

9. Clause (3) of Article 286 provides as under;

                  "(3) Any law of a State shall in so far as it impose or authorizes the imposition of -

                  (a) a tax on the sale or purchase of goods declared by Parliament by law to be of
                  special importance in inter-section trade or commerce; or

                  (b) a tax on the sale or purchase of goods being a tax of the nature referred to in sub-
                  clause (b) sub-clause (c) of sub-clause (d) of clause (29-A) of Article 366.

                  be subjects to such restrictions and conditions in regard to the system of levy rates
                  and other incidents of the tax as Parliament may by law specify".

10. After the Forty-sixth Amendment various State Legislature amended their sales tax legislation to
make provisions for imposition of sales tax in relation to works contracts. The constitutional validity
of the Forty-sixth Amendment as well as the amendment made in the State legislations on that basis
were challenged before this Court in appeals as well as writ petitions filed under Article 32 of the
Constitution. The said matters were disposed of by this Court by it judgment in Builders
Associations case. In that case two points were raised before this Court; (i) the Forty-sixth
Amendment was unconstitutional for the reason that it had not been ratified by the legislatures of
not less than one half the Bill which led to the amendment in question was presented to the
President for assent; and (ii) it was not open to the States to ignore the provisions contained in
Article 286 of the Constitution and the provisions of the Central Sales Tax Act 1956 while making
assessments under the sales tax laws passed by the legislatures of the States.

11. Rejecting the first contentions this Court upheld the validity of the Forty-sixth Amendment in
view of the Memorandum dated January 31, 1982 signed by the Secretary General Rajya Sabha
which showed that the Bill before it was presented to the President for his assent has been ratified
by the legislatures of twelve States and it showed that there was due compliance of the provisions
contained in the proviso to Article 368(2) of the Constitution. As regards the second contention this
Court on a consideration of the contentions raised on behalf of the petitioners and the appellants and
the submissions urged by the States to meet those contentions declared that; (SCC p. 675 para 41
SCR p. 355)
                  "(S)ales tax laws passed by the legislatures of States levying taxes on the transfer of
                  property in goods (whether as goods or in some other form) involved in the
                  execution of a works contract are subject to the restriction and conditions mentioned
                  in each clause or sub-clause Article 286 of the Constitution".

12. This Court has observed that Parliament amendment Article 366 by introducing sub-clause (b)
of clause (29-A) in order to overcome the effect of the decision in Gannon Dunkerley case.
Constructing the provision sub-clause (b) of clause (29-A) of Article 366 this Court has laid down:
(SCC p. 669 para 32: SCR pp. 347-48).

                  "Sub-clause (b) of clause (29-A) states that "tax on the sale or purchase of goods'
                  includes among other things a tax on the transfer of property in goods (whether as
                  good or in some other form) involved in the execution of a works contract. It does
                  not say that a tax on the sale or purchase of goods includes a tax on the amount paid
                  for the execution of a works contract. It refers to 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. The emphasis is on the transfer of property in goods (whether as goods or in
                  some other form). The latter part of clause (29-A) of Article 366 of the Constitution
                  makes the positions very clear. While referring to the transfer delivery or supply of
                  any goods that takes place as per sub-clause (a) to (f) of clause (29-A), the latter part
                  of clause (29-A) says that 'such transfer' delivery or supply of any goods shall be
                  deemed to be as sale of those goods by the person making the transfer delivery or
                  supply and a purchase of those goods by the person to who, such transfer delivery or
                  supply is made. Hence a transfer of property in goods under sub-section (b) of clause
                  (29-A) is deemed to be a sale of the goods involved in the execution of a works
                  contract by the person making the transfer and a purchase of those goods by the
                  person to whom such transfer is made. The object of the new definition introduced in
                  clause (29-A) of Article 366 of the Constitution is, therefor, to enlarge the scope of
                  tax on ale or purchase of goods wherever it occurs in the Constitution so that it may
                  include within its scope the transfer delivery or supply of goods that may take place
                  under any of the transactions referred to in sub-clauses (a) to (f) thereof wherever
                  such transfer, delivery or supply becomes subject to levy of sales tax. So construed
                  the expression 'tax on the sale or purchase of goods' in Entry 54 of the State List,
                  therefore, includes a tax on the transfer of roperty in goods (whether as goods or in
                  some other form) involved in the execution of a works contract also. The tax leviable
                  by virtue of sub-clause (b) of clause (29-A) of Article 366 of the Constitution thus
                  becomes subject to the same discipline to which any levy under Entry 54 of the State
                  List is made subject to under the Constitution."

13. Explaining the effect of the Forty-sixth Amendment on the powers of the State to levy sales tax
this Court has held: (SCC p. 672 para 36: SCR pp. 351-52)

                  "Even after the decision of this Court in the State of Madras v. Gannon Dunkerley &
                  Co. (Madras) Ltd. It was quite possible that where a contract entered into in
                  connection with the construction of a building consisted of two parts namely one part
                  relating to sale of materials used in the construction of the building by the contractor
                  to the person who had assigned the contract and another part dealing with the supply
                  of labour and services seals tax was leviable on the goods which were agreed to be
                  sold under the first part. But sales tax could not be levied when the contract in
                  question was a single and indivisible works contract. After the 46th Amendment the
                  works contract which was an indivisible one is by a legal fiction altered into a
                  contract which is divisible into one for sale of goods and the other for supply of
                  labour and services. After the 46th Amendment it has become possible for the States
                  to levy sales tax on the value of goods involved in a works contracts in the same way
                  in which the sales tax was leviable on the price of the goods and materials supplied in
                  a building contract which has been entered into in two distinct and separate parts as
                  stated above. It could not have been the contentions of the revenue prior to the 46th
                  Amendment that when the goods and materials had been supplied under a distinct
                  and separate contract by the contractor for the purpose of construction of a building
                  the assessment of sales tax could be made ignoring the restriction and conditions
                  incorporated in Article 286 of the Constitution. If that was the position can the States
                  contend after the 46th Amendment under which by a legal fiction the transfer of
                  property is goods involved in a works contract was made liable to payment of sales
                  tax that they are not governed by Article 286 while levying sales tax on the sale of
                  goods involved in works contract ? They cannot do so. When the law creates a legal
                  fiction such fiction should be carried to its logical end. There should not be any
                  hesitation in giving full effect to it. If the power to tax a sale in any ordinary sense is
                  subject to certain conditions and restrictions imposed by the Constitution the power
                  to tax a transaction which is deemed to be a sale under Article 366(29-A) of the
                  Constitution should also be subject to the same restrictions and conditions."

14. After referring to the provision of clause (1) Article 286 where the expression a tax on sale or
purchase of goods is used this Court has observed: (SCC pp 669-70 para 32: SCR p. 348)

                  ".... Here again we have to read the expression 'a tax on the sale or purchase of goods
                  found in Article 286 as including the transfer of goods referred to in sub-clause (b) of
                  clause (29-A) of Article 366 which is deemed to be a sale of goods and the tax
                  leviable thereon would be subject to the terms of clause (1) Article 286."

15. Similarly with reference to clause (2) and (3) of Article 286 this Court has observed: (SCC p.
670, para 32: SCR p. 348)

                  ".. Similarly the restrictions mentioned in clause (2) of Article 286 of the
                  Constitution which says that Parliament may by law formulate principle for
                  determining when a sale or purchase of goods takes places in any of the ways
                  mentioned in clause (1) of Article 286 would also be attracted to a transfer of goods
                  contemplated under Article 366(29-A)(b). Similarly clause (3) of Article 286 is also
                  applicable to a tax on a transfer of property referred to in sub-clause (b) of clause
                  (29-A) of Article 366. Clause (3) of Article 286 consists of two parts. Sub-clause (a)
                  of clause (3) of Article 286 deals with a tax on the sale or purchase of goods declared
                  by Parliament by law to by of special importance in inter-State trade or commerce
                  which is generally applicable to all sales including the transfer supply or delivery of
                  gods which are deemed to be sales under clause (29-A) of Article 366 of the
                  Constitution. If any declared goods which are referred to in Section 14 of the Central
                  Sales Tax Act 1956 are involved in such transfer supply of delivery which is referred
                  to in clause (29-A) of Article 366 the sales tax law of a State which provides for levy
                  of sales tax 15 of the Central Sales Tax Act, 1856. Clause (b) is an additional
                  provisions which empowers Parliament to impose any additional restrictions or
                  conditions in regard to the levy of sales tax on transaction which will be deemed to
                  be sales under sub-clause (b) or sub-clauses (c) or sub-clause (d) of clause (29-A) of
                  Article 366 of the Constitution."

16. Rejecting the contention urged on behalf of the States that since sub-clause (b) of clause (3) of
the Article 286 of the Constitution refers only to the transactions referred to in sub-sections (b), (c)
and (d) of clause (29-A) of Article 366 the transactions referred to under those three sub-clauses
would not be subjected to any other restriction set out in clause (1) or clause (2) or sub-clause (a) of
clause (3) of Article 286 of the Constitution this Court has observed: (SCC p. 670 para 32: SCR p.
349)

                  ".... It may be that by virtue of sub-clause (b) of clause (3) of Article 286 it is open to
                  Parliament to impose some other restriction or condition which are not generally
                  applicable to all kinds of sales. That however cannot make the other parts of Article
                  286 inapplicable to the transactions which are deemed to be sales under Article
                  366(29-A) of the Constitution. We are of the view that all transfers deliveries and of
                  Article 366 of the Constitutions are subject to the restrictions and condition
                  mentioned in clause (1) clause (2) and sub-clause (a) of clause (3) of Article 286 of
                  the Constitution and the transfer and (29-A) of Article 366 of the Constitution are
                  subject to an additional restriction mentioned in sub-clause (b) of Article 286(3) of
                  the Constitutions."

17. The contentions urged on behalf of the States that the properties that are transferred to the owner
in the executions of 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 was rejected by the Court
and it was observed that after the Forty-sixth Amendment it is not possible to accede to the plea of
the States that what is transferred in works contract is the right in the immovable property. (SCC p.
674 para 39; SCR p. 354) This Court also rejected the plea put forward on behalf of the States that
the Forty-sixth Amendment had conferred on the States of larger freedom than what they had before
in regard to their power to levy sales-tax under Entry 54 of the State List. It was held that the Forty-
sixth 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 sales of such goods and materials.
(SCC p. 674, para 40: SCR p. 354)

18. Since it had interpreted the relevant provisions of the Constitutions this Court did not consider it
necessary to take up each and every writ petitions to express its opinion on the validity of the
statutory provisions and rules which were questioned before the Court and the petitioners concerned
were given the liberty to approach the authorities under the Sales Tax Act or the High Court
concerned for necessary relief and further made it clear that it would be open to them to question
before the High Court concerned.

19. In pursuance of the decision of this Court in Builders Associations case fresh writ petitions were
filed by the appellants in the appeals challenging the validity of the provisions of the Rajasthan
Sales Tax Act 1954 and the Rajasthan Sales Tax Rules, 1955 relating to imposition of tax on transfer
of property in goods involved in the executions of a works contract. The said writ petitions were
dismissed by a division bench of the Rajasthan High Court by judgment dated September 3, 1991.
The appeals are directed against the said judgment of the High Court.

20. Writ Petition (Civil) No. 197 of 1991 has been filed under Article 32 of the Constitution by
Larsen & Toubro Ltd., a company incorporated under the Companies Act, 1956, which undertakes
contracts for executing turnkey projects involving building construction, erection and installation of
equipment, etc. In the writ petition, the validity of the provisions relating to imposition of tax on the
transfer of property in goods involved in the execution of a works contract contained in the Sales
Tax Laws of the State of Tamil Nadu, Andhra Pradesh and Rajasthan have been challenged. The
reason for approaching this court under Article 32 of the Constitution, as stated in the writ petition,
is that in spite of the decision of this Court in Builders' Association case the petitioner is being
subjected to demands for tax in relation to works contracts by the various States and each State is
wanting to tax the same transaction on the basis that it constitution sale under its sales tax law. In the
said writ petition, the petitioner has imploded all the States as respondent. We purpose to consider
this writ petition with reference to the provisions contained in the Rajasthan Sales Tax Act, 1954
and the Rajasthan Sales Tax Rules, 1955.

21. During the course of arguments, Shri F. S. Nariman and Shri Harish Salve, learned counsel
appearing for the appellants in the appeals, and Shri K. Parasaran, learned counsel appearing for the
petitioner in the writ petition, raised questions having a bearing on the exercise of the legislative
involved in the execution of a works contract, the applicability of the provisions of the Central Sales
Tax Act to such a transfer, the fixation of the suits of such a transfer for the purpose of ascertaining
whether it constitutes a sale outside the State, the measure for levy and fixing the rates for
imposition of such tax and other matters incidental thereto. Since other writ petitions and appeals
involving similar questions were listed for hearing along with these matters, were have heard Shri
K. M. Vijaayan, Shri A. K. Ganguli, Shri B. R. L. Iyengar, Shri Sankar Ghosh, Shri B. Datta and
Shri G. S. Jetly, learned counsel appearing for the contractor in those cases. On behalf of the States,
who are parties in the appeals and the wit petition, we have heard Shri T. S. Krishnamoorthy Iyer,
Shri R. N. Narasinhamoorthy, Shri C. Sitaramiah, Shri S. K. Dholakia, Shri T. A. Ramachandran,
Shri R. N. Sachthey and Shri N. M. Ghatate. Shri Ahuja, learned counsel appealing for the Union of
India, did not choose to make any submission for the reason that the matter appertains to the
legislative powers of the State Legislatures.

22. On behalf of the contractors, it has been urged that in view of the declaration of the law made by
this Court in Builders' Association case the State Legislature, in exercise of its legislative power to
impose a tax on the transfer of property in goods involved in the execution of a works contract
under Entry 54 of the State List read with Article 366(29-A)(b), cannot levy such a tax in respect of
transactions which are in the nature of sales in the course of inter-State trade and commerce or are
sales outside the State levying such tax or sales in the course of import inasmuch as it is beyond the
legislative competence of the State Legislature to impose a sales tax on inter-State sales as well as
sales outside the State and sales in the course of import or export. It has also been urged that the
existence of a law made by Parliament under Article 269(3), Article 286(2) and Article 286(3)(b) is
a condition precedent for the exercise of the legislative power by the State to impose a tax on
transfer of property in goods involved in the execution of a works contract and since no law has
been enacted by Parliament under Articles 269(3), 286(2) and 286(3)(b) in relation to imposition of
tax on transfer of property in goods involved in the execution of a works contract, it was not open to
the State Legislatures to exercise the power to impose such tax. In this regard, it was contended that
the Central Sales Tax Act, 1956, having not been amended after the Forty-sixth Amendment to
include within its ambit a transfer of property in goods involved in execution of works contract, is
not applicable to such a transfer and it cannot be treated to be a law made under Article 269(3) and
Article 286(2) in relation to sales arising out of such transfers. It was further submitted that it is not
permissible for the State Legislature to define the expression 'sale' in a manner as to include within
its ambit an inter-State sale as well as sale outside the State or sale in the course of import and
thereby assume power to impose tax on the same. It has been contended that since the tax livable by
virtue of sub-clause (b) of clause (29-A) of Article 366 is on goods which are involved in execution
of a works contracts, the measure for such an imposition can only be the value of such goods and
the value of the works contract cannot be made the measure or such an imposition and for the same
reason, the rate of imposition cannot also be fixed on the basis of the value of the works contract
and it has to be fixed in relation to the goods which are involved in the execution of a works
contract.

23. In reply to these contentions, it has been urged on behalf of the States that in their absence of the
applicability of the provisions of the Central Sales Tax Act, 1956 to transfer of property in goods
involved in the execution of a works contract and Parliament having not enacted any law under
Articles 269(3) and Article 286(2), there is no limitation whatsoever on the legislative power of the
States to impose tax on such a transfer. It has also been submitted that the nature of works contract
is such that there can never be any sale in the course of inter-State trade or commerce or an outside
sale or a sale in the course of import in respect of goods which are involved in the execution of such
a contract since the transfer of property in such goods takes place only when the goods are
incorporated in the works and this can only be in the State in which the works is to be executed. It
has been further urged that there is a distinction between the nature of the tax and the measure of the
tax and that though a tax on transfer of property in goods involved in the execution of a works
contract is imposed on the goods which are involved in the execution of a works contract, the value
of the works contract can be made the measure for levy of such a tax as well as for prescribing the
rate for imposition of such tax.

24. Before we proceed to consider these submissions, it is necessary to deal with the contention
urged by Shri Narasinhamoorthy, learned counsel appearing for the State of Karnataka, with regard
to the location of the legislative power to impose the tax on transfer of property in goods involved in
the execution of a works contract. Shri Narasinhamoorthy has urged that as a result of the Forty-
sixth Amendment, a new field of taxation in respect of the works contracts has been made available
to the State and that the said power is independent of the legislative power conferred under Entry 54
in List II of the Seventh Schedule to the Constitution and it is not subject to the constitutional
limitations contained in Article 286 of the Constitution. In this regard, Shri Narasinhamoorthy has
a) argued that this question did not directly arise for consideration in Builders' Association case and
the observations with regard to location of the power to impose this tax in the said judgment are in
the nature of incidental or casual observation only and they do not preclude this Bench from
considering this question.

25. We find it difficult to accept this contention. The question whether as a result of the Forty-sixth
Amendment, an independent taxing power has been conferred on the States had arisen for
consideration before this Court in Builders' Association case since it was specifically raised in the
contentions urged on behalf of the States. While summarising the said contentions this Court has
thus mentioned this contention: "Sub-clause (b) of clause (29-A) of Article 366 of the Constitution
has conferred on the legislatures of States, the power to levy tax on works contract which is
independent of the power conferred on the legislatures of State under Entry 54 of the State List."
(SCC p. 668, para 31: SCR pp. 346) The said contention was rejected with these observations: (SCC
p. 669, para 32: SCR pp. 347-48)

                  "... The object of the new definition introduced in clause (29-A) of Article 366 of the
                  Constitution is, therefore, to enlarge the scope of 'tax on sale or purchase of goods'
                  wherever it occurs in the Constitution so that it may include within its scope the
                  transfer, delivery or supply of goods that may take place under any of the
                  transactions referred to in sub-clauses (a) to (f) thereof wherever such transfer,
                  delivery or supply becomes subject to levy of sales tax. So construed the expression
                  'tax on the sale or purchase of goods' in Entry 54 of the State List, therefore, includes
                  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 also. The tax leviable by virtue of sub-
                  clause (b) of clause (29-A) of Article 366 of the Constitution thus becomes subject to
                  the same discipline to which any levy under Entry 54 of the State List is made
                  subject to under the Constitution."

26. The Court has further observed: (SCC p. 674-75, para 40: SCR p. 354)

                  "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 the Seventh Schedule to the Constitution
                  enabling the State to levy tax on sales and purchases independent of Entry 54 thereof.
                  As 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 observation of the Constitution Bench in the case of Bengal
                  Immunity Company Ltd.(Bengal Immunity Co. Ltd. v. State of Bihar, (1955) 2 SCR
                  603 : AIR 1955 SC 661 : (1955) 6 STC 446) 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 intend 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."

27. These observations clearly indicated that the question whether the power to impose tax on the
transfer of property in goods involved in the execution of a works contract is to be found in Entry
54 in List II or is an independent taxing power squarely arose for consideration in Builders
Association case and has been answered categorically. It cannot, therefore, be said that the said
question did not arise for consideration in that case and the observations of this Court in that regard
are incidental or casual in nature only which do not preclude us from going into this question.

28. Shri Narasinhamoorthy has been contended that the view of this Court in Builders' Association
case that power conferred on the State Legislatures to impose tax on the transfer of property in
goods involved in the execution of a works contract is subject to the restrictions and conditions
mentioned in each clause or sub-clause of Article 286 of the Constitution, does not lay down the
correct law and needs to be considered. We are not inclined to agree. The principles governing
reconsideration of an earlier decision are settled by the various decision of this Court. It has been
laid down: "This Court should not, except when it is demonstrated beyond all reasonable doubt that
its privacies ruling, given after due deliberation and full hearing, was erroneous, go back upon its
previous ruling, particularly on a constitutional issue." (See: Lt. Col. Khajoor Singh v. Union of
India((1961) 2 SCR 828, 845 : AIR 1961 SC 532)). In Keshav Mills Co. Ltd. v. CIT((1965) 2 SCR
908 : AIR 1965 SC 1636 : (1965) 56 ITR 365) it has been observed: (SCR pp. 921-22).

                  "When this Court decided questions of law, it decisions are, under Article 141,
                  binding on all courts within the territory of India, and so, it must be the constant
                  endeavor and concern of this Court to introduce and maintain an element of certainty
                  and continuity in the interpretation of law in the country. Frequent exercise by this
                  Court of its power to review its earlier decisions on the ground that the view pressed
                  before it later appears to the Court to be more reasonable, may incidentally tend to
                  make law uncertain and introduce confusion which must be consistently avoided.
                  That is not to say that if on a subsequent occasion, the Court is satisfied that its
                  earlier decision was clearly erroneous, it should hesitate to correct the error; but
                  before a previous decision is pronounced to be plainly erroneous, the Court must be
                  satisfied with a fair amount of unanimity amongst its members that a revision of the
                  said view is fully justified."

29. In Ganga Sugar Co. Ltd. v. State of U.P.((1980) 1 SCC 223 : 1980 SCC (Tax) 90 : (1980) 1 SCR
769) it has been laid down: (SCC p. 233, para 28: SCR p. 782)

                  "... Pronouncements by Constitution Benches should not be treated so cavalierly as to
                  be revised frequently. We cannot devalue the decisions of this Court to brief
                  ephemerality which recalls the opinion expressed by Justice Roberts of the U.S.
                  Supreme Court in Smith v. Allwright(88 L Ed 987 : 321 US 649, 669 (1944)) that
                  adjudications of the Court were rapidly gravitating into the same class as a restricted
                  railroad ticket, good for this day and train only."

30. Having regard to the observations referred to above and the stand of the parties during the
course of arguments before us, we do not consider it appropriate to reopen the issues which are
covered by the decision in Builders' Association case and we will, therefore, deal with the matter in
accordance with the law as laid down in that case that the expression "tax on the sale or purchase of
goods" in Entry 54 of the State list includes 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 also and the tax leviable
by virtue of sub-clause (b) of clause (29-A) of Article 366 of the Constitution is subject to the
discipline to which any levy under Entry 54 of the State List is made subject to under the
Constitution.

31. The legislative power of the States under Entry 54 of the State List is subject to two limitations -
one flowing from the entry itself which makes the said power "subject to the provisions of Entry 92-
A of List I", and the other flowing from the prohibition contained in Article 286. Under Entry 92-A
of List I, Parliament has the power to make a law in respect of taxes on sale or purchase of goods
other than newspapers where such sale or purchase takes place in the course of inter-State trade or
commerce. The levy and collection of such tax is governed by Article 269. This shows that the
legislative power under Entry 54 of the State List is not available in respect of transactions of sale or
purchase which take place in the course of inter-State trade or commerce. Similarly clause (1) of
Article 286 prohibits the State from making a law imposing or authorising the imposition of a tax on
the sale or; purchase of goods where such sale or purchase takes place (a) outside the State or (b) in
the course of the import of goods into or export of the goods out of the territory of India. As a result
of the said provision, 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
take 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
beyond the competence of the State Legislature to make a law imposing 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 commerce or transactions which constitute sale outside the
State or sales in the course of import or export. Consequently, it is not permissible for a State to
frame the legislative enactment in exercise of the legislative power conferred by Entry 54 in the
State List in a manner as to assume the power to impose tax on such transactions and thereby
transgress these constitutional limitations. Apart from the limitations referred to above which curtail
the ambit of the legislative competence of the State Legislatures, there is clause (3) of Article 286
which enables Parliament to make a law placing restrictions and conditions on the exercise of the
legislative power of the State under Entry 54 in State List in regard to the system of the levy, rates
and other incidents of tax. Such a law may be in relation to (a) goods declared by Parliament by law
to be of special importance in inter-State trade or commerce, of (b) to taxes of the nature referred to
in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366. When such a law is enacted by
Parliament the legislative power of the States under Entry 54 in State List has to be exercise subject
to the restrictions and conditions specified in that law. In exercise of the power conferred by Article
286(3)(a) Parliament has enacted Sections 14 and 15 of the Central Sales Tax Act, 1956. No law
has, however, been made by Parliament in exercise of its power under Article 286(3)(b).

32. On behalf of the contractors, it has been contended that the legislative power conferred on the
States under Entry 54 of the State List can be exercised only after Parliament has enacted a law
under Article 269(3) formulating principles for determining when a sale or purchase of goods takes
place in the course of inter-State trade or commerce and a law under Article 286(2) formulating
principles for determining when a sale or purchase of goods takes place in any of the ways
mentioned in clause (1) of Article 286. The submission is that no law as envisaged by Article 269(3)
and 286(2) has been enacted in respect of imposition of tax on transfer of property in goods
involved in the execution of a works contract. It has been urged that Central Sales Tax Act, 1956
which formulates the principles under Articles 269(3) and 286(2) is not applicable because after the
Forty-sixth Amendment the Central Sales Tax Act has not been amended so as to make it applicable
to transfer of property in goods involved in the execution of a works contract. On behalf of the
State, it is submitted that since the Central Sales Tax Act has not been made applicable and no law
as envisaged under Article 269(3) and 286(2) has been enacted, limitation on the legislative power
conferred on the States under Entry 54 in the State List on the basis of Articles 269 and 286 cannot
be involved. We are unable to accept either of these contentions. With regard to imposition of tax
sale or purchase of goods, after the Forty-sixth Amendment, legislation by Parliament in respect of
following matters is envisaged:

                  (i) formulation of principles for determining when a sale or purchase of consignment
                  of goods takes place in the course of inter-State trade or commerce (Article 269(3));

                  (ii) formulation of principles for determining when a sale or purchase of goods takes
                  place in any of the ways mentioned in clause (1) of Article 286 (Article 286(2)); and

                  (iii) declaration of goods to be of special importance in inter-State trade or commerce
                  and specification of restrictions and conditions in regard to system of levy rates and
                  other incidence of tax in respect of a tax on the sale or purchase of such goods.
                  (Article 286(3)(a)); and
                  (iv) specification of restrictions and conditions in regard to system of levy, rats and
                  other incidents of tax in respect of a tax on the sale or purchase of goods being tax of
                  the nature referred to in sub-clause (b), sub-clause (c) and sub-clause (d) of clause
                  (29-A) of Article 366. (Article 286(3)(b)).

33. The Central Sales Tax Act is a law in respect of matters (i), (ii) and (iii) referred to above. It is a
composite law which has been enacted under Entry 92-A of List I read with clause (1) of Article
269 as well as under clause (3) of Article 269, clause (2) of Article 286 and sub-clause (a) of clause
(3) of Article 286. Chapter II (Sections 3,4 and 5) bears the heading "Formulation of principles for
determining when a sale or purchase of goods takes place in the course of inter-State trade or
commerce or outside a State or in the course of import or export." Section 3 lays down the
conditions when a sale or purchase of goods can be said to take place in the course of inter-State
trade or commerce and it is referable to clause (3) of Article 269. Section 4 prescribes the conditions
when a sale or purchase of goods is said to take place outside a State and Section 5 prescribes the
condition when a sale or purchase of goods is said to take place in the course of import or export.
Sections 4 and 5 are thus referable to clause (2) of Article 286. Chapter III (Sections 6 to 13) bears
the heading 'Inter-State sales tax' and the said provisions are referable to Entry 92-A of List I and
sub-clause (g) of clause (1) of Article 269. Chapter IV (Sections 14 and 15) bears the heading
"Goods of special importance in inter-State trade or commerce" and the said provisions are referable
to sub-clause (a) of clause (3) of Article 286.

34. The question is whether in the absence of an amendment in the Central Sales Tax Act
specifically applying its provisions to a transfer of a property in goods involved in the execution of a
works contract, the provisions of Section 3, 4 and 5 contained in Chapter II can be held applicable
to such a transfer. In this context, it may be mentioned that prior to the Forty-sixth Amendment, a
distinction was being made between a 'works contract' which was entire and indivisible and a works
contract composed of two distinct and separate contract-one, for transfer of materials and other, for
payment of remuneration for services and for work done. The non-availability of the legislative
power of States under Entry 54 of the State List, as construed by this Court in the Gannon
Dunkerley case was confined, in its application, to works contracts falling in the first category, i.e.,
contracts which were entire and indivisible and it was permissible for the State to impose tax on sale
or purchase of goods where the parties had entered into distinct and separate contracts one for the
transfer of materials and other for payment of service and for work done. The provisions of Sections
3, 4 and 5 of the Central Sales Tax Act were applicable where there were two separate contracts. In
Builders' Association case it has been observed: (SCC p. 672, para 36: SCR p. 351 F-G)

                  "After the 46th Amendment the works contract which was an indivisible one is by a
                  legal fiction altered into a contract which is divisible into one for sale of goods and
                  the other for supply of labour and services. After the 46th Amendment, it has become
                  possible for the States to levy sales tax on the value of goods involved in a works
                  contract in the same way in which the sales tax was leviable on the price of the goods
                  and materials supplied in a building contract which had been entered into in two
                  distinct and separate parts as stated above."

35. This would mean that as a result of the Forty-sixth Amendment, the contract which was single
and indivisible has been altered by a legal fiction into a contract which is divisible into one for sale
of goods and other for supply of labour and services and as a result such a contract which was single
and indivisible has been brought on a par with a contract containing two separate agreements. Since
the provisions of Section 3, 4 and 5 were applicable to such contracts containing two separate
agreements, there is no reason why the said provisions should not apply to a contract which, though
single and indivisible, by legal fiction introduced by the Forty-sixth Amendment, has been altered
into a contract which is divisible into one for sale of goods and other for labour and services.
Reference may be made in this context to the oft-quoted observations of Lord Asquith in East End
Dwellings Co. Ltd. v. Finsbury Borough Council((1952) AC 109 : (1951) 2 All ER 587,599):

                  "If one are bidden to treat an imaginary state of affairs as real, one must surely,
                  unless prohibited from doing so, also imagine as real the consequences and incidents
                  which, if the putative state of affairs had in fact existed, must inevitably have flowed
                  from or accompanied it... The statute says that one must imagine a certain state of
                  affairs. It does not say that, having done so, one must cause or permit one's
                  imagination to boggle when it cones to the inevitable corollaries of the state of
                  affairs."

36. If the legal fiction introduced by Article 366(29-A)(b) is carried to its logical end it follows that
even in a single and indivisible works contract there is a deemed sale of the goods 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.

37. For the reasons aforesaid, we are of the view that even in the absence of any amendment having
been made in the Central Sales Tax Act (after the Forty-sixth Amendment) expressly including
transfers of property in goods involved in execution of a works contract, the provisions contained in
Sections 3, 4 and 5 would be applicable to such transfers and the legislative power of the State to
impose tax on such transfer under Entry 54 of the State List will have to be exercised keeping in
view the provisions contained in Section 3, 4 and 5 of the Central Sales Tax Act. For the same
reasons Section 14 and 15 of the Central Sales Tax Act would also be applicable to the deemed sales
resulting from transfer of property in goods involved in the execution of a works contract and the
legislative power under Entry 54 in State List will have to be exercised subject to the restrictions
and conditions prescribed in the said provisions in respect of goods that have been declared to be of
special importance in inter-State trade or commerce.

38. Since the question of levy of inter-State sales tax under Section 6 of the Central Sales Tax Act is
not in issue in these cases which only relate to imposition of sales tax by the States, we do not
propose to go into the question, whether such a tax can be levied on deemed sales resulting from
transfer of property in goods involved in the execution of a works contract without amending the
definition of 'sale' in Section 2(g) of the Central Sales Tax Act, so as to include such transfers within
its ambit. It is, however, made clear that the absence of any amendment in the definition of sale
contained in Section 2(g) of the Central Sales Tax Act, 1956 so as to include transfer of property in
goods involved in execution of a works contract does not in any way affect the applicability of the
Sections 3, 4 and 5 and Sections 14 and 15 of the Central Sales Tax Act to such transfers.

39. On the basis of Article 286(3)(b) which has been introduced by the Forty-sixth Amendment, it
has been urged on behalf of the contractors that till Parliament makes a law specifying the
restrictions and conditions in regard to the system of levy, rates and other incidents of the tax
referred to in Article 366(29-A)(b), it is not open to the State Legislatures to impose a tax on the
transfers referred to in sub-section (b) of clause (29-A) of Article 366. In support of this submission,
reliance has been placed on the decision of this Court in Bengal Immunity Co. Ltd. v. State of Bihar
wherein it was held that until Parliament by law made in exercise of the powers vested in it by
clause (2) provides, no State could impose or authorise the imposition of any tax on sales or
purchase of goods when such sales or purchases take place in the course of inter-State trade or
commerce. The aforesaid observations made in the context of clause (2) of Article 286, as it stood at
that time, can have no bearing on sub-clause (b) of clause (3) of Article 286. Under clause (2) of
Article 286, as it stood at the time when Bengal Immunity case was decided, the States were
precluded from imposing or authorising imposition of tax on the sale or purchase of any goods or
sale or purchased of any goods in the course of inter-State trade or commerce except insofar as
Parliament may by law or otherwise provide. In the absence of a law by Parliament so providing, it
was not permissible for the State Legislatures to impose such a tax. The scheme of sub-clause (b) of
clause (3) of Article 286 is, however, different. In view of sub-clause (b) of clause (29-A) of Article
366, the State Legislatures are competent to impose tax on transfer of property in goods involved in
the execution of a works contract and under sub-clause (b) of clause (3) of Article 286 Parliament
has been empowered to make a law specifying restrictions and conditions in regard to the system of
levy, rates or incidence of such tax. This does not mean that the legislative power of the State cannot
be exercised till the enactment of a law under sub-clause (b) of clause (3) of Article 286 by
Parliament. It only means that in the event of a law having been made by Parliament under Article
286(3)(b) the exercise of the legislative power of the State under Entry 54 in List II to impose a tax
of the natured referred to in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366 would be
subject to restrictions and conditions in regard to the system of levy rates and other incidents of tax
contained in the said law. The existence of a law enacted under Article 286(3)(b) cannot, therefore,
be regard as a condition precedent for the exercise of the taming power of the State under Entry 54
in List II to impose a tax of the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of
Article 366. This does not, however, absolve Parliament from enacting a law as envisaged by article
286(3)(b). Keeping in view the grievance of the contractors that there is wide disparity in the sales
tax legislation of the various States in the matter of imposition, mode of assessment, rate etc., of the
tax on deemed sales resulting from transfer of property in goods involved in the execution of a
works contract referred to in sub-clause (b) of clause (29-A) of Article 366, the need for the law
envisaged by Article 286(3)(b) cannot be minimised.

40. On behalf of the States it has been seriously contended that a deemed sale resulting from
transfer of property in goods involved in the execution of a works contract can never be a sale in the
course of inter-State trade or commerce and it cannot be an outside sale or a sale in the course of
import since the transfer of property in the goods take place only at the stage when the goods are
incorporated in the goods takes place only in the State where the works is required to be executed.
On behalf of the contractors, on the other hand, it has been urged that a works contract can involve
transactions constituting a sale in the course of inter-State trade and commerce as well as an outside
sale or a sale in the course of import and that is a matter which will have to be considered in
accordance with the principles contained in Sections 3,4 and 5 of the Central Sales Tax Act keeping
in view the terms and conditions of the particular contract. In this regard, the learned counsel have
placed reliance on a number of decisions of this Court wherein the provisions of Sections 3 and 4 of
the Central Sales Tax Act, 1956 have been considered. We do not propose to go into this
controversy because the question whether a deemed sale resulting from transfer of property in goods
involved in the execution of a particular works contract amount to a sale in the course of inter-State
trade or commerce under Section 3 of the Central Sales Tax Act or and outside sale under Section 4
of the Central Sales Tax Act or a sale in the course of import under Section 5 of the Central Sales
Tax act has to be decided in the light of the particular terms of the works contract and it cannot be
decided in the abstract. As at present advised, we are not in a position to say the in no case, can
there be a sale in the course of inter-State trade or commerce or an outside sale or a sale in the
course of import in respect of a deemed sale resulting from transfer of property in goods involved in
the execution of a works contract falling within the ambit of sub-clause (b) of clause (29-A) of
Article 366 of the Constitution.

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 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.

42. Having thus defined the ambit of the field available to the State Legislature for enacting a law
imposing a tax on transfer of property in goods involved in the execution of a works contract, we
may now examine some aspects of such a law to which reference has been made during the course
of arguments by the learned counsel for the contractors. We propose to deal with these aspects
separately.

Definition of "Sale"

43. It has been contended on behalf of the contractors that while it is permissible for the State
Legislature to define the expression 'sale' in sales tax legislation to include transfer of property in
goods involved in the execution of a works contract it is not permissible for the State Legislature to
locate the situs of such sale in a manner as to treat a sale in the course of inter-State trade or
commerce or a sale outside the State or a sale in the course of import and export, as a sale inside the
State and thereby assume the power to impose a tax on sales which are actually sales in the course
of import and export. In this regard, it may be stated that so far as sales in the course of inter-State
trade or commerce are concerned, the position is well settled that the situs of the sale or purchase is
wholly irrelevant as regards its inter-State character. (See: Bengal Immunity Co. Ltd. v. State of
Bihar.) In Onkarlal Nandlal v. State of Rajasthan it has been observed: (SCC p. 413, para 7: SCR p.
1086)

                  "... There is, in our opinion, no antithesis between a sale in the curse of inter-State
                  trade or commerce and a sale inside the State. Even an inter-State sale must have a
                  situs and the situs may be in one State or another. It does not involve any
                  contradiction in saying that an inter-State sale or purchase is inside a State or outside
                  it."

44. The location of the situs of the sale in sales tax legislation of the State would therefore, have no
bearing on the charge ability of tax on sales in the course of inter-State trade and commerce since
they fall outside the field of legislative competence of the State Legislatures and will have to be
exclude while assessing the tax liability under the State legislation. The same is true of sales which
are outside the State and sales in the course of import and export., The State Legislature cannot so
frame its law as to convert an outside sale or a sale in the course of import and export into a sale
inside the State, The question whether a sale is an outside sale or a sale inside the State or whether it
is a sale in the course of import or export will have to be determined in accordance with the
principles contained in Sections 4 and 5 of the Central Sales Tax Act and the State Legislature while
enacting the sales tax legislation for the State cannot make a departure from those principles.
Measure of Tax

45. On behalf of the contractors, it has been urged that under a law imposing a tax on the transfer of
property in goods involved in the execution of a works contract under Entry 54 of the state List read
with Article 366(29-A) b), the tax is imposed on the goods which are involved in the execution of a
works contract and the measure for levying such a tax can only be the value of the goods sops
involved and the value of the works contract cannot be made the measure for levying the tax. The
submission is further that the value of such goods would be the cost of acquisition of the goods by
the contractor and, therefore, the measure for levy of tax can only be the cost at which the goods
involved in the execution of a works contract were obtained by the contractor. On behalf of the
States, it has been submitted that since the property in goods which are involved in the execution of
a works contract passes only when the goods are incorporated in the works, the measure for the levy
of the tax would be the value of the goods at the time of their incorporation in the works as well as
the cost of incorporation of the goods in the works. We are in agreement with the submission that
measure for the levy of the tax contemplated by Article 366(29-A)(b) is the value of the goods
involved in the execution of a works contract. In Builders' Association case it has been pointed out
that in Article 366(29-A)(b), "(t)he emphasis is on the transfer of property in goods (whether as
goods or in some other form)". (SCC p. 669, para 32: SCR p. 347) This indicates that thought the
tax is imposed on the transfer of property in goods involved in the execution of a works contract, the
measure for levy of such imposition is the value of the goods involved in the execution of works
contract. We are, however, unable to agree with the contention urged on behalf of the contractors
that the value of such goods for levying the tax can be assessed only on the basis of the cost of
acquisition of the goods by the contractor. Since the taxable event is the transfer of property in
goods involved in the execution of a works contract and the said transfer of property in such goods
takes place when the goods are incorporated in the works, the value of the goods which can
constitute the measure for the levy of the tax has to be the value of the goods at the time of
incorporation of the goods in the works of and not the cost of acquisition of the goods by the
contractor. We are also unable to accept the contention urged on behalf of the States that in addition
to the value of the goods involved in the execution of the works contract the cost of incorporation of
the goods in the works can be included in the measure for levy of tax. Incorporation of the goods in
the works forms part of the contract relating to work and labour which is distinct from the contract
for transfer or property in goods and, therefore, the cost of incorporation of the goods in the works
cannot be made a part of the measure for levy of tax contemplated by Article 366(29-A)(b).

46. With regard to the determination of the value of the goods which are involved in the execution
of a works contract the submission of the learned counsel appealing for the States is that a more
convenient mode for such determination is to take the value of the works contract as a whole and
deduct therefrom the cost of labour and services rendered by the contractor during the course of
execution of the works contract. The submission of the learned counsel is that this mode would
prevent evasion of tax. The learned counsel for the contractors have submitted that in that event the
following deductions should be made from the value of the entire contract in order to arrive at the
value of the goods involved in the execution of a works contract:

                  (i) labour charges for execution of the works;

                  (ii) amounts paid to a sub-contractor for labour and services;

                  (iii) charges for planning, designing and architect's fees;
                  (iv) charges for obtaining on hire the machinery and tools used in the execution of
                  the works contract;

                  (v) cost of consumables such as water, electricity, fuel, etc.

                  (vi) transportation charges for transport of goods to the place of works;

                  (vii) overhead expenses of the head office and branch office including rents, salary,
                  electricity, telephone charges, etc., and interest charges to banks and financial
                  institutions;

                  (viii) profits expected on such contract.

47. Keeping in view the legal fiction introduced by the Forty-sixth Amendment whereby the works
contract which was entire and indivisible has been altered into a contract which is divisible into one
for sale of goods and other for supply of labor and services, the value of the goods involved in the
execution of works contract on which tax is leviable must exclude the charges which appertain to
the contract for supply of labour and services. This would mean that labour charges for execution of
works, (item No. (i)), amounts paid to a sub-contractor for labour and service (item No. (ii)),
charges for planning, designing and architect's fees (item No. (iii)), charges for obtaining on hire or
otherwise machinery and tools used in the execution of a works contract (item No. (iv)), and the
cost of consumables such as water, electricity, fuel, etc., which are consumed in the process of
execution of a works contract (item No. (v)) and other similar expenses for labour and services will
have to be excluded as charges for supply of labour and services. The charges mentioned in item
No. (vi) cannot, however, be excluded. The position of a contractor in relation to a transfer of
property in dealer in goods in the execution of a works contract is not different from that of a dealer
in the goods who is liable to pay sales tax on the sale price charged by him from the customer for
the goods sold. The said price includes the cost of bringing the goods to the place of sale. Similarly,
for the purpose of ascertaining the value of goods which are involved in the execution of a works
contract for the purpose of imposition of tax., the cost of transportation of the goods to the place of
works has to be taken as part of the value of the said goods. The charges mentioned in item No. (vii)
relate to the various expenses which form part of the cost of establishment of the contractor.
Ordinarily the cost of establishment is included in the sale price charge by a dealer from the
customer for the goods sold. Since a composite works contract involves supply of materials as well
as supply of materials and the part between the part of the contract involving supply of materials
and the part involving supply of labour and services. The cost of establishment of the contractor
which is relatable to supply of labour and services cannot be included in the value of the goods.
Similar apportionment will have to be made in respect of item No. (viii) relating to profits. The
profits which are relatable to the supply of material can be included in the value of the goods and
the profits which are relatable to supply of labour and services will have to be excluded. This means
that in respect of charges mentioned in item Nos. (vii) and (viii), the cost of establishment of the
contractor as well as the profit earned by him to the extent the same are relatable to supply of labour
and services will have to be exclude. The amount so deductible would have to be determined in the
light of the facts of a particular case on the basis of the material produced by the contractor. The
value of the goods involved in the execution of a works contract will, therefore, have to be
determined by taking 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;

                  (g) other similar expenses relatable to supply of labour and services;

                  (h) profit earned by the contractor to the extent it is relatable to supply of labour and
                  services.

The amounts deductible under these heads will have to be determined in the light of the facts of a
particular case on the basis of the material produced by the contractor.

48. We may, however, make it clear that apart from the deductions referred, to above, it will be
necessary to exclude from the value of the works contract the value of the goods which are not
taxable in view of Section 3, 4 and 5 of the Central Sales Tax Act and goods covered by Section 14
and 15 of the Central Sales Tax Act as well as goods which are exempt from tax under the sales tax
legislation of the State. The value of goods involved in the execution of a works contract will have
to be determined after making these deductions and exclusions from the value of the works contract.

49. Normally, the contractor will be in a position to furnish the necessary material to establish the
expenses that were incurred under the aforesaid heads of deduction for labour and services. But
there may be cases where the contractor has not maintained proper accounts or the accounts
maintained by him are not found to be worthy of credence by the assessing authority. In that event, a
question would arise as to how the deduction towards the aforesaid heads may be made. On behalf
of the States, it has been urged that it would be permissible for the State to prescribe a formula on
the basis of a fixed percentage of the value of the contract as expenses towards labour and services
and the same may be deducted from the value of the works contract and the said formula need not
be uniform for all works contracts and may depend on the nature of the works contract. We find
merit in this submission. In cases where the contractor does not maintain proper accounts or the
accounts maintained by him are not found worthy of credence it would, in our view, be permissible
for the State legislation to prescribe a formula for determining the charges for labour and service by
fixing a particular percentage of the value of the works contract and to allow deduction of the
amount thus determined from the value of the works contract for the purpose of determining the
value of the goods involved in the execution of the works contract. It must, however, be ensured that
the amount deductible under the formula that is prescribed for deduction towards charges for labour
and services does not differ appreciably from the expenses for about and services that would be
incurred in normal circumstances in respect of that particular type of works contract. Since the
expenses for labour and services would depend on the nature of the works contract and would not be
the same for all types of works contracts, it would be permissible, indeed necessary, to prescribe
varying scales for deduction on account of cost of labour and services for various types of the works
contracts.

Rate of Tax.

50. A question has been raised whether it is permissible for the State Legislature to levy tax on
deemed sales falling within the ambit of Article 366(29-A)(b) by prescribing a uniform rate of tax
for all goods involved in the execution of a works contract even though different rates of tax are
prescribed for sale of such goods. The learned counsel for the contractors have urged that it would
not be permissible to impose two different rates of tax in respect of sale of the same article, one rate
when the article is sold separately and a different rate when there is deemed sale in connection with
the execution of a works contract. On behalf of the States it has been submitted execution of a
works contract. On behalf of the States it has been submitted that it is permissible for the State to
impose a particular rate of tax on all goods involved in the execution of a works contract which may
be different from the rates of tax applicable to those goods when sold separately. In the field of
taxation the decisions of this Court have permitted the legislature to exercise an extremely wide
discretion in classifying items for tax purposes, so long as it refrains from clear and hostile
discrimination against particular persons or classes. (See East India Tobacco Co. v. State of A.P.P.M.
Ashwathanarayana Shetty v. State of Karnataka Federation of Hotel & Restaurant Association of
India v. Union of India and Kerala Hotel & Restaurant Association v. State of Kerala((1990) 2 SCC
502 : 1990 SCC (Tax) 309 : (1990) 1 SCR 516, 530.)) Imposition of sales tax at different rates
depending on the value of the annual turnover was upheld in S. Kodar v. State of Kerala similarly
imposition of purchase tax at different rates for sugar mills and khandsari units was upheld in Ganga
Sugar Co. Ltd. v. State of U.P. In our opinion, therefore, it would be permissible for the State
Legislature to tax all the goods involved in the execution of a works contract at a uniform rate which
may be different from the rates applicable to individual goods because the goods which are involved
in the execution of the works contract when incorporated in the works can be classified into a
separate category when incorporated in the works can be classified into a separate category for the
purpose of imposing the tax and a uniform rate may be prescribed for sale of such goods.

51. The aforesaid discussion leads to the following conclusions.

                  (1) In exercise of its legislative power to impose tax on sale or purchase of goods
                  under entry 54 of the State List read with Article 366(29-A)(b) the State Legislature,
                  while imposing 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 is not competent to
                  impose a tax on such a transfer (deemed sale) which constitutes a sale in the course
                  of inter-State trade or commerce or a sale outside the State or a sale in the course of
                  import or export.

                  (2) The provisions of Sections 3, 4 and 5 Sections 14 and 5 of the Central Sales Tax
                  Act, 1956 are applicable to a transfer of property in goods involved in the execution
                  of a works contract covered by Article 366(29-A)(b).

                  (3) While defining the expression sale in the sales tax legislation it is open to the
                  State Legislature to fix the situs of a deemed sale resulting from a transfer falling
                  within the ambit of Article 266(29-A)(b) but it is not permissible for the State
                  Legislature of define the expression sale in a way as to bring within the ambit of the
                  taxing power a sale in the course of inter-State trade or commerce, or a sale outside
                  the State or a sale in the course of import and export.
                  (4) The tax on transfer of property in goods (whether as goods or in some other
                  form) involved in the execution of a works contract falling within the ambit of
                  Article 366(29-A)(b) is leviable on the goods involved in the execution of a works
                  contract and the value of the goods which are involved in execution of the works
                  contract would constituted the measure for imposition of the tax.

                  (5) In order to determine the value of the goods which are involved in the execution
                  of a works contract for the purpose of levying the tax referred to in Article 366(29-
                  A)(b), it is permissible to take the value of the works contract as the basis and the
                  value of the goods involved in the execution of the works contract can be arrived at
                  by deducting expenses incurred by the contractor for providing labour and other
                  services from the value of the works contract.

                  (6) The charges for labour and services which are required to be deducted from the
                  value of the works contract would cover (i) labour charges for execution of the works
                  (ii) amount paid to a sub-contractor for labour and services (iii) charges for obtaining
                  on hire or otherwise machinery and tools used for execution of the works contract;
                  (iv) charges for planning designing and architect's fees and (v) cost of consumables
                  used in execution of the works contract (vi) cost of establishment of the contractor to
                  the extent it is relatable to supply of labour and services (viii) other similar expenses
                  relatable to supply of labour and services and (viii) profit earned by the contractor to
                  the extent it is relatable to supply of the labour and services.

                  (7) To deal with cases where the contractor does not maintain proper accounts or the
                  account books produced by him are not found worthy of credence by the assessing
                  authority the legislature may prescribe a formula for deduction of cost of labour and
                  services on the basis of a percentage of the value of the works contract but while
                  doing so it has to be ensured that the amount deductible under such formula does not
                  differ appreciably from the expenses for labour and services that would be incurred
                  in normal circumstances in respect of that particular type of works contract. It would
                  be permissible for the legislature to prescribe varying scales for deduction on account
                  of cost of labour and services for various types of works contract.

                  (8) While fixing the rate of it is permissible to fix a uniform rate of tax for the
                  various goods involved in the execution of a works contract which rate may be
                  different from the rates of tax fixed in respect of sales or purchase of those goods as a
                  separate article.

52. We would not proceed to consider the provisions of the Rajasthan Sales Tax Act in the light of
the principles referred to above. In this context, we may briefly outline the general scheme of the
said enactment. Section 2 contains the definitions wherein goods is defined in clause (h), 'sale' is
defied in clause (o), 'sale price' is defined in clause (p), 'taxable turnover' is defined in clause (s) and
'turnover' is defined in clause (t). Section 3 provides for incidence of taxation. Section 4 provides
for exemption from tax of goods specified in the Schedule to the Act. Section 5 provides for rate of
tax. Section 6 provides for registration of a dealer. Section 7 relates to submission of returns.
Sections 10 to 20 relate to assessment of tax. Section 23 deals with refunds. Section 26 confers the
power to make rules.

53. After the Forty-Sixth Amendment, the Rajasthan Sales Tax Act was amended by the Rajasthan
Finance Act, 1987 (Act No. 7 of 1987) By the said Act, among other provisions, the definition of
'sale' contained in clause (o) of Section 2 was substituted, certain amendments were made in
definition of 'sale price' contained in clause (p) of Section 2, the definition of 'turnover' contained in
clause (t) of Section 2 was amended, and clause (cc) was inserted in sub-section (2) of Section 26 to
confer power to frame rules to provide for the determination of the amount payable to the dealer for
the transfer of property in goods (whether as goods or in some other form) made in the course of
execution of a contract or works contract. By Rajasthan Sales Tax (Amendment) Act, 1988 (Act No.
9 of 1988) certain further amendments were made in the definition of sale contained in clause (o)
and definition of turnover contained in clause (t) of Section 2. Clause (u) was introduced in Section
2 to define 'works contract' Sub-section (3) was Rajasthan Sales Tax (Second Amendment) Act,
1988 (Act No. 13 of 1988), the definition of 'works contract' contained in clause (u) of Section 2
was substituted. After the decision of this Court in Builder Association case Rajasthan Sales Tax
(Amendment) Act, 1990 (Act No. 3 of 1990) was enacted whereby some minor changes were made
in the definition of 'sale' contained in clause (o) and the last proviso which was inserted in the
definition of sale price contained in clause (p) by Rajasthan Act No. 7 of 1987 was deleted.

54. In the Rajasthan Sales Tax Rules, 1955, by Notification dated May 28, 1987 sub-rule (2) was
inserted in Rule 29 to provide for deductions of turnover relating to works contracts. After the
Builders' Association case the said sub-rule (2) of Rule 29 was substituted by Notification dated
June 28, 1989.

55. Before the High Court, the appellants had confined their challenge to sub-section (3) of Section
5 and sub-section (2-C) of Section 7 of the Act and sub-rule (2) of Rule 29 and sub-rule (2) of Rule
46 of the Rajasthan Sales Tax Rules. Sub-rule (2) of Rule 29 relates to sub-section (3) of Section 5
whereas sub-rule (2) of Rule 46 relates to sub-section (2-C) of Section 7 of the Act. During the
course of arguments before this Court, the learned counsel for the appellants have also challenged
the validity of Explanation 1 in definition of 'sale' contained in clause (o) of Section 2 of the Act.

56. Clause (o) of Section 2 which defines 'sale', as amended by the enactments referred to above,
provides as under -

                  "(o) Sale with all its grammatical variations and cognate expressions, means every
                  transfer of the property in goods (other than by way of mortgage, hypothecation,
                  charge or pledge) by one person to another for cash, or deferred payment or other
                  valuable consideration and includes -

                  (i) a transfer, otherwise than in pursuance of a contract, of property in goods for cash,
                  deferred payment or other valuable consideration;

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

                  (iii) a delivery of goods on hire-purchase or other system of payment by installments;

                  (iv) a transfer of the right to use goods for any purpose (whether or not for a
                  specified period) for cash, deferred payment or other valuable consideration;

                  (v) a supply of goods by any unincorporated association or body of persons to a
                  member thereof for cash, deferred payment or other valuable consideration;
                  (vi) a supply by way of or as part of any service or in any other manner whatsoever,
                  of goods, being food or any other article for human consumption or any drink
                  (whether or not intoxication), where such supply is for cash, deferred payment or
                  other valuable consideration. -

                  and such transfer, delivery or supply shall be deemed to be a sale and the word'
                  purchase' or 'buy' shall be construed accordingly.

                  Explanation I. - The transfer of property in goods (whether as goods or in some other
                  form) involved in the execution of a works contract shall bel deemed to take place
                  within the State of Rajasthan if the goods are within the State at the time of their
                  appropriation or application or use for the execution of the works contract
                  irrespective of the place where the agreement for such works is made of from where
                  the goods are transferred or delivered for use in the works contract.

                  Explanation II. - Where the work under a works contract is spread over many State
                  including the State of Rajasthan, the proportionate work done within the State of
                  Rajasthan shall be deemed to be the sale under this clause irrespective of the place of
                  agreement or works or the point or movement of goods involved in the execution of
                  that works contract."

57. The main part of the said definition incorporation the provisions contained in clause (29-A) of
Article 366. Explanations I and II seek to fix the situs of the deemed sale in respect of goods
involved in the execution of a works contract. The objection of the learned counsel for the
appellants is that Explanation I widens the amplitude of the expression 'sale' so as to include deemed
sale which are in the course of inter-State trade and commerce as well as sales which take place
outside the State and enables even such sales being subjected to imposition of tax under the
Rajasthan Sales Tax Act.

58. Sub-section (3) of Section 5 provides as under -

                  "(3) Notwithstanding anything contained in this Act, in the case of a works contract,
                  the turnover of such contract shall be subjected to tax;

                  Provided that such deductions as may be prescribed may be allowed to a contractor
                  while determining his tax liability."

59. The expression 'turnover' is defined in clause (t) as under -

                  "(t) 'turnover' means the aggregate amount of sale prices received or receivable for a
                  sale, transfer, delivery or supply by a dealer in any of the ways referred to in clause
                  (o):

                  (Provisos - Omitted)

                  Explanation. - Subject to such conditions and restrictions, if any, as may be
                  prescribed in this behalf -

                  (i) The amount for which goods are sold or supplied shall in relation to a works
                  contract be deemed to be the amount payable to the dealer for carrying out such
                  contract less the cost of labour up to such extent as may be prescribed.

                  #* * *"##

60. In this context reference may also be made to the definition of 'taxable turnover' contained in
clause (s) of Section 2 which provides as follows -

                  "(s) 'taxable turnover' means that part of turnover which remains after deducting
                  therefrom the aggregate amount of the proceeds of sale of goods -

                  (i) on which no tax is leviable under this Act,

                  (ii) which have already been subject to tax under this Act,

                  (iii) which have been sold to persons outside the State of consumption outside the
                  State, and

                  (iv) which are taxable at a point of sale within the State subsequent to the sale by the
                  dealer and such sale is covered by a declaration as may be required under any
                  provisions of this Act or the rules made thereunder.

                  #* * *"##

61. Sub-rule (2) of Rule 29 of the Rajasthan Sales Tax Rules, as substituted by Notification dated
June 24, 1989 provides as under -

                  "(2) In case of a works contract, tax shall be computed on the turnover of the
                  contractor after deducting -

                  (i) The value of the goods transferred in execution of works contract, whether as
                  goods or in some other form which have already suffered tax at the rate prescribed
                  under Section 5 or which are exempted from tax under Section 4 of the Act.

                  (ii) All sums towards labour charges, which are directly correlated with the goods,
                  property in which has passed in the execution of works contract, whether as goods or
                  in some other form.

Provided that where the labour charges are not determinable from the accounts of the contractors, or
are considered unreasonably high considering the nature of the contract, the deductions towards
labour charges shall be allowed by the assessing authority according to the limits prescribed in
column 3 for the type of contract specified in column 2 of the table given below -

(TABLE - Omitted)"

62. Sub-section (2-C) of Section 7 lays down -

                  "(2-C) Notwithstanding anything contained in this act, in the case of a works
                  contract, the tax may be deducted in such manner and under such circumstances as
                  may be prescribed from every bill of payment to a contractor."

63. Sub-rule (2) of Rule 46 of the Rajasthan sales Tax Rules provides as under -
                  "46. (2)(a) In a works contract, the awarder in case of its being a department of any
                  Government, a Corporation, a Government undertaking, a Cooperative Society, a
                  local body, a trust or a private or public limited company, responsible for paying any
                  sum to a contractor for carrying out any works, shall, at the time of credit of such
                  sum to the account of the contractor or at the time of payment thereof in cash or by
                  issue of a cheque or draft or by any other mode, deduct an amount equal to three per
                  cent of such sum towards the tax and shall amount equal to three per cent of such
                  sum towards the tax and shall issue a certificate of deduction of tax to the contractor
                  in Form ST. 45.

                  Provided that such deduction of tax shall be subject to adjustment at the time of
                  assessment of the contractor.

                  (b) The tax deducted under clause (a) of this sub-rule by the awarder of a contract
                  shall be deposited by such awarder in a single challan in Form ST-10 for all the
                  contractors falling within the jurisdiction of one Assessing Authority in the account
                  of such authority, within 15 days of the close of each month and a monthly statement
                  of such deposits shall be furnished by him to such authority in Form ST-46, along
                  with Part IV of the challan, within 15 days of the deposit.

                  (c) If the tax is not deducted from the bill as provided in clause (a) above, the
                  awarder shall be liable to pay (as provided in the Act) and the contractor shall be
                  liable to pay the said tax together with interest at the rate specified in the Act from
                  the date of the receipt of the payment by him."

64. We will first examine the validity of sub-section (3) of Section 5 read with sub-rule (2) of Rule
29 of the Rajasthan Sales Tax Rules. In this regard, it is necessary to mention that while making
provision in relation to works contracts, Section 5(3) makes a departure from the other provisions
inasmuch as in the case of a works contract the tax is to be levied on the turnover of such contract
and not on the taxable turnover as provided in subsection (1) of Section 5 in respect of other sales.
The proviso to sub-section (3) of Section 5 prescribes that the deductions, as may be prescribed may
be allowed to the contractor while determining his tax liability.

65. The expression 'turnover' as defined in clause (t) of Section 2 of the Rajasthan Sale Tax Act,
1954 means the aggregate of the amount of sale prices received or receivable for a sale, transfer
delivery or supply by a dealer in any of the ways referred to in clause (o) wherein the expression
'sale' is defined. With regard to works contracts, Explanation (i) to clause (t) of Section 2 lays down
that the amount for which the goods are sold or supplied shall, in relation to a works contract, be
deemed to be the amount payable to the dealer for carrying out such contract less the cost of labour
up to such extent as may be prescribed. Section 5(3) read with clause (t) of Section 2 of the
Rajasthan Sales Tax Act, thus, provides that in relation to a after deducting (i) the cost of labour up
to such extent as may be prescribed in the rules framed under the Act in view of the Explanation (i)
to Section 2(t), and (ii) such deductions as may be prescribed under the rules in view of the proviso
to Section 5(3). The legislature has not made any express provisions of exclusion of transactions
constituting deemed sales which take place in the course of inter-State trade or commerce or outside
the State or in the course of import and export in relation to which the State Legislature lacks the
competence to impose a tax under Entry 54 of the State List. Nor has any provision been made with
regard to sales of goods which are declared to be of special importance in inter-State trade or
commerce and are governed by Section 14 and 15 of the Central Sales Tax Act. The matter has been
left to the discretion of the rule-making authority to prescribe whether deductions in respect of such
transactions should be allowed or not.

66. In this context reference may be made to sub-section (1) of Section 5 of the Rajasthan Sales Tax
Act which applies to other transaction of sale that are taxable under the Rajasthan Sales Tax Act.
Section 5(1) provides that the tax payable by a dealer under the Act shall be at such single point in
the series of sales by successive dealers as may be prescribed and shall be levied at such rate not
exceeding fifty per cent on the taxable turnover, as may be notified by the State Government in the
Official Gazette. In this provision the legislature has used the expression 'taxable turnover', which
has been defined under clause (s) of Section 2 to mean that part of turnover which remains after
deducting therefrom the aggregate amount of the proceeds of sale of goods: (i) on which no tax is
leviable under the Act, (ii) which have already been subjected to tax under the Act, (iii) which have
been sold to persons outside the State for consumption outside the State, and (iv) which are taxable
at a point of sale within the State subsequent to the sale by the dealer and such sale is covered by a
declaration as may be required under any provision of the Act or the rules made thereunder. These
provisions indicate that in respect of other sales the amount of the proceeds of sale of goods on
which tax is not leviable under the Act has to be excluded from the turnover before it becomes
chargeable to tax. This position is further clarified by the proviso to sub-section (1) of Section 5
which prescribes that the tax in respect of the sale of any goods which are not included in the
Schedule, shall not be leviable (a) if such sale takes place in the course of inter-State trade or
commerce within the meaning of Section 3 of the Central Sales Tax Act, or (b) if such sale takes
place outside the State within the meaning of sub-section (1) of Section 4 of the Central Sales Tax
Act; or (c) if such sale takes place in the course of import or export within the meaning of Section 5
of the Central Sales Tax Act. In the said proviso reference has also been made to sale of goods
which have been declared by Section 14 of the Central Sales Tax Act to be of special importance in
inter-State trade or commerce as well as to Section 15 of the Central Sales Tax Act and it has been
directed that in respect of such goods the tax shall not exceed the limits laid down in clause (a) of
Section 15 of the Central Sales Tax Act, and that tax shall not be payable on such goods if the sale
takes place outside the State within the meaning of Seclusion 4 of the Central Sales Tax Act and
further that the tax shall not be leviable in the State at more than one stage. In view of the non-
obstinate clause in sub-section (3) of Section 5, the said provisions contained in sub-section (1) are
not applicable to works contracts and sub-section (3) of Section 5 alone is applicable.

67. A comparison of the provisions contained in sub-section (3) of Section 5 read with Section 2(t)
and sub-section (1) of Section 5 read with Section 2(s) would indicate that in relation to works
contracts the legislature has made a departure in the matter of chargeability of the tax and by using
the expression "turnover" instead of "taxable turnover" in Section 5(3) it has enlarged the filed of
taxability to permit tax being levied on sales in the course of inter-State trade or commerce, sales
outside the State and sales in the course of import and export and to ignore the conditions and
restrictions placed by Section 15 of the Central Sales Tax Act in relation to imposition of tax on
goods which are declared to be of special importance in inter-State trade or commerce under Section
14 of the Central Sales Tax Act. the proviso to Section 5(3) does not oblige the rule-making
authority to frame a rule allowing deductions for the turnover of the amount of proceeds of sale of
goods on which no tax is leviable under the Act so as to exclude the abovementioned sales from
levy of tax. The rule-making authority would not be contravening the mandate of the statute if it
does not allow deduction of the amount of proceeds for sale of goods on which no tax is leviable
under the Act from the turnover.

68. The constitutional validity of a statute has to be determined on the basis of its provisions and on
the ambit of the operation as reasonably construed and it so judged, it does not pass the test of
constitutionality it cannot be pronounced valid merely because it is administered in a manner which
might not conflict with the constitutional requirements. (See: Collector of Customs v. Nathella
Sampathu Chetty) the rules framed under the Rajasthan Sales Tax Act would not, therefore, by of
any assistance in resolving the question regarding the validity of Section 5(3). We have however,
examined the rules that have been framed and we find that they do not improve the position. The
relevant provisions in this regard are contained in sub-rule (2) of Rule 29 of the Rajasthan Sales Tax
Rules which makes provision for deductions from the turnover in the case of a works contract. The
said sub-rule (2) contains two clauses. Clause (i) which is referable to the proviso to sub-section (3)
of Section 5, provides for deduction of the value of the goods transferred in execution of works
contract, whether as goods or in some other form, which have already suffered tax at the rates
prescribed by Section 5 or which are exempted from tax under Section 4. Clause (ii) is referable to
Explanation (i) of Section 2(t) and it provides for deduction of all sums towards labour charges,
which are directly co-related with the goods, property in which has passed in the execution of works
contract, whether as goods or in some other form.

69. Shri Krishnamurthy Iyer, the learned counsel appearing for the State of Rajasthan, has submitted
that the words "which have already suffered tax at the rates prescribed under Section 5" are wide
enough to permit deduction in respect of goods on which no tax is leviable under sub-section (1) of
Section 5 of the Act, namely, sales in the course of inter-State trade or commerce or sales outside
the State or in the course of import and export as well as sales of goods which have been declared to
be of special importance in the course of inter-State trade or commerce under Section 14 of the
Central Sales Tax Act and are governed by Section 15 of the said Act. We find it difficult to accept
this contention. The words "which have already suffered at the rates prescribed under Section 5"
only refer to the goods which have already been subjected to tax under the Act at the rates specified
under Section 5, and their value is to be excluded from the turnover. The goods on which no tax is
leviable under sub-section (1) of Section 5 are not subject to any tax under the Act and there is no
question of such goods having suffered tax at the rates prescribed under Section 5. In this context
we may again refer to the definition of taxable turnover contained in Section 2(s) of the Rajasthan
Sales Tax Act wherein provision is made under clauses (i) to (iv) for deduction from the turnover
for arriving at the taxable turnover. Clause (i) refers to sale of goods "on which no tax is leviable
under this Act" and clause (ii) refers to sale of goods "which have already been subjected to tax
under this Act."These clauses show that the legislature has made a distinction between a sale of
goods on which no tax is leviable and a sale of goods which has already been subjected to tax under
the Act. Clause (i) of sub-rule (2) of rule 29 is a provision similar to that contained in clause (ii) of
Section 2(s). It is therefore, not possible to construe clause (i) of sub-rule (2) of Rule 29 to mean
that sales on which no tax is leviable under sub-section (1) of Section 5 are to be excluded from the
turnover for the purpose of computing tax on such turnover in relation to a works contract.

70. The High Court has upheld the validity of sub-section (3) of Section 5 by taking into account the
provisions of sub-rule (2) of Rule 29. But, while considering the said provisions the High Court has
failed to notice that under clause (i) of sub-rule (2) of Rule 29, transfer of property in goods
involved in the execution of a works contract, on which no tax is leviable under Section 5, are not
required to be deducted from the turnover. The High Court also failed to attach importance to the
use of the word 'turnover' (instead of word 'taxable turnover') in sub-section (3) of Section 5 as a
result of which the amplitude of the incidence of tax has been widened so as to include transactions
which are outside the sphere of taxation, available to the State Legislature under Entry 54 of the
State List. We are, therefore, unable to uphold the decision of the High Court in this regard and it
must be held that sub-section (3) of Section 5 transgresses the limits of the legislative power
conferred on the State legislature under entry 54 of the State List inasmuch as it enables tax being
imposed on deemed sales resulting from transfer of property in goods (whether as goods or in some
other from) involved in the execution of a works contract which take place in course of inter-State
trade or commerce, or which take place outside the State or which take place in the course of import
and export within the meaning of Sections 3, 4 and 5 respectively of the Central Sales Tax Act and
it does not take into account the conditions and restrictions imposed by Section 15 of the Central
Sales Tax Act on goods declared to be of special importance in inter-State trade or commerce under
Section 14 of the Central Sales Tax Act. Clause (i) of sub-rule (2) of Rule 29 of the Rajasthan Sales
Tax rules also suffers from the same infirmity. Section 5(3) of the Rajasthan Sales Tax Act and
clause (i) of sub-rule (2) of Rule 29 of the Rajasthan Sales Tax Rules must, therefore, be held to be
unconstitutional and void.

71. Since the of Section 5(3) goes the root of the imposition of tax and in the absence of the said
provision the tax cannot be levied, the appellants in the appeals are entitled to succeed. In the
circumstances, it is not necessary to examine the other questions relating to the validity of
Explanation 1 to clause (o) of Section 2 of the Rajasthan Sales Tax Act, Explanation (i) to clause (t)
of Section 2, sub-section (2-C) of Section 7, clause (ii) of sub-rule (2) of Rule 29 and sub-rule (2) of
Rule 46 of the Rajasthan Sales Tax Rules.

72. The appeals are, therefore, allowed. The judgment and order of the High Court is set aside, and
it is declared that sub-section (3) of Section 5 of the Rajasthan Sales Tax Act and clause (i) of sub-
rule (2) of Rule 29 of the Rajasthan Sales Tax Rules are unconstitutional and void. The parties are
left to bear their own costs in these appeals.

73. In view of the declaration that Section 5(3) of the Rajasthan Sales Tax Act is unconstitutional
and void, the assessment order dated September 1, 1990 passed by the Commercial Taxes Officer,
Kota, which is under challenge in W.P. No. 197 of 1991, cannot stand. The said writ petition, insofar
as it relates to the provisions of the Rajasthan Sales Tax Act and the said assessment order dated
September 1, 1990 is allowed to the extent that the assessment order dated September 1, 1990 is
quashed. We do not express any opinion on the questions raised in the writ petition with regard to
the validity of the provisions of the Tamil Nadu General Sales Tax (Fourth Amendment) Act, 1984.
Tamil Nadu General Sales Tax Act (Forth Amendment) Act, 1986, and the rules and orders issued
thereunder and the proceedings for assessment of tax payable by the petitioner under the Andhra
Pradesh General Sales Tax Act, 1957 and orders passed therein. The petitioner would be at liberty to
institute appropriate proceedings for redress of its grievance in respect of those matters before the
appropriate forum. The writ petition will and disposed of accordingly with no order as to costs.

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