State of Orissa vs M/s. B. Engineers & Builders Ltd. & Ors.

HELD 1.1 In the Circular dated 04.11.1986, the State Government expressed the view that the reimbursement in question was required to be allowed in terms of Clause 45.2 of GCC but later on, in the Circular dated 07.11.2001, the State Government took a diametrically opposite view to say that such reimbursement was not to be allowed in relation to the works contract. Obviously, the said Circulars had been based on the given day understanding of the State Government on the operation of the relevant provisions of law and the terms of contract. Such vacillating understanding on the part of the State Government cannot be determinative of the contractual obligations of the parties, which are required to be decided with reference to the principles of law applicable and on true construction of the terms of contract. [Paras 11][829-A-D]

1.2 As per Clause 45.2 of GCC, the amount of sales tax on completed items of works of the contract, as might have been levied upon, and paid by, the contractor, except the penalty levied for contractor’s own fault, was to be reimbursed to the contractor on proof of payment and assessment. It was also provided in Clause 45.2 itself that, during the course of contract period, deductions of sales tax on works contract turnover would be made from the running bills at the prescribed rates and conditions. It is not in dispute that while making payment of various running bills in the course of execution of contracts by the respondent No. 1, deductions were indeed made towards the amount of sales tax and such deducted amount of sales tax was deposited with the Sales Tax Department of the Government of Orissa. Such deductions and deposits with Sales Tax Department had clearly been in accordance with the stipulation contained in the second part of Clause 45.2 ibid. However, and even after making deductions in terms of the second part of Clause 45.2, the appellant State seeks to deny the operation of first part of this Clause 45.2 (whereby the contractor is entitled to reimbursement of the amount of sales tax). Taking up the main plank of the case of the & ORS.

appellant about the nature, extent and implication of the levy of sales tax in relation to a works contract, it could be usefully recapitulated that in view of the forty–sixth amendment to the Constitution of India, Clause (29-A) came to be inserted to Article 366; and, by virtue of sub-clause (b) thereof, it became permissible for the States to levy sales tax on the price of goods and materials used in works contracts as if there was a sale of such goods and materials. Thus, after the forty-sixth amendment to the Constitution, the works contract is divided into two parts by a legal fiction: one for sale of goods/materials and other for supply of labour/services; and it is possible for the States to levy sales tax on the value of goods/materials involved in such works contract. [Paras 12,13][829-D-H; 830-B-D]

1.3 As regards the relevant provisions of the State enactment, it is at once clear that after the aforesaid forty-sixth amendment to the Constitution, the State of Orissa also proceeded to carry out the necessary amendment to the Act of 1947 and provided for levy of sales tax in relation to a works contract, inter alia, by expanding the definition of “Sale” so as to include therein the transfer of property in goods involved in the execution of a works contract; and by specifying that “taxable turnover” in respect of works contract shall be deemed to be the gross value received or receivable by dealer for carrying out such contract less the amount of labour and service charges incurred in execution of the contract. On their essence and intent, what turns out of these amended provisions of the Act of 1947 is that in relation to a works contract, there would be deemed to be the sale of goods involved in execution thereof; and sales tax would be leviable on the taxable turnover (and not on the gross turnover) of such works contract. Contextually read, it is but apparent that the expression “completed item of work” in Clause

45.2 ibid., signifies the intent that reimbursement would be permissible only after execution of a particular item of work has been completed and accomplished. This expression is clearly intended to contradistinguish the cases where any item of work remains incomplete and yet any claim for reimbursement of the sales tax levied is sought for. This expression cannot be read to mean as if signifying the levy of sales tax itself on the completed item of work because such reading of this expression would be totally disjunct from the context and would be entirely detached from the real intent. Viewed from another angle, it would appear that if the contention on the part of the appellant as regards interpretation of the first part of Clause 45.2 is accepted, it would practically result in holding that the said Clause 45.2 is not at all applicable to a works contract. Such a result cannot be countenanced for two major reasons: First, that if such a clause was not to be applied to the works contract, there was no reason to have retained the same in relation to the works contracts awarded to the respondent No. 1. When such a stipulation forms the part of contract, it would be rather preposterous to say that the same would stand but would not operate. Secondly, and more significantly, in the second part of this very Clause 45.2, it has specifically been provided that deductions of sales tax on works contract turnover at source shall be made from each bill. It is not far to seek, and is rather evident on a bare reading of Clause

45.2 in its entirety, that it is to apply in relation to the sales tax on works contract too. The second part of Clause 45.2 had indeed been applied and enforced by the appellant and its offices by regularly making deduction of the amount of sales tax in the running payments of the respondent no.1 and by regularly depositing the same with the Sales Tax Department. It would again be preposterous, nay absurd, to say that the second part of Clause 45.2 entitling the appellant and its offices to make deduction of sales tax on works contract turnover at source could be enforced but when it comes to reimbursement, the first part of this very Clause 45.2 would not apply to a works contract. [Paras 13.1, 14.1 and 14.2][830-E-H; 831-G-H; 832-A-E]

1.4 The terms of contract bind the parties thereto and unless there be any case of ambiguity or violation of law, ordinarily, the terms of contract, revealing the intent of parties, are required to be given effect to. By virtue of Clause 45.2 of GCC, the contractor company is rightfully entitled to claim reimbursement of the amount of sales tax levied on the taxable turnover of the works contracts executed by it. A fortiori, the grounds on which the appellant seeks to resist the claim of the contractor company for such reimbursement, i.e., with reference to the expression “completed item of work” in the said Clause 45.2 and with reference to the stipulations contained in Clauses 13.3 of ITB & ORS.

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

1.5 The basic reason for which the Court feels impelled to refer to these Circulars now and at this concluding stage is borne out of the contents of the Circular dated 04.11.1986, which was issued by the State Government closely following the amendment of the Act of 1947 with insertion of the provisions aimed at facilitating the levy of sales tax on the goods involved in a works contract. Being aware of its obligation in terms of the said Clause

45.2 of GCC (or similar clause/s in other contracts), the instructions were issued by the State Government in the said Circular dated 04.11.1986 for: (a) making reimbursement of the amount of sales tax actually paid by the contractor on production of necessary documentary evidence of such payment; (b) not making reimbursement against the amount of penalty, if any, levied upon the contractor; and (c) obtaining undertaking from the contractor to refund the excess amount of reimbursement, in case of reduction of its liability towards sales tax in appeal or revision [vide sub-paragraphs (i) to (iii) of paragraph 2 of the Circular dated 04.11.1986]. However, the significant feature is that in the second set of instructions in this very Circular, as contained in sub-paragraph (iv) of paragraph 2 thereof, the Engineers-incharge were instructed that no such clause for reimbursement of sales tax or payment of such tax by the department to the contractor be inserted in the Notice Inviting Tenders or Tender document; and no tender containing any clause or condition to that effect be accepted. The said second set of instructions in sub-paragraph (iv) of paragraph 2 of this Circular was, obviously, meant for future contracts, but, its contrast with the first set of instructions in the preceding subparagraphs fortifies the conclusion that the State Government was fully conscious of its obligation to make reimbursement in relation to the existing contracts which carried such reimbursement clause/s. Evidently, the doubts at the later stage, as indicated in the Circular dated 27.01.2000, and converse decision against the obligation of reimbursement, as stated in the Circular dated 07.11.2001, had only been of unwarranted attempts to wriggle out of the contractual obligations with rather perverse construction of the plain terms of the existing contracts. The propositions in the said ill-advised Circular dated 07.11.2001 stand disapproved with the conclusions reached by us hereinbefore. [Paras 17.1, 17.3][835-B-G; 836-C-D]

Builders’ Association of India and Ors. v. Union of India and Ors. (1989) 2 SCC 645 : [1989] 2 SCR 320;

Gannon Dunkerley and Co. and Ors. v. State of

Rajasthan and Ors.: (1993) 1 SCC 364 : [1992] 3 Suppl. SCR 103; State of U.P. and Ors. v. P.N.C. Construction C. Ltd. and Ors. (2007) 7 SCC 320 : [2007] 8 SCR

927 – referred to.