Holding

A contractor is entitled to reimbursement of sales tax levied on the taxable turnover of a works contract under Clause 45.2 of the GCC; the expression “completed item of work” does not preclude such reimbursement, and the State’s later circulars cannot defeat the contractual obligation.

Summary

The State of Orissa appealed a High Court order that granted M/s B. Engineers & Builders Ltd. reimbursement of sales tax paid on works contracts executed between 1998‑99 and 2000‑01. The contracts contained Clause 45.2 of the General Conditions of Contract (GCC) which obliges the employer to reimburse sales tax on completed items of work, subject to proof. The State had earlier issued a 1986 circular directing such reimbursement, but later circulars (2000 and 2001) reversed this view, claiming that sales tax on completed works is not exigible and that the contractor’s bid already included all taxes. The Supreme Court examined the meaning of “completed item of work”, the effect of the 46th Constitution Amendment and the amended Orissa Sales Tax Act, and held that the contractor is entitled to reimbursement of sales tax levied on the taxable turnover of the works contracts. The later circulars were disapproved as they could not override clear contractual terms. Consequently, the State’s appeal was dismissed.

Issues considered

The contractor’s entitlement to reimbursement of sales tax under Clause 45.2 of the GCC.
Whether the expression “completed item of work” excludes reimbursement of sales tax.
The effect of Clause 13.3 of the Instructions to Bidders and Clause 45.1 of the GCC on the reimbursement claim.
The validity of the State’s later circulars (2000, 2001) in altering contractual obligations.
The interpretation of the Orissa Sales Tax Act, 1947 (ss.2(g), 2(jj), 5(2)(AA)) post‑46th Amendment.

Legislation cited

Constitution (Forty‑sixth Amendment) Act, 1982s. Article 366(29‑A)
Orissa Sales Tax Act, 1947s. 2(g), s. 2(jj), s. 5(2)(AA)

Subjects

sales taxworks contractreimbursementGeneral Conditions of ContractOrissa Sales Tax Act46th Amendmentcontractual interpretationcircularstax liabilitycompleted item of work

Judgment

[2020] 6 S.C.R. 801 801

STATE OF ORISSA A
v.
M/s. B. ENGINEERS & BUILDERS LTD. & ORS.
(Civil Appeal No. 2516 of 2020)
JUNE 05, 2020 B
[A. M. KHANWILKAR, INDIRA BANERJEE AND
DINESH MAHESHWARI, JJ.]
Orissa Sales Tax Act, 1947 – ss.2(g),(jj) & 5(2)(AA) –
Amendment in 1947 Act for levying sales tax on works contracts –
C
Circular dated 04.11.1986 issued for reimbursement of sales tax
paid by contractor in case of works contracts executed on or after
07.04.1984 on production of proof thereof – Works contracts
executed by respondent no.1 – Sales tax levied for 1998-99 to 2000-
01 on the taxable turnover – Respondent claimed reimbursement –
In the meantime, in view of another Circular, it was directed that no D
reimbursement of sales tax be made under Clause 45.2 of General
Conditions of Contract (GCC) until further clarification – By
impugned Circular dated 07.11.2001, State Govt. instructed not to
reimburse the sales tax levied on cement, steel etc. and directed for
its recovery wherever reimbursed – Quashed by High Court – Held:
E
Grounds on which the appellant resists respondent’s claim for
reimbursement, i.e., w.r.t the expression”completed item of work” in
Clause 45.2, stipulations contained in Clauses 13.3 of Instructions
to Bidders (ITB) and 45.1 of GCC, are untenable – Contents of
initial Circular dated 04.11.1986 issued by State Govt. closely
following the amendment of 1947 Act aimed at facilitating the levy F
of sales tax on the goods involved in a works contract – In said
Circular, the State Govt. issued directions for reimbursement of sales
tax w.r.t the existing work contracts; and also directed that any
such clause for reimbursement be not included in future contracts –
Second set of instructions of the said Circular was obviously meant
G
for future contracts and fortifies the conclusion that State Govt.
was fully conscious of its obligation to make reimbursement w.r.t
the existing contracts carrying such reimbursement clause/s – High
Court rightly allowed the writ petition filed by respondent no.1 –
Propositions in ill-advised Circular dated 07.11.2001 stand
H
801
802 SUPREME COURT REPORTS [2020] 6 S.C.R.

A disapproved – Constitution (Forty-sixth Amendment) Act, 1982 –
Art.366(29-A) – Orissa Sales Tax (Amendment) Act, 1984 – Orissa
Sales Tax (Amendment) Act, 1985 – Contract.
Dismissing the appeal, the Court
HELD 1.1 In the Circular dated 04.11.1986, the State
B 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
C 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
D 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
E 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
F 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
G 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
H amount of sales tax). Taking up the main plank of the case of the
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 803
& ORS.

appellant about the nature, extent and implication of the levy of A
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
B
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 C
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 D
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 E
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 F
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 G
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 H
804 SUPREME COURT REPORTS [2020] 6 S.C.R.

A 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
B
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
C 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
D
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
E 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]
F
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
G 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
H reference to the stipulations contained in Clauses 13.3 of ITB
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 805
& ORS.

and 45.1 of GCC, are wholly untenable and the appellant and its A
contracting offices are under obligation to honour the claim so
made by the contractor company. [Paras 15, 16, 17][833-B; 834-
E-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 B
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 C
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, D
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 E
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 F
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 sub-
paragraphs fortifies the conclusion that the State Government
was fully conscious of its obligation to make reimbursement in G
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 H
806 SUPREME COURT REPORTS [2020] 6 S.C.R.

A 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]
B 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
C 927 – referred to.
Case Law Reference
[1989] 2 SCR 320 referred to Para 5.1
[1992] 3 Suppl. SCR 103 referred to Para 5.1
D
[2007] 8 SCR 927 referred to Para 6.2
CIVIL APPELLATE JURISDICTION: Civil Appeal No.2516 of
2020.
From the Judgment and Order dated 05.08.2008 of the High Court
E of Orissa at Cuttack in W.P.(C) No.8857 of 2003.
Maninder Singh, Sr. Adv., Shibashish Misra, S. Debabrata Reddy,
Chandan Kumar Mandal, Advs. for the Appellant.
Sukumar Pattjoshi, Sr. Adv., Durga Datta, Mushtaq Ahmad, Mrs.
Kirti Renu Mishra, Ms. Apurva Upmanyu, Ms. C.K. Sucharita, Advs.
F for the Respondents.
The Judgment of the Court was delivered by
DINESH MAHESHWARI, J.
1. Before entering into the subject matter, we may notice at the
G outset that this petition for special leave to appeal is barred by limitation
by a period of 274 days. Though objections have been raised on behalf
of the contesting respondent against the prayer for condonation of delay
but, the record shows that notices on the application seeking condonation
of delay as also on the petition for leave to appeal were issued way back
on 18.11.2011 and for a long time, the matter remained pending while
H
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 807
& ORS. [DINESH MAHESHWARI, J.]

awaiting service on the respondents. Ultimately, after completion of A
service, we had heard learned counsel for the contesting parties on merits.
Having regard to the circumstances of the case and after having heard
the contesting parties on merits, we find no reason to close the matter
only on the ground of delay. Accordingly, delay in filing is condoned.
1.1. Leave granted. B
2. This appeal by special leave is directed against the judgment
and order dated 05.08.2008 as passed by the Orissa High Court at Cuttack
in W.P. (C) No. 8857 of 2003, whereby the High Court accepted the
claim of the respondent No. 1 of present appeal1, for reimbursement of
the amount of sales tax levied in respect of the works contracts executed C
by it. The High Court also directed the Opposite Parties to grant
appropriate reimbursement as claimed by the writ petitioner in terms of
Clause 45.2 of the General Conditions of Contract2 under the National
Competitive Bidding Contract3 while quashing the clarification Circular
dated 07.11.2001 issued by the Government of Orissa in its Department
of Water Resources. D

2.1. The appellant State of Orissa has challenged the order so
passed by the High Court while essentially raising the questions concerning
the nature and implication of the sales tax, levied in relation to the works
contracts executed by the writ petitioner, under the Orissa Sales Tax
Act, 19474 as amended in terms of the Constitution (Forty-sixth E
Amendment) Act, 19825; and concerning the operation and import of
the relevant stipulations in the contracts in question.
3. The factual and background aspects of the matter, being not of
much dispute and confined to a narrow compass, may be noticed, in
brief, as follows: F
3.1. The respondent No. 1 of this appeal, said to be a company of
engineers and builders, who had been engaged in undertaking various
works contracts, responded to the tenders floated by the respondent
Nos. 6 to 18 (various offices of the Government of Orissa) and, on being
determined as the lowest tenderer, was awarded the contracts from G
time to time.
1
Hereinafter also referred to as ‘the writ petitioner’ or ‘the contractor company’.
2
‘GCC’ for short
3
‘NCB’ for short
4
Hereinafter also referred to as ‘the Act of 1947’
5
Hereinafter also referred to as ‘the forty-sixth amendment’ H
808 SUPREME COURT REPORTS [2020] 6 S.C.R.

A 3.2. It is not in dispute that the aforesaid contracts awarded to the
respondent No. 1 carried the stipulations regarding taxes in Clause 45 of
GCC. The claim of the respondent No. 1 for reimbursement of sales tax
had been essentially based on Clause 45.2 of GCC, which carried the
stipulation that any Central or State sales tax and other taxes on completed
items of works (excluding penalty), as may be levied and paid by the
B
contractor shall be reimbursed by the employer on proof of payment
(and) on production of assessment certificate.
3.3. The sales tax regime in the State of Orissa is primarily governed
by the Act of 1947. By way of the Orissa Sales Tax (Amendment) Act,
1984 and the Orissa Sales Tax (Amendment) Act, 19856, the amendments
C were brought about in the Act of 1947 with effect from 07.04.1984
whereby, inter alia, the definition of expression “Works contract” was
inserted; the definition of the expression “Sale” was expanded so as to
include therein the transfer of property in goods involved in the execution
of a works contract; and specific meaning was also assigned to the
D expression “taxable turnover” in respect of a works contract for the
purpose of the rate of tax payable by a dealer. The rate of tax payable
by a dealer on the “taxable turnover” in respect of “works contract”
was fixed at 4%.
3.4. On 04.11.1986, the Government of Orissa, in its Department
E of Irrigation and Power, issued a Circular to the effect that in case of
works contract executed on or after 07.04.1984, containing the specific
clause for reimbursement of sales tax, the Department of Irrigation and
Power would be liable for reimbursement of the amount of sales tax
actually paid by the concerned contractor on production of necessary
documentary evidence. Pursuant to these observations and directions,
F reimbursement of the sales tax paid by the contractor company in respect
of assessment years 1995-1996 to 1997-1998 was allowed.
3.5. Later on, the State Government issued a notification under
Section 5 of the Act of 1947 whereby, the rate of tax payable by a dealer
on the taxable turnover in respect of the works contract was increased
G to 8%. Thereafter, by way of the orders of assessment for the years
1998-1999 to 2000-2001, the Assessing Authority levied sales tax @ 8%
6
These amendments were introduced after the forty-sixth amendment of the Constitution
whereby, Clause (29-A) was inserted to Article 366 and it was, inter alia, provided that
the expression “tax on the sale or purchase of goods” includes a tax on the transfer of
H property in goods involved in the execution of a works contract.
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 809
& ORS. [DINESH MAHESHWARI, J.]

on the taxable turnover in respect of the works contracts executed by A
the contractor company. With reference to such assessments, the
contractor company claimed reimbursement of the sales tax paid in
respect of the works contracts executed by it.
3.6. However, in the meantime, the Government of Orissa, in its
Department of Water Resources, issued another Circular dated B
27.01.2000 to the Engineers-incharge of various offices and projects
that the question as to whether sales tax deducted from the bills of the
contractor and paid to the sales tax officer will be again reimbursed to
the contractor whose quoted price was inclusive of all taxes as per Clause
13.3 of the Instructions to Bidders7, was under active consideration; and
it was directed that no reimbursement of sales tax be made under Clause C
45.2 of GCC until clarification was communicated in that regard.
3.7. Thereafter, on 07.11.2001, the State Government, in its
Department of Water Resources, issued the impugned Circular, said to
be a clarificatory one, stating that a completed item of works, for which
the contractor had entered into an agreement with the department, was D
either an immovable property or a works contract and in either case,
was not exigible to sales tax; and therefore, the question of payment of
sales tax on such immovable property or works contract and
consequential reimbursement by the department as per Clause 45.2 of
the General Conditions of Contract, or similar provision in other contracts, E
did not arise. Accordingly, the State Government instructed its Engineers-
incharge not to reimburse the sales tax levied on cement, steel etc.; and
also directed for recovery of the amount from the contractor wherever
any such amount of sales tax had been reimbursed. These directions of
the Government were followed up by another Circular dated 19.06.2002
to the same effect. F

3.8. In view of the aforementioned Circulars dated 07.11.2001
and 19.06.2002, its claim, for reimbursement of the sales tax paid, being
in jeopardy and rather, the proposition for recovery of the amount already
reimbursed looming large, the contractor company preferred the writ
petition leading to this appeal, while seeking the following reliefs: – G
“(i) Issue a Rule Nisi Calling upon the Opposite Parties to show
cause as to why the alleged clarification dated 07.11.2001 under
Annexure-1, and the subsequent direction for recovery of the
7
‘ITB’ for short H
810 SUPREME COURT REPORTS [2020] 6 S.C.R.

A amount earlier reimbursed, vide letter dated 19.6.2002 under
Annexure-3 ought not to be declared illegal, invalid and non-est in
the eyes of law;
And
(ii) issue a further Rule Nisi Calling upon the Opp. Parties to
B show cause as to why the reimbursement claims made by the
petitioner under Annexure-5 series may not be granted with a
period stipulated by this Hon’ble Court;
And

C (iii) in the event the Opp. Parties fail to show cause or show
insufficient cause make the said Rule Nisi absolute and issue an
appropriate writ of Mandamus or a writ of certiorari in line with
the aforesaid Rule Nisi;
And/or
D (iv) further be pleased to direct either of the Opp. Parties i.e., the
contracting parties (Opp. Parties 6-18) or the Sales-tax Authorities
(Opp. Parties 3-5) to effect reimbursement or refund along with
interest from the date of deposit of tax;
And
E (v) to pass any other writ/writs, order/orders as this Hon’ble Court
may deem just and proper.”
4. The High Court in its impugned order dated 05.08.2008,
examined the contentions of the parties and granted the prayers of the
writ petitioner while observing and holding, inter alia, as under:-
F
“8…… The petitioner now claims reimbursement of tax paid by it
on actual turnover of the works contract and not on the tax paid
by it on the materials procured by it, which have gone into for the
purpose of execution of the works contract. The further admitted
fact that O.Ps. 6 to 18 have, in fact, deducted the sales tax at
G source from the bills raised by the petitioner from time to time in
due progress of the work and the same have in turn been deposited
with the Sales Tax Department.
**** **** ****

H
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 811
& ORS. [DINESH MAHESHWARI, J.]

10. Now Annexure-1, which is sought to be quashed, is a A
clarification but not in supersession of Annexure-10, as it is
projected by the State Government. The said clarification cannot
take away the effect of the statutory provision. The orders of
assessment in Annexure-4 series indicate that after deducting the
labour charges, services charges, amount of tax paid, materials
B
used in the execution of works contract, from the gross turn over
of the assessment year, the balance has been put to tax by the
Sales Tax Authority. The tax, as we find, has been imposed in the
light of the decision in Gannon Dunkerly (supra).
From the discussion made above, the irresistible conclusion
is that the sales tax has been levied in the orders of assessment in C
respect of the amount received pertaining to items of work
completed during the financial year. The clarification in Annexure-
1, which unilaterally takes away the claim of the petitioner for
reimbursement, is contrary to Clause-45.2 of the General
Conditions of the Contract and Section 5 (2) (AA) of the Orissa D
Sales Tax Act as well as the decision of the apex Court in Gannon
Dunkerly (supra). Accordingly, the clarification letter dated
7.11.2001 (Annexure-1) issued by the Financial Adviser-cum-
Additional Secretary to Government, Department of Water
Resources is quashed and the O.Ps. are directed to grant
appropriate reimbursement in terms of Clause-45.2 of the General E
Conditions of Contract, as claimed by the petitioner.”
5. Assailing the order so passed by the High Court, learned senior
counsel for the appellant has strenuously argued that the impugned order
is contrary to the facts of the case as also the principles of law applicable
and hence, deserves to be set aside. F

5.1. The learned senior counsel for the appellant has referred to
Clause (29-A) of Article 366 of the Constitution of India; and the principles
enunciated by this Court in the cases of Builders’ Association of India
and Ors. v. Union of India and Ors.: (1989) 2 SCC 645 and Gannon
Dunkerley and Co. and Ors. v. State of Rajasthan and Ors.: (1993) G
1 SCC 364 to submit that by the forty-sixth amendment of Constitution,
a fiction was created for treating the works contract as deemed sale on
which, sales tax would be leviable but, only on the value of goods which
went into the execution of any works contract.
H
812 SUPREME COURT REPORTS [2020] 6 S.C.R.

A 5.2. Further, with reference to the definitions of “sale”, “goods”
and “works contract” as contained in the Act of 1947 as also Section
5(2)(AA) thereof and the relevant clauses governing the contracts in
question, the learned counsel has submitted that any payment against
the monthly running bill to the contractor does not constitute payment
for any “completed item of work”; and the only meaning of the
B
nomenclature “completed item of work” is the completion of the works
contract as such. Learned counsel would maintain that sales tax is not
leviable on the “completed item of work” in a works contract but, the
contractor is bound to pay sales tax on “taxable turnover” which, for the
purpose of sales tax, could only be on the value of goods utilised in
C completion of the works contract.
5.3. The learned senior counsel has elaborated on the aforesaid
aspects with the submissions that every amount of sales tax on the
“taxable turnover”, which is required to be paid by the contractor, is
achieved either by deduction of such amount of sales tax from the monthly
D running bills by the employer for deposit of the same with the Sales Tax
Department or by way of payment by the contractor directly to the
Sales Tax Department. According to the learned counsel, where the
amount payable as sales tax by the contractor is deducted by the employer
at the time of making payment of monthly running bills and is deposited
by the employer with the Sales Tax Department, there would not arise
E any question of making any reimbursement of the amount so deducted
and paid to the Sales Tax Department back to the contractor because
the liability to pay sales tax on the value of material/goods utilised in any
works contract is that of the contractor; and the claim for its
reimbursement is entirely impermissible.
F 5.4. The learned senior counsel for the appellant has strenuously
argued that the High Court has failed to examine the import and effect
of Clause 13.3 of the Instructions to Bidders and Clause 45.1 of the
General Conditions of Contract which make it clear that the bid price
quoted by the contractor is inclusive of all duties, taxes and other levies,
G including royalties on all materials to be used in performance of the
works contract. Hence, according to the learned counsel, when sales
tax on the goods/materials forms a part of contract price, the claim for
reimbursement has rightly been denied by the Government.
5.5. As regards Clause 45.2 of the General Conditions of Contract,
H the learned counsel would re-emphasise that thereunder, reimbursement
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 813
& ORS. [DINESH MAHESHWARI, J.]

is permissible when there is any sales tax levied on a “completed item of A
work” but in the context of a works contract in a construction project,
there is no sales tax on the “completed item of work” which is an
immovable property. The learned counsel would submit that earlier, the
Circular dated 04.11.1986 came to be issued on an erroneous
understanding of Clause 45.2 in relation to works contract but subsequently,
B
clarificatory Circulars dated 07.11.2001 and 19.06.2002 were issued,
stating the correct position of law that the said Clause 45.2 applied only
to the sales tax on “completed item of work”; and the sales tax levied in
terms of Section 5(2)(AA) of the Act of 1947 was not reimbursable and
had to be borne by the contractor in view of clear stipulation in Clause
45.1 of the General Conditions of Contract. According to the learned C
counsel, reliance on the Circular dated 04.11.1986 on behalf of the
respondent No. 1 is entirely misplaced and the said Circular, by no means,
could be construed as that of amending the contractual terms as also the
liability of the contractor in terms of Section 5(2)(AA) of the Act of
1947.
D
6. Per contra, learned senior counsel for the contractor company
(the respondent No. 1 herein) has duly supported the order impugned
with reference to the reasonings therein.
6.1. Learned senior counsel for the contractor company has
contended that the argument made on behalf of the appellant, that the E
deduction in the running bills had only been of the sales tax payable on
various items, is contrary to the record because the deductions were
made on a deemed sale on turnover basis and not item-wise and such a
recovery of sales tax is squarely covered by Clause 45.2 of GCC
whereunder, the contractor company is entitled to the claimed
reimbursement. F

6.2. The learned senior counsel has again referred to the decision
of this Court in the case of Gannon Dunkerley (supra) and the provisions
contained in Section 5 (2) (AA) of the Act of 1947 as also the said
Clause 45.2 of GCC and the Circular dated 04.11.1986 to submit that
deduction of sales tax on turnover basis pre-supposes the existence of G
sale and therefore, the contractor company is entitled to the
reimbursement as claimed. According to the learned counsel, the Circular
dated 07.11.2001 had been directly against the statutory provisions as
also the contractual stipulations and the same has rightly been disapproved
by the High Court. The learned counsel has also referred to various H
814 SUPREME COURT REPORTS [2020] 6 S.C.R.

A decisions including that in the case of State of U.P. and Ors. v. P.N.C.
Construction C. Ltd. and Ors.:(2007) 7 SCC 320.
7. We have heard learned counsel for the parties at sufficient
length and have examined the record with reference to the law applicable.
8. Having regard to the issues raised, appropriate it would be to
B take note of the relevant provisions of law; the referred conditions
governing the contractual relations of the parties; and the referred
Circulars issued by the Government of Orissa.
8.1. By way of the Constitution (Forty-sixth Amendment) Act,
1982, Clause (29-A) came to be inserted to Article 366 of the Constitution
C of India, providing for inclusive definition of the expression “tax on the
sale or purchase of goods” in relation to various transactions and dealings.
As regards “works contract”, the said expression came to be assigned
the meaning in sub-clause (b) thereof, which reads as under:-
“(29-A) “tax on the sale or purchase of goods” includes-
D
(a)… … …
(b) a tax on the transfer of property in goods (whether
as goods or in some other form) involved in the execution
of a works contract;
E (c) to (f) … … …”
8.1.1. The constitutional validity of the aforementioned provisions
by which the legislatures of the States were empowered to levy sales
tax on certain transactions described in sub-clauses (a) to (f) of Clause
(29-A) of Article 366 of the Constitution as also the question, as to whether
F the power of the State legislature to levy tax on the transfer of property
in goods involved in the execution of works contracts is subject to the
restrictions and conditions contained in Article 286 of the Constitution,
were considered and decided by the Constitution Bench of this Court in
the case of Builders’ Association (supra). Therein, while upholding the
constitutional validity of the aforementioned provisions, the Constitution
G Bench explained the unique features of a composite contract relating to
work and materials; and expounded on the meaning, effect and amplitude
as also contours of the provisions pertaining to the taxing power of the
States in relation to works contract in the following words: -
“38. In Benjamin’s Sale of Goods (3rd Edn.) in para 43 at p. 36
H it is stated thus:
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 815
& ORS. [DINESH MAHESHWARI, J.]

“Chattel to be affixed to land or another chattel.—Where A
work is to be done on the land of the employer or on a chattel
belonging to him, which involves the use or affixing of materials
belonging to the person employed, the contract will ordinarily
be one for work and materials, the property in the latter passing
to the employer by accession and not under any contract of
B
sale. Sometimes, however, there may instead be a sale of an
article with an additional and subsidiary agreement to affix it.
The property then passes before the article is affixed, by virtue
of the contract of sale itself or an appropriation made under
it.”
39. In view of the foregoing statements with regard to the passing C
of the property in goods which are involved in works contract and
the legal fiction created by clause (29-A) of Article 366 of the
Constitution it is difficult to agree with the contention of the States
that the properties that are transferred to the owner in the execution
of a works contract are not the goods involved in the execution of D
the works contract, but a conglomerate, that is the entire building
that is actually constructed. After the 46th Amendment it is not
possible to accede to the plea of the States that what is transferred
in a works contract is the right in the immovable property.
40. We are surprised at the attitude of the States which have put E
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 F
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 States to levy tax on
sales and purchases independent of Entry 54 thereof. As the G
Constitution exists today the power of the States to levy taxes on
sales and purchases of goods including the “deemed” sales and
purchases of goods under clause (29-A) of Article 366 is to be
found only in Entry 54 and not outside it. We may recapitulate
here the observations of the Constitution Bench in the case of
H
816 SUPREME COURT REPORTS [2020] 6 S.C.R.

A Bengal Immunity Co. Ltd. [AIR 1955 SC 661 in which this Court
has held that the operative provisions of the several parts of Article
286 which imposes restrictions on the levy of sales tax by the
States are intended to deal with different topics and one could not
be projected or read into another and each one of them has to be
obeyed while any sale or purchase is taxed under Entry 54 of the
B
State List.”
(emphasis supplied)
8.1.2. In the case of Gannon Dunkerley (supra), while dealing
with the scope of the legislative power of State under Entry 54 of the
C State List contained in Seventh Schedule to the Constitution, particularly
in the context of inter-State trade or commerce, another Constitution
Bench of this Court found no reason to reopen the issues covered by the
decision in Builders’ Association case (supra) and held on the limitations
of the powers of State legislature as under:-
D “31…..the legislative power conferred under Entry 54 of the State
List does not extend to imposing tax on a sale or purchase of
goods which takes place outside the State or which takes place in
the course of import or export of goods. In view of the aforesaid
limitations imposed by the Constitution on the legislative power of
the States under Entry 54 of the State List, it is beyond the
E 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
F or transactions which constitute sales outside the State or sales in
the course of import or export.
**** **** ****
41. It must, therefore, be held that while enacting a law imposing
a tax on sale or purchase of goods under Entry 54 of the State
G List read with sub-clause (b) of clause (29-A) of Article 366 of
the Constitution, it is not permissible for the State Legislature to
make a law imposing tax on such a deemed sale which constitutes
a sale in the course of inter-State trade or commerce under Section
3 of the Central Sales Tax Act or an outside sale under Section 4
of the Central Sales Tax Act or sale in the course of import or
H
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 817
& ORS. [DINESH MAHESHWARI, J.]

export under Section 5 of the Central Sales Tax Act. So also it is A
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.”
B
8.1.3. In the said case of Gannon Dunkerley, the Constitution
Bench explained the purport and effect of the legal fiction introduced by
sub-clause (b) of Clause (29-A) of Article 366 of the Constitution and
also enunciated the principles for its operation as follows: -
“36. If the legal fiction introduced by Article 366(29-A)(b) is C
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 D
services.
**** **** ****
47……..The value of the goods involved in the execution of a
works contract will, therefore, have to be determined by taking E
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; F
(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 G
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;
H
818 SUPREME COURT REPORTS [2020] 6 S.C.R.

A (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
B determined in the light of the facts of a particular case on the
basis of the material produced by the contractor.”
(emphasis supplied)
8.1.4. The salient features of the legal fiction introduced by sub-
C clause (b) of Clause (29-A) of Article 366 of the Constitution and the
co-related concept of “value addition” came to be succinctly explained
by this Court in the case of P.N.C. Construction Co. (supra) in the
following words: -
“21. “Value addition” is an important concept which has arisen
D after the Forty-sixth Amendment to the Constitution. Prior to the
said Amendment this Court had taken the view in State of Madras
v. Gannon Dunkerley & Co. (Madras) Ltd [AIR 1958 SC 560]
that “works contract” was an indivisible contract and the turnover
of the goods used in the execution of the works contract could
not, therefore, become exigible to sales tax. To overcome the
E effect of the said decision, the concept of “deemed sale” was
introduced by Parliament by introducing sub-clause (b) of Clause
29-A in Article 366 of the Constitution which states that the tax
on sale or purchase of goods would include a tax on transfer of
property in goods involved in the execution of works contract.
F The emphasis is on the expression “transfer of property in goods
(whether goods as such or in some other form)”. Therefore, after
the Forty-sixth Amendment to the Constitution, the works contract
which was an indivisible contract is, by a legal fiction, divided into
two parts—one for sale of goods and the other for supply of labour
and services. Therefore, after the Forty-sixth Amendment, it
G became possible for the States to levy sales tax on the value of
the goods involved in a works contract in the same way in which
the sales tax was leviable on the price of the goods supplied in a
building contract. This is where the concept of “value addition”
comes in. It is on account of the Forty-sixth Amendment to the
H
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 819
& ORS. [DINESH MAHESHWARI, J.]

Constitution that the State Government is empowered to levy sales A
tax on the contract value which earlier was not possible.”
(emphasis supplied)
8.2. Having thus noticed the source of power of the State legislature
to levy sales tax in relation to the works contract but only on the value of
the goods/materials involved therein, we may also take note of the relevant B
amended provisions of the Orissa Sales Tax Act, 1947, which read as
under:-
“Section 2(g) “Sale” means with all its grammatical variations
and cognate expression, any transfer of property in goods for
cash or deferred, payment or other valuable consideration and C
includes,—
(i) … … …
(ii) (ii) transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract; D
(iii) to (vi) … … …
Section 2(jj)- “Works Contract” includes any agreement for
carrying out, for cash or deferred payment or other valuable
consideration, the building, construction, manufacture, processing,
fabrication, erection, installation, fitting out, improvement, E
modification, repair or commissioning of any moveable or
immoveable property.
S.5(2)(AA)- Notwithstanding anything contained in sub-section
(2)(A), “taxable turnover” in respect of:
(i) ‘works contract’ shall be deemed to be the gross value received F
or receivable by dealer for carrying out such contract, less the
amount of labour charges and service charges incurred for the
execution of this contract… … …”
8.3. As noticed, the claim for reimbursement made by the
contractor company is based on Clause 45.2 of GCC whereas this claim G
is being resisted by the appellant State with reference to Clause 13.3 of
ITB and Clause 45.1 of GCC. The referred clauses, as placed before us
for consideration, read as under: -

H
820 SUPREME COURT REPORTS [2020] 6 S.C.R.

A Clause 13.3 of ITB
“13.3 All duties, taxes and other levies including royalty payable
by the contractor under the contract or for any other cause shall
be included in the rates, price and total bid price submitted by the
bidder.”
B Clauses 45.1 and 45.2 of GCC
“45.1 The rates quoted by the contractor shall be deemed to be
inclusive of the sales and other taxes including royalties on all
materials that the contractor will have to purchase for performance
of this contract.
C
45.2 Any Central or State Sales Tax and other taxes on completed
items of works of this contract as may be levied excluding penalty
levied for Contractor’s fault and paid by the Contractor shall be
reimbursed by the Employer to the Contractor on proof of payment
on production of assessment certificate on every financial year.
D During the course of contract period, deductions of sales tax on
works contract turnover at the source, shall be made from each
bill at such rate and conditions as may be required under the
provisions of Orissa Sales Tax Act and Rules.”(sic)
8.4. Now, the three Circulars issued by the Government of Orissa
E in regard to the acceptance and then denial of the claim for reimbursement
of sales tax in works contract, which form the part of controversy herein,
may also be noticed.
8.4.1. In its initial Circular dated 04.11.1986, the State Government
issued directions and guidance for such reimbursement of sales tax in
F relation to the existing work contracts; and also directed that any such
clause for reimbursement be not included in future contracts.. This
Circular dated 04.11.1986 reads as under:-
“Government of Orissa
Irrigation and Power Department
G 48154/Dated 4th No November, 1986
No. FA-1-11/86
From
Shri P.K. Das
H
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 821
& ORS. [DINESH MAHESHWARI, J.]

Financial Adviser-cum- A
Joint Secretary to Government
To
The Engineer-in-Chief, Irrigation, Orissa/Chief Engineer, Delta
and Flood Control/ Chief Engineer, Medium Irrigation-I/Chief
Engineer, Medium Irrigation-II/Chief Engineer, Rengali, Gohira B
and Samkoi Projects/ Chief Engineer, Rengali Irrigation Project,
Samal/ Chief Engineer, Mahanadi Birupa Barrage Project/Chief
Engineer, Upper Kolab Project, Bariniput/Chief Engineer, Potteru
Irrigation Project/Chief Engineer, Electricity-cum-Chief Engineer,
Electrical Projects, Orissa/General Manager, Upper Indravati C
Project/Chief Engineer (Ele.) Upper Kolab Hydro Ele. Project.
Sub: RE-IMBURSEMENT OF SALES TAX ON WORKS
CONTRACTS
Sir,
D
1. I am directed to say that in accordance with the Orissa Sales
Tax (Amendment) Act, 1984 read with Orissa Sales Tax
(Amendment) Ordinance, 1985, Sales Tax has become
payable on the turn over of Works Contracts with effect from
07.04.1984.
E
2. Under the Law, Sales Tax is payable by the concerned
contractor/dealer, and not by this Department. Yet, a question
arose as to whether this Department was legally liable to
reimburse the amount of sale tax actually paid or payable by
the Contractor/dealers in so far as the contracts relating to
this Department are concerned. After due consideration of F
the legal aspects of the problem, the following instructions
are issued for information and guidance of all concerned.
(i) In case of Works- Contracts executed on or after
07.04.1984 which contained specific clauses for
reimbursement of Sales Tax, this Department is liable to G
reimburse the amount of sale tax actually paid by the
concerned contractor on production of necessary
documentary evidence in token of making such payment,
after obtaining an undertaking from the concerned
contractor to the following effect:-
H
822 SUPREME COURT REPORTS [2020] 6 S.C.R.

A If the Contractor prefers or has preferred appeal/
revision before the concerned appellate authority under
the Sales Tax Law for remission of the Sales Tax dues
paid by him and said appeal/revision results in any
reduction of such dues, the differential amount, the
amount of Sales Tax reimbursed and the amount of Sales
B
Tax reimbursed and the amount of Sales Tax payable as
decided on appeal/revision will be refunded back to
Government by the Contractor.
(ii) Similar reimbursement will also be permissible and in
the same manner as indicated in Sl. (i) above in case of
C contracts executed prior to 07.04.1984 where the work
was in progress beyond that date, which contained
specific clause for such reimbursement.
(iii) The amount of penalty levied if any, under the Sales Tax
Law on any count and paid by the Contractor-dealer
D shall not be reimbursed by the Department to the
concerned Contractor.
(iv) No clause either for reimbursement for Sales Tax or
payment of such Tax by the department to the
Contractor should be inserted in the Notice Inviting
E Tenders or Tender document and no tender containing
any clause or condition to the above effect should be
accepted.
3. I am to request that the above guideline may be brought to
the notice of all concerned.
F
4. If any amount of Sales Tax has been reimbursed/paid to any
Contractor in any case, not in conformity with the guidelines
as noted vide paragraph-2 above, a proposal should be
furnished to this Department seeking Government approval
to that effect, furnishing full facts and figures on that score,
G clearly indicating the extent and manner of deviation from
any of the guidelines as noted above Sls. (i) to (iv) of
Paragraph-2 above. This may please be treated as urgent
and the proposal(s) should be submitted to Government in all
such cases by 30.11.1986 at latest. If there is no need for
furnishing any proposal on the above score, a Nil report should
H
be submitted by the aforesaid target date.
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 823
& ORS. [DINESH MAHESHWARI, J.]

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

Yours faithfully
Sd/- 04.11.1986
FA-cum-Joint Secretary to Govt.” B
8.4.2. However, in the Circular dated 27.01.2000, the State
Government asked the Engineers-incharge to await its decision on the
queries raised on the issue pertaining to such reimbursement of the
amount of sales tax in relation to the works contracts. This Circular
dated 27.01.2000 reads as under:- C
“Government of Orissa
Department of Water Resources
No. IIT-RVN-11/2000-5295 Dated: 27.01.2000
From
D
Shri N. Behera,
FA-cum-Addl. Secretary to Government
To
The Engineer-in-Chief, Water Resources/ E
Engineer-in-Chief, Planning & Designs/
Engineer-in-Chief, Rengali Irrigation Project/
All the Chief Engineers & Basin Manages/
All the Chief Engineers/ F
All the Chief Construction Engineers/
Director, Ground Water Survey and Investigation
Sub: Reimbursement of Sales Tax on Works contract.
Sir, G

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

H
824 SUPREME COURT REPORTS [2020] 6 S.C.R.

A under the contract or for any other cause shall be included in the
rates, prices and total bid price submitted by the Bidder.”
The clause 45.2 at G.C.C. of the said document stipulates
that “Any Central or State Sales Tax and other Taxes on completed
item of work of this contract as may be levied excluding penalty
B levied for contractor’s default and paid by the contractors shall
be reimbursed by the employer to the contractor on proof of
payment. During the course of contract period deduction of Sales
Tax on works contract turn over at the sources shall be made
from each bill at such rate and conditions as may be required
under the provision of Orissa Sales Tax Act and Rules.”
C
Some Chief Engineers have sought for clarification as to
whether Sales Tax deducted from the bills of the contractor and
paid to the sales tax officer will be again reimbursed to the
contractor whose quoted price is inclusive of all taxes as per clause
13.3 of ITB. In some cases, A. G. Audit has raised objection against
D such reimbursement. This is under active consideration of govt.
for issuing necessary clarification.
Therefore, you are hereby instructed that no reimbursement
of sales tax should be made under clause 45.2 of G. C. C. of NCB
agreements for World Bank works and works covered under
E similar contracts till clarification is communicated by Government.
This may please be brought to the notice of all Subordinate
Officers under your control.
Receipt of the letter may please be acknowledged.
F Yours faithfully
Sd/-
FA-cum-Addl. Secretary to Government”
8.4.3. Thereafter, by the impugned Circular dated 07.11.2001, the
State Government purportedly came out with the clarification but, in
G
effect, issued directions squarely opposite to those contained in the earlier
Circular dated 04.11.1986, while asserting that no such claim for
reimbursement of the amount of sales tax pertaining to works contract
was admissible. This Circular dated 07.11.2001 reads as under: -

H
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 825
& ORS. [DINESH MAHESHWARI, J.]

“Government of Orissa A
Department of Water Resources
No. IIT RVN. 11/2000-42711/UR Dated 07.11.2001
From
Shri B. Pradhan,
B
FA-cum-Addl. Secretary to Government.
To
The Engineer in Chief, Water Resources/
Engineer in Chief, Planning and Designs/
C
Engineer in Chief, Rengali Irrigation Project/
All the Chief Engineers and Basin Manager/
All the Chief Engineers/
All the Chief Construction Engineer/
D
Director, Ground Water Survey and Investigation.
Sub: Clarification on reimbursement of sales tax in respect of
works contracts
Sir,
E
In continuation of this Department letter no.5295 dt.5295
dt.27.01.2000 on the subject mentioned above, I am directed to
say that as per Orissa Sales Tax Act transfer of property in
execution of works contracts (Whether as goods or in some other
form) is subject to levy of Sales Tax. When a building, a bridge, a
road, a canal, a plant etc., is constructed, the ingredients like F
cement, iron & steel, bricks, stones etc. involved in execution of
the contract are subject to levy of sales tax. The completed item
i.e., a bridge, a building, a road, or a canal, as the case may be, is
not subjected to levy of sales tax because after construction these
become immovable property not susceptible to transfer of property G
for the purpose of sales tax assessment.
As per clause 13.3 of I.T.B. of the NCB bid document read with
clause 45.1 of the general conditions of the contract the rates
quoted by the contractor shall be deemed to be inclusive of sales
H
826 SUPREME COURT REPORTS [2020] 6 S.C.R.

A and other taxes including royalties on all materials that the
contractor will have to purchase for performance of the contract.
Clause 45.2 of the G.C.C. speaks that any Central or State Sales
Tax and other taxes on completed items of work of the contract
as may be levied, excluding penalty levied for contractors default
B and paid by the contractor shall be reimbursed by the employer to
the contractor on proof of payment. It is clarified that a completed
item of work for which the contractor has entered into agreement
with the department is either immovable property or a works
contract and in either case is not exigible to sales tax. Therefore,
the question of payment of sales tax on such immovable property
C and consequential reimbursement of the sales tax by the department
as per clause 45.2 of the G.C.C. or similar provision existing in
other contracts does not arise. A contractor may, however, have
to pay sales tax as assessed by the sales tax officer on items
which go into construction of the work. This tax is not reimbursable
D since the contractor is expected to have built it into his rates.
In view of the above, you are hereby instructed not to reimburse
sales tax levied on cement, steel etc., misinterpreting clause 45.2
of the G.C.C. of N.C.B. agreement for World Bank assisted works
and the works covered under other agreement containing similar
E clause. Besides if any amount of sales tax has already been
reimbursed, immediate steps should be taken for recovery of the
amount from the contractors.
This has been concurred in by Finance Department in their
U.O.R.No.3896/ SF. Dt. 24.09.2001.
F
Yours faithfully,
Sd/-
Financial Adviser-cum-Addl. Secretary to Government”
G 9. Now, while taking up the points arising for determination, we
may usefully summarise the relevant aspects pertaining to this case.
9.1. It is evident that the contractor company (respondent No. 1
herein) seeks to assert its right to claim reimbursement of the amount of
sales tax levied in respect of the works contracts executed by it on the
H strength of the stipulations contained in Clause 45.2 of GCC of NCB bid
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 827
& ORS. [DINESH MAHESHWARI, J.]

documents. On the other hand, the appellant State seeks to resist the A
right so claimed by the contractor company with reference to the
principles enunciated in the cited decisions that after the forty-sixth
amendment and insertion of sub-clause (b) of Clause (29-A) to Article
366, the State could levy sales tax on the price of goods and materials
used in works contract as if there was a sale of such goods and materials
B
and then, on two-fold assertions on that basis: one, that in the context of
a works contract, there is no sales tax on the “completed item of work”
which is an immovable property and, therefore, question of any
reimbursement does not arise; and second, that in works contract, the
contractor may have to pay sales tax assessed on the items which go
into the construction but, such amount of sales tax is not reimbursable C
because the contractor is supposed to have provided for the same in its
rates, as envisaged by Clauses 13.3 of ITB and 45.1 of GCC.
9.2. So far as the basic factual aspects are concerned, it is not in
dispute that the respondent No. 1 indeed undertook execution of various
works contracts with the respective offices of the appellant State of D
Orissa. It remains indisputable that in relation to such contracts, Clause
13.3 of ITB stipulated that all duties, taxes and other levies including
royalties payable by the contractor were to be included in the bid price
and Clause 45.1 of GCC specifically provided that the rates quoted by
the contractor shall be deemed to be inclusive of the sales and other
taxes including royalties on all materials that the contractor was to E
purchase for performance of the contract. However, and at the same
time, it is also indisputable that as per Clause 45.2 of GCC, any Central
or State Sales Tax and other taxes on “completed items of works” of the
contract as might be levied upon, and paid by, the contractor (excluding
penalty levied for contractor’s fault) were to be reimbursed to the F
contractor on proof of payment and assessment. This Clause 45.2 further
envisaged that during the course of contract period, deductions of sales
tax on “works contract turnover” was to be made at the source, from
each bill as per the rate and conditions prescribed under the provisions
of Act of 1947. It is also not in dispute that in the course of execution of
such contracts, various running bill payments were made to the respondent G
No. 1 and while making such payments, deductions were indeed made
towards the amount of sales tax; and such deducted amount of sales tax
was deposited with the Sales Tax Department of the Government of
Orissa. Further, it is also borne out that reimbursement of the sales tax
so levied upon, and paid by, the respondent No. 1 in respect of the H
828 SUPREME COURT REPORTS [2020] 6 S.C.R.

A assessments for the years 1995-1996 to 1997-1998 was allowed; but
such claim for reimbursement by the respondent No. 1 in respect of the
assessments for the years 1998-1999 to 2000-2001 was declined.
9.3. As noticed, after the amendments were brought about in the
Act of 1947 for levying sales tax on works contract with effect from
B 07.04.1984, the Circular dated 04.11.1986 was issued by the Government
of Orissa to the effect that in case of works contract executed on or
after 07.04.1984, containing the specific clause for reimbursement of
sales tax, the Department of Irrigation and Power would be liable for
reimbursement of the amount of sales tax actually paid by the concerned
contractor on production of necessary documentary evidence. The
C aforementioned reimbursements were allowed to the respondent No. 1
pursuant to these observations and directions in the Circular dated
04.11.1986. However, by way of the subsequent Circular dated
07.11.2001, the Government of Orissa came out with total volte-face on
its opinion in relation to the claim for reimbursement of sales tax paid by
D the contractors while stating that a “completed item of work” in relation
to a works contract was not exigible to sales tax and, as regards the
sales tax on the items which go into the work, the contractor is expected
to have included the same in the rates. It was, therefore, observed that
the question of reimbursement as per Clause 45.2 of GCC or similar
provision in other contracts did not arise.
E
9.4. The High Court, in its impugned order dated 05.08.2008, has
rejected the contentions of the appellant State and has disapproved the
aforesaid Circular dated 07.11.2001 essentially with reference to the
fact that the claim for reimbursement was being made of the tax that
was levied on the turnover of the works contracts and not of the tax paid
F by the contractor on the materials procured by it. The High Court has
also found that the sales tax was levied after necessary deductions and
in accordance with the decision in Gannon Dunkerley (supra) for which,
the contractor was entitled to claim reimbursement under Clause 45.2
of GCC and that the clarification Circular dated 07.11.2001 cannot take
G away the effect of statutory provisions.
10. Having taken all the relevant aspects in comprehension and
having examined the matter in its totality, we are clearly of the view that
the High Court has rightly allowed the writ petition filed by the respondent
No. 1 and no case for interference in this appeal is made out.
H
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 829
& ORS. [DINESH MAHESHWARI, J.]

11. Before proceeding further, we may at once observe that so A
far as the aforesaid Circulars are concerned, neither of them could be
decisive of the issues at hand. As noticed, in the Circular dated 04.11.1986,
the State Government expressed the view that the 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
B
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 C
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. Therefore, we would ignore the said Circulars while dealing
with the principal issues involved in this matter but shall refer to them at
a later and appropriate stage.
D
12. Reverting to the core issues, it remains rather indisputable
that 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 E
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. As noticed, it is not in dispute that while making payment
of various running bills in the course of execution of contracts by the
respondent No. 1, deductions were indeed made towards the amount of F
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 G
part of this Clause 45.2 (whereby the contractor is entitled to
reimbursement of the amount of sales tax) on the grounds that: (a) the
reimbursement is envisaged of the sales tax levied on the “completed
item of work” but, in works contract, such “completed item” is not exigible
to sales tax and hence, the question of reimbursement does not arise; H
830 SUPREME COURT REPORTS [2020] 6 S.C.R.

A and (b) that as per Clause 45.1 of GCC read with Clause 13.3 of ITB,
the contractor is deemed to have provided for the leviable amount of
sales tax on goods/materials in its rates and hence, the contractor cannot
claim any reimbursement thereof. The question is as to whether such
contentions of the appellant against the operation of first part of Clause
45.2 of GCC could be countenanced? In our view, the answer could
B
only be in the negative.
13. Taking up the main plank of the case of the 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
C 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. In other words, after the forty-sixth amendment to
the Constitution, the works contract is divided into two parts by a legal
D fiction: one for sale of goods/materials and other for supply of labour/
services; and it is possible for the States to levy sales tax on the value of
goods/materials involved in such works contract. These features have
been expounded and explained by this Court in the referred cases of
Builders’ Association, Gannon Dunkerley and P.N.C. Construction
Co. (supra) and need no further enlargement.
E
13.1. As regards the relevant provisions of the State enactment,
it is at once clear that after the aforesaid forty-sixth amendment to 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
F “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
G 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.

H
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 831
& ORS. [DINESH MAHESHWARI, J.]

13.2. As noticed, it has been the consistent case of the respondent A
No. 1 that in the running bill payments, the amount of sales tax was
deducted and the same was deposited with the Sales Tax Department.
It has also been the consistent case of the respondent No. 1 that in the
referred orders of assessment, sales tax was levied on the applicable
rates on the “taxable turnover” in respect of the works contracts executed
B
by it and the claim for reimbursement was made of the amount of sales
tax so levied and paid. The High Court has also recorded a categorical
finding that after deducting the labour charges, service charges and the
tax paid from the gross turnover, the balance had been put to tax by the
Assessing Authority. These assertions of the respondent No. 1 as also
the findings of the High Court are not the subject matter of dispute. That C
being the position, it is but evident that in relation to the works contracts
executed by the respondent No. 1, the appellant and its offices have
indeed levied the sales tax on the taxable turnover that was arrived at
after due deduction of labour/service charges, in conformity with Section
5(2)(AA) of the Act of 1947. There had neither been any levy of the
D
sales tax on the entire turnover of the works contracts nor any such levy
could have been effected because, as noticed, the taxing event of sale in
a works contract is confined to the use of the goods/materials in execution
of the contract.
14. While the aforesaid legal and factual aspects remain more or
less indisputable, what the appellant seeks to contend is that the E
reimbursement envisaged by the first part of Clause 45.2 of GCC is of
the tax levied on the “completed item of work” but in a works contract,
sales tax is not levied on the completed item of work because such
completed item in a works contract becomes an immovable property.
Such a contention of the appellant remains wholly untenable in view of F
the scheme of levy of sales tax in a works contract as also the scheme
of reimbursement envisaged by Clause 45.2 of GCC.
14.1. Contextually read, it is but apparent that the expression
“completed item of work” in Clause 45.2 ibid., signifies the intent that
reimbursement would be permissible only after execution of a particular G
item of work has been completed and accomplished. In other words,
this expression is clearly intended to contradistinguish the cases where
any item of work remains incomplete and yet any claim for reimbursement
of the sales tax levied is sought for. This expression cannot be read to
mean as if signifying the levy of sales tax itself on the completed item of
H
832 SUPREME COURT REPORTS [2020] 6 S.C.R.

A work because such reading of this expression would be totally disjunct
from the context and would be entirely detached from the real intent.
14.2. Viewed from another angle, it would appear that if the
contention on the part of the appellant as regards interpretation of the
first part of Clause 45.2 is accepted, it would practically result in holding
B 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
C 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
D relation to the sales tax on works contract too. As noticed, 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
E 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.
14.3. Viewed from any angle, we are satisfied that heavy reliance
on behalf of the appellant on the expression “completed item of work”,
F as occurring in the first part of Clause 45.2, is entirely misplaced. The
only implication of this expression is that a claim for reimbursement of
sales tax cannot be made in relation to a particular work or item whose
execution is pending or is in progress and has not been completed. So
far the levy of sales tax in relation to a works contract is concerned, the
G same is on “taxable turnover” and not on the entire turnover. It follows
necessarily that the claim for reimbursement could only be made of the
amount of sales tax that had been levied; and had been paid by the
contractor. Hence, the suggestion as if the expression “completed item
of work” refers to the end-product of a works contract is without any
substance. The contentions urged in that regard are required to be, and
H are, rejected.
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 833
& ORS. [DINESH MAHESHWARI, J.]

15. We may now take up the other line of argument on behalf of A
the appellant that as per Clause 45.1 of GCC read with Clause 13.3 of
ITB, the contractor is deemed to have provided for the leviable amount
of sales tax on goods/materials in its rates and hence, the contractor
cannot claim any reimbursement thereof.
15.1. It remains trite that the terms of contract bind the parties B
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. The submission on the part of the appellant, that
first part of Clause 45.2 of GCC would not operate because of Clause
45.1 of GCC read with Clause 13.3 of ITB, remains entirely baseless
and appears to be of a desperate attempt to wriggle out of the contractual C
obligations. Even when the contractors were given instructions in the
said Clause 13.3 of ITB to include all duties taxes and other levies in the
bid price and even when the said Clause 45.1 of GCC provided that the
rates quoted by the contractor shall be deemed to be inclusive of the
taxes and royalties on all the materials which were to be procured for D
performance of the contract, it was yet provided in the first part of
Clause 45.2 of GCC that the sales tax and other taxes on completed
items of work, as may be levied upon, and paid by, the contractor shall
be reimbursed to the contractor on proof of payment/on production of
assessment certificate. It is, therefore, crystal clear that even when the
contract provided that the rates quoted by the contractor shall be deemed E
to be inclusive of sales and other taxes and royalties on the materials, it
was agreed to between the parties that sales tax and other taxes under
completed items of work, as paid by the contractor were to be reimbursed.
15.2. It would at once appear that if the contention on the part of
the appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC F
is accepted in the manner that when the rates quoted by the contractor
are inclusive of the taxes on the goods/materials to be used in performance
of the contract, reimbursement of the sales tax levied upon, and paid by,
the contractor is not to be allowed, it would practically result in rendering
the first part of Clause 45.2 otiose and redundant. Neither that had been G
the intent of the parties nor could the terms of contract be construed in
this manner.
15.3. In our view, the implication and effect of Clauses 13.3 of
ITB and 45.1 of GCC had only been that while making the bid and
quoting the rates, the contractor was supposed to include the taxes, duties, H
834 SUPREME COURT REPORTS [2020] 6 S.C.R.

A royalties etc. payable by it over the materials to be procured and utilised
in performance of the contract and hence, while raising the bills, the
contractor was not entitled to claim any amount towards any such tax/
duty/royalty paid by it on the materials purchased for performance of
the contract. These clauses, i.e., Clause 13.3 of ITB and 45.1 of GCC,
which prohibit the contractor from demanding taxes, duties, royalties
B
etc. on the materials procured by it for performance of the contract do
not, and cannot, conversely operate over the sales tax which is levied
upon the contractor and which is primarily recovered with deductions
from the running bill payments. In other words, in our view, on a plain
reading of the aforesaid relevant terms of the contract, it is clear that
C while the contractor cannot claim any payment towards the taxes/duties/
royalties etc. on the goods/materials purchased by it for performance of
the contract but that does not disentitle the contractor from claiming
reimbursement of the sales tax levied upon it by the employer, of course
after proof of payment/assessment. It is also pertinent to mention that
the respondent No.1 only claimed reimbursement of the sales tax paid
D
by it on the turnover of the works contract and not of any tax or duty or
royalty paid by it on the material procured for the purpose of execution
of the works contract. Therefore, the contentions urged on behalf of the
appellant on the operation of Clauses 13.3 of ITB and 45.1 of GCC over
the claim of the contractor also deserve to be, and are, rejected.
E 16. To summarise the discussion in the preceding paragraphs, we
are clearly of the view that by virtue of Clause 45.2 of GCC, the contractor
company is rightfully entitled to claim reimbursement of the amount of
sales tax levied on the taxable turnover of the works contracts executed
by it. A fortiori, the grounds on which the appellant seeks to resist the
F claim of the contractor company for such reimbursement, i.e., with
reference to the expression “completed item of work” in the said Clause
45.2 and with reference to the stipulations contained in Clauses 13.3 of
ITB and 45.1 of GCC, are wholly untenable and the appellant and its
contracting offices are under obligation to honour the claim so made by
the contractor company.
G
17. Before finally concluding on this matter, we are inclined to
make a few comments as regards the Circulars issued by the State
Government pertaining to the subject of reimbursement of sales tax in
works contracts. While noticing that diametrically opposite views were
expressed by the State Government in the two main Circulars dated
H
STATE OF ORISSA v. M/s. B. ENGINEERS & BUILDERS LTD. 835
& ORS. [DINESH MAHESHWARI, J.]

04.11.1986 and 07.11.2001, we had observed in the earlier part of this A
judgment that the said Circulars were based on the given day
understanding of the State Government but such vacillating understanding
of the State Government was not determinative of the matter; and hence,
we had ignored the said Circulars while dealing with the principal issues
involved in this matter, but had also indicated that we shall refer to the
B
said Circulars at a later and appropriate stage.
17.1. The basic reason for which we feel impelled to refer to
these Circulars now and at this concluding stage is borne out of the
contents of the Circular dated 04.11.1986, which was issued by the State
Government closely following the amendment of the Act of 1947 with
insertion of the provisions aimed at facilitating the levy of sales tax on C
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 D
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 E
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 F
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 sub-paragraphs fortifies the
conclusion that the State Government was fully conscious of its obligation
to make reimbursement in relation to the existing contracts which carried G
such reimbursement clause/s.
17.2. As to what stipulations, terms and conditions are to form the
part of contract remains a matter essentially in the domain of the
contracting parties (of course, subject to the applicable requirements of
H
836 SUPREME COURT REPORTS [2020] 6 S.C.R.

A law) and no comments as regards future contracts are requisite herein
but, on a comprehensive reading of the Circular dated 04.11.1986, it is
evident that the State Government was fully conscious of its obligation
towards reimbursement under the existing terms of contracts and hence,
issued directions for due discharge of such obligation with necessary
safeguards and, at the same time, provided that henceforth, neither such
B
a clause be inserted in the contract documents nor any tender containing
such a clause or condition be accepted.
17.3. Evidently, the doubts at the later stage, as indicated 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
C been of unwarranted attempts to wriggle out of the contractual obligations
with rather perverse construction of the plain terms of the existing
contracts. Be that as it may, the propositions in the said ill-advised Circular
dated 07.11.2001 stand disapproved with the conclusions reached by us
hereinbefore. We say no more.
D 18. In the result, this appeal fails and is, therefore, dismissed with
no order as to costs. Pending interlocutory applications also stand disposed
of.

Divya Pandey Appeal dismissed.
E

F

G

H