Holding

Under Section 2(h) of the U.P. Trade Tax Act, "sale" includes transfer of property in goods involved in a works contract, making the raw materials used to manufacture Hot Mix a deemed sale and entitling the assessee to the concessional tax rate; therefore the show‑cause notice and circulars were invalid.

Summary

The appellant State of Uttar Pradesh challenged a show‑cause notice that sought to revoke a recognition certificate granted to M/s P.N.C. Construction Ltd. under Section 4‑8 of the U.P. Trade Tax Act, 1948. The assessee, engaged in a works contract to widen roads for the National Highway Authority, purchased raw materials (cement, sand, bitumen, etc.) for manufacturing "Hot Mix", a notified good, at a concessional tax rate. The State issued circulars stating that such raw materials could not be bought under Form‑38 and issued a notice to cancel the certificate. The High Court set aside the notice, holding that the raw materials constituted a "deemed sale" under Article 366(29A) and were eligible for the concessional rate. The Supreme Court affirmed this view, holding that Section 2(h) of the Act defines "sale" to include transfer of property in goods used in a works contract, and that the circulars and notice were based on a misreading of the statute. Consequently, the State's appeal was dismissed.

Issues considered

The raw materials used in a works contract for road construction constitute a "deemed sale" within the meaning of Article 366(29A) of the Constitution.
Whether the recognition certificate under Section 4‑8 of the U.P. Trade Tax Act can be revoked on the ground that the goods are used for road construction and not for sale of a notified product.
Whether the circulars issued by the Commissioner and the show‑cause notice were valid exercises of power.

Legislation cited

Constitution of Indias. Article 366(29A)
U.P. Trade Tax Act, 1948s. 2(h), s. 2(m), s. 4-8, s. 4-8(2), s. 48(2)

Subjects

deemed saleworks contractvalue additionU.P. Trade Tax Actrecognition certificateconcessional tax ratehot mixroad constructionsales taxArticle 366(29A)

Judgment

STATE OF U.P. AND ORS. A
v.
MIS. P.N.C. CONSTRUCTION CO. LTD. & ORS.

AUGUST 8, 2007

[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] B

Constitution of India, 1950:

Article 366(29A){b)-Tax on transfer of property on goods involved in
a 'works contract ·~He_ld, after the Forty-Sixth Amendment, State Government C
is empowered to levy sales tax on value of goods involved in a works
contract in the same way in which sales tax was leviable on the price of
goods supplied in a building contract-Thus, State Government has been
empowered to levy sales tax on contract value.

U.P. Trade Tax Act, 1948:
D

Ss.2(h), 2(m) and 4B(2)-'Sale'-'Works contract'-Contract for
widening of roads - Recognition certificate for purchase of raw material i.e.
cement, sand, bitumen, furnace oil, HSD, Lubricant etc. for manufacture of
Hot Mix issued to assessee earlier, sought to be revoked by issuing a show E
cause notice dated 9.5.2001-He/d: Withdrawal of recognition certificate
was erroneous as it was contrary to the definition of the word 'sale' in ~.2(h)
which had to be read with s.4B(2) of the Act-Show cause notice being
based on complete misreading of provisions of the Act was rightly set aside
by High Court.
F
Words and Phrases:

Expressions, 'deemed sale', "value addition", "works contract"-
Connotation of

The respondent-assessee company entered into a 'works contract' with G
National Highway Authority of India for widening the roads, maintenance and
repairs thereof. The assessee was issued a 'recognition certificate' u/s 4-B
of the U.P. Trade Tax Act, 1948 for purchase of raw materials, i.e. cement,
sand, bitumen, furnace oil, HSD, Lubricant etc. for manufacture of Hot Mix.
927 H
~
928 SUPREME COURT REPORTS [2007] 8 S.C.R.

A Pursuant to the recognition certificate the assessee purchased the said raw )-
materials against Form No.38 at concessional rate of tax. However, on
17.1.2001, the Commissioner, Trade Tax, U.P. issued a Circular stating that
purchase of the raw materials used in construction of roads cannot be made
against Form No.38. This Circular was followed by another Circular dated
23.2.2001 to the effect that the recognition certificate u/s 48 of the Act with
B regard to bitumen, chemical compound etc. against Form No.38 should be
reviewed. Consequently, a show cause notice was issued to the assessee as to
why the recognition certificate granted to it should not be revoked. The
assessee filed a writ petition before the High Court challenging the show cause
notice as also the two Circulars dated 17.1.2001 and 23.2.2001 contending
+- t
c that the raw materials used by it in execution of the works contr~ct constituted
'deemed sale' under Article 366(29A) of the Constitution of India and,
therefore, the assessee was entitled to the benefit of concessional rate of duty >-

on the purchase of the raw materials. On behalf of Revenue it was contended
that final product was not the Hot Mix but the road to be constructed from the ~
Hot Mix manufactured by the assessee and .as the end product, i.e., the road,
D was not saleable and as it was not the notified product, the assessee was not ~

entitled to claim the benefit of concessional rate of duty on purchase of raw
materials u/s 4-8 of the Act. The High Court accepting the plea of the J
assessee, held that the impugned show cause notice was liable to be set aside. >
Aggrieved, Revenue filed the instant appeals.
E
Dismissing the appeals, the Court

HELD: 1.1. Under Section 2(m) of the U.P. Trade Tax Act, 1948 the
expression "works contract" is defined to include any agreement for carrying
out building construction, manufacture, processing, fabrication, erection, \--
F installation, repair or commissioning of moveable or immoveable property for tI
cash, deferred payment or in other valuable consideration. "Value Addition"
is an important concept which has arisen after the Forty-sixth Amendment to -{ I
~
the Constitution. Prior to the said Amendment this Court had taken the view*
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
G exigible to sales tax. To overcome the effect of the said decision, the concept
of"deemed sale" was introduced by the Parliament by introducing sub-clause
,..
I

(b) of Clause (29A) in Article 366 of the Constitution which states that the t·
tax on sale or purchase of goods would include a tax on transfer of property
in goods involved in the execution of works contract. The emphasis is on the I
H expression "transfer of property in goods (whether goods as such or in some

•L
I
STATE OF U.P. v. P.N.C. CONSTRUCTION CO.LTD. 929

• other form)". (Paras 10 and 14) (933-F; 937-B, CJ

1.2. After the Forty-Sixth Amendment to the Constitution, the 'works
contract' which was an indivisible contract is, by a legal fiction, divided into
A

two parts - one for sale of goods and the other for supply of labour and services,
and thus it 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 B
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 Constitution that the State Government is empowered to
levy sales tax on the contraet value which earlier was not possible.
(Para 14) (937-D, E)
c
Builders' Association ofIndia and Ors. v. Union ofIndia and Ors., (1989)
2 SCR 320 = (1989) 2 SCC 645; Mis. Gannon Dunkerley and Co. and Ors.
v. State of Rajasthan and Ors., (1992) Supple. 3 SCR 103 = (199311 SCC
364 and State of Kera/a and Anr. v. Builders Association of India and Ors.,
[19961 Supple. 9 SCR 300 (1997) 2 SCC 183, relied on. D
\ *State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., AIR (1958)
~
SC 560, referred to.

1.3. In the instant case, a perusal of various Notifications issued under
the U.P. Trade Tax Act, 1948, shows that 'Hot Mix' is a notified item; and E
cement, sand, bitumen, furnace oil, HSD, Lubricant etc. are the raw-materials
which fall in the category of "goods" for the purpose of s.48(2) of the Act
and are required by the assessee for the manufacture of Hot Mix. Pursuant
to the recognition certificate given by the A.O. (issuing authority) the assessee
,,. · purchased the aforestated raw-materials at the concessional rate of duty. The
impugned show cause notice dated 9.5.01 was based on complete misreading F
'r of the provisions of the Act. Under Section 2(h) of the Act the word "sale" is
defined to mean any transfer of property in goods for cash or deferred payment
or for value consideration. The definition of the word "sale" includes transfer
of property in goods (whether as goods or in some other form) involved in the
execution of a works contract. These words flow from the definition of the G
word "sale" in the Act to Article 366(29A){b) of the Constitution.
(Paras 10, 14 and 15) (934-D; 938-F, G)

Mis. Gannon Dunkerley and Co. and Ors. v. State ofRajasthan and Ors.,
(1993) 1 sec 364, reiterated.
H
930 SUPREME COURT REPORTS [2007) 8 S.C.R.

A 1.4. The High Court was, therefore, right in setting aside the show cause ·· · •.
notice dated 9.5.2001 issued by the A.O. (issuing authority). The withdrawal
of recognition certificate was erroneous as it was contrary to the definition
of the word "sale" in ~ection 2(h) of the Act which had to be read with Section
48(2) of the Act. Therefore, the two circulars dated 17.1.2001and23.2.2001
B issued by the Commissioner, Trade Tax, U.P., cannot constitute the basis for
issuing the impugned show cause notice dated 9.5.2001.
(Para 161 [939-B, C)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7256 of2005.

From the Judgment & Order dated 14.03.2002 ofthe High Court of
C Judicature at Allahabad in Civil Misc. Writ Petition 741 of2001.

WITH

C.A.Nos. 7257 to 7264/2005 and C.A. Nos. 3553 and 3555/2007.

D Sunil Gupta, T.N. Singh, G. Venkateswara Rao and Kamlendra Mishra for
the Appellants.

Anil B. Diwan, S. Ganesh, E.C. Agrawala, Mahesh Agarwal, Rishi
Agrawala, Gaurav Goel, Amit Sharma, Neha Aggarwal, Adarsh Upadhyay,
E Vishwajit Singh, Ujjwal Banerjee, H.K. Puri, Arun Kumar Sinha, Rakesh Singh,
t-lukesh Kumar Sinha, Abhishek Chaudhary, A.P. Dhamija, Ram Niwas and
Pratibha Jain for the Respondents.

The Judgment of the Court was delivered by

KAPADIA, J. l. Leave granted in Special leave petitions.
F
2. This batch of civil appeals is directed against the judgment and order
dated 14.3.02 passed by the Allahabad High Court in Writ Petition No.741 of
2001.

G 3. Civil Appeal No. 7256 of 2005 is the lead case in which the facts are
as follow. .
4. M/s. P.N.C. Construction Co. Ltd. (assessee) is a public limited
company incorporated under the Companies Act, 1956. It is registered under
the U.P. Trade Tax Act, 1948. It entered into a contract with National Highway
H Authority of India, New Delhi, for construction 4/6 lane of national highways
STATEOFU.P. v. P.N.C. CONSTRUCTION CO. LTD. [KAPADIA,J.] 931
of north, south, east and west of the Agra-Gwalior section of NH-3 and for A
laning of24 to 41 kms. of Agra-8holpur section ofNH-3 in the State ofU.P.
Assessee was awarded work by the Construction Division, Agra and Mathura,
for widening the roads, maintenance and repairs.

5. Assessee applied for grant of 'recognition certificate' under Section
4-8 of the U.P. Trade Tax Act, I 948 (for short, 'the Act') for purchase ofraw- J3
materials for manufacture of Hot Mix. The Trade Tax Officer rejected the
request of the assessee. Aggrieved by the said decision, an appeal was
preferred before Dy. Commissioner (Appeals) which was also dismissed vide
order dated 24.4.97. Aggrieved by the decision, the assessee preferred Second
Appeal No.75of1997 before the Trade Tax Tribunal, Agra, which came to the C
conclusion that Hot Mix was manufactured by the assessee in the plant from
cement, sand, bitumen, furnace oil, HSD, Lubricant etc. for the construction
of roads. The Tribunal found that the A.O. had in fact granted recognition
certificate to Mis. National Highway Construction Company, Mathura and
Mis. Oriental Construction Engineers Ltd., Mathura, for manufacturing of Hot
Mix. Therefore, the Tribunal allowed the assessee's appeal and directed the D
A.O. to grant recognition certificate for the purchase of cement, sand, bitumen,,
furnace oil, HSD, Lubricant etc. (raw-materials) against Form No.3-8 at a
concessional rate of tax. Consequently, the A.O. issued recognition certificate
in favour of the assessee for the purchase of the aforestated raw-materials.
Pursuant to the recognition certificate, assessee purchased the said raw- E
materials against Form No.38.

6. However, on 17.1.2001 the Commissioner, Trade Tax, U.P. issued a
circular stating that purchase of raw-materials used in the construction of
roads, cannot be made against Form No.38. This circular dated 17.1.01 was
followed by another circular dated 23.2.01 to the effect that recognition F
certificate under Section 48 of the Act with regard to purchase of bitumen,
chemical compound etc. against Form No.38 should be reviewed by the A.O.
(issuing authority). Pursuant to the aforestated two circulars dated 17.1.0 l
and 23.2.01 (impugned circulars), show cause notice was issued on 9.5.01 to
the assessee herein as to why the recognition certificate earlier granted to the
assessee should not be revoked. The impugned notice dated 9.5.01 as well G
as the aforestated two impugned circulars dated 17.1.01 and 23.2.01 were
challenged by the assessee before the High Court vide Writ Petition No.741
of200l.

7. The main contention of the assessee before the High Court was that H
932 SUPREME COURT REPORTS (2007) 8 S.C.R.

A the raw-materials used by the assessee in execution of works contract
constituted 'deemed sale' under Article 366(29A) of the Constitution oflndia
and, therefore, the assessee was entitled to the benefit of concessional rate
of duty on the purchase of aforestated raw-materials. Before the High Court,
assessee further contended that it was open to the State to challenge the
B order of the Tribunal directing the A.O. to grant recognition certificate to the
assessee; that the State did not challenge the decision of the Tribunal and,
therefore, the impugned circulars dated 17. l.01 and 23 :2.0 I constituted
colourable exercise of power by the Commissioner in order to get over the
judgment of the Tribunal which was against the Department.

C 8. That, it was not open to the issuing authority to cancel the recognition
certificate granted to the assessee by invoking the aforestated impugned
circulars dated 17 .1.0 I and 23 .2.0 I. At this stage, we may point out that the
assessee did challenge the validity of the said circulars dated 17.1.01 and
23 .2.0 I before the High Court. However, the High Court has focused its
attention only to the validity of the show cause notice dated 9.5.01 by the
D A.O. threatening withdrawal of the recognition certificate. Before the High
Court, it was contended on behalf of the State (Department) that the writ
petition was premature and that the appropriate remedy available to the
assessee was to raise the contentions in adjudication before the assessing
authority. The Department further contended that in the meantime assessee
E was not entitled to sell Hot Mix either in the State or in the course of inter-
State trade as provided under Section 4-B(2) of the Act as the final product
was not the Hot Mix but the road to be constructed from the Hot Mix
manufactured by the assessee. On behalf of the Department, it was submitted
that road was the end product; that it was not saleable; that it was not the
notified product and, therefore, assessee was not entitled to claim the benefit
F of concessional rate of duty on purchase of raw-materials under Section 4-
B of the Act.
-~
9. By the impugned judgment, the High Court came to the conclusion
that the impugned notice dated 9.5.01 came to be issued on account of
aforestated two circulars dated 17 .1.0 I and 23.2.0 I issued by the Commissioner,
G Trade Tax, U.P. The High Court further held that there was no allegation, in
the show cause notice dated 9.5.01, of the assessee having violated any terms
or conditions of the recognition certificate. According to the High Court, the
impugned notice dated 9.5.01 was issued only on the basis of the aforestated
two circulars dated 17 .1.0 I and 23 .2.0 I much after the grant of recognition
H certificate and since the object behind the issuance of the aforestated two
STATEOFU.P. v. P.N.C. CONSTRUCTION CO. LTD. [KAPADIA,J.) 933

.J circulars dated 17.1.0 I and 23.2.01 was to overrule the decision of the Tribunal A
in favour of the assessee, the High Court took the view that the impugned
show cause notice dated 9.5.01 was liable to be set aside. Aggrieved by the
said decision, the State (Department) has come to this Court by way of civil
appeals.

JO. The said Act is enacted to provide for levy of tax on sale or B
purchase of goods in U.P. Under Section 2(bb) of the Act "Trade Tax" means
a tax payable on sale or purchase of goods. Under Section 2(d) of the Act
the word "goods" is defined to mean every kind or class of moveable property
including all materials, commodities and articles involved in the execution of
works contract. Un~er Section 2 (e-1) of the Act the word "manufacture" is C
defined to mean producing, mining, extracting, altering, finishing or otherwise
processing, treating or adapting any goods. Under Section 2(gg) of the Act
"purchase price" is defined to mean valuable consideration paid or payable
by a person for purchase of goods less cash discount given by the seller.
Under Section 2(h) of the Act "sale" is defined to mean any transfer of
property in goods for cash or deferred payment or for other valuable D
consideration including transfer of property in goods (whether as goods or
in some other forms) involved in the execution of a works contract. Under
Section 2(i) of the Act "turnover" is defined to mean the total amount for
which goods are supplied or distributed by way of sale by a dealer on his
own account or on account of others for cash or deferred payment or for any E
other valuable consideration. Under Section 2(ii) of the Act the expression
"turnover of purchases" is defined to mean the total amount of purchase price
paid or payable by a dealer in respect of purchases of goods made by him
after stipulated production. Under Section 2(m) of the Act the expression
"works contract" is defined to include any agreement for carrying out building
construction, manufacture, processing, fabrication, erection, installation, repair F
'r or commissioning of moveable or immoveable property for cash, deferred
payment or in other valuable consideration. Section 2;n) of the Act defines
the word "tax" to include additional tax and the composition money accepted
under Section 7-D of the Act. Section 3 of the Act imposes liability to tax
under the Act. Section 4-8 refers to giving of special relief to certain category G
of manufacturers. It states that notwithstanding contained in Section 3, 3-A,
3-AAA and 3-D, where any goods are liable to tax under Section 3-D are
purchased by a dealer who is liable to tax on the turnover of first purchases
and the dealer holds a recognition certificate issued under sub-section (2) of
Section 4-8 he shall be liable in respect of those goods to tax at concessional
rate or to exemption subject to conditions and restrictions specified in that H
934 SUPREME COURT REPORTS (2007]. 8 S.C.R.

A behalf by the State Government. Under Section 4-8(2) of the Act where a
dealer requires any goods, referred to in Section 4-8( 1), for or in the manufacture
by him in the State of any notified goods and such notified goods are
intended to be sold by him in the State or in the course of inter-State trade
or commerce or in the course of export out India, such dealer may apply to
the A.O. in the prescribed form for grant of recognition certificate in respect
B thereof and if the applicant satisfies such requirements as may be prescribed,
the A.O. shall grant to him in respect of such goods a recognition certificate.
Under Section 4-8(2) there is also an Explanation which states that where
goods are required for use in the manufacture of notified goods such goods
shall mean raw-materials, processing materials, machinery, plant, equipment
C etc. and the word "notified goods" shall mean goods to be notified by the
State Government in that behalf from time to time. In the present case, the
aforestated raw-materials, namely, cement, sand, bitumen, furnace oil, HSD,
Lubricant etc. are the raw-materials required by the assessee for the
manufacture of Hot Mix in the Hot Mix Plant of the assessee. In the present
case, recognition certificate was granted in respect of the said raw-materials
D which has been subsequently withdrawn in view of the circulars dated 17 .1.0 I
and 23.2.0 I issued by the Commissioner. Assessee has purchased the
aforestated raw-materials at the concessional rate of duty. This was pursuant
to the recognition certificate given by the A.O. (issuing authority) which is
subsequently cancelled on account of the aforestated two circulars dated
E 17.1.01 and 23.2.01. Hot Mix is a notified item. On 21.5.94 State ofU.P. have
issued Notification No.TT-2-1623/XI-7(159)/91-U.P.Act-15/48-0rder-94 which
stated that with effect from I .6.94 tax shall be payable at the rate of2 per cent,
on the sale or purchase as the case may be, by a dealer holding a valid
recognition certificate under Section 4-8(2) of any raw-material covered by
such certificate which raw-material shall be used in the manufacture of notified
F goods. Similarly, by another Notification No.T.l.F.-2-2383/XI-9(25 l )/97-U.P. Act-
l 5-48-0rder··98 dated 23.11.98 the tax became payable in respect of declared
goods'( cement) at 2 per cent and at the rate of 2.5 per cent on other raw-
materials like sand, bitumen, furnace oil, HSD, Lubricant etc. Further under the
said notification apart from chemical, fertilizer and electrical energy, all other
G goods were separately classified as notified goods. To the same effect is.. the
Notification No.K.A.NI.-2~530/XI- 7( l 59)/9 l-U.P.Act-15-48-0rder 2000 dated
17 .2.2000 which was subsequently am.ended by another Notification No.K.A.NI-
2-3348/Xl-7 (159)/91-U.P. Act-15-48-0rder~(67)-2001 dated 30.10.2001. Therefore,
it is clear that recognition certificate granted to the assessee was in respect
of the aforestated raw-materials which attracted concessional rate of duty and
H it was granted to the assessee as the assessee had indicated in its application
STATEOFU.P. v. P.N.C.CONSTRUCTIONCO. LTD. [KAPADIA,J.] 935
---.<
.... that they required the raw-materials for manufacture of Hot Mix which was A
a notified item under the above notifications.
t

I I. The main contention advanced on behalf of the Department by Mr.
Sunil Gupta, learned senior counsel, was that the High Court should not have
interfered at the stage of show cause notice; that the question as to whether
use of the above raw-materials in execution of the works contract constituted B
transfer of property in goods needed to be established by the assessee in the
adjudication proceedings and, therefore, the High Court should have allowed
the Department to proceed with the show cause notice. Learned counsel
submitted that under the scheme of Section 4-8(2) of the said Act notified
goods are goods which are intended to be sold in the State and since "roads"
did not constitute notified goods and nor did they constitute saleable product,
c
........ the Department was right in issuing show cause notice dated 9.5.01 for
cancellation of the recognition certificate. Learned counsel submitted that in
the present case the Commissioner had issued the aforestated circulars dated
17.1.01 and 23.2.01 as the assessees in the State of U.P. were using the
aforestated raw-materials for the construction of roads. Learned counsel D
-l
submitted that roads cannot constitute a notified item and use of raw-materials
:- for construction of roads in the State cannot constitute a "deemed sale" as
there was no transfer of property in the goods. Learned counsel urged that
under the Act the word "sale" is defined to mean transfer of property in
goods and it includes a transfer of property in goods involved in the execution
of works contract. Learned counsel urged that by no stretch of imagination
E
"roads" can constitute a notified item. It cannot also come in the definition
of the word "goods" and, therefore, the assessee was not entitled to the
recognition certificate under the Act. Learned counsel submitted that goods
used in the works contra~t for construction of roads cannot come within the
,,; concept of "deemed sale" under Article 366(29A) of the Constitution of India. F
r Learned counsel further submitted that in the present case the Department is
not invoking the provisions of the Constitution. Learned counsel submitted
that limited question involved in these civil appeals is : whether the case of
the assessees came within Section 4-8(2) of the said Act. Learned counsel
submitted that the very purpose of granting of recognition certificate is to
give the benefit of concessional rate of duty to the assessee who buys raw-
G
materials for the manufacture of goods like doors, windows etc. Learned
counsel submitted that in the present case the assessees are buying the
\.: aforestated raw-materials for construction of roads which cannot by any
stretch of imagination be treated as goods. Learned counsel further submitted
that roads are not saleable commodities. In the circumstances, learned counsel H
/

~

936 SUPREME COURT REPORTS [2007) 8 S.C.R.
).--.

A submitted that the assessees were not entitled to the benefit of the concessional
rate of duty. Learned counsel further submitted that consumption and use of '}
Hot Mix in the manufacture of roads cannot fall under Section 4-8(2) of the
Act as the said section contemplates goods (raw-materials) to be used in the
manufacture of notified goods and such notified goods should be intended
to be sold in the State. Learned counsel urged that roads cannot be sold in
B the State; that roads are not notified goods; that roads are not goods even
by way of definition of goods under Section 2(d) and in the circumstances
the assessees were not extended to recognition certificate under Section 4-
8(2) of the Act. In the alternative, learned counsel submitted that if it is the
case of the assessees that the raw-materials, referred to above, were used/
c consumed in the manufacture of Hot Mix then that que'stion was required to
be looked into by the A.O. by way of adjudication and, therefore, the High
~
Court should not have interfered under Article 226 of the Constitution at the
stage of show cause notice.

12. We find no merit in the civil appeals filed by the State (Department).
D At the outset, we may state that there are no disputed facts which warrant
adjudication. Assessee has entered into a contract to construct roads. In I-
~-· execution of the contract assessee is required to buy aforestated raw-materials y
which are used in the manufacture of Hot Mix. The said Hot Mix is used for
construction of roads. The show cause notice dated 9.5.01 relies upon the
aforestated two circulars dated 17.l .Oland 23.2.01 issued by the Commissioner.
E
According to the Commissioner, if any contractor manufactures doors,
windows, grills etc. from cement (one of the raw-materials herein) then such
manufacturer would be entitled to avail of the facility of concessional rate of
duty under Section 4-8 of the Act. According to the Commissioner, doors,
windows, grills and frames are self-manufactured goods which were taxable
F as sale and, therefore, Section 4-8(2) of the Act covers such type of goods
,..
and not roads. According to the Commissioner, if the contractor utilizes the -1
said raw-materials for construction of the foads then the contractor-assessee
would not be entitled to the benefit of Section 4-8 of the Act. Further,
according to the Commissioner, the contracted road is an immoveable property
whereas under Section 4-8 of the Act the facility of buying raw-materials was
G permissible only to the manufacturing who sold the manufactured commodity
and since roads were not saleable the manufacture-assessee was not entitled
to the benefit of Section 4-B.

13. In the present case, raw-materials are bought by the assessee which
are used in the manufacture of Hot Mix which is utilized for road construction.
H
- STATE OF U.P. v. P.N.C. CONSTRUCTION CO. LTD. [KAPADIA, J.] 937

·--\
These facts are not in dispute. The question before us is : whether on the A
said facts the Department was right in denying the benefit of Section 4-B of
the Act to the assessee? .Therefore, there was no need for adjudication.

14. "Value Addition" is an important concept which has arisen after the
Forty-sixth Amendment to the Constitution. Prior to the said Amendment this
Court had taken the view in State of Madras v. Gannon Dunkerley & Co. B
(Madras) Ltd, AIR (1958) SC 560, that "works contract" was an indivisible
contract and the turnover of the goods used in the execution of the works
contract could not, therefore, become exigible to sales tax. To overcome the
~-
effect of the said decision, the concept of "deemed sale" was introduced by
the Parliament by introducing sub-clause (b) of Clause 29A in Article 366 of
the Constitution which states .that the tax on sale or purchase of goods would
c
include a tax on transfer of property in goods involved in the execution of
works contract. The emphasis is on the expression "transfer of property in
goods (whether goods as such or in some other form)". Therefore, after the
Forty-sixth Amendment to the Constitution, the works contract which was an
indivisible contract is, by a legal fiction, divided into two parts - one for sale D
of goods and the other for supply of labour and services. Therefore, after the
Forty-sixth Amendment, it 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 Of! 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 Constitution that the State
E
Government is empowered to levy sales tax on the contract value which earlier
was not possible. In the present case, the assessee has paid the tax under
the scheme of composition at a stipulated percentage of the contract value.
The assessee has paid the tax as defined under Section 2(n) of the Act. As
stated above, "works contract" has been defined under Section 2(m) of the F ~
,,:.
Act to include any agreement for carrying out building construction,
>- manufacture, processing or commissioning of any moveable or immoveable
property. These two definitions have been inserted in the said Act in conformity
with the Forty-sixth Amendment to the Constitution [See: Builders' Association
ofIndia and Ors. v. Union of India and Ors., (1989] 2 SCC 645]. To the same
effect is the ratio of the judgment of this Court in the case of Mis. Gannon
G
Dunkerley and Co. and Ors. v. State ofRajasthan and Ors., (1993] I SCC 364,
in whi~h it has been held, vide para 36, that, if the legal fiction introduced
by Article 366(29A)(b) of the Constitution is carried to its logical conclusion
\
it follows that even in a single and indivisible contract there could be a
"deemed sale" of the goods in the execution of a works contract. Such a H
938 SUPREME COURT REPORTS [2007] 8 S.C.R.

A deemed sale has all the incidents of a "sale" in cases where the contract is >--
divisible into two parts - one for sale of goods and the other for supply of
labour and services. Similarly, in the case of State of Kera/a and Anr. v.
Builders Association of India and Ors., [1997] 2 SCC 183, it has been held
that after the Forty-sixth Amendment goods transferred in the course of
B execution of the works contract is chargeable to tax under the Kerala General
Sales Tax Act, 1963.

15. In the present case, as stated above, the notifications issued by the
State Government from time to time show that different rates were prescribed
for declared goods and other raw-materials. 'Cement' fell in the category of
C declared goods whereas sand, bitumen, furnace oil, HSD, Lubricant etc. fell
in the category of other raw-materials. The said notifications also indicate
notified goods. 'Hot Mix' fell in the category of notified goods. Under Section
4-8(2) of the Act the recognition certificate enabled the assessee to buy the
above raw-materials at concessional rate of duty provided they were used in
the manufacture of notified goods and such notified goods were intended to
D be sold by the assessees in the State or in the course of inter-State trade or
commerce or in the course of export out of India. Raw-materials came in the
category of "goods" for the purposes of Section 4-8(2) of the Act. In the
present case, the assessee has used cement, sand, bitumen, furnace oil, HSD,
Lubricant etc. as raw-materials in the manufacture of Hot Mix. The show
E cause notice dated 9.5.01 impugned in the writ petition (before the High
Court) proceeded on the basis that roads are not capable of being sold; that
roads were not goods; and that roads were not moveables and, therefore,
according to the Department the assessee was not entitled to the concessional
rate of duty on purchase of raw-materials. In our view, the impugned show
cause notice dated 9.5.01 was based on complete misreading of the provisions
F of the said Act. Under Section 2(h) of the Act the word "Sale" is defined to
mean any transfer of property in goods for cash or deferred payment or for
value consideration. The definition of the word "Sale" includes transfer of
property in goods (whether as goods or in some other form) involved in the
execution of a works contract. These words flow from the definition of the
G word "Sale" in the Act to Article 366(29A)(b) of the Constitution. The said
words have been interpreted by this Court, as stated above, in the second ·
Gannon Dunkerley 's case (Supra) in following words vide para 36:

"36. If the legal fiction introduced by Article 366(29-A) is carried to
its logical end it follows that even in a single and indivisible works
contract there is a deemed sale of the goods which are involved in
H
STATEOFU.P. v. P.N.C.CONSTRUCTIONCO. LTD. [KAPADIA,J.] 939
--<
.... the execution of a works contract. Such a deemed sale has all the A
'\ incidents of a sale of goods involved in the execution of a works
contract where the contract is divisible into one for sale of goods and
the other for supply of labour and services."

16. For the aforestated reasons, we are of the view that the- High Court
was right in setting aside the above show cause notice dated 9.5.01 issued B
by the A.O. (issuing authority). The withdrawal of recognition certificate was
erroneous as it was contrary to the definition of the word "sale" in Section
2(h) of the Act which had to be read with Section 4B(2) of the Act. Therefore,
the aforestated two circulars dated 17.1.01 and 23.2.01 issued by the
Commissioner, Trade Tax, U.P., cannot constitute the basis for issuing the
impugned show cause notice dated 9.5.01.
c
mil_
\

17 In the circumstances, the civil appeals filed by the State are dismissed
with no order as to costs.

RP. Appeals dismissed.
D
.;,...,