Carl Still G. M. B. H. and Another vs The State Of Bihar And Others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Not extracted

Decision Date: 19 April 1961

Coram: S.K. Das, J.L. Kapur, M. Hidayatullah, T.L. Venkatarama Aiyar, J.C. Shah

The judgment was delivered on 19 April 1961 in the matter titled Carl Still G M B H & Another versus The State of Bihar and Others. The petitioners were Carl Still G M B H and another individual, while the respondents were the State of Bihar together with other parties. The case was heard by a bench of the Supreme Court of India comprising Justices S K Das, J L Kapur, M Hidayatullah and J C Shah.

The official citation for this decision is 1961 AIR 1615 and 1962 SCR (2) 81. The judgment is also referenced in subsequent reports as R 1965 SC1655 (24) and R 1969 SC 556 (3). The issues involved the interpretation of a contract for construction works, the supply of materials, and the legality of the sales tax levied thereon. The proceedings concerned the attempt of the sales‑tax authorities to levy tax, a writ petition filed to quash those proceedings, and the maintainability of the petition under Articles 226 and 227 of the Constitution of India.

According to the headnote, on 19 December 1953 the appellant, a company incorporated in West Germany, entered into a contract with an Indian company for the erection of a complete coke‑oven battery and associated by‑product plants at Sindri in the State of Bihar. The contract required the appellant to construct buildings, install plants and machinery, and to deliver and supply accessories and articles both from Germany and locally from India. All services to be performed were enumerated in the First Schedule of the agreement, and the total consideration was fixed at Rs 2,31,50,000 inclusive of all costs.

The contract contained specific provisions for the event of default. It stipulated that if the contractor failed to complete the works within the time specified, the Indian company could take possession of the works and the materials, which would then become the company’s property, and could complete the works while deducting the expenses incurred from the contract price. Clause 15(ii) provided that any material brought by the contractor onto the site would immediately become the property of the Indian company; however, any material rejected by the company during the progress of the works would cease to be the company’s property. After the coke‑oven and by‑product plants were completed, the contractor retained the right to remove any surplus material. The clause also exempted the company from liability for loss of materials caused by fire or any other manner of destruction.

Under the Bihar Sales Tax Act, 1947 (Bihar 19 of 1947), Section 2, materials used in the execution of works under a contract are treated as sold by the contractor, and their value is taken as the sale price liable to tax. The works contemplated by the contract were completed in 1955 as agreed. Subsequently, on 20 March 1956, the sales‑tax authorities issued a notice to the appellant stating that it was liable to pay tax for the three years spanning 1952 to 1955 under the provisions of the Act. The appellant contended that it had merely supplied materials for the execution of the works contract, that no sale of goods or materials had taken place, and that the tax proceedings were therefore improper.

In the present dispute, the appellant contended that the sales tax authorities had treated the supply of materials used in the construction contract as a taxable sale, an approach that the appellant asserted to be unlawful. Despite the appellant’s representations that the materials were supplied solely for the purpose of executing the works and that no sale of goods had taken place, the tax authorities proceeded to take further steps to levy the tax. Consequently, the appellant approached the High Court of Patna by filing a petition under Articles 226 and 227 of the Constitution of India, seeking a writ to quash the tax proceedings. The High Court examined clause 15(ii) of the contract and concluded that the ownership of the materials passed to the Indian company as soon as the items were brought onto the site. The court interpreted this passage as amounting, in effect, to a sale of those materials from the appellant to the company. However, the court declined to grant the relief sought, holding that the factual matrix had not yet been fully explored. The court therefore directed that the sales tax authorities were free to investigate the facts, and after a proper construction of the contract they could determine whether the appellant was liable to pay tax and, if so, to what extent.

The dissenting opinion, authored by Justice Shah, set out two principal observations. First, Justice Shah held that a proper construction of the agreement dated 19 December 1953 revealed a single, indivisible contract for the construction of a coke‑oven battery and a by‑products plant for a lump‑sum price, not a contract for the sale of materials as such; accordingly, the tax authorities could not impose a levy on the supplied materials on the basis that the supply constituted a sale, relying on the authorities in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., [1959] S.C.R. 379 and Piare Lal Hari Singh v. State of Punjab, [1959] S.C.R. 438. Second, Justice Shah observed that where proceedings are instituted before a tribunal under a statutory provision that exceeds the tribunal’s jurisdiction, an aggrieved party may approach the court under Article 226 for appropriate writs to quash those proceedings without waiting for the tribunal’s process to conclude, citing State of Bombay v. United Motors (India) Ltd., [1953] S.C.R. 1069, Himmatlal Harilal Mehta v. State of Madhya Pradesh, [1954] S.C.R. 1122 and Bengal Immunity Company Ltd. v. State of Bihar, [1955] 2 S.C.R. 603. Applying these principles, Justice Shah concluded that the tax authorities sought to maintain the appellant’s tax liability solely on the basis of the December 19, 1953 contract and the provisions of the Bihar Sales Tax Act, 1947, and that the proceedings therefore lacked legal basis and must be set aside. He further explained that the agreement covered both the construction of the coke‑oven battery and the supply of accessories and articles; even if the supply was merely incidental to the works, a conclusion that it did not form part of a sale could not be drawn without a detailed investigation into the true nature of the transaction.

The Court observed that any question concerning liability to pay tax must be investigated by the tax authorities who possess the appropriate jurisdiction. It emphasized that before such facts are established, the High Court could not simply rely on the written terms of the contract and disregard an inquiry into the actual character of the transaction. Consequently, the High Court was unable to determine whether the contract that had been performed constituted a pure works or construction contract or whether it was a composite contract involving both elements. Accordingly, the Court held that the High Court was correct in refusing to grant the writ that had been sought. The matter then proceeded to the Civil Appellate Jurisdiction, where Civil Appeals Nos. 237 and 238 of 1960 were filed by way of special leave against the judgment and order dated 8 July 1958 of the Patna High Court, recorded in Miscellaneous Judicial Cases Nos. 713 and 819 of 1958. Counsel for the appellants comprised senior advocates, while counsel for the respondents appeared on behalf of the State. The judgment dated 19 April 1961 was delivered by a bench consisting of Justices S. K. Das, J. L. Kapur, M. Hidayatullah and T. L. Venkatarama Aiyar, with Justice Venkatarama Aiyar authoring the opinion and Justice J. C. Shah delivering a separate judgment. Both appeals arose from identical facts and presented the same legal issue, and the opinion of Justice Venkatarama Aiyar was declared to govern both appeals. The appellant in Civil Appeal No. 237 of 1960 was a company incorporated at Recklinghausen near Düsseldorf in West Germany, engaged in the manufacture and erection of plants and machinery. On 19 December 1953, this company entered into a contract with Sinclair Fertilisers and Chemicals (Private) Ltd., referred to as the Owner, for the assembly and installation of machinery, plants and accessories for a coke‑oven battery and by‑products plant at Sindri in Bihar, for an all‑inclusive sum of Rs 2,31,50,000. The agreement stipulated that the appellant would provide all materials and labour necessary for the works, and that performance would be divided into a “German section” and an “Indian section.” The German section comprised deliveries of material from Germany on a free‑on‑board basis at European ports, the cost of technical drawings, and the services of German specialists. The Indian section comprised the supply of Indian‑sourced material and charges for Indian labour and services to be performed within India. Payment for the German section was to be made from the lump‑sum amount in the form of Rs 1,31,50,000 payable in pounds sterling in London, while the Indian section was to be paid the remaining Rs 1,00,00,000 in Indian currency, with instalments linked to the progress of the contract. After the agreement was executed, the appellant assigned the Indian section to an Indian firm called Coke Oven Construction Company (Private) Ltd.; the Owner accepted this arrangement, thereby making the Indian company the assignee of that portion of the contract.

In relation to the performance of the Indian portion of the contract, the company that was assigned that work is identified as the appellant in Civil Appeal No. 238 of 1960. The parties carried out the contractual works, and the work on the Indian section was finished in the year 1955 as stipulated in the agreement. After the completion of the works, the sums that were payable under the contract were also disbursed to both appellants. The controversy that now comes before the Court concerns whether the two appellants are required to pay sales tax on the monetary value of the materials that they employed in carrying out the contractual works. To decide this issue, the Court finds it useful to examine the pertinent provisions of the Bihar Sales Tax Act, Bihar Act No. XXX of 1947, which the Court will refer to simply as “the Act.” Section 2(g) of the Act states that the term “sale” includes any transfer of property in goods that are used in the execution of a contract. Section 2(b) defines “contract” as any agreement for the performance, for cash or other valuable consideration, of construction, fitting out, improvement or repair of any building, road, bridge or other immovable property. Section 2(d) explains that “goods” means all materials, articles and commodities, whether or not they are used in the construction, fitting out, improvement or repair of immovable property. Section 2(h)(ii) provides the meaning of “sale price,” describing it as the amount payable to a dealer as valuable consideration for carrying out any contract, after deducting, as may be prescribed, the portion of that amount that represents the usual proportion of labor costs to material costs in the contract. Section 2(c) defines “dealer” as any person who sells or supplies any goods, including goods that are sold or supplied in the performance of a contract. Section 2(1) then defines “turnover” as the total of the sale‑price amounts that a dealer has received or is entitled to receive for the sale or supply of goods or for the execution of any contract during a specified period. Section 4, the charging provision, declares that every dealer whose gross turnover for an accounting period exceeds Rs 10,000 is liable to pay tax on sales occurring in Bihar. Section 5 adds that the tax payable by a dealer under the Act shall be levied on his taxable turnover at the rates, restrictions and conditions that may be prescribed each year by the annual Bihar Finance Act. The Bihar Finance Act further explains “taxable turnover” as the portion of a dealer’s gross turnover on sales made in Bihar that remains after applying certain permissible deductions. Section 9(1) of the Act provides that no dealer who is liable under Section 4 to pay tax may carry on business as a dealer unless he has first been registered under the Act and holds a valid registration certificate. Finally, Section 13(5) of the Act is the provision under which the present proceedings have been instituted.

In this case, the Court described the procedure that the Commissioner must follow when the Commissioner, after receiving information, becomes convinced that a dealer ought to have paid tax under the Act for a particular period but has deliberately failed to obtain registration. The Commissioner is required to give the dealer a reasonable opportunity to be heard, and then to assess, according to his best judgment, the amount of tax, if any, that is due from the dealer for that period and for any later periods. After making such an assessment, the Commissioner may also order the dealer to pay a penalty that can be as much as one and a half times the assessed tax amount.

The Court noted that the practical effect of these provisions is that, in a contract for carrying out works, the materials used in the work are treated as having been sold by the contractor, and their value is taken as the sale price on which tax is to be levied. The statute also provides a method for determining that value. Acting on this statutory scheme, the Superintendent of Sales Tax in Dhanbad, who is the third respondent in these proceedings, issued a notice on 20 March 1956 to the appellant, who was also the appellant in Civil Appeal No 237 of 1960. The notice was issued under section 13 of the Act and asserted that, based on information that had come into his possession, the Superintendent was satisfied that the appellant was liable to pay tax for the financial years 1952‑53, 1953‑54 and 1954‑55, and that the appellant had willfully failed to register under section 9 of the Act. The notice therefore required the appellant to show cause why a penalty should not be imposed.

In response to this notice, the appellant appeared before the third respondent and contended that it had merely supplied materials for the execution of a works contract and that it had not made any sale of goods or materials. The appellant argued that treating the supply of those materials as a sale and imposing tax on that alleged sale was unlawful. The third respondent rejected this contention and directed the appellant to produce all of its books, accounts and other relevant documents so that an assessment could be carried out. The Court observed that this direction was understandable because it was the duty of the Superintendent to levy tax in accordance with the provisions of the Act.

Subsequently, the appellant filed petitions in the High Court of Patna invoking Articles 226 and 227 of the Constitution. The petitions sought appropriate writs to set aside the proceedings before the third respondent and to prohibit any further action under the Act on the ground that the proceedings were wholly incompetent. The appellant advanced two main grounds. The first ground was that, although the State legislature has the power to enact a tax on the sale of goods, it does not have the authority to tax something that is not a sale under the law, and that the supply of materials in the course of executing works does not constitute a sale of goods; therefore, a tax on such supply is unauthorized. The second ground was that, even if a sale of materials were deemed to have occurred, the materials were imported from Germany, and imposing tax on such import would be inconsistent with Article 286(1)(b) of the Constitution.

After acquiring the Indian portion of the contract, the appellant in Civil Appeal No. 238 of 1960 registered as a dealer under section 9 of the Sales Tax Act on 11 May 1953. It subsequently began filing the periodic returns that the Act and the registration certificate required on a regular basis. The appellant maintained throughout that it was not liable to pay sales tax on the disputed transactions because only supplies of materials for executing the works contract were involved. It argued that such supplies did not amount to a sale of goods within the meaning of the statute. The Superintendent of Sales Tax, Dhanbad, who is the third respondent, rejected this contention and assessed the appellant to sales tax for the fiscal years 1952‑53 and 1953‑54. While the appellant pursued appeals or revisions against those assessment orders, the third respondent issued further notices demanding assessment of tax for the years 1954‑55 and 1955‑56. It also directed the appellant to produce all its books of account and other documents for the periods in question. Consequently, the appellant instituted petitions in the Patna High Court under Articles 226 and 227 of the Constitution, mirroring the petitions it had earlier filed in Civil Appeal No. 237 of 1960. The petitions sought writs that would set aside the orders of the sales‑tax authorities, arguing that those orders were unlawful. They contended that the Act’s provisions, insofar as they attempted to tax the supply of materials in works contracts, exceeded the State’s legislative competence. By the time those petitions were scheduled for hearing, the Supreme Court’s decision in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. had been reported. That decision held that the term “sale of goods” in Entry 48 of List II of Schedule VII to the Government of India Act 1935 carried the same meaning as in the Sale of Goods Act 1930. The decision also noted that Entry 48 corresponded to Entry 54 of List II of Schedule VII to the Constitution of India. It further observed that where a building contract is executed for a lump‑sum price, there is no separate contract of sale of the materials used in the work. Consequently, levying a tax on the supply of those materials by treating it as a sale was beyond the power of the State Legislature under the cited entry. The learned judges, however, expressed the view that the Madras decision was distinguishable because the agreement before them contained a clause providing that ownership of the materials would pass to the owner. They added that the ownership would transfer as soon as the materials were placed on the site in accordance with the terms of the contract. Turning next to the present appellants’ argument that, because there was no agreement for payment of a price for the materials, the materials could not be deemed sold, the learned judges noted the opposing contention raised by the Government Pleader. The learned judges recorded the opposing contention raised by the Government Pleader without providing any further comment on the issue. They recorded this observation without providing any further comment on the matter, leaving the issue open for further consideration.

The respondents based their contention on section 9 of the Sale of Goods Act, asserting that although the contract did not specify a price for the materials, the price could be inferred from the parties’ account books, invoices and the regular course of their dealings. The learned Judges then stated that they were not prepared to give a definitive opinion on whether the materials in question constituted a sale liable to tax in the present proceedings. They observed that the facts had not been fully examined by the sales tax authorities, and that the petitioners had failed to provide all the relevant account books, documents and other information necessary for a conclusive determination. The Judges added that it remained for the sales tax authorities to investigate the factual matrix, to interpret the contract correctly, and to decide whether, and to what extent, the petitioners were liable to pay sales tax. They expressed confidence that the authorities would apply the principles laid down by the Supreme Court in State of Madras versus Gannon Dunkerley and Company (Madras) Limited, reported in 9 Sales Tax Cases 353. After making these observations, the learned Judges dismissed the petitions. The dismissal formed the basis for the present appeals, which were taken on special leave. The primary issue for determination in the present appeal concerned whether, on construing the agreement dated 19 December 1953, the appellants could be said to have sold the materials used in the construction works apart from the performance of the works themselves.

The Court referred to the decision in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., noting that building contracts may assume several different forms. In that decision, the Court explained that parties might enter into two distinct contracts: one for the transfer of materials for monetary consideration and another for remuneration for services and work performed. Even if a single instrument embodied both agreements, the State retained the authority to separate the sale of materials from the contract for labour and services and to impose tax on the sale component without challenge. Consequently, the present Court needed to decide whether the contract of 19 December 1953 represented a combination of two separate agreements—one for the sale of materials and another for the supply of labour and services—or whether it constituted a single, indivisible agreement for the execution of the works. To address this question, the Court examined the relevant portion of the agreement. The preamble disclosed that the Owner had agreed that the contractor would establish a complete coke‑oven battery ready for production, together with by‑product plants, in accordance with the specifications set out in the agreement, that the installation would take place at a site chosen by the Owner, and that the contractor would carry out the works as described.

The agreement required the contractor to erect and construct buildings, plants and machinery, to deliver and supply accessories and articles sourced both from Germany and locally from India, and to render the services described in the First Schedule, all for a single, all‑inclusive price of Rs 2,31,50,000. Clause I of the contract stipulated that the contractor must execute and complete the works enumerated in the Schedule, while clause II obliged the Owner to pay the contractor the sum of Rs 2,31,50,000 for performing the contract. Clause 4 imposed on the contractor the duty to provide all labour, materials, machinery, plant, tools, tackles and other implements necessary for carrying out the works in a workman‑like manner. Under clause 11, the contractor guaranteed that full production would be achieved within twenty‑two months from 15 September 1952 and further undertook to satisfy the guarantees set out in Schedule II within three months after the accomplishment of full production. Clause 28 provided that if the contractor failed or was unable to complete the works within the prescribed period, the Owner could take possession of the works and of the materials, which would then become the Owner’s property, complete the works, and deduct the expenses incurred in such completion from the agreed price.

From these provisions, the Court observed that the essential subject matter of the agreement was the installation of the coke‑oven battery and its accessories, and that the agreed price of Rs 2,31,50,000 represented the lump‑sum consideration for executing those works. The Court noted that the contract did not contain any provision for the sale of materials by the appellants to the Owner; rather, it was a single, indivisible contract for the construction of specified works for a fixed sum. The High Court had previously favored the contention that a particular clause effectually created a sale of materials because it stipulated that ownership of the materials would pass to the Owner upon their arrival on site. The contested clause read: “All materials and plant brought by the Contractor upon the site under the German and Indian Sections in connection with the construction of the Coke Oven and by‑products Plant shall immediately, when they are brought upon the site, become the Owner’s property and shall not on any account whatsoever be removed or taken away by the Contractor or by any other person without the Owner’s prior authority in writing. Such of them as during the progress of the works will be rejected by the Owner in accordance with the terms agreed upon between the Contractor and the Owner in this respect shall, on such rejection, cease to be the Owner’s property. The Owner shall not be liable for any loss or damage ….” The Court considered this clause in light of the overall contract and concluded that it merely dealt with the risk of loss and the handling of surplus or rejected items, and did not transform the agreement into a contract for the sale of the materials themselves. Hence, the Court held that the contract remained a single, comprehensive construction contract, not a material‑sale agreement.

The agreement further stipulated that any loss, theft, injury or destruction of the materials and plant caused by fire, tempest or any other cause would be the responsibility of the contractor, and the owner would not be liable for such loss. After the Coke Oven and by‑products plants had been completed in accordance with the terms of the contract, the owner agreed that the contractor could remove from the site all tools, tackles, machines, packing materials, protective roofing and any other items that were surplus to the normal operation of the plants, provided that the contractor made no claim for additional costs in respect of the removed items. The Court referred to the earlier decision in Peare Lal Hagri Singh v. The State of Punjab, where a building contract contained a clause stating that all stores and materials brought to the site would become and remain the property of the Government and could not be removed without prior written approval. The same clause provided that, upon final completion of the works, the contractor, at his own expense, must promptly remove all surplus stores and materials originally supplied by him, and that such removal would cause the ownership of those surplus items to revert to the contractor. In that case, the Court examined whether the clause created a separate contract of sale of the materials distinct from the works contract. The Court concluded that the purpose of the clause was merely to ensure that the appropriate materials of the right sort were used in the construction, and that it was not intended to create a contract for the purchase of the materials as a separate transaction.

In the present matter, clause 15 of the agreement was examined and found to be even clearer that it did not intend to effect a sale of materials. The clause expressly provides that if the materials are destroyed by fire, tempest or any other cause, the loss falls on the contractor and not on the owner, a result that would be inconsistent with an absolute transfer of ownership to the owner. The Court rejected the argument that section 9 of the Sale of Goods Act could be invoked. Section 9 deals with situations where a contract of sale of movable property does not specify a price; it then requires the price to be fixed according to the agreement, the parties’ course of dealings, or, failing that, a reasonable price to be paid. However, the provision presupposes the existence of a contract of sale. The Court cited the decision in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., which held that a contract of sale requires an agreement between the parties for the sale of the goods in question, with property passing as a result of that agreement. Since clause 15 does not embody an agreement to sell the materials, there is no contract of sale concerning those materials, and consequently section 9 of the Sale of Goods Act cannot be applied.

The Court observed that the provisions of the Act could not be applied to the present situation. Accordingly, the argument that clause 15 of the agreement could be interpreted as creating a contract of sale of the materials, and that the price for such a sale could be determined under section 9 of the Sale of Goods Act by referring to the appellants’ account books, to the invoices, or to the usual course of dealings between the parties and the owner, was rejected as untenable. The Court then explained that the agreement dated 19 December 1953 was a single, indivisible contract for the execution of construction works. Consequently, the respondents could not levy a tax on the materials supplied in performance of that contract on the basis that such supply constituted a sale. The Court further noted that the respondents advanced another contention: that irrespective of the merits of the arguments concerning the nature of the contract, the proper forum for raising any dispute was the authority created under the Act to hear and determine assessments of tax; that the appellants were required to demonstrate to those authorities that no taxable sales had occurred; that the appellants were obliged to exhaust the remedies provided by the Act before seeking the jurisdiction of the High Court under article 226; and that, on this basis, the learned High Court judges were correct in refusing to entertain the petitions filed by the appellants. The Court acknowledged the well‑settled principle that when a statute establishes a tribunal and confers on it jurisdiction over certain matters, a properly instituted proceeding before that tribunal cannot be removed by a prerogative writ issued by the High Court under article 226, nor can the High Court interfere with the tribunal’s proceedings. However, the Court also affirmed the equally well‑settled rule that if a proceeding before a tribunal is founded on a provision that is ultra vires, an aggrieved party may approach the court under article 226 for appropriate writs to quash the proceedings on the ground of incompetence, without having to wait for the tribunal’s process to be completed. This principle has been affirmed in earlier decisions, including The State of Bombay v The United Motors (India) Ltd., Himmatlal Harilal Mehta v The State of Madhya Pradesh, and The Bengal Immunity Company Limited v The State of Bihar. Applying these principles, the Court held that if the proceedings before the Sales Tax Officer were based on the provisions of the Act that authorize a tax on the supply of materials in a construction contract, then, in view of the decision in The State of Madras v Gannon Dunkerly & Co., such proceedings must be regarded as incompetent and therefore be set aside. Conversely, if the proceedings pertained in any way to sales that were not made under the construction contract, then the inquiry must continue before the authorities established under the Act, and the application of article 226 would fail.

In order to determine whether the proceedings initiated by the sales‑tax authorities could lawfully continue, the Court first noted the authorities cited in the earlier discussion, namely (1) [1953] S.C.R. 1069, 1077; (2) [1954] S.C.R. 1122, 1127; (3) [1955] 2 S.C.R. 603, 617‑619, 764‑766; and (4) [1959] S.C.R. 379. The Court observed that any application to the appropriate authorities under the Act, as well as the petition filed under Article 226, must be dismissed if the underlying proceedings are found to be incompetent. Consequently, the Court set out to examine the precise nature of the proceedings before the Sales Tax Officer in light of the principles previously articulated. The Court began by reminding that the Act expressly provides for the imposition of tax on the supply of materials when such supply occurs under a construction contract. The appellants were undeniably engaged in construction work pursuant to an agreement dated 19 December 1953, and no allegation was made that they were operating as independent dealers of materials within the State of Bihar. Accordingly, it was presumed that the sales‑tax authorities had initiated their proceedings in respect of the materials supplied by the appellants pursuant to that contract dated 19 December 1953.

When the appellants received the notice issued by the third respondent and challenged their liability to pay tax, they contended that the supplies of materials made under the contract did not constitute sales. Subsequently, the appellants approached the court under Article 226 seeking a writ to quash the tax proceedings, arguing that the provisions of the Act, insofar as they attempted to impose a tax on the materials supplied in performance of the contract as if they were sales, were beyond the statutory power (ultra vires). The Court further observed that, had the respondents intended to levy tax on the basis that sales of materials occurred outside the contractual arrangement, they bore the burden of raising that point in their answer to the petition. No such argument was advanced; the respondents failed to file even a counter‑statement. At the time of argument, confronted with the Supreme Court’s decision in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1), the respondents maintained that the parties’ agreement should be interpreted as effecting a sale of materials, the value of which could be determined from invoices, account books and the parties’ usual dealings. No assertion was made that any sales of materials existed beyond the contractual relationship between the appellants and the owner.

The learned judges of the High Court, in dismissing the petitions, underscored that the inquiry by the sales‑tax authorities must be conducted with reference to the appellants’ liability to pay sales tax “upon proper construction of the contract.” In the present proceedings, the respondents reiterated, in their statement, that the appellants’ liability derived solely from the contract, relying on clause 15 previously mentioned and on section 9 of the Sale of Goods Act. There was no claim that the appellants were liable for sales occurring outside the contractual framework. It was also noted before the Court, without contradiction from the respondents, that Sindri Fertilisers and Chemicals (Private) Ltd. was a company controlled by the Government, a fact that, if true, would have supplied the respondents with knowledge of any transaction outside the agreement, yet no such facts were ever alleged. Accordingly, the Court concluded that the proceedings at every stage were premised on the contention that the appellants’ liability arose under the contract dated 19 December 1953 and not on any other basis.

The Court observed that, because the respondents were always in possession of the factual material that could have demonstrated whether the appellants had entered into any transaction that fell outside the agreement, their failure to allege any such facts was significant. The Court was satisfied that, at every stage, the proceedings were premised on the contention that the appellants’ liability arose strictly from the contract dated 19 December 1953 and not on any other basis. Consequently, applying the principle laid down in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1), the Court held that the respondents’ actions in attempting to impose sales tax on the material supplies made by the appellants under that contract were unlawful. Accordingly, the tax‑imposing proceedings were ordered to be set aside. In the result, the Court allowed the appeals, directed that the writs sought by the appellants be issued, and awarded the appellants their costs throughout the litigation.

Justice Shah, however, expressed a contrary view. He noted that the appellants contended that the transaction of 19 December 1953 did not constitute a “sale” within the meaning of the Bihar Sales Tax Act, 1947, but rather represented a contract for the assembly and installation of machinery, plants and accessories of a coke‑oven battery and related equipment. Relying on the same precedent in The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. (1), Justice Shah explained that such a contract fell outside the scope of sales‑tax liability. He then recited the statutory definitions: “sale” means any transfer of property in goods for cash, deferred payment or other valuable consideration, including the transfer of property in goods involved in the execution of a contract; “contract” means any agreement for carrying out, for cash, deferred payment or other valuable consideration, the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property; “goods” includes all movable property other than actionable claims, stocks, shares or securities and embraces all materials, articles and commodities, whether or not they are to be used in the construction, fitting out, improvement or repair of immovable property; and “sale price” is the amount payable to a dealer as valuable consideration for the sale or supply of any goods, after deducting ordinary cash discounts but including any sum charged for services performed by the dealer before delivery, except for freight, delivery or separately charged installation costs, or the amount for carrying out a contract after adjusting for the usual proportion of labour cost to material cost. Justice Shah concluded that, insofar as the definitions seek to treat goods supplied or used in the execution of a works or construction contract as sales, they fall within the principle that such supplies are not subject to sales tax under the Act.

In this case, the Court observed that goods which are sold and therefore liable to sales‑tax under the statute must, according to the decision rendered in Gannon Dunkerley’s case (1), be considered outside the legislative competence of a State Legislature. The Court explained that, in Gannon Dunkerley’s case (1), it was held that a building contract obliges the contractor to construct the building in accordance with the specifications set out in the agreement and that the contractor receives payment as stipulated in that agreement. The Court further clarified that such an agreement does not contain a contract to sell the materials used in the construction, nor does ownership of those materials pass as movable property. Consequently, a building contract, being a single, entire and indivisible undertaking, does not constitute a sale of goods and therefore falls beyond the jurisdiction of the Provincial Legislature under Entry 48 in List I of the Constitution, as reflected in Schedule VII of the Government of India Act, 1935, to tax the supply of materials used in the contract by treating it as a sale.

Relying on the precedent set by Gannon Dunkerley’s case (1), the appellants argued that the sum they received under the contract dated 19 December 1953 should not be subject to assessment for sales‑tax. However, the Court noted that the question of whether the contract in question is a pure works contract or a composite contract has never been examined. While the formal document evidencing the contract appears, at first glance, to be a works contract, the Court emphasized that, for tax liability purposes, the assessing authority cannot limit its inquiry to the literal terms of the document. The authority must investigate the genuine nature of the transaction by examining all relevant materials and determining whether the transaction possesses the characteristics that the statute defines as taxable. In doing so, the authority may also consider how the contract was actually performed.

The Court pointed out that the Act confers upon the taxing authorities the exclusive power to ascertain the facts on which tax liability depends, and that the Act is comprehensive in its scope and content. The appellants, by filing petitions under Articles 226 and 227 of the Constitution, sought to bypass the entire procedure and machinery established by the Act for fact‑finding. The Court strongly disapproved of allowing a taxpayer to invoke the High Court’s jurisdiction to issue prerogative writs based on assumed facts that have never been examined in the manner prescribed by law. The determination of the facts necessary to decide the true nature of the taxable transaction, as required by the statute, resides solely with the taxing authorities and not with any other body or tribunal. Accordingly, the Court held that invoking the High Court’s jurisdiction to adjudicate the factual issues underlying tax liability, whether directly or indirectly, amounts to an improper invitation of the Court to perform a function that belongs exclusively to the tax authorities.

The Court noted that the High Court was being asked to exercise a jurisdiction that it legally did not possess. It added, however, that this observation did not imply that the High Court could never be approached to issue a writ of prohibition against the levy of tax under any statute. The Court explained that a writ of prohibition could be warranted where the statute exceeded the legislature’s competence, violated a constitutional limitation, or infringed a fundamental right. The Court also held that the writ could be invoked if the taxing authority assumed powers it did not possess. It could also be invoked if the authority levied tax twice on the same transaction contrary to the statute. A further ground was the authority’s attempt to recover tax on a plainly erroneous interpretation of the statutory provision. Nevertheless, the Court emphasized that the High Court could not be asked to determine disputed facts that bore upon the taxability of a transaction, because such jurisdiction belonged to another authority. The Court then turned to the nature of the contract that was under dispute, describing it as principally a works contract. According to the preamble, the appellants had agreed with Sindri Fertilizers and Chemicals Ltd. to erect a complete coke‑oven battery ready for production, together with a by‑products plant, on a specified site. The preamble further required construction of buildings, plants and machinery, delivery and supply of accessories and articles, and rendering of services fully described in the first schedule. All of this was to be performed subject to guarantees and mutually agreed terms set out in the second schedule for an all‑inclusive price. From the preamble, the Court found it clear that the agreement covered construction of a coke‑oven battery and by‑products plant, as well as the delivery and supply of accessories and articles. The Court acknowledged that the price stipulated was an inclusive price covering the entire contract, but noted that this fact did not alter the character of the component involving delivery and supply of accessories and articles. The appellants had, under the terms of the contract, undertaken to execute and complete the works enumerated in the first schedule. The Court observed that the portion of the contract relating to installation of plant and construction of buildings constituted a works contract and, notwithstanding the definitions of “sale” and “contract” in the Act, was not subject to tax. However, the contract also contemplated that the appellant would deliver and supply accessories and articles. The Court stated that even if this supply was incidental to the works, it could not be assumed without investigation that the supply was not part of a taxable sale. The appellants had asked the High Court to treat the contract as a pure works contract, but the High Court declined to make that assumption. Justice Ramaswami, speaking for the Court, observed that he did not wish to express any concluded opinion on the question at that stage.

In this case the Court observed that the question of whether any sale of materials was liable to tax had not been fully examined by the sales‑tax authorities, and that the petitioners had failed to produce all of their account books, documents, and other pertinent information that would be necessary to resolve the issue. The Court held that the sales‑tax authorities were free to investigate the facts and, after a proper construction of the contract, could determine whether the petitioners were liable to pay sales tax and, if so, to what extent. The Court agreed with the learned Chief Justice that this was the correct approach. It noted that the authorities had not made any assessment; they had only issued a notice under section 13(5) of the Act requiring the appellants to produce their books of account and records so that it could be ascertained whether any part of the transaction amounted to a sale of goods. The Court stated that the authorities possessed jurisdiction to issue such a notice and that the High Court could not decide the matter merely by examining the written contract without conducting an inquiry into the true nature of the transaction. Consequently, the High Court could not simply assume that the contract was a pure works or construction contract or that it was a composite contract without investigation. The Court rejected the contention that, because the appellants had not filed a rejoinder affidavit challenging the claim that the contract was a pure works contract, the High Court was bound to decide the dispute on the basis set up by the appellants. It explained that the taxing authorities could not be expected to assert facts that were beyond their knowledge without conducting an investigation, and that their statutory power could not be nullified merely because they had not done so. The Court reiterated that the investigation of the facts relevant to tax liability rested with the taxing authorities, whose jurisdiction was established by law. Until those facts were established, the High Court could not be required to presume that the transaction was purely a works contract and could not be asked to determine the appellants’ liability on that basis. The Court observed that there was no reason to assume that the taxing authorities would disregard the decision in Gannon Dunkerley’s case once the true nature of the transaction was clarified. Accordingly, the Court agreed with the High Court’s refusal to grant the writ that had been prayed for. By the majority opinion the appeals were allowed, appropriate writs were ordered to be issued as prayed for, and the appellants were awarded costs throughout. The appeals were thus allowed, and the citation for the decision is (3) [1959] S.C.R. 379.