MAHADEO S/O KERBA MASKE versus STATE OF MAHARASHTRA AND ANR.

90. The Court in HindZlstan Shipyard7 also set out three categories: (a) the contract may be for work to be done, for remuneration and for supply of materials used in the ~ecution C of work for a price, (b) contract for work in which the use of the materials is accessory or incidental to the execution of the work and (c) contract for supply of goods where some work is required to be done as inciden,tal to the sale. Having regard to the recitals of the contract, the Court then concluded that the contracts in question involved sale of respective vessels within the meaning of clause (m) of the Andhra Pradesh General Sales Tax Act and were not merely the works contract as defined in clause (t) thereof.

91. In our opinion, the tests laid down in Hindustan Shipyard7 after Forty-sixth Amendment are not of much help in determining whether a contract is a works contract or sale of goods. In any case, Hindustan Shipyard? also says that there is no absolute rule for distinguishing a contract for sale (of goods} and a contract for labour (or services).

92. It seems to us (and that is the view taken in some of · the decisions) that a contract may involve both a contract of work and labour and a contract of sale of goods. In our opinion, the distinction between contract for sale of goods and contract· for work (or service) has almost dimil'lished in the matters of G composite .contract involving both (a contract of work/labour and a contract for sale for the purposes of Article 366 (29-A}(b). Now by legal fiction under Article 366(29-A)(b), it is permissible to make such contract divisible by separating the transfer of property in goods as goods or in some other form from the A contract of work and labour. A transfer of property in goods under clause 29(A)(b) of Article 366 is deemed to be a sale of goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. For this reason, B lhe traditional decisions which hold that the substance of the contract must be seen have lost their significance. What was viewed traditionally has to be now understood in light of the philosophy of Article 366(29-A).

93. The question is: Whether taxing sale of goods in an agreement for sale of flat which is to be constructed by the developer/promoter is permissible under the Constitution? When the agreement between the promoter/developer and the flat purchaser is to construct a flat and eventually sell the flat with the fraction of land, it is obvious that such transaction D involves the activity of construction inasmuch as it is only when the flat is constructed then it can be conveyed. We, therefore, think that there is no reason why such activity of construction is not covered by the term "works contract". After all, the term "works contract" is nothing but a contract in which one of the E parties is obliged to undertake or to execute works. Such activity of construction has all the characteristics or elements of works contract. The ultimate transaction between the parties may be sale of flat but it cannot be said that the characteristics of works contract are not involved in that transaction. When the F transaction involves the activity of construction, the factors such as, the flat purchaser has no control over the type and standard of the material to be used in the construction of building or he does not get any right to monitor or supervise the construction activity or he has no say in the designing or lay-out of the G building, in our view, are not of much significance and in any case these factors do n"ot detract the contract being works contract insofar as construction part is concerned.

94. For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, in our opinion, three conditions must be fulfilled: (i) there must be a works · A contract, (ii) the goods should have been involved in the execution of a works contract, and (iii) the property in those goods must be transferred to a third party either as goods or in some other form. In a building contract or any contract to do construction, the above three things are fully met. In a contract to build a flat there will necessarily be a sale of goods element. Works contracts also include building contracts and therefore without any fear of contradiction it can be stated that building contracts are species of the works contract.

95. Ordinarily in the case of a works contract the property c in the goods used in the construction of the building passes to the owner of the land on which the building is constructed when the goods and materials used are incorporated in the building. But there may be contract to the contrary or a statute may provide otherwise. Therefore, it cannot be said to be an absolute proposition in law that the ownership of the goods must pass by way of accretion or exertion to the owner of the immovable property to which they are affixed or upon which the building is built.

96. Value addition as a concept after Forty-sixth Amendment to the Constitution has been accepted by this Court in P.N.C. Construction17. While dealing with this concept, the Court said that value addition was important concept which had arisen after the Forty-sixth Amendment by insertion of sub- clause (b) of clause (29-A) in Article 366. It has now become 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 in a building contract. On account of the Forty-sixth Amendment in the Constitution the State Governments are empowered to levy sale,s tax on the contract value which earlier was not possible.

97. Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not (2013) 17 S.C.R.. A denude it of its character as works contract. Article ::166(29- A)(b) does contemplate a situation where the goods may not be transferred in the form of goods but m~y be transferred in some other form which may even be in the form of immovable property. The decision of the Australian High Court in. M.R. B Hornibrook18 is worth noticing in this regard. Section 3(4) of the Australian Sales Tax Assessment Act, 1930 was brought in by way of amendment by the Legislature in 1932 which reads, "For the purposes of this Act, a person shall be deemed to have sold goods if, in the performance of any contract under c which he has received, or is entitled to receive, valuable consideration, he supplies goods the property in which whether as goods (or in some other form) passes, under the terms of the contract, to some other person".

The question for consideration before the Australian High Court in light of the 0 above provision was whether the contractor was liable to pay sales tax on the transfer of goods involved in a works contract. The majority judgment held as follows: "In my opinion the commissioner is right in his contention that this provision applies to the present case. The appellant company, in the performance of a contract for building a bridge under which contract it was entitled to receive and doubtless has received valuable consideration, has supplied goods, namely, reinforced concrete piles. Such piles are plainly manufactured articles. They are chattels. They were intended to be incorporated in a structure and were so incorporated. They lost their identity as goods in that structure. But this fact does not prevent the piles from being goods any more than it prevents bricks or stones or nuts and bolts from being goods. The fact that the goods were specially manufactured and designed for a particular purpose cannot be held to deprive them of the character of goods." (Emphasis supplied)

98. M.R. Homibrook18 has been followed by this Court in Builders' Association4. This Court said that sub-clause (b) of A clause (29-A) of Article 366 of the Constitution of India had more or less adopted the language used in Section 3(4) of the Australian Act.

99. Learned Advocate General. for Maharashtra vehemently argued that there was noihing to prevent the taxation of different aspects· of the same transaction as separate taxable events. Pressing into service the aspects theory, he argued that a contract for carrying out works coupled with the sale of immovable property may be taxed by both, the State legislatures and the Parliament within their respective spheres of legislative competence as there is deemed sale of goods involved in works contracts. The works contract aspect can be taxed by the State legislatures under Entry 54 of List II of Seventh Schedule read with Article 366 (29-A)(b) of the Constitution. The transfer of immovable property can be taxed by the Parliament under Entry 97 of List I. Mr. K.V. Vishwanathan, however, argued that the aspect theory has no application as the State legislatures inherently lack ·the legislative competence to tax the transfer of an immovable property. According to him, the aspect theory would apply when a tax is sought to be imposed on more than one distinct;.field of legislation in relation to the same matter provided that there exists in the States/Union legislative competence/legislative power to levy a tax under each distinct head.

100. We have no doubt that the State legislatures lack legislative power to levy tax on the transfer of immovable property under Entry 54 of List 11 of the Seventh Schedule. However, the States do have competence to levy sales tax on the sale of goods in an agreement of sale of fl!it which also has a component of a deemed sale of goods. Aspects theory though does not allow the State legislature to entrench upon the Union List and tax services by including the cost of such service in the value of goods but that does not detract the State to tax the sale of goods element involved in the execution of works A . contract in a composite contract like contract for construction of building and sale of a flat therein. In para 88 of Bharat SancharS, the Court stated: "the aspects theory does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value B of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax''. Having said that, the Court also stated that the States were not competent to C include the cost of service in the value of the goods sold (i.e. the sim card) nor the Parliament could include the value of the sim card in the cost of services. But the statement in para 92(C) of the Report is clear that it is upto the States to tax the sale of goods element in a composite contract of sale and service. Bharat SancharS thus supports the view that taxation of different D aspects of the same transaction as separate taxable events is permissible.

101. In light of the above discussion. we may summarise the legal position, as follows: (i) For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilted: (one) there must be a works contract, (two) .the· goods should have been involved in the F execution of a works contract and (three) the property in those goods must be transferred to a third party either as goods or in some other form. (ii) For the purposes of Article 366(29-A)(b), in a building contract or any contract to do construction, if the developer has G received or is entitled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods.

(iii) Where a contract comprises of both a works contract and a transfer of immovable property; such contract does not den.ude it of its character as works contract. The term "works contract" in Article 366 (29-A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term "works contract". (iv) Building contracts are species of the works contract. (v) A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished. o (vi) The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29- A).

Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative. (vii) A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. (viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the A execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in' the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services.

In other words, the single and indivisible contract, now by Forty- B sixth Amendment has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material in the execution of works contract. (ix) The expression "tax on the sale or purchase of goods" C in Entry ·54 in List II of Seventh Schedule when read with the definition clause 29-A of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the .execution of works contract. (x) Article 366(29-A)(b) serves to bring transactions where essential ingredients of 'sale' defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though E it may not be sale within the meaning' of the Sale of Goods Act.

(xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the F transfer of immovable property. T.he value of the goods which can constitute the measure for the levy of the tax has to be the val~e of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods. ·

102. The crucial question would now remain: whether the view taken in Raheja Development1 with reference to definition of "works contract". in KST Act is legally unjustified? The following definition of "works contract" was under consideration H before this Court in Raheja Development1: "works contract" MIS. LARSEN & TOUBRO LIMITED v. STATE OF KARNATAKA [R.M. LODHA, J.] includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufactur.e, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property".

103. The Court also noticed the definition of "dealer" and "taxable turn over ".

104. The broad facts in Raheja Development1 were these: " Raheja Development carried on the business of c real estate development and allied contracts; " Raheja Development entered into development agreements with the owners of land; " Raheja Development entered into agreements of sale with intended purchasers. The agreements provided that on completion of the construction, the residential apartments or the commercial complexes would be handed over to the purchasers who would get an undivided interest in the land also; " The owners of the land would then transfer the ownership directly to the society formed under the Karnataka Ownership Flat (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1972 (for short, 'KOF~').

105. In light of the above facts and the definition of ''works contract", the question before this Court was whether Raheja Development were liable to pay turnover tax on the value of goods involved in the execution of the works contract.

106. Section 5-B of the KST Act provides for levy of tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract.

107. On consideration of the arguments that were put forth by the parties, the Court in Raheja Development1 held as under: (i) The definition of the term "works contract" in the Act is an inclusive definition. (ii) It is a wide definition_which includes "any agreement" for carrying out building o.r constructiGn activity for cash, deferred payment or other valuable consideration. {iii) The definition of works contract does not make a c distinction based on who carries on the construction activity. Even an owner of the property may be said to be carrying on a works contract if he enters into an agreement to construct for ca~h. deferred payment or other valuable consideration. (iv) The developers had undertaken to build for the D prospective purchaser.· (v) Such, constructio,n/development was to be on payment of a price in various installments set out in the agreement. (vi) The developers were not the owners. They claimed lien on the property. They had right to terminate the agreement and dispose bf the unit if a breach was committed by the purchaser. A clause like this does not mean that the agreement ceases to be "works contract". So long as there is no termination, the construction is for and on behalf of the purchaser and it remains F a "works contract". (vii) If there is. a termination and a particular unit is not resold but retained by the developer, there would be no works contract to that extent. (viii) If the agreement is entered into after the flat or unit is already constructed then there would be no works contract. But, so long as the agreement is entered into before the construction is complete it would be works contract. MIS. LARSEN & TOUBRO LIMITED v. STATE OF KARNATAKA [R.M. LODHA, J.]

108. The correctness of the view taken in Raheja Development1 has been doubted in the referral order principally for the reasons: (a) the developer had undertaken the contract to develop the property of the owner. It is not alleged by the department that there is monetary consideration involved in the development agreement. If the development agreement is not a works contract, could the department rely upon the second contract which is the tripartite agreement and interpret it to be a works contract; (b} if the ratio in Raheja Development1 is to be accepted then there would be no difference between works contract and a contract for sale of c chattel as a chattel and (c) from the definition of works contract, the contractor must have undertaken the work of construction for and on behalf of the flat purchaser for cash, deferred or any other valuable consideration but could it be said that developer was contractor for the prospective flat purchaser.

109. In Raheja Development', the Court on consideration of the clauses (q} and (r) of the recitals and clauses (1), 5(c) and (vii) of the agreement between the flat purchaser, developer and owner of the land observed that the agreement had an element for carrying out building and construction activity for cash, deferred payment or other valuable consideration. The developer had undertaken to build for the prospective purchaser. Having regard to the various clauses of the recitals and also the clauses of the agreement, the Court was of the view that such agreement was a .typical agreement and so long as there was no termination of the contract, the construction is for and on behalf of the purchaser and it remains a "works contract".

110. The argument on behalf of the developers that the flat purchaser is entitled to transfer of flat and conveyance of fraction of land only when all installments have been fully paid and that shows that the agreement between the developer and the flat purchaser is the sale of flat and not to appoint the developer as the contractor of the flat purchaser for the A purposes of carrying out the construction of the flat for and on behalf of the flat purchaser has no merit. The submission overlooks the typical nature of the development agreement which is followed by a tripartite agreement between the owner of the land, the developer and the flat purchaser. Effectively and B de facto it is the developer who constructs the building for the flat purchaser. The developer does so for monetary consideration. The label of payment is not decisive but the factum of the payment is. The construction is done on payment of price as agreed upon between the developer and the flat c · purchaser.

It is not necessary to recapitulate all clauses of the agreement under KOFA or for that matter under MOFA. Raheja Development1 takes note of relevant clauses of the recitals and the agreement under KOFA. We need not repeat them. Similarly, Form V of the Maharashtra Ownership Flat Rules 0 contains recital such as, 'as a result of the Development agreernent the promoters are entitled and enjoined upon to construct buildings on the said land'. One of the relevant clauses (omitting unnecessary portion) in Form V reads, "the promo•"'r· shall construct the said building/s …. in accordance with the E plans, designs, specifications ….. which have been seen and approved by the flat purchaser with the owner, such variations and modifications as the promoter may consider necessary or as may be required by the concerned local authority/the government. …. provided that the promoter shall have to obtain prior consent in writing to the flat purchaser in respect o1 F variations or modifications which may adversely affect .the flat of the purchaser". It is, thus, not correct to say that the work is undertaken by the developer for himself and for the owner and the construction is not carried for and on behalf of the purchaser.

111. In the development agreement between the owner of the land and the developer, direct monetary consideration may not be involved but such agreement cannot be seen in isolation to the terms contained therein and following development H agreement, the agreement in the nature of tbe tripartite agreement between the owner of the land, the developer and the flat purchaser whereunder the developer has undertaken to construct for the flat purchaser for monetary consideration. Seen thus, there is nothing wrong if the transaction is treated as a composite contract comprising of both a works. contract and a transfer of immovable property and levy sales tax on the value of the material involved in execution of the works contract. The observation in the referral order that if the ratio in Raheja Development1 is to be accepted then there would be no difference between works contract and a contract far sale of chattel as chattel overlooks the legal position which we have c summarized above.

112. The argument that flat is to be sold as a flat and not an aggregate of its ~omponent parts is already negated by the Constitution Bench in the case of Builders' Association4. As a matter of fact, in Builders' Association•, this argument was advanced on behalf of the States. Repelling the argument, the Constitution Bench observed that it was 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 works contract, but a conglomerate, that is the entire building which is actually constructed.

113. Yet another argument advanced on behalf of the · appellants is that in Raheja Deve/opment1, it is _noticed that the builder has .a lien on the property but incorrectly states that lien is because they are not owners. It is argued that lien is because if the monies are not recovered from the prospective ·flat purchasers, the lien can be exercised and this would show that the contract is a contract of an agreement to sell immovable property. The argument is insignificant because if G the developer has undertaken to build for the prospective purchaser for cash or deferred payment or a valuable consideration pursuant tci a contract then to that extent, the contract is works contract and there is deemed sale of material (goods) used in the construction of building and merely (2013] 17 S.C.R. A because the builder has a right of lien in the event due monies are not paid does not alter the character of contract being works contract.

114. In Article· 366(29-A)(b), the term 'works contract' B covers all genre of works contract and it is not limited to one specie of the contract. In Raheja Development', the definition of ''works contract" in KST Act was under consideration. That definition of "works contract" is inclusive and refers to building contracts and diverse construction activities for monetary consideration viz; for cash, deferred payment or other valuable C consideration as works contract. Having regard to the factual · position, inter alia, Raheja Development' entered into development agreements with the owners of the land and ii also entered into agreements for sale with the flat purchasers, the consideration being payment in installments and also the· D clauses of the agreement the Court held that developer had undertaken to build for the flat purchaser and so long as there was no termination of the contract, the construction is for and on behalf of the purchaser and it remains a "works contract". The legal position summarized by us and the foregoing E discussion would justify the view taken by the two Judge Bench in Raheja Development'.

115. It may, however, be clarified that activity of. construction undertaken by the developer would be works: F contract only from the stage the developer enters into a contract\ with the flat purchaser. The value addition made to the goods I transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government.

116. The reasons stated in the referral order for reconsideration of Raheja Development' do not make out any good ground for taking a view different from what has been taken by this Court in Raheja Development'. We are in agreement with the submission of Mr. K.N. Bhat that since H Raheja Development' in May, 2005 almost all States have MIS. LARSEN & TOUBRO LIMITED v. STATE OF KARNATAKA [R.M. LODHA, J.] modified their laws in line with Raheja Development' and there is no justification for change in the position settled after the decision of this Court in Raheja Development'.

117. The submission of Mr. K.N. Bhat that the view in Raheja Development1 that whf!n a completed building is sold, there is no work contract and, therefore, no liability to tax is not correct statement of Jaw, does not appeal to us. If at the time of construction and until the construction was completed, there was no contract for constructiol) of the building with the flat purchaser, the goods used in the construction cannot be deemed to have been sold by the builder since at that time there is no purchaser. That the building is intended for sale ultimately after construction does not make any difference.

118. We are clearly of the view that Raheja Development' lays down the correct legal position and we approve the same.

119. There is challenge to the constitutional validity of explanation (b)(ii) to Section 2(24) which was brought by amendment with effect from 20.06.2006 in MVAT Act and sub- rule (1A) which was inserted into Rule 58 of the MVAT Rules by a notification ·dated 01.06.2009.

120. Clause (24)*** of Section 2 defines sale to mean a sale of goods made Within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge of pledge; and the words "sell", "buy" and."purchase", with all their grammatical variations and cognate expressions. An explanation is appended to this clause. Clause· (b)**** of the explanation to Section 2(24) ·- "2(24) "sale" means a sale of goods made within the State for cash or deferred payment or other valuabftn:onsideration bui does not include a mortgage,,hypothecation, charge or pledge; and the words "sell", "buy" and "purchase", with all their grammatical variations and cognate expressions, shall be construed accordingly." 0"(b)(i) the transfer of property in any goods. otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration; A defines what would be a sale for the purpose of the clause and brought in its ambit the transactions mentioned therein. Explanation (b)(ii) was amended with effect from 20.06.2006 by inserting the following words after the words "works contract": "including, an agreement for carrying out for cash, B deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property".

121. There is no doubt in our mind that the amendment in C explanation b(ii) to Section 2(24) was brought because of the judgment of this Court in Raheja Development'. We have already held that Raheja Development' lays down the correct legal position. Thus, in our view, there is no merit in the challenge to the constitutional validity to the provisions of D explanation (b)(ii) to Section 2(24) of MVAT which were amended with effect from 20.06.2006. The Division Bench of the Bombay High Court took the view that the provision under challenge was not in breach of any constitutional boundaries. This is what it said: "34. The amended definition of the expression sale in (ii) the transfer of property in goods (whether as goods or in some other form), involved in the execution of a works contract….. (iii) a delivery of goods on hire-purchase or any system of payment by instalments; (iv) the transfer of the right to use any goods for any propose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (v) the supply of goods by any association or body of persons incorporated or not, to a member thereof tor cash, deferred payment or other valuable consideration; (vi) the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is made or given for cash, deferred payment or other valuable consideration;" MIS.

LARSEN & TOUBRO LIMITED v. STATE OF KARNATAKA [R.M. LODHA, J.] clause b(ii) of the Explanation to Section 2(24) brings within the ambit of that expression transactions of that nature which are referable to Article 366(29A)(b). The transactibns which the legislature had in mind involve works contracts. What the state ·legislatures can tax under the expanded definition contained in clause b of Article 366 (29A) must meet the governing requirements of that clause. There must be a transfer of property in goods involved in the execution of a works contract. The relevant clause in Section 2(24) is valid because i.t does not transgress the boundaries set out in Article 366(29A). c Indeed, after the 46th Amendment, State legislation must confine itself to.; the limits set out even in the expanded concept of what- constitutes a sale or purchase of goods in Article 366(29A). State legislation cannot expand. the ambit of what constitutes a tax on the sale or purchase of 0 goods beyond the constitutional frontiers.

In order that Section 2(24) remains within constitutional boundaries, in the context of works contracts, it must be read to cover those cases which fall within the expanded definition as elaborated after the 46th Amendment. Whether there is a works contract in a given case is for assessing authorities to determine. As noted earlier, it is not possible to provide a comprehensive or all encompassing list of what contracts constitute works contracts. Section 2(24) properly construed, even after its amendment, reaches out to tho.se cases which fall within the ambit of Article 366(29A). Explanation b(ii) to Section 2(24) in other words covers those transactions where there is a transfer of property in goods, whether as goods or in any other form, involved in the execution of a works contract. Once those parameters are met, the amended definition in the State legislation in the present case provides a clarification or cla rificatory instances.

When constitutional norms govern state legislation such as those provided in Article 366(29A) in this case, the legislatio.n must be co.nstrued in the context of tho.se norms which it cannot transgress. The law is valid because it does not breach those boundaries. There is no breach of constitutional boundaries."

122. We are in agreement with the above view and reject challenge to amendment to the provisions of explanation (b)(ii) B to Section 2(24) of MVAT Act.

123. Sub-rule (1A)***** was inserted into Rule 58 by a notification dated 01.06.2009. As a matter of fact, Rule 58(1) of the MVAT Rules provides that the value of the goods at the time of the transfer of the property in goods involved in the C execution of a works contract may be determined by effecting certain deductions from the value of the entire contract insofar as the amounts rela~ing to deductions pertain to the said works contract. The challenge was laid to Rule 58(1A) of the MVAT Rules before the Bombay High Court. The Division Bench of o the Bombay High Court found that there was nothing to show that the proviso to the said provision was arbitrary. It held that the Legislature was acting within the field of the legislative powers in devising a measure for the tax by excluding the cost of the land. The Division Bench recorded the following reasons E in repelling the challenge to Rule 58(1A).

"35. The challenge to Rule 58(1A), may now be ….. "(1A) In case of a construction contract, where along with the immovable property, the land or, as the case may be, interest in the land, underlying the immovable property is to be conveyed, and the property in the goods (whether as goods or in some other form) involved in the execution of the construction contract is also transferred to the purchaser such transfer is liable to tax under this rule. The value of the said goods at the lime of the transfer shall be calculated after making the deductions under sub-rule (1) and the cost of the land from the total agreement value. The cost of the land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995, as applicable on the 1st January of the year in which the agreement to sell the property is registered: Provided that, deduction towards cost of land under this sub-rule shall not exceed 70% of the agreement value." M/S. LARSEN & TOUBRO LIMITED v. STATE OF · KARNATAKA; [~.M, LODHA, .J.] considered. The Rule has provided that in the case of. A construction contracts where the immovable property, land or as the case may be, interest therein is to be conveye\:\ . and, the property involved in the execution of the. construction contract is also transferred, it is the latter component which is brought to tax. The value of the goods at the time of transfer is to be calculated after making the deductions which are specified under sub-rule (1 ). The judgment in the second Gannon Dunkerley specifies the nature of such deductions which can be made from the . entire value of the works contracts. This was permitted to c the States as a convenient mode for determining the value 01 the goods in the~executiori of the works contract. . · ' Similarly, the cost ofthe land is required .to be exciuded. from the total agreement value. Sub-rule (1A) stipulates that the cost shall 6e 'determined in accordance with the guidelines iippeli'ded to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 as applicable on 1 January of the year in which the agreement to sell the property is registered. The Proviso stipulates that deduction towards the cost of land under the sub-rule shall not exceed 70% of the agreement value. The petitioners have not brought on the record any material to indicate that the proviso to sub-rule (1A) of Rule 58 is arbitrary. Rule 58(1A) provides for the measure of the tax. The measure of the tax, as held by the Supreme Court in its decision in Union of India v. Bombay Tyre International Ltd. [(1984) 1 sec 467], must be distinguished from the charge of tax and the incidence of tax. The Legislature was acting within the filed of its legislative powers in devising a measure for the tax by excluding the cost of the land."

124. The value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later. Taxing the sale of goods [2013) 17 S.C.R. A element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporl!tion and does not purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner B that meets this criteria and we read down Rule 58(1-A) accordingly. The Maharashtra Government has to bring clarity in Rule 58 (1-A) as indicated above. Subject to this, validity of Rule 58(1-A)1of MVAT Rules is SL!Stained. 125~ Once we have held that Raheja Development1 lays C down the correct law, in our opinion~ nothing turns on the circular dated 07.02.2007 and the notification dated 09.07.2010. The circular is a trade circular y.ihich is clarificatory in nature only. The notification enables the registered dealer to opt for a composition scheme. The High Court has dealt with the circular D and notification. We do not find any error in the view of the High Court in this regard. Moreover, "the Advocate General for Maharashtra clearly stated before us that implementation of Rule 58(1-A) shall not result in double taxation and in any case all claims of alleged double taxation will be determined in the E process of assessment of each individual case.

126. After having given answer to the reference, we send the matters back to the Regular Bench for final disposal.- Bibhuti Bhushan Bose Reference answered & matter referred to Regular Bench.