The 46th Constitutional Amendment: Empowering States to Tax Works Contracts | Study Guides, Projects, Research Constitutional Law

LEGISLATIVE HISTORY OF 46 TH

CONSTITUIONAL AMENDMENT

The 46th Amendment Bill, 1981 was introduced in Lok Sabha on 03.04.1981 and was enacted

as The Constitution (Forty-sixth Amendment) Act, 1982. It sought to amend Articles 269,

286, 366 and Seventh Schedule of the Constitution.

The Amendment has empowered the States to tax the value of goods involved in a Works

Contract in the same manner as it did when the contracts were separable.

With regard to work contracts and its taxation aspects:

- This Amendment provided the States the measures to prevent the avoidance of tax in

various ways.

- Assigned the States to collect the tax on the consignment of goods at the place of

business in inter-state trade or commerce.

- Specified restrictions and conditions in regard to the:

system of levy and rates,

incidents of tax on the transfer of goods involved in:

- execution of works contracts,

- delivery of goods on hire-purchase agreement,

- on any system of payment by instalments,

- on the right to use any goods.

PRE-AMENDMENT ERA.

-On the footings of the Government of India act 1935, sale tax laws enacted after

commencement of the Constitution were considered to give a wider interpretation to

the term “sale of goods”.

-However, in 1958 in the case of Gannon Dun Kerley’s (case related to work contract),

the SC held that the expression “sale of goods” as used in the entries in the VII

Schedule of the Constitution has the same meaning as in the Sale of Goods Act, 1930.

-This meant that in order to levy sales tax on a sale contract, it has to fulfil certain

conditions namely, agreement to sell, parties competent to contract, mutual assent and

transfer of property in goods from one of the parties to the contract to the other party

and price.

-Then in the case of Hindustan Aeronautics Ltd, the question arose before SC was

whether manufacture and supply of coaches to the railway is a works contract to

which it was held that it purely depends upon terms of contract.

-Further in the case of Associated Hotels of India (1972), the SC said that supply of

food and drinks to the guest residing in hotel does not amount to sale.

-The SC went further in Northern India Caterers case, where it held that service of

meals whether in a hotel or restaurant wouldn’t be considered as sale of food for the

purpose of levy sales tax for reason being that there is no transfer of property in

goods.

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LEGISLATIVE HISTORY OF 46TH^ CONSTITUIONAL AMENDMENT

The 46th^ Amendment Bill, 1981 was introduced in Lok Sabha on 03.04.1981 and was enacted as The Constitution (Forty-sixth Amendment) Act, 1982. It sought to amend Articles 269, 286, 366 and Seventh Schedule of the Constitution. The Amendment has empowered the States to tax the value of goods involved in a Works Contract in the same manner as it did when the contracts were separable. With regard to work contracts and its taxation aspects:

This Amendment provided the States the measures to prevent the avoidance of tax in various ways.
Assigned the States to collect the tax on the consignment of goods at the place of business in inter-state trade or commerce.
Specified restrictions and conditions in regard to the:  system of levy and rates,  incidents of tax on the transfer of goods involved in: - execution of works contracts, - delivery of goods on hire-purchase agreement, - on any system of payment by instalments, - on the right to use any goods. PRE-AMENDMENT ERA. - On the footings of the Government of India act 1935, sale tax laws enacted after commencement of the Constitution were considered to give a wider interpretation to the term “sale of goods”. - However, in 1958 in the case of Gannon Dun Kerley’s (case related to work contract), the SC held that the expression “sale of goods” as used in the entries in the VII Schedule of the Constitution has the same meaning as in the Sale of Goods Act, 1930. - This meant that in order to levy sales tax on a sale contract, it has to fulfil certain conditions namely, agreement to sell, parties competent to contract, mutual assent and transfer of property in goods from one of the parties to the contract to the other party and price. - Then in the case of Hindustan Aeronautics Ltd , the question arose before SC was whether manufacture and supply of coaches to the railway is a works contract to which it was held that it purely depends upon terms of contract. - Further in the case of Associated Hotels of India (1972), the SC said that supply of food and drinks to the guest residing in hotel does not amount to sale. - The SC went further in Northern India Caterers case, where it held that service of meals whether in a hotel or restaurant wouldn’t be considered as sale of food for the purpose of levy sales tax for reason being that there is no transfer of property in goods.

- As a result, this situation increased the scope of tax evasion which was causing a huge revenue loss to the government. Therefore, the matter was recommended to the Commission which recommended certain Constitutional amendments. - The Parliament accepted the recommendation and brought 46 th^ Constitutional amendment by  adding a new clause (29A) in Article 366 of the Constitution.  adding a new clause (h) in Article 269(1) of the Constitution.  amending clause (3) of Article 269  adding a new clause (3) in Article 286 of the Constitution  adding a new entry 92B in the Union List in the Seventh Schedule of the Constitution. POST-AMENDMENT ERA - This amendment specified and cleared the scope of the term “sales of good”. - The amendment was challenged in the case Builder’s Association of India vs union of India where the Supreme Court upheld the constitutional validity of the same.

Further, in Larsen & Turbo Case , it has been clarified that post the 46th amendment, the narrow meaning of work contract in the Gannon Dun Kerley case no longer survives.
Further, it has also been clarified that once the characters of work contract are satisfied then any additional obligations incorporated in contract would not take away the nature of a contract as a work contract.
Recently in Ujagar prints v. Union of India (2002), the retrospective effect given to the tax entry was challenged in which the Supreme Court held that “the power to legislate gives the power to legislate prospectively as well as retrospectively’’. Therefore, the retrospective effect was held constitutionally valid.
In 2012, in the case of Maharashtra Chamber of Housing Industry and Others v. State of Maharashtra and Others the Bombay High Court gave certain conditions required in order to attract the application of 366 (29A) which are -  There has to be a transfer of property in goods;  The expression “goods” is as defined in Article 366(12); and  Such transfer has to be in the execution of a works contract.

The 46th Constitutional Amendment: Empowering States to Tax Works Contracts, Study Guides, Projects, Research of Constitutional Law

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LEGISLATIVE HISTORY OF 46TH^ CONSTITUIONAL AMENDMENT