SC upholds reimbursement of Sales Tax to Contractor: State cannot refuse refund on vacillating Circulars

The SC on June 05, 2020 {STATE OF ORISSA vs M/S B. ENGINEERS & BUILDERS LTD. & ORS.} held that the terms of contract bind the parties thereto and unless there be any case of ambiguity or violation of law, ordinarily, the terms of contract, revealing the intent of parties, are required to be given effect to.

It was held by the Bench, comprising of Justice A.M. KHANWILKAR, Justice INDIRA BANERJEE & Justice DINESH MAHESHWARI, that on their essence and intent, what turns out is that in relation to a works contract, there would be deemed to be the sale of goods involved in execution thereof; and sales tax would be leviable on the taxable turnover (and not on the gross turnover) of such works contract.

It was held that it is crystal clear that even when the contract provided that the rates quoted by the contractor shall be deemed to be inclusive of sales and other taxes and royalties on the materials, it was agreed to between the parties that sales tax and other taxes under completed items of work, as paid by the contractor were to be reimbursed.

In the present case, the question before the SC was as to whether sales tax deducted from the bills of the contractor and paid to the sales tax officer will be again reimbursed to the contractor. In the Circular dated 04.11.1986, the State Government expressed the view that the reimbursement in question was required to be allowed in terms of Clause 45.2 of GCC but later on, in the Circular dated 07.11.2001, the State Government took a diametrically opposite view to say that such reimbursement was not to be allowed in relation to the works contract. The HC accepted the claim of the respondent No. 1 for reimbursement of the amount of sales tax levied and quashed the Circular dated 07.11.2001 - which judgment was assailed in present case before the SC by State of Orissa.

The SC held that such vacillating understanding on the part of the State Government cannot be determinative of the contractual obligations of the parties, which are required to be decided with reference to the principles of law applicable and on true construction of the terms of contract. 

It was held that by virtue of Clause 45.2 of General Conditions of Contract (in short 'GCC'), the contractor company is rightfully entitled to claim reimbursement of the amount of sales tax levied on the taxable turnover of the works contracts executed by it. A fortiori, it was held that the grounds on which the appellant seeks to resist the claim of the contractor company for such reimbursement, i.e., with reference to the expression “completed item of work” in the said Clause 45.2 and with reference to the stipulations contained in Clauses 13.3 of Instructions to Bidders and 45.1 of GCC, are wholly untenable and the appellant and its contracting offices are under obligation to honour the claim so made by the contractor company. 

In the result, the appeal of State of Orissa failed and was, therefore, dismissed by the SC.