S NARASIMHA SHENOY Vs. STATE OF ANDHRA PRADESH

JUDGEMENT

(1.) THE above two writ petitions have been filed with a prayer to issue a writ of mandamus or any other appropriate writ, order or direction directing the respondents, the State of Andhra Pradesh and the Commissioner, Commercial Taxes, Board of Revenue, Government of Andhra Pradesh, not to collect any sales tax on the turnover of the business of the writ petitioners after declaring that section 5 (1) read with the first proviso of the Andhra Pradesh General Sales Tax Act of 1957 ultra vires and unconstitutional is so far as they relate to the turnover of the business of the petitioners. In writ Petition No. 4864 of 1973 as many as 83 petitioners joined claiming to be carrying on the hotel and restaurant business. In Writ Petition No. 2070 of 1973, the only petitioner is Sri Anand Bhavan Hotel, Secunderabad, represented by its managing partner.

(2.) THE averments in both the writ petitions are substantially the same and may be set out. The petitioners are all owners of hotels or catering establishments in the twin cities of Hyderabad and Secunderabad. Some of the petitioners run boarding and lodging houses and some others run boarding-houses and restaurants exclusively. The customers who reside in the lodges are served with meals and refreshments and a comprehensive bill is issued for the total service rendered to them. In the case of restaurants and catering houses, the foodstuffs are served in the premises and consumed there. In a few cases the foodstuffs are taken by the customers outside the premises. For the purpose of making the foodstuffs, large quantities of raw materials of various types are used. The foodstuffs and the beverages are made by a large labour force like cooks, servers, etc. The premises provide decent and comfortable accommodation for the customers who enjoy the amenities provided for relaxation such as fans, etc. , while consuming the foodstuffs. The bulk of the price paid by the customers goes towards the service charges. The charges for service constitute about 80 per cent of the price paid by the customer for the foodstuffs and the remaining 20 per cent goes only to the cost of the materials. The petitioners provide therefore essentially service to the customers. The business of the petitioners is in the nature of an agency for preparing foodstuffs and storing them to be served later to the customers who come there. The relationship between the petitioners and their customers is in the nature of a contract of service. Thus the entire transaction between the petitioners and their customers is not one of sale or purchase but is essentially one of service. Under entry 54 in List II of the Seventh Schedule of the Constitution of India, the State Legislature is empowered to levy a tax on sale or purchase of goods but cannot levy a tax on a mere contract of service. But the Andhra Pradesh Legislature, ignoring the important constitutional provisions, has provided for a levy of sales tax on hotel turnover. Perishable articles like fruits, vegetables, etc. , which stand on a par with the foodstuffs sold in a hotel are completely exempt and therefore the first proviso to section 5 (1) of the Act is discriminatory. The State Legislature is not invested with any power to levy tax on any contractual service such as the one which the petitioners are rendering because contractual service is the very essence of the petitioner's business. The definition of the words "goods", "business" and "sale" in the Act also support the petitioner's case. In the case of the petitioner in Writ Petition No. 2070 of 1973, it was stated that the 2nd respondent accepted the plea of the petitioner with regard to the sale of foodstuffs to the lodgers, but declined to treat the other sales as one of service and by his order dated 6th March, 1973, a demand of sales tax was made on the sales in the hotel premises of the petitioner.

(3.) THE Government of India Act, 1935, empowered the State Legislatures to impose a tax on sales as provided in entry 48, List II, of the Seventh Schedule to that Act. It may be noticed that entry 54 in the said list in the Seventh Schedule to the Constitution is in the same terms as entry 48 in List II in the Seventh Schedule to the Government of India Act, 1935. In the State of Madras v. Gannon Dunkerley and Co. ([1958] 9 S. T. C. 353 (S. C.); A. I. R. 1958 S. C. 560.), the Supreme Court had to consider a case which arose under the provisions of the Government of India Act, 1935, in relation to the Madras General Sales Tax Act, 1939. The vires of the said Act as amended by Madras Act 25 of 1947, which widened the definition of sale by including, inter alia, in it a transfer of property in the goods involved in the execution of works contract was raised. Under the amended definition, the sales tax authority brought into chargeable turnover the materials used in the construction works carried out by Gannon Dunkerley and Co. Venkatarama Aiyar, J. , held that a power to enact a law with respect to tax on sale of goods under entry 48 of List II in the Government of India Act, 1935, in order to be intra vires be one relating in fact to sale of goods, and that a Provincial Legislature could not in the purported exercise of its power tax transactions which were not sales by enacting that they should be deemed to be sales. In order to construe a transaction as a sale, there should be an agreement relating to the goods to be supplied by passing title in those goods and that it was the essence of such a contract that both the agreement and the sale should relate to one and the same subject-matter. The building contract in the case, even if it were to be disintegrated, there was no passing of title in the materials as movables in favour of the other party to the contract. The contract was one and indivisible, there was no sale of the materials and there was therefore no question of title to the materials used by the builders passing to the other party to the contract. Even in case where the thing produced under a contract is movable property, the materials incorporated into it might pass as a movable only in cases where there was an agreement to sell the materials as such. Otherwise, it would not be taxable. It was further held that the expression "sale of goods" in entry 48 is a nomen juris. Further, the expression "sale of goods" could not be construed in its popular sense, but must be interpreted in its legal sense and should be given the same meaning which it has in the Sale of Goods Act, 1930. It was further observed that both in England and in India, in order to constitute a sale, it was necessary that there should be an agreement between the parties for the purpose of transferring title to the goods. It presupposes a capacity to contract. The transaction must be supported by money consideration. The result of the transaction must be that the property actually passes in the goods. There would be no sale if merely title to goods passes where it is not the result of any contract between the parties either express or implied. In the case of a building contract, there is neither a contract to sell the materials used in the construction, nor does property pass therein as movables. The Supreme Court held that there was no sale and therefore the Provincial Legislature had no competence to impose a tax under entry 48. From the aforesaid decision, the meaning to be given to the expression "sale of goods" has to be understood and given the same meaning as it is given in the Sale of Goods Act.