2026 PLP 854 (PTD)

SYED ARSHAD ALI, J.

The instant tax reference as well as the connected constitutional petitions (the detail whereof has been provided in Annexure A to this judgment), are taken together for disposal as a common question of law has been raised in all petitions for adjudication of this Court. Brief Background of the Case.

2. The facts in brief are that the petitioners are registered service providers classified under PCT No. 9815.2000 and described as Construction Contractors in the First Schedule to the Act of 2022. It was observed by the Revenue while examining the record that M/s Anhui Construction Engineering Group Co. Ltd. in a joint venture with petitioners had been providing taxable services to M/s National Highway Authority for the project titled Dualization of Indus Highway (N-55) Package I & II in terms of entry at serial No.14 of the Second Schedule to the Act of 2022. The calculation of sales tax on services in the instant case was based on the scrutiny of documents/record related to the amount received by the petitioners for the periods of July 2021 to April 2022, against taxable services for the project mentioned above with the following details:- Tax Period Work Completed/Payment Received Rate Sales Tax on Services July-2021 to April-2022 1,620,502,899 2% 32,410,058 Total 1,620,502,899 32,410,058

3. It is alleged that the petitioners were obliged to declare and deposit the amount of sales tax to the tune of Rs. 32,410,058/- for the aforesaid project, but they failed to do so.

4. Accordingly, a notice was issued to the petitioners on 09.06.2022 to show-cause as to why the said amount of tax should not be recovered from the petitioners. The petitioners submitted a reply, wherein they stated that this was their first such default and further assured future compliance with the Authority s regulations.

5. The Assessing Officer, vide assessment order dated 20.07.2022, affirmed the allegations of the Revenue and ordered for the recovery of sales tax amounting to Rs.31,774,566/- along with default surcharge under Section 53 and penalty under Section 54 of Khyber Pakhtunkhwa Sales Tax on Services Act, 2022 ( Act of 2022 ).

6. The petitioners challenged the said assessment order through an appeal No. 196/2022 before the Collector (Appeals), Khyber Pakhtunkhwa Revenue Authority, Peshawar. The Collector (Appeals), vide judgment dated 29.12.2022, dismissed the appeal of the petitioners. Feeling aggrieved, the petitioners filed a further appeal before the Appellate Tribunal for Sales Tax on Services, Khyber Pakhtunkhwa Peshawar ( Tribunal ). The worthy Tribunal upheld the orders of both the fora below, vide impugned judgment dated 31.05.2023. Hence, the petitioners filed the instant tax reference.

7. The seminal question for determination of this Court is the constitutional validity of the Finance Act, 2013, which was later substituted by the Act of 2022, making construction contract/work contract subject to imposition of sales tax on services by inserting entry No. 14 in the Second Schedule to the Act of 2022. It would be important to note that the parties are not at dispute relating to PCT Head No. 9815.1000 (architects, civil engineers, construction consultants, construction contractors, property promoters, developers) as admittedly it falls within the meaning of service provider, however, the main dispute in the present case pertains to the construction contract falling in PCT Head No. 9815.3000. The said contracts are composite in nature. Historical evolution of the law on sales tax in Pakistan.

8. The Government of India Act, 1935 ( the Act of 1935 ) laid down the basic framework of governance in the subcontinent. In relation to the legislative fields, the Act contained three Lists and seven Schedules: the first enumerated matters within the exclusive competence of the Federation, the second those within the exclusive competence of the Provinces, and the third the Concurrent List, comprising subjects on which both could legislate. Section 100(1) of the Act provided that, notwithstanding subsections (2) and (3), the Federal Legislature alone was competent to legislate on matters enumerated in the Federal Legislative List. Conversely, subsection (3) declared that, subject to the preceding provisions, the Provincial Legislature alone was competent to legislate for the Province in respect of matters contained in the Provincial Legislative List. Entry No. 48 of the Provincial List specifically included taxes on the sale of goods and on advertisements. Accordingly, prior to partition, the power to levy sales tax vested exclusively in the Provinces. However, in 1948, this subject was made federal by the First Constituent Assembly of Pakistan through the promulgation of the Pakistan General Sales Tax Act, 1948 ( the Act of 1948 ), dated 31st March 1948. The Act of 1948 was subsequently repealed and replaced by the Sales Tax Act, 1951, which in turn was substituted by the Sales Tax Act, 1990 ( the Act of 1990 ).

9. Under the Constitution of the Islamic Republic of Pakistan, 1973 ( the Constitution ), the subject of taxes on sales and purchases of goods, imported, exported, produced, manufactured or consumed was originally included in the Federal Legislative List. However, pursuant to the Eighteenth Constitutional Amendment, Entry No. 49 of the said List was amended in the following terms: Taxes on Sales and purchases of goods imported, exported, produced, manufactured or consumed, except Sales Tax on Services .

10. Therefore, until the enactment of the Eighteenth Amendment, the settled legal position was that only the Parliament possessed the competence to legislate with respect to the imposition of sales tax, both on goods as well as on services. The domain of sales tax on goods continued to be governed by the Sales Tax Act, 1990, whereas sales tax on the provision of services was regulated under the Federal Excise Act, 2005.

11. It is pertinent to note that during General Musharraf s regime in the year 2000, an attempt was made by the Provinces to promulgate Sales Tax Ordinances on Services. However, such enactments lacked constitutional validity, as was observed by the Sindh High Court in Pakistan International Freight Forwarders Association

1. Following the Eighteenth Amendment, the fields of sales tax on goods and sales tax on services have been constitutionally recognized as distinct domains of legislation. Under the constitutional scheme, the Provinces do not share taxing powers with the Federation; consequently, the imposition of sales tax on goods remains an exclusive Federal subject. Conversely, pursuant to the Eighteenth Amendment, the Provinces have been vested with the constitutional mandate to legislate in respect of sales tax on services. The more intricate issue, however, arises in determining the precise scope of services. Provincial statutes on sales tax generally define services in residual terms, i.e., as anything which is not goods, and further enumerate them to include facilities, amenities, utilities, or advantages by whatever name called liable to sales tax on services, as specified in the First Schedule to the Act of 2022.

12. The Constitution of the Islamic Republic of Pakistan is federal in character, and the distribution of legislative fields is prescribed under Article 142 thereof. In terms of the said provision, the Federation has exclusive authority to legislate on matters enumerated in the Federal Legislative List, as contained in the Fourth Schedule to the Constitution. The taxation powers of the Federation are specifically set out in Entries Nos. 43, 44, and 47 to 53 of the Federal Legislative List. The law is now well settled that the Provinces do not share concurrent competence with the Federation in respect of such entries, and that the legislative entries relating to taxation are to be interpreted in the widest possible sense.2 It is a settled principle of constitutional interpretation that legislative entries demarcate the field of legislative competence and must be construed in broad and liberal terms. The question of interpretation of the Legislative Lists was exhaustively examined by the Apex Court in Messrs Sui Southern Gas Company Ltd.3, wherein the Court upheld the vires of the Industrial Relations Act, 2012, and enunciated the following principles of interpretation: i. The entries in the Legislative List of the constitution are not power of legislation but only fields of legislative heads; ii. In construing the words in an Entry conferring legislative power and a legislative authority, the most liberal construction should be put upon the word; iii. While interpreting an Entry, in a Legislative List, it should be given widest possible meaning and should not be read in a narrow and restricted sense; iv. Each general word in an Entry should be considered to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it.

13. As noted above, the central issue is whether a works contract falls within the ambit of sale of any goods, thereby excluding it from the legislative domain of the Province to levy tax thereon. The term goods has been defined in Article 260 of the Constitution to include all materials, commodities, and articles. However, the term sale has not been defined in the Constitution, and thus must be accorded its ordinary and natural meaning. It is a well-settled principle of constitutional interpretation that such expressions, when occurring in legislative entries, are to be construed in their widest amplitude and not in a narrow or restrictive sense.

14. The learned counsel for the petitioner contended that a construction contract is, in industry parlance, a compendious expression encompassing not only the supply of goods, materials, items, and equipment but also the provision of labour and other incidental activities, both skilled and unskilled, required for the delivery of a completed asset to the employer. It was urged that, in such works contracts, the dominant intention is the sale of goods such as cement, steel, and other construction materials, while the accompanying services are merely ancillary in nature. Meaning and Scope of Work Contract.

15. We shall first examine the nature and essential character of a construction or works contract as understood in the relevant industry and trade. This inquiry necessarily extends to the scope of the provision of goods vis- -vis services within such contracts, as delineated by constitutional courts in various jurisdictions as well as under international instruments and treaties. 15.1. Markanda, "A building or engineering Contract may be defined as an agreement under which a builder or contractor undertakes for a consideration to carry out for a building owner or employer, works of a building or civil engineering nature. Such works shall be constructed by the builder or contractor on the land of the building owner or the employer". Even though the foregoing definition does not expressly characterize construction contracts as agreements for the provision of services, neither does it define them as contracts for the sale of goods. However, the use of the expressions engineering contract and on the land of the building owner implies that, in their true sense, construction contracts are more appropriately understood as contracts for the provision of services rather than for the sale or supply of goods or property. 15.2. Hudson's Building and Engineering Contracts 1995. "A building or engineering contract may be defined, for the purposes of this book, as an agreement under which a person, in this book called variously the builder or contractor, undertakes for reward to carry out for another person, variously referred to as the building owner or employer, works of a building or civil engineering character. In the typical case, the work will be carried out upon the land of the employer or building owner, though in some special cases obligations to build may arise by contract where this is not so, for example under building leases, and contracts for the sale of land with a house in the course of erection upon it. "Out of the two examples provided in the definition, the sale of land with a house in the course of erection upon it may be considered as an agreement for sale but by way of analysis mentioned earlier and in the later parts of this Memorandum the former cannot be considered the same. 15.3. Law of contract by Chitty; "the term construction contract includes both "building contract" and "engineering contract", which will have particular characteristics depending upon the technical subject matter of the contract under consideration...". As the Construction Contracts involves the provision of work (labour services) and material (goods and equipment) this raises the question whether the Construction Contracts are contracts for sale of goods or contracts for provision of services. 15.4. In Tripp v. Armitage (1839) 4 M & W. 687 (Australian Jurisdiction), one Bennett, a builder, had entered into an agreement with certain trustees to build a hotel. The agreement provided inter alia that the articles which were to be used for the structure had to be approved by the trustees. Subsequently, Bennett became bankrupt, and the dispute was between his assignees in bankruptcy, and trustees as regards title to certain wooden sash-frames which had been approved on behalf of the trustees but had not yet been fitted in the building. The trustees claimed them on the ground that property therein had passed to them when once they had approved the same. In negativing this contention, Lord Abinger, C.B., observed: .... this is not a contract for the sale and purchase of goods as movable chattels; it is a contract to make up materials, and to fix them; and until they are fixed, by the nature of the contract, the property will not pass." Whereas Parke B. observed: " . but in this case, there is no contract at all with respect to these particular chattels it is merely parcel of a larger contract. The contract is, that the bankrupt shall build a house; that he shall make, amongst other things, window-frames for the house, and fix them in the house, subject to the approbation of a surveyor; and it was never intended by this contract, that the articles so to be fixed should become the property of the defendants, until they were fixed to the freehold." 15.5. In Clark v. Bulmer [1843] 11 M & W 243, the plaintiff entered into a contract with the defendant to build an engine of 100 horse power for the sum of Pounds 2,500, to be completed and fixed by the middle or end of December". Different parts of the engine were constructed at the plaintiff's manufactory and sent in parts to the defendant's colliery where they were fixed piecemeal and were made into an engine. The suit was for the recovery of a sum of Pound 3,000 as price for "a main engine and other goods sold and delivered". The contention of the defendant was that there was no contract of sale, and that the action should have been one for work and labour and materials used in the course of that work and not for price of goods sold and delivered. In upholding this contention, Parke B. observed: "The engine was not contracted for to be delivered, or delivered, as an engine, in its complete state, and afterwards affixed to the freehold, there was no sale of it, as an entire chattel, and delivery in that character; and therefore it could not be treated as an engine sold and delivered. Nor could the different parts of it which were used in the construction, and from time to time fixed to the freehold, and therefore became part of it, be deemed goods sold and delivered, for there was no contract for the sale of them as moveable goods; the contract was in effect that the plaintiff was to select materials, make them into parts of an engine, carry them to a particular place, and put them together, and fix part to the soil, and so convert them into a fixed engine on the land itself, so as to pump the water out of a mine." 15.6. In Seath v. Moore [1886] 11 App. Cas. 350, the facts were similar to those in Tripp v. Armitage [1839] 4 M & W.

687. A firm of engineers, A. Campbell & Son, had entered into five agreements with the appellants, T. B. Seath and Co., who were ship-builders to supply engines, boilers and machinery required for vessels to be built by them. Before the completion of the contracts, A. Campbell & Son became bankrupt, and the dispute was as regards the title to machinery and other articles which were in the possession of the insolvents at the time of their bankruptcy but which had been made for the purpose of being fitted into the ships of the appellants. It was held by the House of Lords approving Tripp v. Armitage [1839] 4 M & W. 687 that there had been no sale of the machinery and parts as such, and that therefore they vested in the assignee. For the appellant, reliance is placed on the following observations of Lord Watson at p. 380: "The English decisions to which I have referred appear to me to establish the principle that, where it appears to be the intention, or in other words the agreement, of the parties to a contract for building a ship, that a particular stage of its construction, the vessel, so far as then finished, shall be appropriated to the contract of sale, the property of the vessel as soon as it has reached that stage of completion will pass to the purchaser, and subsequent additions made to the chattel thus vested in the purchaser will, accession become his property." It is to be noted that, even in this passage, the title to the parts is held to pass not under any contract but on the principle of accretion. The respondents rely on the following observations at p. 381 as furnishing the true ground of the decision: "There is another principle which appears to me to be deducible from these authorities and to be in itself sound, and that is, that materials provided by the builder and portions of the fabric, whether wholly or partially finished, although intended to be used in the execution of the contract, cannot be regarded as appropriated to the contract, or as 'sold', unless they have been affixed to or in a reasonable sense made part of the corpus. That appears to me to have been matter of direct decision by the Court of Exchequer Chamber in Wood v. Bell [1856] 6 E. & B.

355. In Woods v. Russell ([1822] 5 B. & Al. 942. the property of a rudder and some cordage which the builder had bought for the ship was held to have passed in property to the purchaser as an accessory of the vessel, but that decision was questioned by Lord Chief Justice Jervis, delivering the judgment of the Court in Wood v. Bell [1856] 6 E. & B. 355, who stated the real question to be 'what is the ship, not what is meant for the ship', and that only the things can pass with the ship 'which have been fitted to the ship and have once formed part of her, although afterwards removed for convenience'. I assent to that rule, which appears to me to be in accordance with the decision of the Court of Exchequer in Tripp v. Armitage [1839] 4 M & W. 687:150ER 1597 (Z21) . 15.7. In Reid v. Macbeth and Gray [1904] A.C. 223, the facts were that a firm of ship-builders who had agreed to build a ship became bankrupt. At the date of the bankruptcy, there was lying at railway stations a quantity of iron and steel plates which were intended to be fixed in the ship. The dispute was between the assignee in bankruptcy and the ship-owners as to the title to these articles. It was held by the House of Lords following Seath v. Moore [1886] 11 App. Cas. 350 and in particular the observations of Lord Watson at p. 381 that the contract was one for the purchase of a complete ship, and that under that contract no title to the articles in question passed to the ship-owners. The following observation of Lord Davey are particularly appropriate to the present question: "There is only one contract a contract for the purchase of the ship. There is no contract for the sale or purchase of these materials separatism, and unless you can find a contract for the sale of these chattels within the meaning of the Sale of Goods Act, it appears to me that the sections of that Act have no application whatever to the case."

16. The crux of the foregoing discussion is that a works or construction contract essentially comprises both the provision of labour and services as well as the use of materials, goods, and equipment. Such materials, whether wholly or partially finished and intended for execution of the contract, cannot be regarded as appropriated to the contract, nor does their title pass to the other party, unless and until they are affixed, consumed, or utilized in the completion of the works. The mere use or provision of materials in the course of a works contract does not, therefore, constitute a sale of such materials, and consequently falls outside the ambit of Entry No. 49 of the Fourth Schedule to the Constitution. It thus does not lie within the legislative competence of Parliament. Rather, being in the nature of services, it falls within the exception to Entry No. 49, and accordingly lies within the exclusive domain of the Provincial Legislature under Article 142(c) of the Constitution to levy tax on construction works. Scope of Khyber Pakhtunkhwa Sales Tax on Services Act, 2022.

17. Section 2 of the Act of 2022 refers to First Schedule of the Act as list of services. Furthermore, Section 3 of the Act of 2022 provides that A taxable service is a service listed in Second Schedule to this Act... Below are the relevant extracts of First and Second Schedule of the Act of 2022. First Schedule 9815.1000 Services provided by architects, civil engineers, construction consultants, construction contractors, town or real estate or property promoters, developers including interior decorator so rallied or ancillary professions 9815.3000 Construction contractors including contractors of allied work such as electrical or gas fittings, plumbing, water boring, wood work, plastering, flooring, steel work, paint and other finishing work Second Schedule 14 Services provided by construction contractors, architects, civil engineers, land or property surveyors, construction consultants, designing and supervision consultants, town or real estate or property promoters, developers or planners including interior decorators or allied or ancillary professions: a) Construction services rendered or provided in respect of the construction of structures, buildings, roads, bridges, under passes or flyovers (and other civil works). Electro-mechanical works, turn-kay and Engineering, Procurement and Construction (EPC) projects and similar other works involving construction activity. b) Architects and civil engineers or town promoters, developers, planners. c) Town, real estate or property promoters, developer or planners. d) Services of contractors of allied works such as electrical, mechanical gas fittings, plumbing, water boring, wood work, plastering flooring, steel work, paint and other finishing work or works. e) Interior decorators. f) Landscaping or land development designers including land surveyors. g) Other similar, allied or ancillary services. 9815.0000 9815.1000 9815.2000 9815.3000 9815.4000 9815.9000 9819.5000 Five percent (5%) except Government funded construction projects including ADP /PSDP. Funded projects and construction of hydropower projects on which the rate of tax shall be two percent (2%). The nature of tax on services and the dominant intention test

18. Before proceeding to examine the issue at hand, it would be instructive, for purposes of clarity and understanding, to refer to the jurisprudence developed by the Supreme Court of India on the subject, which eventually culminated in a constitutional amendment. The opinions expressed by the Indian Supreme Court in a series of judgments, though rendered under a constitutional framework that differs in material respects from our own, nonetheless provide valuable guidance and comparative insight for the present legal discourse.

19. As stated above, under Act of 1935, it was the Province having the authority (Entry No.48 of Legislative List) to tax on sales of goods and on advertisement. In the case of Gannon Dunkerley and Co.4, the assesse faced a levy in respect of goods sold in relation to work contract under the Madras General Sales Tax Act, 1939, as amended by the Madras General Sales Tax (Amendment) Act No.XXV of 1947, wherein certain new provisions were incorporated in the Act, including Section 2(i) which defines work contract to mean any agreement for carrying out, for cash or for deferred payment or valuable consideration, the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property or the fitting out, improvement or repair of any movable property. It would be important to note that the province had no authority to tax on service. In pursuance of the said provision, the rules were amended and the assessment was framed. When the matter reached to the Supreme Court of India, it was ruled that a work contract is not a sale and cannot be subject to sales tax. The Court held that a work contract is a composite transaction that includes a contract for material and contract for payment for work. The relevant para of the judgment is reproduced as under:-

72. This conclusion entails that none of the Legislatures constituted under the Government of India Act, 1935, was competent in the exercise of the power conferred by section 100 to make laws with respect to the matters enumerated in the Lists, to impose a tax on construction contracts and that before such a law could be enacted it would have been necessary to have had recourse to the residual powers of the Governor-General under section 104 of the Act. And it must be conceded that construction which leads to such a result must, if that is possible, be avoided. Vide Manikhasundara v. R.S Nayudu MANI/FE/007/1946: [1946] F.C.R.

67. It is also a fact that acting on the view that Entry 48 authorizes it, the State have enacted laws imposing a tax on the supply of materials in works contracts, and have been realizing it, and their validity has been affirmed by several High Court. All these laws were in the statute book when the Constitution came into force and it is to be regretted that there is nothing in it which offers a solution to the present question. We have, no doubt. Art.248 and Entry 97 in List I conferring residual power of legislation on Parliament, but clearly it could not have been intended that the center should have the power to tax with respect to works constructed in the State. In view of the fact that the State Legislature had given to the expression sale of goods in Entry 48 a wider meaning than what it has in the Indian Sale of Goods Act, that States with sovereign powers have a recent times been enacting laws imposing tax on the use of materials in the construction of buildings, and that such a power should more property be lodged with the States rather than the center, the Constitution might have given an inclusive definition of sale in Entry 54 so as to cover the extended sense. But our duty is to interpret the law as we find it, and having anxiously considered the question, we are of opinion that there is no sale as such of materials used in a building contract, and that the Provincial Legislatures had no competence to impose a tax thereon under Entry 48. 19.1. The law laid down in Gannon Dunkerley s case (supra) was subsequently approved by the Indian Supreme Court. The gist of the said cases are reproduced as under: 19.1.1. In Carl Still G.m.b.H. v. State of Bihar [(1961) 2 SCR 466], the Supreme Court held that a contract for assembling and installing machinery and plant for a lump sum was an indivisible works contract, not a sale of goods. Since there was no separate agreement to sell materials, the transaction could not be taxed as a sale under sales tax laws. 19.1.2. In Patnaik & Co. v. State of Orissa [(1965) 2 SCR 782], the Supreme Court observed that the construction of bus bodies on government-supplied chassis amounted to a sale of goods, as it involved the transfer of property in the bus bodies (movable goods) for a price. The Court emphasized that fixing one chattel onto another (bus body onto chassis) does not negate the nature of a sale, and thus, sales tax was leviable on the transaction. 19.1.3. Similarly, in State of Gujarat v. M/s. Kailash Engineering Co. (Pvt.) Ltd. (AIR 1967 SC 547), the Supreme Court held that the construction of sleeper coaches under a detailed agreement with the Railways constituted an indivisible works contract, not a sale. The Court emphasized that the contract did not contemplate the sale of materials or finished coach bodies, and was solely for the execution of specified works, thereby falling outside the scope of sales tax. 19.1.4. In The State of Madras v. Richardson and Cruddas Ltd. [(1968) 21 STC 245 (SC)], the Court observed that a contract for the fabrication, supply, and erection of steelwork for a lump sum, without separation of material and labour costs, constituted an indivisible works contract. The Court emphasized the predominance of skill and labour by qualified engineers and mechanics, and relying on Clark v. Bulmer (1843) 11 M & W. 243, concluded that the transaction was not a sale of goods, but a works contract. 19.1.5. In State of Rajasthan v. Man Industrial Corporation Ltd. [(1969) 1 SCC 567], the Court opined that a contract for providing and fixing customized windows according to specific designs, drawings, and instructions was a contract for work and labour, not a sale of goods. The Court emphasized that fixing the windows to the building was an integral and essential part of the contract, not incidental to a sale, making it an indivisible works contract rather than a sale liable to sales tax. 19.1.6. In The State of Punjab v. M/s. Associated Hotels of India Ltd. [(1972) 1 SCC 472], the Constitution Bench of the Supreme Court held that where the principal object of a contract is not the transfer of a chattel as a chattel, but the rendering of work or services, it is a contract for work and labour, not a sale. Applying this test, the Court found that the relationship between a hotelier and a guest is governed by a contract of service, where the amenities and goods supplied are incidental to the provision of hospitality services, and thus not taxable as a sale of goods. The judgment reiterated that the dominant intention and substance of the contract determine its legal nature. 19.1.7. In State of Gujarat (Commissioner of Sales Tax, Ahmedabad) v. M/s. Variety Body Builders [(1976) 38 STC 176 (SC)], the Court reiterated that there is no rigid or universal formula to distinguish a contract of sale from a contract for work and labour. The Court held that while such contracts may share common and overlapping features, the decisive test lies in the specific facts and circumstances of each case. Certain clinching terms or features in the agreement may tilt the balance, but each case must be examined on its own merit, emphasizing the substance over form of the transaction. 19.1.8. In Vanguard Rolling Shutters and Steel Works v. Commissioner of Sales Tax [(1977) 2 SCC 250], the Supreme Court was called upon to determine whether the contracts entered into by the assessee for the manufacture and installation of rolling shutters constituted works contracts or contracts for the sale of goods liable to sales tax. The assessee manufactured the shutters according to specifications provided by the customers and installed them at their premises. While the High Court held that the transactions were pure sales and thus taxable, the Supreme Court reversed this view. It observed that the total consideration was paid as a lump sum without any bifurcation between the cost of materials and the charges for labour or service. Moreover, the materials used were not handed over as movable chattels, but were affixed to immovable property in such a manner that they became permanent fixtures. The Court also emphasized that the operations performed at the site were not merely incidental to the contract but were central to its execution. Considering these aspects, it concluded that the dominant intention of the parties was not a mere transfer of goods but the execution of a composite contract involving both supply of materials and the provision of labour and services. Thus, the contract was held to be a works contract and not one of sale simpliciter, and therefore not liable to sales tax as a sale of goods. 19.1.9. In Ram Singh & Sons Engineering Works v. Commissioner of Sales Tax, U.P [(1979) 1 SCC 487], the Court observed that the contract for the fabrication, supply, and erection of overhead travelling cranes constituted a works contract. The erection process was deemed an integral part of the contract, as the crane only becomes functional once fully erected at the customer's site. The court emphasized that while the manufacturer owns the component parts during fabrication, ownership of the complete crane is transferred to the customer only once the crane is fixed and permanently embedded at the site, making it a part of the customer's property. Thus, there was no transfer of property in the crane as a chattel by the manufacturer. 19.1.10. In Hindustan Aeronautics Limited v. State of Orissa [(1984) 2 SCC 16], the Court emphasized that there is no rigid, one-size-fits-all rule to distinguish between a contract for sale and a contract for work and labor. The court stated that the distinction primarily depends on the main objective of the parties involved, considering the specific circumstances of the transaction. The nature of the contract should be evaluated based on the intent and purpose of the agreement between the parties.

20. It has remained the consistent opinion of the Indian Supreme Court that State Legislation had no authority to tax work / construction contract, as the same were always considered indivisible, involving both processed goods and services. The key test employed was the dominant intention of the contract, which required courts to examine the substance of each agreement to determine whether it primarily involved the sale of goods or the provision of services.

21. Further, in view of the survey of the case law stated above, a work contract could not have been liable to be taxed under the State sales tax laws, and it was the nature of work contract, dependent upon the dominant intention test determinable from the terms and conditions of the contract, despite the fact that the execution of the contract involved both the provision of materials as well as services.

22. This complex legal preposition constrained the Parliament to amend the Constitution by incorporating clause (29A) in Article 366 of the Constitution by creating a legal fiction authorizing the State Legislatures to tax the transfer of goods in a work contract. For ease of reference, the Forty-Sixth Amendment in the Constitution of India is reproduced as under:- "366 (29A) "tax on the sale or purchase of goods" includes - a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; b) a tax on the transfer of property, in goods (whether as goods or in some other form) involved in the execution of a works contract; c) a tax on the delivery of goods on hire purchase or any system of payment by instalments; d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; f) a tax on 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 for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase or those goods by the person to whom such transfer, delivery or supply is made;" Post-Forty Sixth Amendment Jurisprudential development in India

23. This amendment clarified that certain transactions, including those involving works contracts, could be deemed sales for the purposes of taxation. Specifically, sub-clause (b) of Article 366(29A) allowed the imposition of tax on the transfer of property in goods involved in the execution of a works contract. The Indian Supreme Court in the Builders' Association of India and others v. Union of India and others [(1989) 2 SCC 645] upheld this amendment, affirming that States could now tax the goods component of a works contract without being hindered by the indivisibility doctrine. The Court made it clear that the power to tax under Entry 54 of List II now extended to such deemed sales, provided that the constitutional restrictions in Article 286 were observed.

24. In Hindustan Shipyard Ltd. v. State of A.P [7 (2000) 6 SCC 579], the Supreme Court recognized that categorizing contracts strictly as sales or service contracts is not easy and reiterated that the terms and conditions of each contract must be examined holistically. The Court identified three general types of contracts-composite contracts involving both goods and services, pure service contracts, and contracts for sale with incidental service-but emphasized that these categories were not rigid. Later, in Larsen and Toubro Limited and another v. State of Karnataka and another [(2014) 1 SCC 708], the Court observed that this earlier classification had limited applicability after the 46th Amendment, which allowed the goods portion of a works contract to be taxed independently.

25. In Bharat Sanchar Nigam Ltd. and another v. Union of India and others [(2006) 3 SCC 1] the Court again addressed the scope of clause (29A) and held that the dominant nature test was no longer applicable to works contracts after the constitutional amendment. This decision further solidified the principle that the goods element in a composite contract could be identified and taxed separately, irrespective of whether the contract's dominant intention was the provision of goods or services.

26. In K. Raheja Development Corporation v. State of Karnataka [(2005) 5 SCC 162], the Court considered whether agreements to construct and sell apartments before completion amounted to works contracts. The Court ruled affirmatively, stating that so long as the contract was entered into before the completion of construction, it would qualify as a works contract, making the developer liable for sales tax on the transfer of property in goods involved in the execution. This decision was later affirmed in Larsen and Toubro as stating the correct legal position.

27. In State of U.P. and others v. P.N.C. Construction Co. Ltd. and others [(2007) 7 SCC 320], the issue revolved around whether road construction involving the use of manufactured hot mix was eligible for benefits under the U.P. Trade Tax Act. The Court held that post-46th Amendment, emphasis had to be placed on the transfer of property in goods involved in works contracts, reiterating the States' authority to levy tax on such transactions.

28. Lastly, the Supreme Court of India in Kone Elevator India Private Limited v. State of Tamil Nadu [(2014) 7 SCC 1] finally consolidated the different views as discussed above while considering the question that whether contracts for the manufacture, supply, and installation of lifts should be classified as sale or works contract . The Court determined that such contracts are composite and should be treated as works contracts, as they involve both the supply of goods and the provision of services in the following words:

63. Considered on the touchstone of the aforesaid two Constitution Bench decisions, we are of the convinced opinion that the principles stated in Larsen and Toubro (supra) as reproduced by us hereinabove, do correctly enunciate the legal position. Therefore, the dominant nature test or overwhelming component test or the degree of labour and service test are really not applicable. If the contract is a composite one which falls under the definition of works contracts as engrafted under Clause (29A)(b) of Article 366 of the Constitution, the incidental part as regards labour and service pales into total insignificance for the purpose of determining the nature of the contract.

64. Coming back to Kone Elevators (supra), it is perceivable that the three-Judge Bench has referred to the statutory provisions of the 1957 Act and thereafter referred to the decision in Hindustan Shipyard Ltd. (supra), and has further taken note of the customers' obligation to do the civil construction and the time schedule for delivery and thereafter proceeded to state about the major component facet and how the skill and labour employed for converting the main components into the end product was only incidental and arrived at the conclusion that it was a contract for sale. The principal logic applied, i.e., the incidental facet of labour and service, according to us, is not correct. It may be noted here that in all the cases that have been brought before us, there is a composite contract for the purchase and installation of the lift. The price quoted is a composite one for both. As has been held by the High Court of Bombay in Otis Elevator (supra), various technical aspects go into the installation of the lift. There has to be a safety device. In certain States, it is controlled by the legislative enactment and the rules. In certain States, it is not, but the fact remains that a lift is installed on certain norms and parameters keeping in view numerous factors. The installation requires considerable skill and experience. The labour and service element is obvious. What has been taken note of in Kone Elevators (supra) is that the company had brochures for various types of lifts and one is required to place order, regard being had to the building, and also make certain preparatory work. But it is not in dispute that the preparatory work has to be done taking into consideration as to how the lift is going to be attached to the building. The nature of the contracts clearly exposit that they are contracts for supply and installation of the lift where labour and service element is involved. Individually manufactured goods such as lift car, motors, ropes, rails, etc. are the components of the lift which are eventually installed at the site for the lift to operate in the building. In constitutional terms, it is transfer either in goods or some other form. In fact, after the goods are assembled and installed with skill and labour at the site, it becomes a permanent fixture of the building. Involvement of the skill has been elaborately dealt with by the High Court of Bombay in Otis Elevator (supra) and the factual position is undisputable and irrespective of whether installation is regulated by statutory law or not, the result would be the same. We may hasten to add that this position is stated in respect of a composite contract which requires the contractor to install a lift in a building. It is necessary to state here that if there are two contracts, namely, purchase of the components of the lift from a dealer, it would be a contract for sale and similarly, if separate contract is entered into for installation, that would be a contract for labour and service. But, a pregnant one, once there is a composite contract for supply and installation, it has to be treated as a works contract, for it is not a sale of goods/chattel simpliciter. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel. Therefore, it would not be appropriate to term it as a contract for sale on the bedrock that the components are brought to the site, i.e., building, and prepared for delivery. The conclusion, as has been reached in Kone Elevators (supra), is based on the bedrock of incidental service for delivery. It would not be legally correct to make such a distinction in respect of lift, for the contract itself profoundly speaks of obligation to supply goods and materials as well as installation of the lift which obviously conveys performance of labour and service. Hence, the fundamental characteristics of works contract are satisfied. Thus analysed, we conclude and hold that the decision rendered in Kone Elevators (supra) does not correctly lay down the law and it is, accordingly, overruled.

29. To conclude, in the wake of the Forty-Sixth Amendment to the Constitution of India, the Supreme Court has clarified that the dominant nature test or similar formulations such as the overwhelming component test no longer govern the field. Where the agreement is a composite contract involving both supply of goods and provision of labour and services such as in the case of manufacture, supply, and installation of lifts, it must be classified as a works contract. The Court has further affirmed that the constitutional fiction created by the Amendment permits both the Parliament and the State Legislatures to levy tax on each component of such contracts, thereby rejecting the earlier view that incidental elements of labour or service could be disregarded in determining their nature.

30. Conversely, under our constitutional scheme, particularly after the Eighteenth Amendment, the position is distinct. The Federation retains exclusive legislative authority over sales tax on goods, while the Provinces are vested with competence to levy sales tax on services. Consequently, in cases of composite or complex contracts involving both supply of goods and provision of services, the dominant intention test continues to be the applicable standard for determining the true nature of the transaction. The learned Sindh High Court, in the case of Association of Builders5, while dealing with a similar issue, in para-40 of the judgment has observed that: In our view, if the contract or activity to which heading No. 9824.0000 is sought to be applied is multi-dimensional in the sense noted above, then the "dominant intention" test can usefully be resorted to in order to determine whether the nature is such that it can be regarded as the providing of "construction services". It will be recalled that in this context learned counsel for the petitioners also relied upon an American case, a decision of the Court of Appeals for the 5th Circuit. This is Propulsion Technologies Inc. v. Aitwood Corporation 369 F.3d 896 (2004). It was there held as follows (relying on a decision of the Texas Supreme Court); "In such hybrid transactions [such as building contracts involving the sale of both services and materials], the question becomes whether the dominant factor or essence of the transaction is the sale of materials or of services". Reference may also be made to a decision of the Court of Appeals for the 8th Circuit. Bunebrake v. Cox 499 F.2d 951 (1974), where multi-dimensional contracts were referred to as "mixed contracts". It was observed that such contracts were "legion", and it was held as follows: "The test ... is not whether they are mixed, but, granting than they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved ...or is a transaction of sale, with labor incidentally involved ...". These formulations can usefully be applied while determining whether a multi-dimensional contract is such that it constitutes the providing of "construction services".

31. Applying the dominant intention test to construction contracts under PCT Head No. 9815.3000, the Indian Supreme Court, prior to the Forty-Sixth Amendment, held that such contracts lay beyond the competence of the State Legislature. The same reasoning applies under our constitutional scheme. Notwithstanding the divisible elements of goods and services within a construction contract, the exception to Entry No. 49 makes it clear that the power to tax construction work rests exclusively with the Provincial Legislature.

32. In the present case, we are dealing with the composite contract for work/construction executed between the two contracting parties. However, a question may arise relating to a taxing event which may occur independently when a contracting party to a work contract has to purchase goods from the market and pay sales tax under the Act of 1990. The said independent event of tax is not the subject matter of our discussion; however, suffice it to mention that the Act of 1990 as well as Act of 2022 have inbuilt provisions for input adjustment of the tax paid under either of the statute. Section 2, subsection (14) of the Act of 1990 defines input tax as: input tax , in relation to a registered person, means- (a) tax levied under this Act on supply of goods to the person; (b) tax levied under this Act on import of goods by the person; (c) in relation to goods or services acquired by the person, tax levied under the Federal Excise Act, 2005 in sales tax mode as a duty of excise on the manufacture or production of the goods, or the rendering or providing of the services; (d) provincial sales tax levied on services rendered or provided to the person excluding those services as specified by the Board through notification in the official Gazette subject to such conditions, restrictions and limitations as mentioned therein; and (e) levied under the Sales Tax Act, 1990 as adapted in the State of Azad Jammu and Kashmir, on the supply of goods received by the person; Similarly, subsection (af) of Section 2 of the Act of 2022 defines input tax as: input tax , in relation to a registered person, means‑ (i) tax levied under this Act on the services received by the person; and (ii) tax levied under the Sales Tax Act, 1990, on the goods whether imported or procured locally by the person: Provided that Government may, by a notification in the official Gazette, specify and declare any other sales tax on services, levied and paid under any other law, to be an input tax for the purposes of this Act: Provided further that Government may, by rules or notification in the official Gazette, specify that any or all of the aforesaid tax shall not be treated as input ax for the purposes of this Act, subject to such conditions and limitations as may be prescribed in rules or by notification; .

33. Section 16 of the Act of 2022 provides for input tax adjustment of the sales tax on services, whereas section 16, subsection (2) clearly stipulates that the Management Committee may, subject to such conditions, restrictions, limitations, allow registered person to claim adjustments including refunds arising as a result thereof, in respect of the tax paid under any other law in respect of any taxable service or goods or class of taxable services or goods, received or acquired and used in the provision of taxable service or services by him. The only restriction, inter alia, imposed by Section 17 of the Act of 2022 is that the input tax credit shall not be allowed in respect of goods for which sales tax has not been deposited in the Federal Government treasury by the respective suppliers of goods.

34. The question relating to the exemption under the PSDP which was executed prior to 30th June, 2021 has already been extended to the petitioners; therefore, the only question for adjudication before this Court was the legal authority of the province relating to the imposition of sales tax on services as provided in Entry No.14 of the Second Schedule to the Act of 2022.

35. In view of what has been stated above, we hold and declare that:- i. The construction contract essentially involves provision of work (labour and service) and use of material goods and equipment be that wholly or partially finished and intended to be used in the execution of contract does not amount to sale of goods, therefore, is beyond the remit of Parliament to legislate for imposition of tax on the aforesaid goods being used in a construction agreement. ii. Applying the dominant intention/object test the work/construction contract amounts to sale of services and thus entry No. 14 of the second schedule is intra vires to the Constitution.

36. Moving on further to the connected matter. In Constitutional Petitions Nos.715-P/2023, 477-P/2024, 492-P/2024, 1115-P/2024, 4681-P/2024, 628-P/2025, 3147-P/2025, 1439-P/2022, 4252-P/2022, 1173-P/2022, 522-P/2023, 1806-P/2023, 2621-P/2023, 2648-P/2023, 2792-P/2023, 4788-P/2023, 5230-P/2023, 3780-P/2024 and 2777-P / 2024, the vires of Entry 14 in Second Schedule to the Act of 2022 has been challenged; therefore, keeping in view the reasons stated above, the said petitions are dismissed. However, the Assessing Officer or in case any assessment order has been passed against the petitioners, the fora seized of the matter shall decide the factual aspect of the case accordingly.

37. In Constitutional Petitions bearing Nos.4578-P/2023, 4579-P / 2023, 2784-P/2023, 6185-P/2023, and 5405- P/2023, the notice of its compulsory registration under the Act of 2022 or under the Finance Act, 2013, has been challenged. The said petitions, in view of the aforesaid finding, are also dismissed. However, the forum seized of the matter questioned before this Court shall decide their individual cases strictly in accordance with law.

38. In Writ Petitions bearing Nos.1519-P/2024, 1938-P/2024, 2208-P/2024, 4519-P/2022, 272-P/2023 and 3572-P/2023, the recovery notices or the assessment orders passed against the petitioners under the relevant law have been challenged. For reasons stated above, these petitions are also dismissed. However, it is for the hierarchy established under the Finance Act, 2013 or Act of 2022, if the issue has been agitated before the said fora and has not been decided, shall decide the matter in accordance with law.

39. In W.P No. 3677-P/2023 as well as W.P No. 3731- P/2023, the matter has already been disposed of by the first appellate forum; therefore, the said petitions have become infructuous, which are dismissed. In writ petitions Nos. 5907-P/2024 and 4504-P/2023, the issue of exemption from the impugned levy has been raised, which shall accordingly be decided by the relevant authority/forum seized of the matter in accordance with law. Annexure A S.No. Case Title

1. Tax Ref. No. 18/2023 M/s Matracon Pakistan (Pvt.) Ltd. and others v. Appellate Tribunal for Sales Tax on Services and others

2. W.P. No. 1173/2022 M/s Saif Heights and others v. Province of KP

3. W.P. No.1439/2022 M/s Saif Mall and Residency and others v. Government of Khyber Pakhtunkhwa and others

4. W.P. No.4252/2022 M/s Safico Group v. Government of Khyber Pakhtunkhwa and others

5. W.P. No.4519/2022 M/s Mumtaz Heights Peshawar v. Government of Khyber Pakhtunkhwa and others

6. W.P. No.272/2023 M/s Rabbi Heights and another v. Government of Khyber Pakhtunkhwa and others

7. W.P. No.522/2023 Syed Tayyab Hussain Shah and others v. Government of Khyber Pakhtunkhwa and others

8. W.P. No.715/2023 Khawaja Muhammad Khan and others v. Government of Khyber Pakhtunkhwa and others

9. W.P. No. 1806/2023 M/s Engineering Technologies and others v. Government of Khyber Pakhtunkhwa through Chief Secretary and others 10 W.P. No.2621/2023 M/s Haji Muhammad Khan & Sons v. Government of Khyber Pakhtunkhwa through Chief Secretary and others

11. W.P. No.2648/2023 M/s JK Engineering Services v. Government of Khyber Pakhtunkhwa through Chief Secretary and others

12. W.P. No.2784/2023 The Gardens (Pvt.) Ltd. through Mr. Kamal Mehmood v. Khyber Pakhtunkhwa Revenue Authority through its Director General and others

13. W.P. No.2792/2023 M/s Orchard Villas Mardan v. Khyber Pakhtunkhwa Revenue Authority through Director General and others

14. W.P. No.3572/2023 M/s GHC International (Pvt.) Ltd. and others v. Khyber Pakhtunkhwa Revenue Authority and others

15. W.P. No.3677/2023 M/s Siraj ul Haq and Sons v. Government of Khyber Pakhtunkhwa and others

16. W.P. No.3731/2023 Fazal Hussain Mughal Government Contractor and others v. Khyber Pakhtunkhwa Revenue Authority and others

17. W.P. No.4504/2023 M/s Acro Constructions (Pvt.) Ltd. v. Khyber Pakhtunkhwa Revenue Authority and others

18. W.P. No.4578/2023 M/s Subhan Smart City Society Mardan v. Khyber Pakhtunkhwa Revenue Authority and others

19. W.P. No.4579/2023 M/s Merryland Housing Society Mardan v. Khyber Pakhtunkhwa Revenue Authority and others

20. W.P. No.4788/2023 Anwar Khan and another v. Government of Khyber Pakhtunkhwa and others

21. W.P. No.5230/2023 M/s Tori Khel and others v. Government of Khyber Pakhtunkhwa and others

22. W.P. No.5405/2023 Al Hayat Perfect Builders & Dev. (Pvt.) Ltd. v. Khyber Pakhtunkhwa Revenue Authority and others

23. W.P. No.6185/2023 M/s New City Nowshera Ziarat Kaka Saib v. The Khyber Pakhtunkhwa Revenue Authority through its Director General and others

24. W.P. No.477/2024 Zakir Ullah Construction Company Chitral v. Govt of Khyber Pakhtunkhwa through its Chief Secretary and others

25. W.P. No.492/2024 M/s Zakirullah and others v. Government of Khyber Pakhtunkhwa and others

26. W.P. No. 1115/2024 M/s Manzar Hussain and others v. Government of Khyber Pakhtunkhwa and others

27. W.P. No. 1519/2024 M/s Park City Phase-I Mardan v. Khyber Pakhtunkhwa Revenue Authority through its Director General and others

28. W.P. No.1938/2024 M/s Saya Heights v. Collector Khyber Pakhtunkhwa Revenue Authority and others

29. W.P. No.2208/2024 M/s Al Haj Asia Star Steel Co. (Pvt.) Ltd. and others v. Khyber Pakhtunkhwa Revenue Authority and others

30. W.P. No.2777/2024 Zhongmei Al Mehreen Joint Venture v. Government of Khyber Pakhtunkhwa and others

31. W.P. No.3780/2024 M/s Long Life Builders v. Government of Khyber Pakhtunkhwa and others

32. W.P. No.4681/2024 M/s Tahmeedullah v. Government of Khyber Pakhtunkhwa and others

33. W.P. No.5907/2024 Musa Khan v. Government of Khyber Pakhtunkwha and others

34. W.P. No.628/2025 M/s JV Green Hydro Engineering Kumrat Construction v. Government of Khyber Pakhtunkhwa and others

35. W.P. No.3147/2025 M/s HAR & Co. (Government Contractor) Mingora Swat v. Government of Khyber Pakhtunkhwa through Chief Secretary and others MWA/111/P Order accordingly. 1 Pakistan International Freight of Forwarders Association through General Secretary v. Province of Sindh through Secretary and another (2017 PTD 1). 2 Islamabad High Court, Bar Association, Islamabad through President and others v. Election Commission of Pakistan through Chief Election Commissioner, Islamabad and others (PLD 2023 SC 720). 3 Messrs Sui Southern Gas Company Ltd. and others v. Federation of Pakistan and others (2018 SCMR 802). 4 State of Madras v. Gannon Dunkerley & Co. (AIR 1958 SC 560). 5 Association of Builders and Developers of Pakistan vs. Province of Sindh and others (2018 PTD 1487).