PETITIONER:
HINDUSTAN AERONAUTICS LIMITED
Vs.
RESPONDENT:
STATE OF KARNATAKA
DATE OF JUDGMENT16/12/1983
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
TULZAPURKAR, V.D.
PATHAK, R.S.
CITATION:
1984 AIR 744 1984 SCR (2) 248
1984 SCC (1) 706 1983 SCALE (2)1090
CITATOR INFO :
R 1989 SC 962 (24,25)
ACT:
Sales Tax Law-Karnataka Sales Tax Act-Exigibility to
tax-Contracts for servicing reassembling I.A.F Planes which
includes supply of materials by the “contractor” if the
“owner” did not supply them, and only if the owners Dy.
Financial Advisor authorises them-Whether the contracts in
question were sales contract or were part of one contract of
executing the works contracts not attracting Sales Tax.
HEADNOTE:
The appellant is a manufacturer of spare parts and
accessories of various aircrafts and has also established
facilities for assembling, servicing, repairing, overhauling
of aircrafts, their instruments and accessories. The job
done by the appellants were servicing, assembling, repairing
and overhauling “Airforce planes” entrusted to them. These
works were done on the basis of contracts or job orders
issued from time to time. While on contract directly
concerning the repairing servicing and overhauling of a
specified aircraft, instrument or accessory in which the
spare parts had been used in the execution of service
contracts was on record, there was an agreement dated 23rd
June 1951 described as “contract for the flight servicing
and maintenance of the H.Q. Training Command I.A.F
Communication Flight, “wherein the President of India has
been described as the ”owner” and the appellant as the
contractor. The agreement provided that the works would be
carried out by the contractor and payment made by the owner
“at cost plus 10% profit basis or at the contractor’s
standard fixed rates, where applicable. Under clause 3, the
owner will provide the contractor with all the necessary
spares and materials (other than expendable materials such
as paints, dopes, cleaning rages etc.) and where however
there was delay in the supply of the essential items, the
contractor will provide those whenever possible by purchase
or manufacture within expenditure authorised by the owner’s
Deputy Financial Adviser at the contractor’s request from
time to time.
The Sales Tax authorities sought to tax that portion of
the total turnover of the appellant for the relevant years
in question which was equivalent to the money value of the
spare parts of the air-crafts which it had supplied to the
Indian Air Force as a result of their use in the process of
repairing, servicing and overhauling of the aircrafts, their
instruments and accessories which were sent to the appellant
for the said purpose. The Appellate Tribunal and the High
Court held these to be composite contracts. The High Court
was of the view that sale of spare parts was clearly in
contemplation of the parties and the documents in question
constituted composite contracts, one relating to the
remuneration for the services rendered and the other for the
sale of goods. Hence the appeals by special leave.
Allowing the appeal, the Court
^
HELD : 1:1 It is well settled that the difference
between contract of
249
service and contract for sale of goods, is, that in the
former, there is in the person performing work or rendering
service no property in the things produced as a whole
notwithstanding that a part or even the whole of materials
used by him had been his property. In the case of a contract
for sale, the thing produced as a whole has individual
existence as the sole property of the party who produced it
some time before delivery and the property therein passed
only under the contract relating thereto to the other party
for price. [257 D-E]
1:2 It is necessary, therefore, in every case for the
courts to find out whether in essence there was any
agreement to work for a stipulated consideration. If that
was so, it would not be a sale because even if some sale may
be extracted that would not affect the true position. Merely
showing in the bills or invoices, the value of materials
used in the job would not render the contract as one of
sales. The nature and type of the transactions are important
and determinative factor. What is necessary to find out, is
the dominant object. [257 F-G]
1:3 A contract of sale of goods must be distinguished
from a contract for work and labour. The distinction is
often a fine one. A contract of sale is a contract whose
main object is the transfer of the property in, and the
delivery of the possession of, a chattel as a chattel to the
buyer. Where however the main object of work undertaken by
the payee of the price was not the transfer of chattel qua
chattel, the contract is one of work and labour. The test,
is, whether or not the work and labour bestowed end in
anything that can properly become the subject of sale;
neither the ownership of the materials, nor the value of the
skill and labour as compared with the value of the
materials, is conclusive, although such matters may be taken
into consideration in determining, in the circumstances of a
particular case, whether the contract was in substance one
for work and labour and one for the sale of a chattel. [258
G-H; 259 A-B]
2:1. The tests indicated in several decisions of this
Court to distinguish between a contract for sale and a
contract for work and labour were not exhaustive and did not
lay down any rigid or inflexible rule applicable alike to
all transactions. These did not give any magic formula by
the application of which one could say in every case whether
a contract was a contract for sale or a contract for work
and labour. These merely focussed on one or the other aspect
of the transaction and afforded some guidance in determining
the question, but basically and primarily, whether a
particular contract was one for sale of goods or for work
and labour depended upon the main object of the parties
gathered from the terms of the contract, the circumstances
of the transactions and the custom of the trade. [259 C-D]
Sentinel Rolling Shutters & Engineering Company Pvt.
Ltd. v. The Commissioner of Sales Tax, 42 Sales Tax Cases
409; referred to.
2:2 It cannot be said as a general proposition that in
every case of works contract, there is necessarily implied
the sale of the component parts which go to make up the
repair. That question would naturally depend upon the facts
and circumstances of each case. Mere passing of property in
an article or commodity during the course of performance of
the transaction in question does not render the transaction
to be transaction of sale. Even in a contract purely of
works or service, it is possible that articles may have to
be used by the person executing the work, and property in
such articles or materials may pass to the other party. That
would not necessarily convert the contract into one of sale
of those materials.
250
In every case, the Court would have to find out what was the
primarily object of the transaction and the intention of the
parties parties while entering into it. It may in some cases
be that even while entering into the contract of work or
even service, parties might enter into separate agreements,
one of work and service and the other of sale and purchase
of materials to be used in the course of executing the work
or performing the service. But, then in such cases the
transaction would not be one and indivisible, but would fall
into two separate agreements, one of work or service and the
other of sale. In order to constitute a sale, it is
necessary that there should be an agreement between the
parties for the purpose of transferring title to goods,
which of course pre-supposed capacity to contract, that it
must be supported by money consideration that as a result of
transaction, the property must actually pass in the goods.
Unless all these elements were present, there would be no
sale. [260 C-H]
State of Himachal Pradesh & Others v. Associate Hotels
of India Ltd, 29 Sales Tax Cases 474; State of Madras v.
Gannon Dunkerley & Co., Madras Ltd, 9 Sales Tax Cases 353
[1959] S.C.R. 379; Robinson v. Graves, [1935] 1 K.B. 579;
referred to.
2:3 Whether a given transaction is a works contract
pure and simple or it involves sale of goods also is of
course a mixed question of law and fact depending upon the
facts of each case. It is true, that it cannot be said that
parties did not contemplate and apply their minds to the
question of spare parts and other materials necessary for
the execution of the works. [262 F-H]
3:1 The High Court of Karnataka was not right in its
conclusion on the taxability of the turnover of the spare
parts and materials supplied in execution of appellant’s job
works. [266 D]
3:2 It is clear from clause 3 that it was the
expenditure to be incurred for providing the materials for
the jobs to be done were subject to the approval and
sanction of the Government. The expressions “All items
provisioned by the contractor will be the property of the
owner and will be issued on contract loan.” are significant
and indicative of the real intention of the parties. [263 F]
3:3 “The expression “contract loan” is not an
expression of art. It has no generally accepted meaning in
dictionary, legal or otherwise, as such. There is no meaning
of this expression provided in the contract between the
parties or in the correspondence between the parties in
connection with the execution of the works. But these
expressions indicate that the `provisions’ which would be
required for carrying out the contracts, which could not be
anticipated before the beginning or in execution of the
contracts will be the property of the owner i.e. that though
gathered and procured or manufactured by the contractor, the
contractor will have no property in the said goods or spares
or materials and would not be able to either dispose of or
deal with those but these will be treated for the purpose of
this contract to be the property of the owner and, then the
contract stipulated that on fictional basis these will be
lent out to the contractor for being used in the execution
of the jobs entrusted to the contractor. [263 G-H; 264 A]
3:4 The idea was that the moment these spares and
materials were required for the jobs entrusted to the
appellant and there was delay in supplying these spare parts
and materials, the contractor would be free to procure or
obtain these spares
251
and materials either by manufacturing or by purchase from
the market local or foreign, these goods to be identified
and would be treated by the operation of the contract to be
the goods of the owner of the planes. It is true that in
order to be given out on loan by the ‘owner’ to the
contractor, the owner must have property in the spares and
materials in question. But the ‘owner’ i.e. the Government
in the context of 1951 agreement, and it is indisputable
that the transactions in this case were done on the basis of
the agreement of 1951, became the owner of the property the
moment the goods were identified and there was delay or
inability on the part of the government in supplying spares
and materials. [264 C-F]
In the instant case, the property in the materials
which are used in the execution of the jobs entrusted to the
contractor became the property of the Government before it
was used. Further there was no possibility of any other
materials to be used for the contract. [265 H; 266 A]
Commissioner of Commercial Taxes, Mysore v. Hindustan
Aeronautics Ltd, [1972] 2 SCR 927; Ram Singh & Sons
Engineering Works v Commissioner of Sales Tax, U.P. 43 Sales
Tax Cases 195; followed.
State of Gujarat v Variety Buildings, 38 Sales Tax
Cases 176 distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1386-91
of 1977
Appeals by Special leave Petitions from the Judgment
and Order dated 1st December, 1976 of the Karnataka High
Court in S.T.R.P. Nos. 24-29 of 1975.)
S.T. Desai, S.J. Chandran & Mrs. A.K. Verma for the
Appellant.
S.S. Javali and Swaraj Kaushal for the Respondent.
The Judgement of the Court was delivered by:
SABYASACHI MUKHARJI, J. These appeals by special leave
are from the judgment and decision of the High Court of
Karnataka dated 1st December, 1976 involving the questions
of assessability of the appellant Sales Tax, Central as well
as State. While granting leave, this Court excluded the
question whether the sales effected in the canteen by the
appellant were assessable to Sales Tax. By the impugned
judgment, the High Court of Karnataka had dismissed several
Writ Petitions against several orders being S.T.R.Ps. Nos.
28, 27 and 29 of 1985 under the Karnataka Sales Tax Act, for
the year 1960-61, 1961-62 and 1962-63 respectively and also
three others namely; S.T.R. Ps. Nos. 25, 26 and 24 of 1975,
under the Central Sale Tax Act for the corresponding years
respectively, at the instance of the present appellant.
These involved common questions of law and facts and were
disposed of by a common judgment. We also propose to do the
252
same. As stated, one of the questions was about the
taxability of the turn-over in respect of the sales made in
the canteen of the appellant company. This question is not
before us. Before the Tribunal, the two following questions
relevant for appeals before us were agitated, namely;
(i) Whether the turnover apportioned from the job
works undertaken by the appellant related to the
sales of materials by the appellant to the Indian
Air Force or other private parties, as the case
may be, and as such whether these were taxable as
held by the ower appellate authority.
(ii) Whether, in the case of job works undertaken from
the private parties mainly on quotation on
inclusive price-basis, the Sales Tax authorities
were right in apportioning a portion of the
turnover as attributable towards sales of
materials.
In order to appreciate the controversy in these
appeals, it is necessary to state certain facts. The
appellant is a manufacturer of spare parts and accessories
of various aircrafts and has also established facilities for
assembling, servicing, repairing, overhauling of aircrafts,
their instruments and accessories. The Sales Tax authorities
sought to subject to tax that portion of the total turnover
of the appellant for the relevant years in question which
was equivalent to the money value of the spare parts to the
aircrafts which the appellant supplied to the Indian Air
Force as a result of their use in the process of repairing,
servicing and overhauling of the aircrafts, their
instruments and accessories which were sent to the appellant
for the aforesaid purposes during the relevant years in
question.
At the outset, it is important to emphasise that the
jobs done by the appellant were servicing, assembling,
repairing and overhauling ‘Airforce Planes’ entrusted to the
appellant. In the second appeal being Civil Appeal No. 1387
(NT) of 1977, the main job done was assembling; sales tax
was levied in respect of the turnover for doing the same
job. These works were done on the basis of contracts or job
orders issued from time to time. While no contract directly
concerning the repairing, servicing and overhauling of a
specified aircraft, instrument or accessary in which the
spare parts had been used in the execution of service
contracts was on record, there is, however, a specimen
contract that was entered into between the appellant and
253
I.A.F. being agreement dated 23rd June, 1951, hereinafter
referred to as ’1951′ Contract’. The agreement is described
as “Contract for the flight servicing and maintenance of the
H.Q. Training Command I.A.F. Communication Flight”. The
agreement was between Hindustan Aircraft Limited, described
in the agreement as the ‘Contractor’ and the President of
India, described in the agreement as the ‘Owner’. It may be
mentioned that the Hindustan Aircraft Limited has later on
become the appellant i.e. M/s Hindustan Aeronautics Limited.
As the contentions of the parties in these appeals centered
on the question whether the contracts in question, the
income of which has been subjected to sales tax, were works
contracts only or were agreements to sell spare parts, it
would be relevant to refer in detail to some of the clauses
of the “1951 Contract”.
The agreement states that the ‘contractor’ agrees to
accomplish for the ‘owner’ the servicing and maintenance of
the H.Q. Training Command, I.A.F. Communication Flight, and
works required on visiting aircrafts, to the standard as
specified in the said agreement at Bangalore or at any other
place required by the ‘owner’. Then the specifications
according to which the works had to be done were mentioned
thereafter. The agreement also provides that the works would
be carried out by the contractor, and payment made by the
owner “at Cost plus 10% profit basis” or at the contractor’s
standard fixed rates, where applicable. Sub-clause (b) of
clause 2 provides that any additional works to those
specified in clause I, items (a), (b) and (c), authorised by
Air Headquarters should also be charged for separately as
per sub-clause (a) of clause 2 of the agreement.
As the question of the price of the spares and
materials is involved, it is necessary to set out clause 3
which deals with spares and materials:
“Generally, the owner will provide the contractor
with all the necessary spares and materials (other than
expendable materials such as paints, dopes, cleaning
rages etc.). Where, however, there is delay in the
supply of essential items, the contractor will provide
those wherever possible either by purchase or
manufacture, within an expenditure authorised by the
owner’s Deputy Financial Adviser at the Contractor’s
request from time to time. All items provisioned by the
contractor will be the property of the owner, and will
be issued on Contract Loan. The owner agrees to pay the
contractor for provision of spares at the following
rates:-
254
(a) for items manufactured by the contractor-Cost plus
10%
(b) for items purchased from indigenous and overseas
sources-actual invoice price plus all other
charges the contractor is called upon to pay, such
as packing and shipping etc. plus 5%.”
Regarding Technical advice and publications, clause 4
of the 1951 agreement stipulated that all relevant service
publications and manuals would be made available on loan to
the contractor through I.A.F. Liaison Officer attached to
the contractor’s Factory. Regarding delivery, it was
provided by clause 5 that subject to the owner’s compliance
with clause 3, the contractor would keep ready for flight as
many of the available planes as possible.
Clause 6 of 1951 agreement deals with terms of payment
and stipulated that the contractor would submit to the owner
monthly bills as per clause 2(a) supported by cost analysis
showing, inter alia, of certain details and the details are
set out in different sub-clause mentioned in clause 6 of the
agreement. The other incidental provisions of clause 6 are
not relevant for the controversy in question. Clause 7 of
the 1951 agreement dealt with indemnity for loss or damage
which is not relevant for our purposes. Clause 8 dealt with
right to cancel the agreement, Clauses 9 and 10 provided for
‘inspection”. Clause 11 prohibited the contractor, the
appellant, from in any way assigning or transferring any
rights or benefits under the agreement except with the
previous consent of the owner in writing. Clauses 12, 13 and
14 are also not relevant for our purpose.
We may mention that reliance was also placed on behalf
of the appellant on an affidavit by one Shri S. Krishna
Murthy who was the Sales Officer of the Overhaul Division of
the Appellant Company and which affidavit had been filed
before the Sales-Tax Tribunal in Mysore, Bangalore. In the
said affidavit, he had described the nature of the works
done by the appellant in connection with repairs and had
mentioned that two types of works were done; one was
overhaul of Aircrafts, accessories and equipments thereof,
and the other known as fixed quotation basis. It is not
necessary to refer to the said affidavit in detail. He had
mentioned in the said affidavit the procedure for preparing
the bills and had stated that after the works were
completed, a final inspection of the repairs done was
checked by the Works Inspection Department, whereafter
delivery orders were prepared and thereafter he described
how bills were prepared thus:
255
“After the work is completed, a final Inspection
of the repair done is checked by the Works Inspection
Department, whereafter a delivery order is prepared and
the billing section prepares the bill. As it is
required by the Defence Audit purposes, the labour
charges and material charges are shown which is worked
out on cost plus 10% basis.
In the case of private Aircraft owners and other
airlines for a similar contract for repairs, we give a
fixed price quotation unlike in the case of repairs to
Defence Aircraft which by virtue of the contract is on
cost plus 10% basis, wherein a break up had to be given
as aforementioned for purposes of defence audit.”
The Sales Tax authorities sought to tax that portion of
the total turnover of the appellant for the relevant years
in question which was equivalent to the money value of the
spare parts of the aircrafts which it had supplied to the
Indian Air Force as a result of their use in the process of
repairing, servicing and over-hauling of the aircrafts,
their instruments and accessories which were sent to the
appellant for the said purpose during the relevant years in
question. The works undertaken and executed by the appellant
in assembling, repairing, servicing and overhauling were on
cost plus 10% profit basis as well as on fixed inclusive
quotation basis. The appellant with regard to the latter
types of contracts succeeded before the Appellate Tribunal
who held such contracts to be exclusively works contract.
The controversy before the High Court and before us in these
appeals is only with regard to the first category of
contracts, which the Appellate Tribunal held to be composite
contracts. The appellant contended that so far as the supply
of spare parts to the Indian Air Force during the relevant
period was concerned, there had been no sale of the spare
parts to the I.A.F., for that spare parts in question were
used during the course of and in the process of execution of
the works contracts relating to the servicing, repairing and
overhauling of the aircrafts, their instruments and
accessories and that there was no sale contracts as such in
pursuance whereof, the spare parts in question could be said
to have been sold to the I.A.F. The Tribunal had negatives
the contention of the appellant and the appellant had gone
up in revision before the High Court. The High Court was of
the view that whether the supply of the spare parts by the
appellant would amount to sale or not would depend on the
fact as to whether there was a sale contract between the
appellant and the I.A.F. in that regard. The High Court was
of the view that,
256
in the light of certain documents which we would also
incidentally note, it could not be said that supply of spare
parts and other materials was not in contemplation of the
contracting parties and the spare parts in question became
the property of the owner i.e. I.A.F. only by way of
accretion to the aircrafts for being used in the process of
executing the contracts and not as a result of the agreement
between the contracting parties. The High Court referred to
certain decision and came to the conclusion that in the
present case what was sought to be brought within the
purview of Sales Tax Act was the cost to the vendees of the
spare parts supplied by the appellant. In such a case, the
High Court was of the view that the stage at which the
property therein passed to the owner was not material. What
was material was as to whether the goods in question were
the property of the assessee before the same became the
property of the President of India under the contracts.
Dealing with the contention of the parties, the High
Court was of the view that in providing separately the basis
of payment of spare parts in the contracts, the intention of
the parties was clear and unambiguous i.e. the parties
clearly agreed to the sale of spare parts according to the
contract. Certain invoices were placed on record, namely,
the Invoice dated 28.2.1962 being Invoice No. HT2/CAT.B/F-1
which indicated separately the labour charges being Rs.
26,837.69 and materials and spares used by the appellant as
per schedule attached as Rs. 32,187.92, reference was also
made to another Invoice dated 31.3.1962 which had also
mentioned separately labour charges as well as the costs of
the materials and spares. To the same effect was another
Invoice dated 28-2-1962. The Tribunal was of the view that
these Invoices supported the conclusion that the labour
charges had been separately itemised from the price of the
spare parts and whenever any spare parts had been provided
by the I.A.F. authorities, the price thereof had been
deducted indicating that the spare parts supplied by the
appellant. For the aforesaid reasons as indicated in the
judgment of the High Court, the High Court was of the view
that sale of spare parts was clearly in contemplation of the
parties and the documents in question constituted composite
contracts, one relating to the remuneration for the services
rendered and the other for the sale of goods. In that view
of the matter, the High Court was of the view that the
Tribunal was right in dismissing the appeals of the
appellant on the particular turnover of the appellant.
The question before us, is, therefore, whether the
payments made for spare parts in executing the contracts in
question were also
257
sales contracts or were part of one contract of executing
the works contracts.
On behalf of the appellant, it was urged before us
referring to the terms of the contracts which are more or
less in the form of “1951 contract” mentioned before that
the contracts in question manifested the clear intention
that in substance and reality these were agreements to carry
out works of assembling, repairs, servicing and overhauling
of the aircrafts being the property of the Indian Air Force.
We must emphasise that the property in such planes was and
had all along continued to remain with the Air Force.
Relevant contracts and the whole transactions between the
parties indicate that the materials used in the process of
such assembling, repairs, servicing and overhauling were
either supplied by the Indian Air Force or were of the
appellant, the bulk was supplied by the Govt. The question
therefore is, was it the intention to do the works
undertaken as one job or not. Counsel on behalf, of the
appellant contended that that was the intention and there
was no intention whatever to pass any property in any
chattel qua chattel.
It is well settled that the difference between contract
of service and contract for sale of goods, is, that in the
former, there is in the person performing work or rendering
service no property in the things produced as a whole
notwithstanding that a part or even the whole of materials
used by him had been his property. In the case of a contract
for sale, the thing produced as a whole has individual
existence as the sole property of the party who produced it
some time before delivery and the property therein passed
only under the contract relating thereto to the other party
for price. It is necessary, therefore, in every case for the
courts to find out whether in essence there was any
agreement to work for a stipulated consideration. If that
was so, it would not be a sale because even if some sale may
be extracted that would not affect the true position. Merely
showing in the bills or invoice, it was contended on behalf
of the appellant, the value of materials used in the job
would not render the contract as one of sale. The nature and
type of the transactions are important and determinative
factors. What is necessary to find out, in our opinion, is
the dominant object.
It was urged before us that contract of sale is one
whose main object was to transfer property in and the
delivery of the possession of a chattel to the buyer. If the
principal object of works undertaken by the party was a
transfer of a chattle qua chattel, the contract would
258
be for sale. It is necessary to find out whether the
contract was primarily a contract for supply of materials at
a price agreed to between the parties and the work or
service rendered is only incidental to the execution of the
contract. Mere transfer of property in goods used in the
performance of a contract was not sufficient. To constitute
a sale, there must be an agreement expressed or implied
relating to the sale of goods and the performance of the
agreement by passing of title in those very goods.
On behalf of the respondent, counsel contended that the
spare parts in question had been supplied by the appellant
against payment of price in pursuance of specific
stipulations in the contracts. He, therefore, urged that the
transactions constituted sale which was liable to tax. It
was highlighted that the appellant manufactured and did
business in the sale of materials in question. The fact that
the appellant was a dealer in the spare parts supplied to
the I.A.F. and other parties, is undisputed. It was
emphasised that the appellant supplied the spare parts in
question to I.A.F. against payment of price and it was
submitted that it was not the case of the appellant nor
there was any material on record, to suggest that the spare
parts in question were either manufactured or supplied as
being incidental to the work of servicing and maintenance
entrusted to the appellant or were loaned to the I.A.F. It
was urged on behalf of the revenue that the correspondence
on record and bills and invoices clearly demonstrated the
intention of the parties to incorporate a separate agreement
for the sale of spare parts by the appellant in the
agreement. According to counsel, the contract of 1951
consisted of two separate agreements. The parties had
consciously treated the works and the supply of materials,
separately and our attention was drawn to the clauses
dealing with the same. It was urged that the contract
contained separate stipulation for the work and for the
supply of spare parts. It was also emphasised that the
appellant was a regular manufacturer of the spare parts
involved in the case of supply to the I.A.F.
As has been clearly stated in the Halsbury’s Laws of
England, Third Edition, Volume 34, a contract of sale of
goods must be distinguished from a contract for work and
labour. The distinction is often a fine one. A contract of
sale is a contract whose main object is the transfer of the
property in, and the delivery of the possession of, a
chattel as a chattel to the buyer. Where however the main
object of work undertaken by the payee of the price was not
the transfer of chattel qua chattel, the contract is one of
work and labour. The
259
test, is, whether or not the work and labour bestowed end in
anything that can properly become the subject of sale
neither the ownership of the materials, nor the value of the
skill and labour as compared with the value of the
materials, is conclusive, although such matters may be taken
into consideration in determining, in the circumstances of a
particular case, whether the contract was in substance one
for work and labour and one for the sale of a chattel.
In the case of Sentinel Rolling Shutters & Engineering
Company Pvt. Ltd. v. The Commissioner of Sales Tax,(1) this
Court reiterated that tests indicated in several decisions
of this Court to distinguish between a contract for sales
and a contract for work and labour were not exhaustive and
did not lay down any rigid or inflexible rule applicable
alike to all transactions. These did not give any magic
formula by the application of which one could say in every
case whether a contract was a contract for sale or a
contract for work and labour. These merely focused on one or
the other aspect of the transaction and afforded some
guidance in determining the question, but basically and
primarily, whether a particular contract was one for sale of
goods or for work and labour depended upon the main object
of the parties gathered from the terms of the contract, the
circumstances of the transactions and the custom of the
trade. In that case, the assessee who was carrying on
business as engineers, contractors, manufacturers and
fabricators had entered into a contract with a company for
fabrication, supply, erection and installation of two
rolling shutters in two sheds belonging to that company for
a price which was inclusive of charges for “erection at
site”. The contract provided, among others, that the
delivery of the goods was to be ex-works and once the
delivery was effected, rejection claims would not be
entertained. All masonry works required before or after
erection were to be carried out by the company at its own
cost. Payments were to be made on overall measurements which
should be checked by the company before installation. The
actual transportation charges were to be in addition to the
price stipulated in the contract and the terms of payment
provided “25 per cent advance, 65 per cent against delivery
and remaining after completion of erection and handing over
of the shutters to the satisfaction” of the company. The
assessee had submitted the bill to the company after
completion of the fabrication of the rolling shutters, but
before they were erected and installed at the premises of
the company. On the question whether the contract was a
contract for sale or a contract for work and labour, the
High Court had held,
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agreeing with the Sales Tax Tribunal, that the contract was
a divisible contract, which essentially consisted of two
contracts, one for the supply of rolling shutters for money
and the other for service and labour and that the amount
payable at the stage of delivery represented the sale price
of rolling shutters and it was liable to sales tax. On
appeal, by special leave, this Court held that the contract
was one single and indivisible contract and the erection and
installation of the rolling shutters was as much a
fundamental part of the contract as the fabrication and
supply. The contract was clearly and indisputably a contract
for work and labour and not a contract for sale.
It cannot be said as a general proposition that in
every case of works contract, there is necessarily implied
the sale of the component parts which go to make up the
repair. That question would naturally depend upon the facts
and circumstances of each case. Mere passing of property in
an article or commodity during the course of performance of
the transaction in question does not render the transaction
to be transaction of sale. Even in a contract purely of
works or service, it is possible that articles may have to
be used by the person executing the work, and property in
such articles or materials may pass to the other party. That
would not necessarily convert the contract into one of sale
of those materials. In every case, the Court would have to
find out what was the primary object of the transaction and
the intention of the parties while entering into it. It may
in some cases be that even while entering into the contract
of work or even service, parties might enter into separate
agreements, one of work and service and the other of sale
and purchase of materials to be used in the course of
executing the work or performing the service. But, then in
such cases the transaction would not be one and indivisible,
but would fall into two separate agreements. One of work or
service and the other of sale. These principles can be
deduced from the decision of this Court in The State of
Himachal Pradesh and Others v. Associated Hotels of India
Ltd.(1) In the decision in the case of The State of Madras
v. Gannon Dunkerley & Co. (Madras) Ltd.,(2) this Court had
stated that according to the law, both of England and of
India, in order to constitute a sale, it is necessary that
there should be an agreement between the parties for the
purpose of transferring title to goods, which of course pre-
supposed capacity to contract, that it must be supported by
money consideration that as a result of transaction the
property must actually pass in the goods. Unless all
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these elements were present, there would be no sale.
In the instant case it is indisputable as we have
referred to the “1951 Contract” and the substance of the
invoices and, it is not disputed that the other works orders
were on the basis of the principles agreed by the 1951
agreement set out hereinbefore, that the transactions were
as a result of composite contracts involving the execution
of works viz. overhauling, repairing, servicing and in one
year assembling, air force planes, entrusted to the
appellant. The question, is, whether this composite contract
was divisible into one exclusively for work and labour and
another for sale of materials. The fact that there is supply
of materials for the purpose of execution of the work
contracts undertaken by the appellant cannot be disputed.
But the question then arises whether that can be taken as
pursuant to a distinct contract with a view to execute the
work undertaken. In this connection we have already
mentioned the principles enunciated by the statement of
Halsbury’s Laws of England, Third Edition Volume 34 pages 6
and 7 para 3.
It would be appropriate, in our opinion, because it
clearly enunciates the principles, to refer to the statement
of law in Benjamin’s Treatise on the Law of Sale of Personal
Property with reference to the French Code and Civil Law,(1)
where the learned Editor has deduced the principles that
would be applicable in deciding the controversy before us.
These principles are:-
“1. A contract whereby a chattel is to be made and
affixed by the workman to land or to another chattel
before the property therein is to pass, is not a
contract of sale, but a contract for work, labour and
materials, for the contract does not contemplate the
delivery of a chattel as such.
2. When a chattel is to be made an ultimately
delivered by a workman to his employer, the question
whether the contract is one of sale or of a bailment
for work to be done depends upon whether previously to
the completion of the chattel the property in its
materials was vested in the workman or in his employer.
If the intention and result of the contract is to
transfer for a price property in which the transferee
had no previous property then the contract is a
contract of sale.
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Where, however, the passing of property is merely
ancillary to the contract for the performance of work
such a contract does not thereby become a contract of
sale.
3. Accordingly
(i) Where the employer delivers to a workman
either all or the principal materials of a
chattel on which the workman agrees to do
work, there is a bailment by the employer,
and a contract for work and labour, or for
work, labour and materials (as the case may
be), by the workman.
Materials added by the workman, on being
affixed to or blended with the employer’s
materials thereupon vest in the employer by
accession and not under any contract of sale.
(ii) Where the workman supplies either all or the
principal materials, the contract is a
contract for sale of the completed chattel,
and any materials supplied by the employer
when added to the workman’s materials vest in
the workman by accession.”
The learned Editor has emphasised that where passing of
property was merely ancillary to the contract for the
purpose of the work, such a contract does not thereby become
a contract for sale. This principle can also be deduced from
the observations of the decision of Robinson v. Graves.(1)
Whether a given transaction is a works contract pure
and simple or it involves sale of goods also is of course a
mixed question of law and fact depending upon the facts of
each case. We have noted in the instant case the contracts
in question. It is true, as was emphasised on behalf of the
respondent and has been emphasised by the Tribunal as well
as the Karnataka High Court, that it cannot be said that
parties did not contemplate and apply their minds to the
question of spare parts and other materials necessary for
the execution of the works. It was emphasised on behalf of
the respondent and on this aspect the decision of the High
Court of Karnataka as well as the
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decision of the Tribunal were relied upon to stress the
point that the price separately provided as cost plus 10%.
The bills and the invoices were also made separately
indicating the prices involved in these transactions. But it
is important to emphasise that clause I of the contract was
to accomplish for the owner the servicing and maintenance of
the Headquarters Training Command I.A.F. Communication
Flight, and works required on visiting aircrafts according
to the standard as specified hereunder as these air-planes
were necessary to be kept in readiness and that as there
should be no delay in getting the materials, the contract in
detail provided that the works would be carried out by the
contractor and payment to be made by the owner at cost plus
10% profit or at the contractor’s standard fix-rates. The
additional work that would be required as specified in
clause 1 in the different sub-clauses was also to be charged
as in clause 2(a). Regarding spares and materials, the idea
was that the owner would provide to the contractor all the
necessary spares and materials except expendable materials,
such as paints, dopes, cleaning rages etc. and it may be
mentioned that these were necessary tools in carrying out
the works entrusted to the appellant. It also stipulated in
order to ensure that there should be no delay in keeping the
air-planes ready at all times, that in cases of delay in
supply of materials, the contractor would provide those from
wherever possible, either by purchase or manufacture but the
expenditure to be incurred for the same should be authorised
by the owner’s Deputy Financial Adviser at the contractor’s
request from time to time. Therefore it emphasises that it
was the expenditure limited not only for the jobs to be done
but expenditure to be incurred for providing the materials
for the jobs to be done were subject to the approval and
sanction of the Government. The expressions following
thereafter in clause 3 are, in our opinion, significant and
indicative of the real intention of the parties. These
expressions are “All items provisioned by the contractor
will be the property of the owner, and will be issued on
Contract Loan.” (Emphasis supplied).
The expression “Contract Loan” is not an expression of
art. It has no generally accepted meaning in dictionary,
legal or otherwise, as such. There is no definition or
meaning of this expression provided in the contract between
the parties or in the correspondence between the parties in
connection with the execution of the works. But in our
opinion, these expressions indicate that the ’provisions’
which would be required for carrying out the contracts,
which could not be anticipated before the beginning or in
execution of the contracts will be the property of the owner
i.e. that though gathered and procured or
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manufactured by the contractor, the contractor will have no
property in the said goods or spares or materials and would
not be able to either dispose of or deal with those but
these will be treated for the purpose of there contracts to
be the property of the owner and, then the contract
stipulates that on fictional basis these will be lent out to
the contractor for being used in the execution of the jobs
entrusted to the contractor.
It was urged before us that the contractor in this case
the appellant is also a dealer and manufacturer of these
spares and materials, to emphasise that these materials were
not prepared or produced or procured by the contractor on
ad-hoc basis for the purpose of execution of the jobs
entrusted to the contractor. This position is indisputably
true. But it has also to be emphasised that what spare parts
or materials that would be required were not identified
goods and it was submitted that these would be treated to be
the goods of the owner, and given on ‘Contract Loan’. It
appears to us that the idea was that the moment these spares
and materials were required for the jobs entrusted to the
appellant and there was delay in supplying these spare parts
and materials, the contractor would be free to procure or
obtain these spares and materials either by manufacturing or
by purchase from the market local or foreign, these goods to
be identified and would be treated by the operation of the
contract to be the goods of the owner of the planes. It is
true as was emphasised that in order to be given out on loan
by the ’owner’ to the contractor, the ‘owner’ must have
property in the spares and materials in question. But the
‘owner’, i.e. the Government, in our opinion, in the context
of 1951 agreement, and it is indisputable that the
transactions in this case were done on the basis of the
agreement of 1951, became the owner of the property the
moment the goods were identified and there was delay or
inability on the part of the government in supplying spares
and materials. It was emphasised that not a consolidated
price was contemplated but what was contemplated was
separate price for the materials. Indeed the invoices relied
upon by the parties in the specific works orders indicated
those were charged for separately. The basis for this has
been explained in the affidavit of Shri Krishna Murthy
mentioned hereinbefore. The affidavit was before the
authorities below as also before the High Court of Karnataka
and there is no dispute as to the correctness of the
statements made in the said affidavit.
In the case of Commissioner of Commercial Taxes,
Mysore, Bangalore vs. Hindustan Aeronautics Ltd.,(1) this
Court construed the
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correspondence between Railway Board and the respondent
assessee, which correspondence to our opinion has a ring of
similarity to the terms and conditions of the present
transaction, for the manufacture and supply of railway
coaches, and the indemnity bond in respect of the contract.
It was held by this Court that the answer to the question
whether a contract is a works contract or a contract of sale
depends upon the construction of the terms of the contract
in the light of surrounding circumstances. It was held that
when all the materials used in the construction of a coach
belonged to the Railways there could not be any sale of the
coach itself. It was a pure works contract, and the
difference between the price of a coach and the cost of
materials being only the cost of service rendered by the
assessee. This Court emphasised that whether the wheel sets
and under frames were supplied free of cost or not made no
essential difference. The material and wage escalator and
adjustments regarding final price mentioned in the contract
were neutral factors. The facts which should be emphasised
in transactions in question with which we are concerned,
that the transactions related to the entrustment of the
maintenance of the airplanes of the I.A.F. These had to be
kept ready for all times to meet all situations. All
avoidable and conceivable delays were planned to be
eliminated and in the background of this second factor, it
is further to be emphasised that for the bulk of the
materials, the Government undertook to supply the spares and
materials and it is only in those cases where these
materials could not be supplied or provided for by the
Government or there was delay, that it was stipulated that
these could be procured or manufactured by the contractor
within the prices sanctioned by the Government. and after
being procured or manufactured by the contractor, these
could not be used for any purpose except in the execution of
the jobs entrusted to the contractor. The contractor had no
disposing power or property in these spares and materials.
The fact that these materials were separately placed at cost
plus 10% profit were to ensure quick and proper execution of
the works and were like the railway coaches’ case neutral
factors. This conclusion is strengthened by the expressions
we have extracted from the 1951 Contract itself.
It is manifest in the instant case from the terms of
the contracts and transactions, as in the railway coaches
case and as was emphasised by Sikri, C.J. that the property
in the materials which are used in the execution of the jobs
entrusted to the contractor in this case became
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the property of the Government before it was used. It is
also manifest that there was no possibility of any other
materials, to be used for the construction as would be
manifest from the affidavit and the correspondence and the
invoices, and works orders in these transactions. Emphasis
was placed before the Tribunal as well as before the High
Court of Karnataka on the case of State of Gujarat v.
Variety Buildings(1) where the court was concerned with the
‘bus bodies’. In the ‘bus bodies’ case, the assessee
contractor had continued to have the ownership rights and it
was held that the ‘bus body’ had to be transferred from the
contractor to the other party as a result of contract for
sale but in the instant case it is manifest that the
specified spares and materials were not the properties of
the contractor, in the sense that the contractor never had
any ownership over these. The conclusion arrived at by us is
in consonance with the principles laid down by this Court in
the case of Ram Singh & Sons Engineering Works v.
Commissioner of Sales Tax, U.P.(2)
For the reasons aforesaid, we are of the opinion that
the High Court of Karnataka was not right in its conclusion
on the taxability of the turnover of the spares parts and
materials supplied in execution of appellant’s job works. As
a result except for the item on canteen sales which is not
in dispute before us, these appeals are allowed. The
necessary adjustments in the assessments should be made. In
the facts and circumstances of these cases, the parties will
bear their own costs throughout.
S.R. Appeal allowed.
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