State of Punjab Vs. M/S. Associated
Hotels of India Ltd.  INSC 6 (4 January 1972)
SIKRI, S.M. (CJ) DUA, I.D.
KHANNA, HANS RAJ
CITATION: 1972 AIR 1131 1972 SCR (2) 937 1971
SCC (1) 472
CITATOR INFO :
D 1974 SC2309 (110) RF 1977 SC1642 (6) RF
1978 SC 621 (28) R 1978 SC1591 (3,6,7) R 1980 SC 674 (4) E 1984 SC 744 (18) F
1989 SC 285 (10)
Sales tax-Sale and contract of Work and
service-Distinction and tests.
The respondent-company was running the business
of a hotelier and was registered as a dealer under the Punjab General Sales Tax
Act, 1948. It applied for a declaration that it was not liable to sales-tax in
respect of meals served to the guests staying in the hotel on the grounds that
: (1) the hotel receives guests primarily for the purpose of lodging; (2) when
so received the management provides him with a number of amenities including
meals at fixed hours, incidental to such lodging and with a view to render hi-,
stay comfortable; (3) the transaction between the respondent and the guests is
one for the latter to stay and not one of sale of food stuffs supplied; (4) the
bill given by the respondent and paid by the guest is one and indivisible,
being a fixed amount per day during his stay in the hotel and does not consist
of separate items in respect of the several amenities furnished to him, and (5)
the transaction does not envisage any sale of food since the guest cannot
demand a rebate or deduction if he were to miss a meal or meals nor is he entitled
to carry away or deal with, in any manner, the food served on his table if a
part of it is not consumed.
The department rejected the company's
application but the High Court allowed its writ petition.
Dismissing the appeal to this Court,
HELD : The transaction is one essentially of
service in the performance of which and as part of the amenities incidental to
that service, the hotelier serves meals at stated hours.
The Revenue, therefore, was not entitled to
split up the transaction into two parts one of service and the other of sale of
food stuffs and to split up the bill charged as consisting of charges for
lodging and charges for food stuffs served with a view to bring the latter
under the Act.
[947 F-G] The distinction between a contract
of sale and a contract of work and service is fine especially when the contract
is a composite one involving both. In considering whether a transaction is a
sale falling within the purview of salestax it is necessary to determine the
nature of the contract involved on the facts of each case. A contract of sale
is one whose main object is the transfer of property and delivery of possession
of a chattel to the buyer; but the mere passing of property in an article or
commodity during the course of the performance of a transaction does not render
it a transaction of sale when there is no intention to sell and purchase. When
the principal object of work undertaken by the payee of the price is not the
transfer of a chattel qua chattel the contract is one of work and labour. The
test is whether or not the work or labour bestowed ends in anything that can
properly become the subject of sale; neither the ownership of the materials nor
the value of the skill 938 and labour as compared with the value of materials
is conclusive, although such matters may be taken into consideration. In every
case the court would have to find out what is the primary object of the
transaction and the intention of the parties while entering into it. [942 D-G:944
F-G. H] The transaction in the present case is one and indivisible, namely, one
of receiving a customer in the hotel to stay.
The bill is not capable of being split up
into one for residence and another for sale of meals. Amenities including
meals, are part and parcel of the service which, in reality, is the transaction
between the parties. Even if it was to be disintegrated the supply of meals
during such stay does not constitute a separate contract of sale, since no
intention on the part of the parties to sell and purchase the food stuffs supplied
during meal time can be spelt out.
[945 G-H; 946 A-C] Madras v. Gannon Dunkerley
& Co. Ltd.,  S.C.R. 379, Mohanlal Jogani Rice & Atta Mills. v.
Assam  4 S.T.C. 129, Masanda & Co. v. Commissioner of Sales-tax,
 8 S.T.C. 370, United Bleachers Ltd. v. Madras, (1960) 9 S.T.C.
278, Krishna & Co. Ltd. v. Andhra
Pradesh,  7 S.T.C.
26, Patnaik & Co. v. Orissa,  16
S.T.C. 364, Andhra Pradesh v. Guntur Tobaccos Ltd.  2 S.C.R. 167 and
English Law and United States Law, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1207 of 1968.
Appeal by special leave from the judgment and
order dated May 10, 1967 of the Punjab and Haryana High Court in Letters Patent
Appeal No. 159 of 1966.
V. C. Mahajan and R. N. Sachthey, for the
M. C. Setalvad, M. C. Bhandare, Rameshwar
Nath, T. R. Bhasin and Lalit Bhasin, for the respondent.
The Judgment of the Court was delivered by
Shelat, J. The respondent-company carries on business as hoteliers and conducts
several hotels including the 'Cecil Hotel' at Simla. Besides conducting hotels,
it also carries on restaurant business. As part of its business as hoteliers,
the company receives guests in its several hotels to whom, besides furnishing
lodging, it also serves several other amenities, such as public and private
room, bath with hot and cold running water, linen, meals during stated hours
etc. The bill tendered to the guest is an all inclusive one, that is to say, a
fixed amount for the stay in the hotel for each day and does not contain
different items of each of the aforesaid amenities. That is, however, not the
case in its restaurant business where a customer takes his meal consisting
either of items of food of his choice or a fixed menu. The primary function of
such a restaurant is to serve meals desired by a customer, although along with
the food, the customer gets certain other amenities also, such as service,
linen etc. The bill which 939 the customer pays is for the various food items
which he consumes or at a definite rate for the fixed menu, as the case may be,
which presumably takes into account service and other related amenities.
The respondent-company, as such hoteliers,
has been registered as a dealer under the Punjab General Sales Tax Act, XLVI of
1948 and has been filing quarterly returns and paying sales tax under that Act.
On September 2, 1958 the company applied for
a declaration that it was not liable to pay sales tax in respect of meals
served in the said Cecil Hotel to the guests coming there for stay. In support
of its plea, the company raised the following contentions : (1) that the, hotel
receives guests primarily for the purpose of lodging, (2) that when so
received, the management provides him with a number of amenities incidental to
such lodging and with a view to render his stay in the hotel comfortable
including meals at fixed hours, (3) that the transaction between the company
and such a guest is one for the latter to stay and not one of sale of food
stuffs supplied as one of the incidental amenities, (4) that the bill given by
the company and paid by the guest is one and indivisible, that is, a fixed
amount per day during his stay in the hotel and does not consist of separate
items in respect of the several amenities furnished to him including meals served
to him, and (5) that the transaction so entered into does not envisage any sale
of food since the guest cannot demand a rebate or deduction if he were to miss
a meal or meals, nor is he entitled to carry away or deal with in any manner
the food served at his table, if a part of it remains unconsumed. It is, on the
other hand, the management which has the right to deal with such unconsumed
remainder as it likes. Such a position, therefore, is inconsistent with a sale
under which the property in the whole must pass to the purchaser, and who can
deal with the remainder in any manner he likes.
The Sales Tax Officer rejected the company's
application on the ground that the transaction Which takes place between the
management and a resident guest takes in both lodging and boarding and the
hotel charges include consideration for both. A revision under S. 21 of the Act
by the company to the Commissioner met the same fate. The company then filed a
writ petition for an order quashing the said decision as also the notices
issued by the Sales Tax authorities under the Act. The grounds put forward in
the writ petition were almost the same which the company had previously urged
in its application for declaration.
There was no dispute regarding the facts
stated in the writ petition and particularly with regard to the fact that the
transaction which a visiting resident enters into with the management is one
and indivisible, that the bill charged on him is likewise one and indivisible,
that the charges are for each day of stay, and that that being so, the bill was
incapable of being split up into separate charges for each of the amenities
furnished and availed of by such a visiting resident. The dispute was as to the
nature of the transaction and whether such transaction included sale of food
stuff supplied at various meals supplied to such a customer.
The High Court, on a consideration of the
arguments urged before it and relying mainly upon the decision of this Court in
Madras v. Gannon Dunkerley and Co. Ltd.(,'), to the effect that where a
transaction is one and indivisible it cannot be split up so as to attract the
Sales Tax Act to a part of it , allowed the writ petition. It held that a
transaction between a hotelier and his resident visitor did not involve a sale
of food when the former supplied meals to the latter as one of the amenities
during his residence, and that if there was one inclusive bill, it was
incapable of being split up in the absence of any rates for the meals agreed to
between the parties as part of the transaction between the two. The High Court
also held that the transaction was primarily one for lodging, that the board
supplied by the management amounted to an amenity considered essential in these
days in all properly conducted hotels, and that when so supplied, it could not
be said to constitute a sale every time a meal was served to such a resident
visitor. This appeal, by special leave, is filed against this view of the High
The question in this appeal, it would appear,
arises in the present form for the first time. There are, therefore, no
previous decisions to guide its determination. It would, however, be helpful to
consider certain decisions both of this Court as also of the High Courts, in
which different types of transactions which came up before them for
consideration in sales tax cases have been dealt with and which might throw
some light upon the problem before us.
In a case arising under the Assam Sales Tax
Act, 1947 though there was no express sale in respect of gunny bags in which
rice, an exempted commodity, was supplied to Government, they were held to form
assessable turnover. There was, however, in that case evidence that the
assessees had charged the Government for those bags (Mohanlal Jogani Rice &
Atta Mills V. Assam) (2).
In D. Masanda and Co. v. Commissioner of
Sales Tax(3), the question was whether photographic materials imported and (1)
 S.CR. 379.
(3)  8 S.T.C. 370.
(2)  4 S.T.C. 129.
941 used in the process of manufacturing
photographic work, copies of which were supplied by the assessee to a customer,
was a transaction involving sale of those materials. The High Court held that
such a transaction did not cease to be a sale merely because the materials were
not sold directly in their original form but in another form, forming the,
components of the finished product, namely, the copies of the photograph, and
that the transaction was not merely the performance of skilled services but the
supply of finished goods. This was, however, a border line case. The
transaction might well be considered as one of service, during performance of
which, a transfer of certain materials, in respect of which there was no
contract for sale, either express or implied, may be said to have taken place.
An illustration of such a kind is furnished by the case of United Bleachers
Ltd. v. Madras(1). In that case the assessee bleached and dyed, calendered,
pressed and folded unbleached yarn and cloth manufactured by his customer
textile mills. The bills issued by the assessee contained, (a) bleaching
charges, and (b) charges for stitching, folding, stamping, baling etc., but did
not contain separately charges for the materials used for those' purposes. The
Revenue contended that there was transfer of those materials and separately
assessed the charges of those materials holding that though the assessee did
not specifically deal in those materials, a portion of the profit earned in the
business of bleaching and calendering could legitimately be attributed to the
packing materials and the transaction involved a sale of them for
consideration. On a reference, the High Court held that the case was one of
contract of service as distinguished from a sale of a principal commodity, such
as rice in Assam case (supra) and salt in Varasuki and Co. v. Madras(1) On the
other hand, where a contract is to supply such commodity in a packed condition,
it could be inferred, though the contract might not be express that the
intention of the parties was to give and accept delivery of the goods in a packed
condition and not to take the principal commodity alone so that in the contract
of sale of such a commodity there was implicit the sale of packing material as
Even in a contract of service such as
bleaching and calendering where the goods after such processing are delivered
packed a sale of packing, materials is possible, quite apart from the contract
of service. The question in such cases would be one of evidence, whether there
is such a contract beside the one of service. Where however there are no such
distinct contracts and the contract is one and indivisible, the essential part
of which is one of service, packing would be part of or incidental to the
service, and unless an intention to charge for the materials used in the
packing can be spelt out, the Revenue would not be (1)  9 S.T.C. 278.
(2)  2 S.T.C. 1.
942 entitled to split up the contract,
estimate approximately the charges for such materials and treat them as
chargeable on the mere ground that the transaction involved transfer of packing
materials, whose value must have been taken into consideration while fixing
charges for the service. Such an implied contract of supply of packing
materials was inferred in a contract of service, namely, drying raw tobacco in
Krishna and Co. Ltd. v. Andhra Pradesh But the decision in that case did not
rest on there being a transfer of packing materials in favour of the customer.
There was evidence that such a transfer was for consideration, inasmuch as the
amounts charged as remuneration for service also contained charges for the
packing materials though such charges were not separately shown in the
assessee's accounts. In such a state of evidence it would be possible for the
Court to infer a separate implied contract of sale of packing materials and not
as part of the service of drying raw tobacco and delivering it in packed
The difficulty which the Courts have often to
meet with in construing a contract of work and labour, on the one hand, and a
contract for sale, on the other, arises because the distinction between the two
is very often a fine one. This is particularly so when the contract is a
composite one involving both a contract of work and labour and a contract of
sale. Nevertheless, the distinction between the two rests on a clear principle.
A contract of sale is one whose main object is the transfer of property in, and
the delivery of the possession of, a chattel as a chattel to the buyer.
Where the principal object of work undertaken
by the payee of the price is not the transfer of a 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 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 is in substance one for work and labour
or one for the sale of a chattel(1).
In Patnaik and Co. v. Orissa (3), a
difference of opinion arose because of the fine distinction between the two
types of contract. The contract there was for constructing and fixing bus
bodies on the chassis supplied by the Orissa Government. The contract, infer
alia, provide that the appellants were to construct the bus bodies in the most
substantial and workmanlike manner (1)  7 S.T.C. 26. (2) Halsbury's Laws
of England, 3rd Ed. Vol. 34, 6-7.
(3)  16 S.T.C. 364.
943 both as regards materials and otherwise
in every respect in strict compliance with the specifications and should
deliver them to the Governor on or before the dates specified therein. The
majority rejected the contention that that was a contract of work and labour
and held that the transaction was one of sale. The question primarily was one
of construction of the contract, and the majority held that both the agreement
and the sale related to one kind of property, namely, the bus bodies. The
reason for so.
holding was stated to be that it was clear
from the contract that the property in the bus bodies did not pass on their
being constructed on the chassis, but only when the vehicles including the bus
bodies were delivered. Such a contract was unlike a building contractor a
contract under which a movable is to be fixed on to another chattel or on the
land, where the intention plainly is not to sell that article but to improve
the land or the other, chattel and the consideration is not for the transfer of
the chattel but for the work and labour done and the materials furnished. The
contract in question was to manufacture a bus body and fix it on the chassis
supplied and transfer the bus body so constructed for consideration.
In Madras v. Gannon Dunkerley and Co. Ltd.(1)
the main question was as regards the vires of the Madras General Sales. Tax
Act, 1939, as amended by Madras Act XXV of 1947 which widened the definition of
'sale' by including, inter alia, in it a transfer of property in the goods
involved in the execution of a works contract. Under this definition, the Sales
Tax authority brought into chargeable turnover the materials used in the
constructiOn works carried out by the company. This Court held that a power to
enact a law with respect to tax on sale of goods under entry 48 of List 11 in
the 1935 Constitution Act must, to be intra vires, be one relating in fact to a
sale of goods and that a Provincial Legislature could not, in the purported
exercise of its power, tax transactions which were not sales, by enacting that
they should be deemed to sales, that to construe a transaction as sale there
should be an agreement relating to goods to be supplied by passing title in
those goods, and that it was of the essence of such a concept that both the,
agreement and the sale should relate to one and the same subject matter. The
conclusion arrived at was that in a building contract, even if it were to be
disintegrated, there was no passing of title in the materials as movables in
favour of the other party of the contract. The contract was one and
indivisible, there was no sale of materials, and consequently, there was no
question of title to the materials used by the builders passing to the other
party to the contract. Even where the thing produced under a contract is movable
property, the materials in(1)  S.C.R. 379.
944 corporated into it might pass as a
movable. But there would be no taxable sale if there was no agreement to sell
the materials as such. In arriving at this conclusion, the Court relied upon
Appleby v. Myres(1) and the observations of Blackburn, J., at 659-660 of the
report to show that thread stitched into a coat which is under repair becomes
part of the coat, but in a contract for repairing the coat the parties surely
did not enter into an agreement of sale of that thread. In Andhra Pradesh v.
Guntur Tobaccos Ltd.(2), the transaction was for re drying tobacco entrusted to
the respondent-company by its customers. The process involved the keeping of
the moisture content of tobacco leaf at a particular level and for that purpose
the leaf had to be packed in bales, in water-proof packing material, as it
emerged from the reconditioning plant. The tobacco was then returned to the
customer packed in costly packing material. In the, company's charges for re drying
there was no separate charge for the value of such packing material. It was
held that the re drying process could not be completed without the use of the
packing material, that packing formed an integral part of that process, and
that although the re dried tobacco was returned together with the packing
materials there was no sale of those materials as there was no intention on the
part of the parties to enter into any transaction of sale as regards those
The mere fact that in such a contract of work
or service property in goods which belonged to the party performing service or
executing the work stands transferred to the other party is not enough. To
constitute a taxable sale, the Revenue has to establish that there was a sale,
distinct from the contract of work or service, of the property so passing to
the other party.
Thus, in consider whether a transaction falls
within the purview of sales tax it becomes necessary at the threshold to
determine the nature of the contract involved in such a transaction for the
purpose of ascertaining whether it constitutes a contract of sale or a contract
of work or service. If it is of the latter kind it obviously would not attract
the tax. From the decisions earlier cited it clearly emerges that such determination
depends in each case upon its facts and circumstances. Mere passing of property
in an article or commodity during the course of the performance of the
transaction in question does not render it a transaction of sale. For, even in
a contract purely of work 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 these materials. in ,every case the Court would
have to find out what was the primary (1)  L.R.2C.P.651.
(2)  2 S.C.R. 167.
945 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 a 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.
What precisely then is the nature of the
transaction and the intention of the parties when a hotelier receives a guest
in his hotel ? Is there in that transaction an intention to sell him food
contained in the meals served to him during his stay in the hotel ? It stands
to reason that during such stay a well equipped hotel Would have to furnish a
number of amenities to render the customer's stay comfortable. In the supply of
such amenities do the hotelier and his customer enter into several contracts
every time an amenity is furnished ? When a traveler, by plane or by
steam-ship, purchases his passage-ticket, the transaction is one for his
passage from one place to another. If, in the course of carrying out that
transaction, the traveler is supplied with drinks or meals or cigarettes, no
one would think that the transaction involves separate sales each time any of those
things is supplied. The transaction is essentially one of carrying the
passenger to his destination and if in performance of the contract of carriage
something is supplied to him, such supply is only incidental to that services,
not changing either the pattern or the nature of the contract. Similarly, when
clothes are given for washing to a laundry, there is a transaction which
essentially involves work or service, and if the laundry man stitches a button
to a garment which has fallen off, there is no sale of the button or the
thread. A number of such cases involving incidental uses of materials can be
cited. none of which can be said to involve a sale as part of the main
The transaction in question is essentially
one and indivisible. namely, one of receiving a customer in the hotel to stay.
Even if the transaction is to be disintegrated, there is no question of the
supply of meals during such stay constituting a separate contract of sale.
since no intention on the part of the parties
to sell and purchase food stuff supplied during meal times can be realistically
spelt out. No doubt, the customer, during his stay, consumes a number of food
stuffs. It may be possible to say that the property in those food stuffs passes
from the hotelier to the customer at least to the extent of the food stuffs
consumed by him. Even if that be so, mere transfer of property, as aforesaid,
is not conclusive and does not render the event of such supply and con946
sumption a sale, since there is no intention to sell and purchase. The
transaction essentially is one of service by the hotelier in the performance of
which meals are served as part of an incidental to that service, such amenities
being regarded as essential in all well conducted modem hotels.
The bill prepared by the hotelier is one and
indivisible, not being capable by approximation of being split up into one for
residence and the other for meals. No doubt, such a bill would be prepared
after consideration of the costs of meals, but that would be so for all the
other amenities given to the customer. For example, when the customer uses a
fan in the room allotted to him, there is surely no sale of electricity, nor a
hire of the fan. Such amenities, including that of meals, are part and parcel
of service which is in reality the transaction between the parties.
Even in the case of restaurants and other
such places where customers go to be served with food and drink for immediate
consumption at the premises, two conflicting views appear to prevail in the American
courts. According to one view, an implied warranty of wholesomeness and fitness
for human consumption arises in the case of food served by a public eating
place. The transaction, in this view, constitutes a sale within the rules
giving rise to such a warranty. The nature of the contract in the sale of food
by a restaurant to customers implies a reliance, it is said, on the skill and
judgment of the restaurant-keeper to furnish food fit for human consumption.
The other view is that such an implied warranty does not arise in such
transactions. This view is based on the theory that the transaction does not
constitute a sale inasmuch as the proprietor of an eating place does not sell
but "utters" provisions, and that it is the service that is predominant,
the passing of title being merely incidental(','). The two conflicting views
present a choice between liability arising from a contract of implied warranty
and for negligence in tort, a choice indicative of a conflict, in the words of
Dean Pound, between social interest in the safety of an individual and the
individual interest of the supplier of food. The principle accepted in cases
where warranty has been spelt out was that even though the transaction is not a
sale, the basis for an implied warranty is the justifiable reliance on the
judgment or skill of the warrant or and that a sale is not the only transaction
in which such a warranty can be implied. The relationship between the dispenser
of food and one who consumes it on the premises is one of contractual
relationship, a relationship of such a nature that an implied warranty of
wholesomeness reflects the reality of the transaction involved and an express
obligation understood by the parties in the sense that the customer does, in
fact, rely upon such dispenser (1) Corputs Juris Section, Vol 77,1215-1216.
947 of food for more than the use of due
care. (see Cushing v Rodman(1). A representative case propounding the opposite
view is the case of F. W. Woolworth Co. v. Wilson(2), citing Nisky v. Childs
Co.(3), wherein the principle accepted was that such cases involved no sales
but only service and that the dispenser of food, such as a restaurant or a drug
store keeper serving food for consumption at the premises did not sell and
warrant food but uttered and served it and was liable in negligence, the rule
in such cases being caveat emptor.
In England, a hotel under the Hotel
Proprietors Act, 1956 is an establishment held out by the proprietor as
offering food, drink, and if so required, sleeping accommodation, without
special contract, to any traveller presenting himself and who appears able and
willing to pay a reasonable sum for the services and facilities provided. This
definition, which is also the definition, of an inn, still excludes, as
formerly, boarding houses, lodging houses and public houses which are merely
alehouses and in none of which there is the obligation to receive and entertain
guests. An innkeeper, that is to say, in the present days a hotel proprietor,
in his capacity as an in keeper is, on the other hand, bound by the common law
or the custom of the realm to receive and lodge in his inn all comers who are
travellers and to entertain them at reasonable prices without any special or
previous contract unless he has some reasonable ground of refusal (4) . The
rights and obligations of hotel proprietors are governed by statute which has
more or less incorporated the common law. The contract between such a hotel
proprietor and a traveller presenting himself to him for lodging is one which
is essentially a contract of service and facilities provided at reasonable
The transaction between a hotelier and a
visitor to his hotel is thus one essentially of service in the performance of
which and as part of the amenities incidental to that service, the hotelier
serves meals at stated hours. The Revenue, therefore, was not entitled to split
up the transaction into two parts, one of service and the other of sale of food
stuffs and to split up also the bill charged by the hotelier as consisting of
charges for lodging and charges for food stuffs served to him with a view to
bring the latter under the Act.
The conclusion arrived at by the High Court
is one with which we agree. Consequently, the appeal fails and is dismissed
V.P.S. Appeal dismissed.
(1) 104 American L.R. 1023; 82 T.R. 2nd Srs.
(2) 74 F.R. 2nd Srs. 439.
(3) 103 N.J. Law 464.
(4) Halsbury's Laws of England, 3rd Ed., Vol. 21, 445-446.