Commissioner of Sales Tax, Gujarat Vs.
M/S. Sabarmati Reti Udyog Sahakari Mandali Ltd.  INSC 126 (26 April 1976)
KHANNA, HANS RAJ
CITATION: 1977 AIR 197 1976 SCR 158 1976 SCC
CITATOR INFO :
RF 1989 SC 962 (22)
Sales Tax-Works contract for manufacturing
and supply of kiln burnt bricks-Bricks manufactured and supplied according to
contract and payment received-Contract whereby land is given free and the right
to sell to third parties is subject to restrictions- there is a transfer of
chattel for consideration-Contract whether liable to sales tax on bricks
supplied-Bombay Sales Tax Act, 1959.
Contract of sale and contract for work and
labour- Distinction-Beneficial welfare features in a contract do not negate the
concept of a contract of a sale.
The respondent manufactured and supplied kiln
burnt bricks to the appellant as per the works contract dated 8/9th December,
1970, which provided (1) that land would be given free, (ii) that the material
shall remain at the contractor's risk till the date of final delivery: and
(iii) that the contractor had a right to sell to the third parties bricks
subject to payment of 10 of the value of materials at the tender rates of the
appellant. the respondent was assessed to sales tax under the Bombay Sales Tax
Act, 1959, on the basis that these supplies were sales. The Deputy Commissioner
of Sales Tax on an application under- s. 52 of the Bombay Sales Tax Act held
the supplies as sales on appeal the Sales Tax Appellate Tribunal confirmed it,
following the ratio of the decision in 1964 (2) SCR p. 879 (C. B. Gosain v.
State of Orissa and Ors.) But, the High Court, on a reference answered it in
favour of the assessee and against the revenue.
Allowing the Revenue's appeal by special
leave the Court,
HELD: (1) It is well settled that whether a
particular transaction is contract of sale or a works contract depends upon the
true construction of the terms and conditions of the document, when there is
one. The question will depend upon the intention of the parties executing the
There is no standard formula by which one con
distinguish a contract of a contract from the contract for work or labour.
The question is not always easy and has
always easy jurists all over. The distinction between contract of sale of goods
and a contract for work and labour is often a fine one. A contract of sale is a
contract whose main object is the transfer of property in and the delivery of
the possession of, a chattel as a chattel to the buyer. [160 E-G] State of
Gujarat v. Variety Body Builders  (3) SCR 131 applied.
Halsbury's Laws of England, referred to.
(2) As per terms and conditions of contract,
the land was given free for manufacture of bricks; the materials remained at
the risk of the contractor till the date of final delivery; the respondent
could not sell the bricks to third-d parties but could do so under certain
the contracting parties have used the words
as sale, purchase, delivery or rates of supply etc. in the contract.
All these terms and conditions are almost
identical to the conditions in Chandra Bhan Gosailn's case and hence the
decision in that case will govern the present case as well .
The various other terms in the contract,
namely, maintenance of a qualified executive engineer for supervision of work,
restriction on employment of children under 12 years of age, labour welfare
provisions regarding wages, workmen's compensation etc., provision relating to
cruelty to animals, non-payment of royalty for excavating earth etc. relate to
159 a process of proper and efficient manufacturing of bricks and are not
inconsistent in a contract of sale. These terms do not appear to impinge on the
character of the contract as one for sale of bricks manufactured. The
Government in its overall interest and anxiety could insist on compliance of
certain beneficial legal measures. Provision against sub- letting when the land
was given free by the Government was also understandable. All these features do
not negate the concept of a contract of sale of bricks that are ultimately
manufactured. The true test in this case is whether in making the contract,
brick produced was transferred as a chattel for consideration and this has
taken place in this case. The essence of the contract was, therefore, the
delivery of the bricks after manufacturing. [164 A-H, 165 A- D] (3) The
contract in this case is contract of sale and not a works contract and the
assessee is liable to sale tax. [165 E] C. B. Gosain v. State of Orissa and
Ors.  (2) SCR 879, followed.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1512 of 1971.
Appeal by Special Leave from the Judgment and
order dated the 8th/9th December, 1970 of the Gujarat High Court in Sales Tax
Reference No. 3/70.
S. T. Desai and M. N. Shroff for the
V. S. Desai, Vimal Dave and Miss Kailash
Mehta, for the Respondent.
The Judgment of the Court was delivered by
GOSWAMI, J, This is an appeal by special leave against the Judgment of the
Gujarat High Court dated 8th/9th December, 1970.
The respondent (hereinafter to be described
as the assessee) entered into a contract with the Public Works Department of
the Government of Gujarat on September 6, 1965 for manufacture and supply of
kiln-burnt bricks to the said Department for the construction of the Capital
Project, Ghandhinagar. Large quantities of bricks were manufactured and
supplied under the contract and the applicant received payment for the same in
accordance with the agreed rates.
The assessee made an application under
section 52 of the Bombay Sales lax Act, 1959, on November 19, 1967, to the
Deputy Commissioner of Sales Tax, to determine the question whether the said
supplies of bricks by the assessee to the Public Works Department were sales or
works contract. The Deputy Commissioner held the supplied of bricks by the
assessee as sales. The assessee then appealed to the Tribunal against that
order. The Tribunal following the ratio of the decision of this Court in
Chandra Bhan Gosain v. The State of orissa and others(1) came to the conclusion
that the supplies of bricks were sales. At the instance of the assessee, the
Tribunal referred the following question of law to the High Court:-
"Whether on the facts and in the circumstances of the case the transaction
envisaged by the contract entered into by the applicant with the Public Works
Department of the Government of Gujarat on 6th September 1965 for the
manufacture and supply of kiln-burnt bricks to the said Department and the
supply of bricks to the said Department in terms of their running Bill No. XI
dated 28th October 1967 is a sale or a works contract ? The High Court answered
the question in favour of the assessee holding that the transaction was a works
In coming to that conclusion the High Court
hold as follows:- In our opinion the decision of the Supreme Court in Chandra
Bhan Gosai's case (supra) is clearly distinguishable on facts. The contract in
that case though prima facie worded as regards the relevant clauses in similar
fashion as the contract in the instant case is in fact cast in a different
mould and it would be difficult to hold in the light of the special features
and characteristics of the contract with which we are concerned that the decision
of the Supreme Court in that case would completely govern the facts of this
case. " Mr. S. T. Desai, the learned counsel for the appellant submits
that the present case is squarely governed by the decision in Chandra Bhan
Gosain's case (supra) and the High Court is wrong in holding to the contrary.
Mr. V. S. Desai learned counsel appearing on
behalf of the assesee, on the other hand submits that the High Court is right
in distinguishing the present case in view of certain distinguishing features
of the contract With which we are concerned.
It is well-settled that whether a particular
transaction is a contract of sale or works contract depends upon the true
construction of all the terms and conditions of the document when there is one.
The question will depend upon the intention of the parties executing the
contract. As we have observed ill our judgment in State of Gujarat v.
Variety Body Builders(1) which we have just
delivered there is no standard formula by which one can distinguish a contract
of Sale from contract for work and labour. The question is not always easy and
has for all time vexed jurists all over. The distinction between a contract of
sale of goods and a contract for work and labour is often a fine one. A
contract of sale is 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.
(Halsbury's Laws of England Third Edition
Volume 34 page 6.) The contract with which we are concerned in this appeal is
found in a tender for the supply of materials containing a memorandum of the
conditions. The nature of work is described as manufacturing and supplying
kiln-burn bricks for construction of Gandhinagar . The question will depend
upon the true construction of the tender which on acceptance is treated here as
the contract containing all the terms and conditions agreed upon between the
two parties. In the tender the assessee stated I/We chairman Sabarmati Rati
Udyog Sahakari Mandi (1)  3 S.C.R. 131 161 Ltd., the undersigned do
hereby tender for the supply of the materials described in the Schedule
attached herewith subject to the conditions annexed. The schedule described
materials as bricks and also stated quantities to be delivered", and
"rate at which to be supplied". The tender is described as
"Supply of Materials Tender". Although the above nomenclature, by
itself, is not decisive, we find that the same is justified by the principal
terms governing the contract to which we will presently refer. ` "Clause
6:The contractor shall give notice to the Executive Engineer or his Assistant
of his intention of making delivery of materials and on the materials being
approved, receipt shall be granted to him by the Executive Engineer or by his
Assistant and no materials which is not so approved shall be considered to have
Clause7: on the completion of the delivery of
materials, the contractor shall be furnished with a certificate to that effect,
but the delivery shall not be considered to be complete until the contractor
shall have removed all rejected materials, and shall have the approved
materials, stacked or placed in such position as may be pointed out to him.
Clause 8: The materials to be supplied shall
be of the best quality and in strict accordance with the specification and the
contractor shall receive payment for such materials only as are approved and
passed by the Executive Engineer or his Assistant . Should the Executive
Engineer consider that any of the materials delivered are not of the best quality
are not in strict accordance with the specification but that they may be
accepted and made use of it shall be within his full discretion to accept the
same at such reduced rates as he may fix thereon.
Clause 9: In the event of the material being
considered by the officer in the charge OF the work to be inferior to that
described in the specifications, the contractor shall on demand in writing,
forthwith to remove the same at his own cost and in the event of his failure to
do so, within such period as may be named by the Executive Engineer or his
Assistant, the said officer may have such rejected material removed at the
contractor's risk and expense, the expense so incurred being deducted from any
sums due or which may become due to the contractor.
13-833 Sup.C1/76 162 Clause 11: The
contractor shall supply at his own expense all tools, plants and implements
required for the due fulfillment of his contract, and the materials shall
remain at his risk till the date of final deli very, except such portion as
shall have been in the meantime removed for use by the Executive Engineer or
Clause 13:This contract shall not be sublet
without the written permission of the Executive Engineer.
In the event of the contractor subletting his
contract without such permission he shall be considered to have thereby
committed a breach of the contract and shall forfeit his security deposit, and
shall have no claim for any compensation for any loss that may accrue on
account of the collection of the materials or engagements entered into.
Clause 16:No guarantee can be given that the
total number of quantities of material indicated in the Schedule of the
contract will be ordered during the period - of the contract. But, the
Executive Engineer shall purchase from the contractor all such materials as are
detailed in the Schedule which he may require to purchase during the period of
Clause 17:No claim or claims made by the
contractor for increased rates on the grounds that the market or other rates
included in the contract, have risen during the period of his contract, will be
recognized that is to say, the contractor is bound to complete the work and or
to supply materials at the rates mentioned in the contract.
Clause 22:ALL rates quoted by the contractors
arc inclusive of sales tax and the contractor will pay the same himself,
Clause24: The contractor hereby declares that the articles sold to the buyer
under this contract shall be of the best quality (and workmanship) and shall be
strictly in accordance with the specifications and particulars contained in the
Schedule and accompaniments hereof and the contractor hereby guarantees that
the said articles would continue to conform to the description and quality
aforesaid for the period shown in the Schedule from the data of delivery of the
said articles to the purchaser and that notwithstanding that fact that 163 the
purchaser may have inspected and approved, the said articles if during the
aforesaid period stated in the Schedule the said articles be discovered not to
conform to the description and quality aforesaid or have deteriorated and the
decision of the purchaser in that behalf shall be final and conclusive. The
purchaser will be entitled to reject the said articles on such portion thereof
as may be discovered not to conform to the said description and quality on such
rejection the articles will be at the sellers' risk and all the provisions
herein contained relating to rejection of goods, etc. shall apply. The cont
tractor shall if so called upon to do, replace the articles etc. Or such
portion thereof as is rejected by the purchaser otherwise the contractor shall
pay to the purchaser such damages as may arise by any of the breach of the
condition herein contained, nothing herein contained shall prejudice any other
right of the purchaser in that behalf under this contract or otherwise."
Amongst some of the general conditions of the contract, we find the following:
"Clause3: All the necessary arrangements
of raw materials, equipment water, coal, labour etc.
required for supply and manufacture of bricks
shall have to be made by the contractor at his own cost. The Government shall
give only land for excavating soil for manufacture of bricks to the contractors
free of rent from the land reserved by the. Government for this purpose. The
land shall have to be handed over back to the Government after the
manufacturing of the brick work is completed.
* * * * Clause 10:The contractor shall have
no right to sell these bricks, brick bats, chharas or any other materials
manufactured on this site to any other private parties. If, however, it is
found that the materials have been sold by him to private parties or other
bodies, he shall have to pay to Department at the rate of 10% of the value of
materials at the tender rates." While giving the specifications Item No. l
herein refers to "manufacturing and supplying of 1 Class kiln- burnt
bricks of standard size including stacking in regular consignments etc. camp.
164 Mr. V. S. Desai brings to our- notice the
common as well as the distinguishing features of this case and of Chandra Bhan
Gosain's case (supra). According to him the common features are the following:-
The land was given free for manufacture of bricks in both the cases. The
materials shall remain at the contractor`s risk till the date of final
delivery. in Chandra Bhan Gosain`s case (supra) the contractor could not sell
the bricks to third parties without previous permission of the company . Here
also the contractor has no right to sell the bricks etc. but if he does sell he
will have. to pay 10 percent of the value of the materials at the tender rates.
Both the Clauses are, therefore, permissive Clauses and are substantially the
same. In both the contracts the contracting parties have used the words such as
sell, purchase, deliver or rate of supply etc. in the contract.
In Chandra Bhan Gosain`s case (supra)
dealing;, with those very common features this Court observed as follows:-
"lt may- be presumed that it was understood that in quoting his rate for
the bricks, the appellant would take into account the free supply of earth for
making the bricks. Again what was supplied to the company by the appellant was
not the earth which he got from it but bricks, which, we think, are something entirely
different. It could not have been in intended that the property in the earth
would continue in The company in spite of its conversion into such a different
thing as bricks. Further we find that the contract provided that the bricks
would remain at the appellant`s risk till delivery to the company. Now,
obviously bricks could not remain at the appellants risk unless they were his
property. Another Clause provided that the appellant would not be able to sell
the bricks to other parties without the permission of the company. Apparently,
it was contemplated that without such a provision the appellant could have sold
the bricks to others. Now - he could not sell the bricks at all unless they
belonged to him. Then we find that in the tender which the appellant submitted
and the acceptance of which made the contract, he stated, "I/we hereby
tender for the supply to the Hindus than Steel Private Ltd. Of the materials
described in the undermentioned memorandum. The memorandum described the
materials as bricks, and also stated the 'quantities to be delivered' and the
'rate at which materials are to be supplied'. All these provisions plainly show
that the contract was for sale of bricks. If it were so, the property in the
bricks must have been in the appellant and passed from him to the
From the above extract, it is clear. that the
decision in Chandra Bhan Gosain's case (supra) will govern the present case
where terms and conditions are almost identical so far as relating to the
165 Mr. Desai, however, took pains to point
out certain distinguishing features of the present case such as maintenance of
qualified Executive Engineer for supervision of work subject to removal at the
instance of the Government; restriction on employment of children under 12
years; labour welfare provisions regarding wages; workmen's compensation, etc.;
provisions in relation to prevention of cruelty to animals; non-payment of
royalty for excavating earth; use of tube-wells standing on the Government site
manner of execution of the work regarding moulding and drying and provision
against subletting which shall constitute a breach of the contract resulting in
forfeiture of security deposit.
All the above terms relate to a stage in the
process of proper and efficient manufacturing of bricks and are not
inconsistent in a contract of sale. These terms do not appear to impinge on the
character of the contract as one for sale of the bricks manufactured. The
Government in its overall interest and anxiety for general welfare could insist
on compliance with certain beneficial legal measures.
It could also insist on certain terms which
will ensure efficient production of the material. Provision against subletting
when the land was given free by Government is also understandable. All the
above features do not negate the concept of a contract of sale of the bricks
that are ultimately manufactured. The true test in this case is whether in
making the contract to brick produced was transferred as a chattel for consideration
and we are clearly of opinion that this has taken place in this case.
The property in the bricks was entirely of
the assessee. He had not only to manufacture that but also to stack them for
facilitating delivery. The essence of the contract was, therefore. the delivery
of the bricks after manufacture. The present case cannot be distinguished from
the decision of the Chandra Bhan Gosain`s case (supra).
We are, therefore, clearly of opinion that
the contract in this case is a contract of sale and not a works contract.
The assessee is, therefore liable to sales
tax. The question is answered accordingly. The High Court was not right in
answering the question in favour of the assessee. The decision of the High
Court is set aside. The appeal is allowed with costs.
S.R. Appeal allowed.