Hindustan Aeronautics Limited Vs.
State of Karnataka [1983] INSC 203 (16 December 1983)
MUKHARJI, SABYASACHI (J) 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 sometime 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 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.
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 owner 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, where after 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, where after 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, 260 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 261 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.
262 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 263 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 264
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 their 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 265 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
266 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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