Report No. 61
Difference between "Works and Sale"
1A.7. Difference between contract of works and contract for sale.-
The primary difference between a contract for work (of service) and a contract for the sale of goods is that in the former there is in the person performing the work rendering a service, no property in the thing produced as a whole, even if a part or even a whole of the materials used by him may have been his property.1-2 Eventually, the property passes;3 in the generality of building contracts, the agreement between the parties is that the contractor should construct a building according to the specifications contained in the agreement, and in consideration therefor, he should receive the payment as provided therein. There is, in such agreement, neither a contract to sell the materials used in construction, nor does property pass therein as movables. The materials pass to the owner of the building only as an accretion to the building. A contract for the sale of materials cannot be implied from such an agreement.
1. C.S.T. v. Purushottam Premji, (1970) 26 STC 38 (41).
2. See also para. 1A.27, infra.
3. State of Madras v. Gannon Dunkerley, AIR 1958 SC 560 (on appeal from AIR 1954 Mad 1130).q
1A.8. Splitting up by assesses immaterial.-
Where the contract is indivisible, it cannot be split up, and even the fact that the assesses has split it up for his own purposes is immaterial.1
1. (a) C.S.T. v. Asha Watch Co., (1971) 28 STC 395 (Guj);
(b) Variety Body Builders v. C.S.T., (1971) 28 STC 339 (Guj).
1A.9. Gannon Dunkerley's case.-
State of Madras v. Gannon Dunkerley & Co., AIR 1958 SC 560: 1959 SCR 379, is an example of taxation of composite contracts, involving the supply of goods and services. It is the leading case, holding that States cannot tax works contracts. In Government of Andhra Pradesh v. Guntur Tobacco Ltd., (1965) 16 STC 240 (255) (SC)., various aspects of a contract of work were thus dealt with:-
"A contract for work in the execution of which goods were used may take one of three forms. The contract may be for work to be done for remuneration for supply of materials used in the execution of the works for a price; it may be a contract for work in which the use of materials is accessory or incidental to the execution of the work; or it may be a contract for work, and the use or supply of materials, though not accessory to the execution of contract, is voluntary or gratuitous. In the last class there is no sale, because, though property passes it does not pass for a price, whether a contract is of the first or the second class must depend upon the circumstances; if it is of the first, it is a composite contract for work and sale of goods; where it is of the second category, it is a contract for execution of work not involving sale of goods."
1A.11. Two types of works contracts where the element of sale can be split up and where it cannot be.-
Work contracts, thus are of various types. For the present purpose, it is sufficient to state that where the question whether a particular contract of work is taxable by the States as a contract of sale arises, one has to distinguish between contracts in which the element of sale is divisible and contracts in which such element cannot be split up and which are, therefore, indivisible. Briefly, the position is as follows:-
(a) Where the agreement constitutes a single contract (as above), it is not open to the State 'to split up' the agreement into its component parts, i.e., to single out that which relates to the supply of materials and to impose a tax thereon treating1 it as one of sale.
(b) Where the contract is one for the execution of work for a lump sum as offered by a tender and accepted by the contractor, no separate agreement for the supply of materials is involved,2-3 even though there is a term in the agreement that the property in materials would pass to the employer as soon as the goods were brought to the site by the contractor.
(c) Parties may, however, enter into distinct and separate contracts, one for the transfer of materials for money consideration and the other for payment of the remuneration for services and for work done.4
(d) The burden of showing that a works of service contract involves a taxable sale of the materials used is upon the taxing authorities, and the burden is not discharged by merely showing that property in goods which belonged to the party performing the service or executing the contract stands transferred to the other party.5
1. State of Madras v. Gannon Dunke;ley, AIR 1948 SC 560.
2. Peare Lal v. State of Punjab, (1958) 9 STC 412 (SC).
3. Carl Still's case, AIR 1961 SC 1615 (1619).
4. State of Madras v. Gannon Dunkerley, AIR 1958 SC 560.
5. Government of Andhra Pradesh v. Guntur Tobacco Ltd., (1965) 16 STC 240 (255) (SC).