Bombay High Court
Commissioner Of Sales Tax vs Steel Plant Private Ltd. on 6 February, 1995
Author: D.K. Trivedi
Bench: D.K. Trivedi
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under section 61(1) of the Bombay Sales Tax Act, 1959, the Maharashtra Sales Tax Tribunal has referred the following question of law to this Court for opinion at the instance of the Revenue :
"Whether, on the true and proper interpretation of the terms of the contract entered into by the respondents on January 6, 1967 with the Municipal Corporation of Greater Bombay, the Tribunal was correct in holding that it was an indivisible contract for work and labour and not a divisible contract, one for the sale of machinery and equipments and the other for the erection of the said individual items of machinery and equipments ?"
2. The materials facts of the case relevant for determination of the controversy, briefly stated, are as follows :
The assessee, M/s. Steel Plant Pvt. Ltd., carries on the business of manufacturing of boilers, furnaces and other engineering equipment. It had entered into a contract with the Bombay Municipal Corporation on January 6, 1967, for "supplying and erecting machinery and electric equipments for the proposed slaughter house at Deonar". As the said contract involved both supply of materials and erection thereof, the assessee applied to the Commissioner of Sales Tax under section 52(1) of the Bombay Sales Tax Act ("the Act") seeking determination of the questions (i) whether it would be regarded as a dealer in respect of the supply of the machinery involved in the above contract; (ii) whether the contract of supplying of electrical machinery and electrical equipment for the proposed slaughter house at Deonar entered into between the assessee and Municipal Corporation of Greater Bombay should be treated as an indivisible works contract or a divisible contract for supply of materials and labour. The Deputy Commissioner of Sales Tax who took up the determination, by his order dated October 31, 1968, held that the contract in question was a divisible contract for supply of electrical machinery and electrical equipment for the proposed slaughter house and for installation and hence, the value of the materials involved therein would be subject to tax at the rates applicable thereto. Against the above determination of the Deputy Commissioner, the assessee appealed to the Maharashtra Sales Tax Tribunal ("the Tribunal"). Before the Tribunal, it was contended on behalf of the assessee that on a proper consideration of the terms and conditions of the contract, the Deputy Commissioner was not justified in holding that it was a divisible contract and the value of the materials supplied in execution of the same amounted to sales of goods within the meaning of section 2(28) of the Act. The Tribunal perused the contract and examined the relevant terms and conditions thereof and observed that what was necessary to ascertain for deciding the controversy was the main object or intent of the parties when they entered into the contract. On considering all the terms and conditions of the contract, the Tribunal came to the conclusion that the contract was an indivisible works contract for supply and erection of machinery and electrical equipment and hence no sales tax was leviable on the value of the materials involved therein. Accordingly, the Tribunal set aside the order of the Deputy Commissioner. Hence, this reference at the instance of the Revenue.
3. Ms. Ankalesaria, learned counsel for the Revenue, produced before us a copy of the contract between the Municipal Corporation of Greater Bombay and assessee, M/s. Steel Plant Pvt. Ltd., which was not made a part of the paper book by the Tribunal. By consent of the parties, the same was taken on record. We have perused the same. We have heard Ms. Ankalesaria. She drew our attention to the "Bill of quantities for supplying and erecting machinery and electrical equipment for the proposed slaughter house at Deonar", which is annexed to the contract, to show that the cost of the supply of the machinery at a site and cost of erection have been separately considered in determining the total value of the contract. Our attention was also drawn to clause 1 of the contract, which specifies the contract price of the works prescribed therein and the manner of payment thereof. It reads :
"1. (a) The contract price for the works described herein shall be Rs. 45,70,685 subject however to the following variations, that is to say -
(1) the additional price agreed to by the parties for any variation of the works as hereinafter provided.
(2) Any variation from ruling price as on June 1, 1966 and the prices ruling at the time of supply will be to the Corporation's account and for determining the quantum of escalation following formula shall be applied :
(a) The selling price of the contractor is based on 70 per cent as cost of material and 30 per cent as cost of labour. For erection, the contract value is based on 30 per cent as cost of material and 70 per cent as cost of labour.
(b) The increase, if any, for cost of labour shall be directly related to and in proportion to the labour index as announced by Commissioner of Labour, Bombay, every month.
(c) The increase, if any, on cost of material shall be directly related to and in proportion to the price index applicable as announced by the Government of India pertaining to semi manufacturers and manufacturers.
(d) The contractors shall not be entitled under this clause to increase in the prices of labour and materials beyond 10 per cent, under any circumstances.
.................
(5) In the event of the Indian Government or the State Government or any other statutory authority shall levy any rates, taxes, customs duties, sales or excise taxes or surcharges on any of the items included in the contract then the amount of same shall (less any rebates, commissions or allowances which may be received) be added to the contract price.
The contract price shall be paid as follows, that is to say -
(a) as to the machinery and equipment, 97 per cent of the price as set out in the specifications immediately the machinery and equipment are delivered at the site.
(b) as to the machinery and equipment aforesaid, the balance of 3 per cent, at the expiration of the maintenance period as defined in clause 35 of this contract.
(c) as to the erection of the machinery and equipment at the site (together with any other remaining items hereinafter contracted for) and subject to the provision for the payment of progress payments as provided in clause 20 hereof, 97 per cent, on completion of the erection, and
(d) as to the remaining 3 per cent, at the expiration of the maintenance period as hereinafter provided."
According to the learned counsel, it is evident from the clause 1 set out above that the contract was divisible contract for supply of materials and for execution of work.
4. Mr. Joshi, learned counsel for the assessee, vehemently opposes the above contention of Ms. Ankalesaria and submits that it is a clear case of indivisible works contract.
5. We have carefully considered the rival submissions of the counsel for the parties. We have also perused the contract between the parties ("contract") and the terms thereof. The scope of the contract between the assessee and the Bombay Municipal Corporation ("the Corporation") has been set out in clause (D) of the preamble to the said contract in the following terms :
"(a) Supply at site of indigenous machinery and equipment manufactured as per designs and drawings supplied by Messrs. W. J. Powell Overseas Pvt. Ltd.
(b) Clearing, forwarding and transporting to site the Australian/foreign machinery and equipment supplied by contractors' principals Messrs. W. J. Powell Overseas Pvt. Ltd.
(c) Erection of entire equipment under scope of this contract as well as the contract entered with Messrs. W. J. Powell Overseas Pvt. Ltd., under the supervision of Messrs. W. J. Powell Overseas Pvt. Ltd.
(d) Testing of entire machinery and equipment with assistance and under the supervision of Messrs. W. J. Powell Overseas Pvt. Ltd.
(e) Handing over the entire plant."
It is clear from the above, that what was intended by the parties to the contract was not "sale or supply of goods" but "installation and erection of the plant". The law is well-settled now that such a contract would be an indivisible works contract and not a contract for sale and labour. In order that there should be a sale of goods which is liable to sales tax as part of a contract for work under the Act, there must be a contract in which there is not merely transfer of title to goods as an incident of the contract, but there must be a contract, express or implied, for sale of the very goods which the parties intended should be sold for a money consideration, i.e., there must be in the contract for work an independent term for sale of goods by one party to the other for a money consideration.
6. A number of tests have been evolved by the Supreme Court from time to time to distinguish a contract for sale from a works contract but none of the tests is exhaustive and of universal application. These tests, as observed by the Supreme Court in Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax [1978] 42 STC 409, do not give any magic formula by the application of which one can say in every case whether a contract is a contract for sale or a contract for work and labour. They merely focus on one or the other aspects of the transaction and afford some guidance in determining the question. The answer to the question whether a particular contract is one for sale of goods or for work and labour, basically and primarily, depends upon the main object of the parties which has to be gathered from the terms of the contract, the circumstances of the transaction, and the custom of the trade.
7. It is thus clear that the question as to under what circumstances the contract can be said to be a works contract is not free from difficulty and has to be decided on the facts and the circumstances of each case. The various tests laid down for the purpose; merely afford guidelines for determining the true nature of the contract. The real question that has to be decided in each case is whether the contract is primarily a contract for supply of materials at the price agreed to between the parties for the materials so supplied and the work and service rendered is incidental to the execution of the contract. If it is so, the contract is one for sale of materials and if on the other hand, the contract is primarily a contract for work and labour and supply of materials is incidental to the execution of such contract, it cannot be said that there is a contract of sale of materials. It would be a works contract. [State of Madras v. Richardson & Cruddas Ltd. [1968] 21 STC 245 (SC), State of Rajasthan v. Man Industrial Corporation Ltd. [1969] 24 STC 349 (SC), Vanguard Rolling Shutters & Steel Works v. Commissioner of Sales Tax , Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax and Ram Singh & Sons Engineering Works v. Commissioner of Sales Tax .
8. From the facts of the present case, it would be seen that the contract is (i) for supply of indigenous machinery and equipment manufactured by the assessee as per designs and drawings supplied by the M/s. W. J. Powell Overseas Pvt. Ltd. who are specialised in this field, (ii) erection of the entire equipment under the scope of the contract, (iii) testing of the machinery and equipment and (iv) handing over the entire plant. The setting up of the plant is a highly sophisticated activity which requires a very high degree of skill. The supply and erection of machinery is one single indivisible process and the plant comes into being only when the erection is complete. Erection or installation is thus a fundamental and integral part of the contract. It cannot be regarded as merely incidental to the supply of machinery. An all-inclusive price is charged by the assessee for the work of fabrication, supply and installation of machinery at the slaughter house to make it a complete plant. It is therefore not a contract for sale of machineries but a works contract for erection of the plant at the slaughter house.
9. We have also considered clause (1) of the contract, pointed out by the learned counsel of the Revenue Ms. Ankalesaria, which provides for payment of 97 per cent of the price of the machinery and equipment as set out in the specifications immediately on delivery of the machinery and equipment at the site. We are, however, of the opinion that it cannot have any bearing on the determination of the question whether the contract is one for sale or for work and labour. The true nature of the contract cannot depend on the mode of payment of the amount provided in the contract. This aspect of the matter came to be considered by the Supreme Court in Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax [1978] 42 STC 409 where there was a provision in the contract for fabrication, supply, erection and installation of rolling shutters which stipulated that 90 per cent of the amount due under the contract would be paid before the erection and installation of the rolling shutters had commenced. The Supreme Court held that that would not make it a contract for sale. It was observed :
"...... The true nature of the contract cannot depend on the mode of payment of the amount provided in the contract. The parties may provide by mutual agreement that the amount stipulated in the contract may be paid at different stages of the execution of the contract, but that cannot make the contract one for sale of goods if it is otherwise a contract for work and labour."
The Supreme Court also noted the fact that the contract in State of Madras v. Richardson & Cruddas Ltd. [1968] 21 STC 245 contained a provision that the full amount due under the contract shall be paid in advance even before the execution of the work has started, and yet the Madras High Court held, that the contract was works contract which view was affirmed by the Supreme Court. The legal position was summed up by the Supreme Court thus :
"...... The payment of the amount due under the contract may be spread over the entire period of the execution of the contract with a view either to put the manufacturer or contractor in possession of funds for the execution of the contract or to secure him against any risk of non-payment by the customer. That cannot have any bearing on the determination of the question whether the contract is one for sale or for work and labour."
10. We are also of the opinion that the nature of the contract would not be affected by the fact that the components of the various contract amount or the price are shown separately. This, in our opinion, is not relevant in deciding whether the contract is a contract for sale of goods or a work contract.
11. Our attention was also drawn by Ms. Ankalesaria, learned counsel for the Revenue, to the fact that in the "Bill of quantities", which forms part of the contract, there is specific mention of the amount of general sales tax leviable on the value of the machinery required for erection of the plant which is the subject-matter of the contract. We have considered the above submission. It appears that at the bottom of the agreement, there is a note under the heading "for guidance only" which is as follows :
"For guidance only : Rs.
I - Indigenous machinery at 6 per cent sales tax 2,74,241
and general tax on Rs. 45,70,685
II - Excise duty on indigenous machinery confined to 90,000
Rs. 90,000 only irrespective of cost amount.
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Total 49,34,926
III - Cost of municipal establishment for supervision
of equivalent to 2.5 per cent of the total
tendered amount for 20 months (month will
be reckoned as 30 days each of 8 hours)
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Total contract amount 50,58,299
(Rupees fifty lakhs fifty-eight thousand two hundred and ninety-nine only).
Note : The items I and II listed on this page are estimates only and are not part of the contractor's responsibility."
We have perused the above note. We, however, do not think that the above note can, in any manner, assist us in the determination of the nature of the contract or affect the true nature thereof. The fact that provision has been made for payment of sales tax on the value of machinery cannot convert a works contract into transaction of sale.
Moreover, the burden of showing that a works contract involved a taxable sale of materials used in execution of the work is upon the taxing authorities which cannot be discharged merely by showing that property in goods which belonged to the party executing the contract stood transferred to the other party. In the instant case, in our opinion, taxing authorities have failed to establish that the contract in question involved sale of machineries and equipments.
12. In view of the above discussion, we answer the question referred to us in the affirmative, i.e., against the Revenue and in favour of the assessee.
Under the facts and circumstances of the case, there shall be no order as to costs.
13. Reference answered in the affirmative.