Madras High Court
State Of Tamil Nadu vs Eff. Aar. Fabrications on 9 September, 1992
JUDGMENT
1. The State which was unsuccessful before the Sales Tax Appellate Tribunal (Main Branch), Madras, has filed the above tax revision. The respondents-assessees registered as dealers under the Tamil Nadu General Sales Tax Act were carrying on business in the manufacture and sale of rolling shutters, steel windows, etc., during the assessment year 1978-79. For the said assessment year, they reported a total and taxable turnover of Rs. 6,24,588.06 in the monthly returns in form A2. On check and verification of their accounts before finalising the assessment, the assessing officer found that certain exemptions claimed were not permissible and that a turnover of Rs. 3,24,352 said to represent the receipts in respect of works contract executed in the form of supplying rolling shutters was not allowable for the exemption claimed. Consequently, after issuing a show cause notice and giving them due opportunity and considering the explanations, the assessing officer, by his order dated March 26, 1980 determined a total and taxable turnover of the respondents-assessees for the year in question at Rs. 6,83,891. As noticed supra, the exemption claimed on receipts in respect of what the respondents-assessees claimed to be works contract was not allowed.
2. Aggrieved, the respondents-assessees filed an appeal before the Appellate Assistant Commissioner, Commercial Taxes, Kancheepuram. About three items of turnover including the receipt relating to the works contract referred to and the levy in respect of the same were challenged. Reliance was placed on the fact that the contract was for manufacture, supply and fixing or installation of the rolling shutters and the rate fixed therefor was all including erection charges and taxes. The assessees also placed reliance upon the decision of the apex Court in Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax to substantiate the plea that the contract was for work and labour and does not attract any liability to sales tax. The department has filed a petition for enhancement in respect of a turnover of Rs. 56,302.12 which was said to be labour receipts.
3. The first appellate authority was of the view that contract relating to the turnover of Rs. 3,24,352 was mainly for transfer of property and the essence of the contract was the delivery of shutters after manufacture and the labour involved in fixing is only incidental to the sale of the shutters. The levy of tax at 4 per cent. on the said turnover was, therefore, upheld. The enhancement prayed for by the department was also allowed.
4. Thereupon the assessees filed an appeal before the Tribunal challenging the levy of tax on a turnover of Rs. 3,24,352 representing the receipts on works contract and Rs. 56,302.12 pertaining to labour charges, but wrongly assessed to tax. An estimated addition to the tune of Rs. 3,000 in relation to the sale value of the scraps was also challenged. The Tribunal after carefully analysing the nature of the contract with reference to the materials available on record and taking into account the relevant decision of the apex Court on the subject held that the contracts in question relating to the turnover of Rs. 3,24,352 were contracts for work and labour and not contracts for sale. The challenge to the estimated addition of Rs. 3,000 was also upheld and in respect of the other turnover, the matter has been remitted to the assessing officer for verification with reference to the books of account of the customers and for passing of appropriate orders in accordance with law and in the light of the directions made by the Tribunal. Hence, the above tax revision.
5. Mrs. Chitra Venkataraman, learned Additional Government Pleader (Taxes), appearing for the State contended that what commenced as a works contract ultimately fructified only as a contract of sale since the assessees though under the contract agreed to supply and fix or install the shutters, that installation was not actually effected by the assessees and that they were only paid for the actual supply of material after deducting from the agreed rate, a flat rate of installation and labour charges and that, therefore, the turnover in question, at any rate, was liable to tax and the Tribunal committed an error in holding the same as not taxable. The subsequent variation or novation of the contract or the frustration of the portion relating to installation and labour work has not been taken into account by the Tribunal and the contract, as ultimately executed or performed was one merely of supply of shutters, and therefore, is to be viewed as contract, of sale and supply of shutters, etc., and not a works contract. The learned counsel for the respondents-assessees submitted that out of 400 items of supply and installation, the assessees not only supplied but erected and installed the shutters also of about 265 items and only in respect of the balance of 135 items the installation and erection was incomplete and partial deductions were made in effecting payments and that even in respect of such items, subsequently, though belatedly the installation and erection works also have been completed by the assessees and consequently the Revenue is not justified in its stand. It is also stated that belated performance is not the concern of the taxing authorities and since ultimately the installation of balance of 135 items also was completed by the assessees for which also they were duly paid, the nature of the contracts as works contract was not altered and the plea of variation or frustration has no basis or relevance for the present case. The decisions referred to by the counsel appearing on either side would be referred to hereinafter before actual consideration of the case before us.
6. The decision in Man Industrial Corporation Ltd. v. State [1966] 17 STC 152 is that of a Division Bench of the Rajasthan High Court in relation to a contract for providing and fixing special type steel windows of four different specifications in the building constructed to house the office of the Accountant General at Jaipur. Taking into account the fact that the contract is not only for the purpose of fabricating doors and windows but also to fix those fabricated articles to the building for an all-inclusive price the court held that the property in such parts passed only after it had acquired the characteristics of immovable property and, therefore, could not be either described as a sale of movable property or broken into its component parts and treat one part thereof as sale when in fact it is an indivisible and complete works contract. The same was also affirmed by the apex Court in State of Rajasthan v. Man Industrial Corporation Ltd. [1969] 24 STC 349. The apex Court held that the contract in question therein was a composite one and there were no two contracts one of sale and another of service and the windows did not pass under the contract as windows and it is only when the windows are actually fixed as stipulated the contract is fully executed and property also passed therein after such completion of the work and not before. The contract was held to be for execution of work not involving sale of goods.
7. The decision of the apex Court in Vanguard Rolling Shutters & Steel Works v. Commissioner of Sales Tar [1977] 39 STC 372 concerned with a contract for the manufacture of iron shutters according to specification given and to be also fixed at the premises of the customers. As a matter of fact in that case the assessee was required to fabricate the rolling shutters, bring them to the site of the customers at the cost of the customers and erect them and the masonry work had to be done by the customers at their cost but according to the assessee's instructions. The assessee therein was also entitled to be paid full price of the shutters against delivery prior to despatch and there was no such thing as making payment after fixing. The apex Court while reversing the view of the Allahabad High Court in the decision reported in Commissioner of Sales Tax v. Vanguard Rolling Shutters and Steel Works [1976] 38 STC 229 held that the contract was a works contract and the transaction was not exigible to sales tax. While analysing the contract in that case, the apex Court expressed the view that the transaction is a composite consolidated contract which is one and indivisible comprising labour and services executed for a lump sum and, therefore, the materials are not supplied to the customer so as to pass as chattel simpliciter but really became an accretion to the immovable property when fixed and erected. It was also emphasised therein that the question as to under what circumstances a contract can be said to be a works contract is not free from difficulty and has to depend on the facts of each case and it would be also difficult to lay down any rule of universal application, but the issue has got to be decided only in accordance with the well recognised tests laid down by judicial pronouncements. In referring to such guidelines, the apex Court observed as hereunder :
"One of the important tests is to find out whether the contract is primarily a contract for supply of materials at a price agreed to between the parties for the materials so supplied and the work or service rendered is incidental to the execution of the contract. If so, the contract is one for sale of materials and the sale proceeds would be exigible to sales tax. On the other hand, where the contract is primarily a contract for work and labour and materials are supplied in execution of such contract, there is no contract for sale of materials but it is a works contract. The circumstance that the materials have no separate identity as a commercial article and it is only by bestowing work and labour upon them, as for example, by affixing them to the building in case of window-leaves or wooden doors and windows that they acquire commercial identity, would be prima facie indicative of a works contract. So also where certain materials are not merely supplied but fixed to an immovable property so as to become a permanent fixture and an accretion to the said property, the contract prima facie would be a works contract. This is exactly what has happened in the present case."
This decision was followed and the principles laid down therein were reiterated by the apex Court in Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax [1978] 42 STC 409 while reversing the decision of the Bombay High Court reported in Sentinel Rolling Shutters and Engineering Co. Pvt. Ltd. v. Commissioner of Sales Tax [1977] 39 STC 504.
8. The often agitated issue involving the distinction between contract for work and labour and the contract of sale was also considered at length by the apex Court in the decision in Hindustan Aeronautics Ltd. v. State of Karnataka 11984] 55 STC 314. The contract considered therein was for servicing, repairing and overhauling Air Force planes and the payment was at cost plus 10 per cent. The apex Court has declared the position of law in unmistakable terms as hereunder :
"The question therefore is, was it the intention to do the works undertaken as one job or not. The 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 sometime 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 invoices, 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 chattel qua chattel, the contract would 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."
9. A Division Bench of this Court, in the decision in S. Chandrasekaran v. State of Tamil Nadu [1990] 78 STC 147 had an occasion to consider the issue in the context of a contract undertaken to manufacture mosaic tiles and lay mosaic flooring at a particular rate for a particular area and not for mere supply of mosaic tiles. The Division Bench while holding that the contract was in substance an indivisible works contract and not a contract for sale of goods also pointed out that the fact that the customer had agreed to supply water, electricity, support labour, etc., could not detract from the real nature of the contract, if it was otherwise an indivisible works contract. In yet another decision of a Division bench of this Court in Stare of Tamil Nadu v. Aparajitha Rubbers (P) Ltd. [1991] 82 STC 74 to which one of us (Abdul Hadi, J.) was a party this Court had an occasion to consider a contract for rubber lining of industrial equipments such as pipes, vessels, storage tanks, etc., in order to protect them from corrosive chemicals used in the industry concerned. Laying emphasis on the dominant object principle and the essence of the contract the Division Bench held the contract to be a works contract and that the components used for rubber lining were considered to have been used only incidentally in the execution of the works entrusted and undertaken for a consolidated price or rate.
10. So far as the facts and circumstances of the case before us are concerned, there is no dispute that the contract entered into was for manufacture, supply and fixing of rolling shutters and steel windows and that the contracts so executed were works contracts. In the light of the decisions referred to supra and particularly having regard to the ratio of the decisions of the apex Court rendered in similar and identical type of contracts, it would be too late in the day for the Revenue to take a different stand or successfully contend that the contracts entered into between parties in these cases, in respect of about 400 items of work are not contracts for work and labour. On the other hand, the plea of the Revenue is that as observed by the Tribunal itself, the shutters were actually fixed by the customers themselves in position by engaging the services of civil contract and that as a matter of fact the erection charges were deducted from the lump sum contract and on that view the contract as performed by the assessees was only of supply and sale of shutters, as goods and, therefore, the turnover in question would be liable to sales tax. As could be seen from the order of the first appellate authority, the assessees specifically contended before that authority that the contract was for supply and fixing in position of 400 shutters for an all-inclusive price of Rs. 900 per shutter with delivery charges alone being extra, that as against the total price payable in a sum of Rs. 3,60,000 payment of a sum of Rs. 3,42,066.75 representing notional value of materials together with tax paid by the assessees were sought for to wipe out the heavy burden of investment by them and that the customer paid Rs. 3.26,227 retaining with them Rs. 33,773 to be paid after completion of the work as per agreement and that the balance of amount in respect of 265 items which were fully executed as against 400 items has already been claimed and so far as the remaining 135 items are concerned, the balance amounts could be claimed after completion of the erection work agreed and the same does not alter the nature of the contracts which according to the assessees were pure and simple works contracts. At the time of hearing also, the learned counsel for the assessees while reiterating the stand elaborated further that subsequently, though belatedly, the assessees themselves completed the erection work also in respect of the balance of 135 items and received payments and this can be substantiated by the accounts for the period subsequent to the assessment year in question. The customer in this case who entrusted the work to the assessees is SIDCO, an undertaking of the Tamil Nadu Government. Consequently it was submitted for the respondents that there was no contract for the supply of materials and it did not involve any transfer of property in goods as a chattel, and that the facts regarding the completion of work in respect of 135 items also can be verified by the authorities. But the first appellate authority without further verification held "that the delivery at an agreed price had been completed and that the incidental job of erection at extra rate was pending" and that the dominant object of the assessees was only the supply of shutters of different sizes and whatever other services are rendered are merely incidental to the execution of the contract of sale of the rolling shutters. It was also observed by the said authority that no evidence was produced that shutters as units were fabricated at the site of the customers and simply because some assembly and masonry work was done incidental to the contract of sale, that will not alter the nature of the contract.
11. We have carefully considered the submissions of the learned counsel appearing on either side in the light of the orders passed by the authorities below including the Tribunal and the various judicial pronouncements placed before us to which, reference has already been made supra. In our view, the ratio of the decisions of the Supreme Court reported in State of Rajasthan v. Man Industrial Corporation Ltd. [1969] 24 STC 349, Vanguard Rolling Shutters & Steel Works v. Commissioner of Sales Tax [1977] 39 STC 372 and Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax [19781 42 STC 409 squarely applies to the case before us on all fours and governs the issue raised before us in favour of the respondents/assessees with one reservation which will be considered hereinafter. The contracts to fabricate, deliver and erect the shutters in question in the present case are pure and simple works contracts and the findings of the assessing officer and the first appellate authority are not only baseless and proceed upon conjectures and surmises but also are vitiated on account of a predetermined and perversity of approach. Those findings and conclusions cannot be justified in the face of the law declared or the principles laid down by the decisions referred to supra, in similar and identical cases and consequently, the Tribunal was perfectly right in its conclusions rendered that contract was only a works contract applying the ratio of the decision of the apex Court. But at the same time, the Tribunal also, in our view, committed an error in not separately taking up for consideration and rendering a finding in respect of the balance of 135 items of works with reference to which the materials only have been found supplied and delivered but no erection was said to have been done by the assessees. There is at any rate a dispute and controversy over this fact and as the assessees would contend that ultimately the erection work has been completed even in respect of those items and that they were also paid the balance due in respect of those works by the customers, the Revenue contends to the contra that the assessees did not erect them and the customers only got it done by engaging others.
12. The contracts or agreements between the assessees and the customer are works contract, pure and simpliciter and in respect of the 265 items of work out of the agreed 400 items there is no question of treating them as contracts of sales exigible to sales tax under the Tamil Nadu General Sales Tax Act, 1959, since the assessees have fully executed the contracts by completing erection work also. In respect of the balance of 135 items of work, the same view cannot be taken by us with the materials available on record. The agreement of contract or its terms as disclosed in the communication or orders placed could only be merely an "agreement to do" but if the ultimate performance was not in accordance with the initial agreement but the contract as performed and completed was in deviation or alteration of the earlier agreement or understanding of contract, the assessees concerned cannot justifiably contend, validly in law, that the nature of the contract has got to be determined only on the basis of the initial agreement totally ignoring and turning one's Nelson's eye to the subsequent developments and conduct of parties and the manner and method of actual execution of the contracts in arriving at a finding as to whether the same is a works contract or contract of sale and supply of goods. The conclusions of the Tribunal regarding the nature of the transactions, according to us, have to be confined to the items of work in respect of 265 items only, which alone were executed in full as agreed to between parties. So far as the balance of 135 items - "the executed contracts" only speak of the same being contract for supply of shutters and thus viewed the turnover relating to those items would be liable to sales tax under the Act. As a matter of principle it has to be necessarily declared that the order of the Tribunal cannot be said to be correct or valid in respect of those balance of 135 items in respect of which there is no material whatsoever available on record or in the assessment files or appellate records about the subsequent completion of the erection work in terms of the initial agreements, though belatedly. The learned counsel for the respondents/assessees was very firm about the stand taken by him factually regarding the subsequent development and execution claimed of the erection work also and the payment of the balance of the initially agreed all-inclusive price, by the customer thereafter.
13. Though we declare the correct position and principle of law as above, we cannot foreclose the adjudication of the claim made by the assessees once and for all in respect of the 135 items of balance of works. Interests of justice would require that the assessing authority should be directed to verify this aspect and if on the basis of the relevant materials and records, it is proved by the assessees that they have fulfilled their obligations and carried out erection work also, as originally agreed to in respect of the 135 items also, those transactions also could not be subjected to assessment or levy of sales tax as in the case of the other 265 items of works, which were held to be not exigible to sales tax by us and the Tribunal. If the assessees are not able to produce the relevant materials to prove the subsequent erection by the assessees themselves of the shutters and receipt of the balance withheld by the customers to the satisfaction of the assessing authority who shall objectively consider the issue and pass orders giving sufficient reasons for his conclusions, the same shall be considered and treated as only contracts for supply of materials and therefore are liable to sales tax.
14. The order of the Tribunal in so far as it relates to the 135 items of work shall stand set aside and the matter shall stand remitted to the assessing authority for consideration afresh in the light of the materials that may be produced by the assessees and determination in accordance with our directions and declaration of law made in this order. In other respects, viz., relating to 265 items out of 400 agreed to and executed already, the revision shall stand dismissed. Having regard to the above facts and circumstances of the case, the revision shall stand allowed partly and is remitted and there shall be no order as to costs.
15. Petition partly allowed.