Bombay High Court
Commissioner Of Sales Tax, Maharashtra ... vs Brimco Plastic Machinery Private ... on 10 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, made at the instance of the Revenue, the Maharashtra Sales Tax Tribunal has referred the following question of law to this Court for opinion :
"Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that the transaction evidenced by invoice No. 209/76-77 dated February 23, 1977, is a transaction of works contract and not a transaction of 'sale' within the meaning of section 2(28) of the Bombay Sales Tax Act, 1959 ?"
2. The assessee, M/s. Brimco Plastic Machinery Pvt. Ltd., is a manufacturer of machineries, and specialises in manufacture of plastic machineries and plants. The assessee entered into agreements with various parties for supply, erection and installation of plastic machineries. Some of these parties raised objection to the charging of sales tax on such transactions by the assessee on the ground that these transaction amounted to works contract. The assessee, therefore, made an application under section 52(1)(c) of the Bombay Sales Tax Act, 1959 ("the Act") to the Commissioner of Sales Tax seeking determination of the question whether the transactions in question were transactions of "sale". For that purpose, the assessee submitted requisite details of a transaction of supply, erection and commissioning of a plant at site of M/s. Bharat Plastics, Bombay, which was evidenced by invoice dated February 23, 1977. The assessee furnished the invoice, relevant correspondence, bills, designs, drawings, reports, etc., to enable the Commissioner to appreciate the true nature of the transaction. The assessee also submitted literature about different types of machineries supplied by it to its customer. A note on the actual procedure of operation and completion of the transaction, giving the various stages of erection, date-wise report of work-in-progress and service reports of the personnel entrusted with the erection and commissioning of the said plants, was also submitted for the perusal of the Commissioner. A copy of contract dated October 15, 1976, was also annexed to the application. The determination under section 52(1)(c) of the Act was taken up by the Deputy Commissioner of Sales Tax, who held the transaction in question to be a transaction of sale of goods and not a works contract. Aggrieved by the above order of the Deputy Commissioner, the assessee appealed to the Maharashtra Sales Tax Tribunal ("the Tribunal"). The case of the assessee before the Tribunal was that under the terms of the contract the machineries were to be installed on a foundation of 60 ft. to 100 ft. erected by the customer. The plant comprised of several units and sub-assemblies and sub-components. A foundation plan for the plant was supplied to the customers prior to despatch of the sub-assemblies, parts and components to reserve and earmark suitable space. The assessee's engineers visited the site for inspection of foundation and directed necessary modifications for exact dimensions, level, etc. The various sub-assemblies, parts and components were assembled at site by the engineers of the assessee. After installation on the foundation, the engineers of the assessee undertook technical examination of installation, electrification, water connection, etc., and checked the levelling and alignment. Thereafter, the plant was tested for trial production on the various materials supplied by the customer. The assessee could get the completion certificate from the customer only on completion of satisfactory trial. The transaction would be complete only on issue of such certificate, and then only the property in the plant installed by the assessee on the foundation erected by the customer would pass to the customer. On consideration of the terms of the contract and the various activities required to be undertaken by the assessee, the Tribunal came to a conclusion that the transaction in question was a works contract and not a transaction of sale. The Tribunal, therefore, set aside the order of the Deputy Commissioner and held that the transaction in question was a works contract and not a transaction of sale within the meaning of section 2(28) of the Act. Hence, this reference at the instance of the Revenue.
3. Mr. R. V. Desai, learned counsel for the Revenue, submitted before us that though the transaction was for "supply, erection and installation of plastic machinery", erection and installation was merely incidental to the supply of machinery and hence it was a transaction of "sale" within the meaning of section 2(28) of the Act. Counsel, however, did not dispute the fact that the amount of consideration settled between the parties in the instant case also included the cost of erection and installation of the machinery at site. His contention, in fact, was that looking at the totality of the terms and conditions of the agreement between the parties, the transaction has to be held to be a transaction of sale and not a works contract. In support of the above contention, our attention was drawn to some of the terms of the contract, in particular, the term which requires the machineries to be insured by the customer while in transit. It was also pointed out that the total value of the order was to be paid within 15 days of receipt of intimation of the machinery being ready for delivery. Our attention was also drawn to the clause which deals with sales tax to show that there was a provision for payment of sales tax at the rates applicable at the material time.
4. We have considered the submissions of Mr. Desai, the learned counsel for the Revenue. We have also heard the learned counsel for the assessee. We have carefully gone through the statement of the case and the terms and conditions of the contract with a view to ascertaining the true nature of the transaction. On consideration of the same and for reasons set out hereinbelow, we are fully satisfied that the transaction in question is not a transaction of sale but a works contract. The fact that the customer is required to insure the goods while in transit or while lying at the site before installation, in our opinion, does not in any way affect the real nature of the transaction. In any event, in the instant case, there is no such clause which requires the customer to insure the goods while in transit. On the other hand, the clause regarding insurance merely provides that the insurance charges shall be recovered from the customer in addition to the agreed amount. This is clear from the insurance clause which reads :
"Unless otherwise instructed all consignments will be insured up to destination at your cost. The approximate charges will be one per cent. No responsibility is accepted for any damage or loss in transit."
So far as the sales tax clause in the agreement is concerned, that too, in our opinion, is not determinative of the true nature of the transaction. If, on a proper construction of the agreement and the terms and conditions thereof, a transaction can be held to be a works contract, it cannot be treated as a transaction of sale merely because sales tax has been collected on the contract value from the customer or there is a provision in the agreement giving a right to the contractor to charge sales tax. This, in our opinion, is not a relevant consideration. In fact, in the instant case, the controversy itself has arisen because the assessee wanted to realise sales tax from the customer to which the customer objected on the ground that no sales tax was leviable as, according to him, the transaction in question was a works contract and not sale of goods.
5. Before we proceed to examine whether the transaction in question in the present case is a works contract or a sale, it is necessary to refer to the terms of the contract in regard to erection and delivery which are embodied in a separate sheet attached to the quotation dated October 15, 1976, given by the assessee to Bharat Plastics. These terms read as follows :
"Erection : The prices quoted are inclusive of erection at site. All raw materials and skilled and unskilled labour required for erection will have to be provided by you.
Delivery : In approximately 4/8 weeks from the date of receipt of the order subject to confirmation by us at the time the order is received. The delivery period quoted is only an indication at all times subject to delay due to war, strikes and any other circumstances beyond our control and subject to force majeure. No responsibility for any direct or indirect loss arising out of delay in delivery will be accepted by us."
From the above clauses, particularly the clause dealing with erection, it is clear that all inclusive price was charged for the supply, erection and commissioning of the plant. In the light of these facts, we are to decide whether this transaction is a works contract or sale of goods.
6. 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. Government of Andhra Pradesh v. Guntur Tobaccos Ltd. ([1965] 16 STC 240, pages 256-257). The fact that in the execution of a contract for work some materials are used and property in the goods so used passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that account to sell the materials. A contract for work in the execution of which goods are used may take one of the three forms. The contract may be for work to be done for remuneration and 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 use or supply of materials though not accessory to the execution of the 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. Government of Andhra Pradesh v. Guntur Tobaccos Ltd. .
7. The distinction between a contract for sale and a works contract has been pointed out by the Supreme Court in a number of decisions and some tests have also been evolved for that purpose. But these tests, as pointed out by the Supreme Court in Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax [1978] 42 STC 409, are not exhaustive and do not lay down any rigid or inflexible rule applicable alike to all transactions. They do not give any magic formula by the application of which we 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 aspect of the transaction and afford some guidance in determining the question, but basically and primarily, whether a particular contract is one for sale of goods or for work and labour depends upon the main object of the parties gathered from the terms of the contract, the circumstances of the transaction and the custom of the trade.
8. It is thus obvious 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. Though it is difficult to lay down any rule of universal application, there are some well-recognised tests which are laid down by decided cases of the Supreme Court which afford guidelines for determining as to whether a contract in question is a works contract or a contract for supply of goods. 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. See Vanguard Rolling Shutters & Steel Works v. Commissioner of Sales Tax .
8A. We shall now refer to some of the important decisions of the Supreme Court where these tests were applied to determine whether a contract was a contract of sale or a works contract.
In State of Madras v. Richardson & Cruddas Ltd. [1968] 21 STC 245 (SC), the assessees without a formal contract agreed to supply, fabricate and erect steel structures for a sugar factory. The assessees completed the contract. A bill was submitted by the assessees for charges for fabrication, supply and erection of steel structures at certain rates. The High Court of Madras on a consideration of the evidence held that there was a stipulation for a consolidated lump sum payment of Rs. 1,160 per ton for fabricating, supplying and erecting at site all steel work, etc.; there was no stipulation for passing of property in the goods to the factory before actual completion of the erection work; there the contract did not contemplate dissecting the value of the goods supplied and the value of work and labour bestowed in the execution of the work; and the predominant idea underlying the contract was the bestowing of special skill and labour by the experienced engineers and mechanics of the assessees. The Supreme Court agreed with the High Court and held that the contract was a works contract and not a contract for sale.
In State of Rajasthan v. Man Industrial Corporation Ltd. [1969] 24 STC 349 (SC), pursuant to an invitation of the Executive Engineer, the assessee submitted its tender for fabricating and fixing certain windows in accordance with specifications, designs, drawing and instructions. The work was to be completed within six months from the date of its acceptance and the windows were to be fixed to the building with rawl plugs in cut stone-works. The rate quoted by the assessee was based on the current price of mild steel billets and the price was to be revised if there was a change in the controlled price of billets supplied to the assessee. The tender was accepted and the assessee carried out the contract. The question was whether the sum of Rs. 23,480 received under the contract could be included in the taxable turnover for the purpose of sales tax. The Supreme Court on consideration of the above facts, held that the contract undertaken by the assessee was to prepare the window-leaves according to the specifications and to fix them to the building. There were not two contracts, one of sale and another of service. Fixing the windows to the building was also not incidental or subsidiary to the sale, but was an essential term of the contract. The window-leaves did not pass under the terms of the contract as window-leaves. Only on the fixing of the windows as stipulated could the contract be fully executed and the property in the windows passed on the completion of the work and not before. The contract was therefore held to be a contract for execution of work not involving sale of goods.
In Vanguard Rolling Shutters & Steel Works v. Commissioner of Sales Tax , the assessee manufactured iron shutters according to specifications given by the parties and fixed the same at the premises of the customers. Under the terms of the contract the assessee was required to fabricate the rolling shutters, bring them to the site of the customers at the cost of the customers and thereafter erect them at the premises. The masonry work had to be done by the customers at their cost, according to the assessee's instructions. The assessee was entitled to receive full price of the shutters against delivery prior to despatch of documents by bank and there was no such thing as to make payment after fixing. The process involved in the fabrication of a rolling shutter and its actual fitting to the premises at the site was a continuous one and was completed only when erection was completed in every way. The price charged by the assessee from the owner of premises was one lump sum without at all specifying as to what part was meant for the materials used or fabricated and what part for the services or labour put in by the assessee. The High Court held that the contract entered into by the assessee was not a works contract but a contract for the supply of goods simpliciter and the assessee was, therefore, liable to pay tax. On appeal, the Supreme Court held that the contract was a works contract.
In Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax [1978] 42 STC 409, the question before the Supreme Court again was whether a contract for fabrication, supply and erection of certain types of rolling shutters was a contract of sale or a contract for work and labour. The Supreme Court analysed the nature of the contract and pointed out that "not only are the rolling shutters to be manufactured according to the specifications, designs, drawings and instructions provided in the contract, but they are also to be erected and installed at the premises of the company. The price stipulated in the contract is inclusive of erection and installation charges and the contract does not recognise any dichotomy between fabrication and supply of the rolling shutters and their erection and installation so far as the price is concerned. The erection and installation of the rolling shutters is as much an essential part of the contract as the fabrication and supply and it is only on the erection and installation of the rolling shutters that the contract would be fully executed." The Supreme Court then proceeded to examine what is a rolling shutter and how it is erected and installed in the premises and observed that a rolling shutter consists of several component parts and "the component parts do not constitute a rolling shutter until they are fixed and erected on the premises. It is only when the component parts are fixed on the premises and fitted into one another that they constitute a rolling shutter as a commercial article and till then they are merely component parts and cannot be said to constitute a rolling shutter. The erection and installation of the rolling shutter cannot, therefore, be said to be incidental to its manufacture and supply. It is a fundamental and integral part of the contract because without it the rolling shutter does not come into being. The manufacturer would undoubtedly be the owner of the component parts when he fabricates them, but at no stage does he become the owner of the rolling shutter as a unit so as to transfer the property in it to the customer. The rolling shutter comes into existence as a unit when the component parts are fixed in position on the premises and it becomes the property of the customer as soon as it come into being. There is no transfer of property in the rolling shutter by the manufacturer to the customer as a chattel. It is essentially a transaction for fabricating component parts and fixing them on the premises so as to constitute a rolling shutter." The contract for fabrication, supply and erection of the rolling shutters was, on this reasoning, held by the court to be a contract for work and labour and not contract for sale.
In Ram Singh & Sons Engineering Works v. Commissioner of Sales Tax , a contract for fabrication and erection of a 3-motion electrical overhead travelling crane was held to be a contract for work and labour and not a contract for sale. To arrive at the above conclusion the Supreme Court considered what is a 3 motion electrical overhead travelling crane and how it is fabricated, erected and installed and following the analogy of its earlier decision in Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. [1978] 42 STC 409 held that the contract was not a contract for sale but a contract for work and labour. It observed :
"......... It would thus be seen that the fabrication and erection of a 3-motion electrical overhead travelling crane is a highly skilled and specialised job and the component parts have to be taken to the site and they are assembled and erected there and it is only when this process is complete then a 3-motion electrical overhead travelling crane comes into being. The process of assembly and erection requires a high degree of skill and it is not possible to say that the erection of a 3-motion electrical overhead travelling crane at the site is merely incidental to its manufacture and supply. The fabrication and erection is one single indivisible process and a 3-motion electrical overhead travelling crane comes into existence only when the erection is complete. The erection is thus a fundamental and integral part of the contract, because without it the 3-motion electrical overhead travelling crane does not come into being. The manufacturer would undoubtedly be the owner of the component parts when he fabricated them, but at no stage does he become the owner of the 3-motion electrical overhand travelling crane as a unit so as to transfer the property in it to the customer. The 3-motion electrical overhead travelling crane comes into existence as a unit only when the component parts are fixed in position and erected at the site, but at that stage it becomes the property of the customer because it is permanently embedded in the land belonging to the customer. The result is that as soon as 3-motion electrical overhead travelling crane comes into being, it is the property of the customer and there is, therefore, no transfer of property in it by the manufacturer to the customer as a chattel. It is essentially a transaction for fabricating component parts and putting them together and erecting them at the site so as to constitute a 3-motion electrical overhead travelling crane. The transaction is no different than one for fabrication and erection of an open godown or shed with asbestos or tin sheets fixed on columns. There can, therefore, be no doubt that the contract in the present case was a contract for work and labour and not a contract for sale."
In State of Madras v. Richardson & Cruddas Ltd. [1968] 21 STC 245, the Supreme Court also dealt with the question whether a contract for fabrication and installation of bottle cooling equipment at the premises of its customer was a contract for sale of the equipment or works contract. Under the terms of the contract, in that case, the assessee undertook to install a bottle cooling equipment, that is, to fabricate different parts of the unit according to the special requirements of the customer, and to install the unit in the premises of the customer. Each bottle cooling equipment required special fabrication and had to be installed at the place selected by the customer and found suitable for installation of the unit. An all inclusive price was charged by the assessee for the work of fabrication of the bottle cooling equipment required in the premises of the customer and for installation of the equipment. The Supreme Court held that the contract being one for supplying for an inclusive price a specially designed fabricated unit to be assembled and installed by specially trained technicians in the premises of the customer, it was not a contract for sale of a unit or different parts of the unit as specific goods, but a works contract.
9. On perusal of the above decisions in the light of facts of the present case, we are of the clear opinion that the analogy of above decisions of the Supreme Court, particularly, the decisions in Richardson & Cruddas Ltd. [1968] 21 STC 245, Vanguard Rolling Shutters & Steel Works [1977] 39 STC 372, Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. [1978] 42 STC 409 and Ram Singh & Sons Engineering Works [1979] 43 STC 195, fully applies to the case before us. The nature of the transaction in the instant case is in no way different than the transaction of "supply of fabrication and installation of bottle cooling plant" in Richardson & Cruddas Ltd. [1968] 21 STC 245 (SC) and the contract "for fabrication and erection of 3-motion electrical overhead travelling crane" in Ram Singh & Sons Engineering Works . Accordingly, we hold that the contract for supply, erection and installation of plastic machinery in the present case is a works contract and not a contract for sale.
10. In view of the above, we answer the question referred to us in the affirmative and in favour of the assessee.
11. In the facts and circumstances of the case, we make no order as to costs.
12. Reference answered in the affirmative.