Madras High Court
State Of Tamil Nadu vs Aparajitha Rubbers (P) Ltd. on 8 August, 1990
Equivalent citations: [1991]82STC74(MAD)
JUDGMENT Abdul Hadi, J.
1. These tax revision cases are against the common order of the Sales Tax Appellate Tribunal Main Bench, Madras-104, dated December 9, 1986, in the Tribunal Appeal Nos. 463, 461 and 462 of 1985, respectively, relating to the same assessment year 1982-83. The first of the three relates to sales tax under the Tamil Nadu General Sales Tax Act, 1959, and the other two relate to consequent surcharge and additional sales tax therein under the Tamil Nadu Sales Tax (Surcharge) Act, 1971 and Tamil Nadu Additional Sales Tax Act, 1970, respectively.
2. The question involved in all these cases relates to the disputed turnover of Rs. 6,52,851 representing receipts towards rubber lining contract, which was brought to tax by the assessing officer as representing sales made by the respondent-assessee in all the three cases. The assessing officer rejected the claim of the assessee that it was only a works contract and resulted in so sales exigible to tax under the abovesaid enactments [prior to the amendment made to the Tamil Nadu General Sales Tax Act, 1959, with effect from May 29, 1984, by Tamil Nadu Act 28 of 1984, consequent upon the Constitution (Forty-sixth Amendment) Act, 1982]. In the assessee's appeal, the Appellate Assistant Commissioner only confirmed the assessment made. In its second appeal to the Tribunal, the latter set aside the assessment order relating to the said disputed turnover on the ground that the transaction was only a works contract and there were no sales. Hence, the State has filed these tax revision cases.
3. The assessee-company is a manufacturer of rubber goods and it also undertakes rubber lining of industrial equipments. The Tribunal set out in its order the nature of the business of the assessee and the process involved in the abovesaid rubber lining (as per the affidavit of the assessee's Director, Mr. Gangwal) which, as the Tribunal itself states, "are undisputed by the State".
"(a) The appellant effects outright sales of rubber components for which the components are manufactured according to specific drawings. On those sales, sales tax is charged and paid.
(b) The appellant-company undertakes rubber lining on the customers' industrial equipments like, pipes, vessels, storage tanks and other equipments which use corrosive chemical materials and to protect that costly equipment from such corrosion, rubber lining is done .......
(c) As soon as the enquiry is received, the matter is discussed with customers regarding the type of corrosive substance which the equipment is going to be put use of. Thereafter, the type of rubber lining is mutually discussed and agreed. For each category of job, the rubber linings have different properties having the suitable mix of rubber, input chemicals, which are suitably blended and compounded before preparing the rubber lining. The equipments are received at the factory of the appellant and always the rubber lining is blended, compounded and prepared only after the order is received. In other words, the rubber lining compound or sheet is not kept ready for use in the equipment from time to time but specifically prepared for each job then there as per the customers' specification;
(d) The raw rubber is suitably blended with rubber chemicals, in the rolling mixing mill to prepare appropriate lining sheets. Simultaneously the customers equipments surface is treated first by sand blasting (cleaning the surface of the metal to remove the dust and other foreign particles). Thereafter the surface is subjected to adhesive chemical coating and then the rubber lining is munually affixed on the surface of the metal and pressed by small hand roller to have a bonding with the metal. This is highly technical and skilled job, since any minor error makes the surface defective, with loose binding, air bubbles, pin-holes, etc., in lining sheet, which totally make the equipment useless for its purpose. After rubber lining sheet is put on the equipment it is thoroughly checked and tested with spark testing machine, etc., to locate the most minute defect in the rubber lined; entire equipment is put into the auto-clave (a heat treatment chamber) side by side the steam is kept ready in a boiler. This steam at a required pressure and temperature is passed through pipe lines into autoclave or heat chamber in order to cook the line which is called the curing or vulcanising process. The rubber lining surface is hardened and bonded and makes the rubber lining inseparable and permanent part of the equipment capable of withstanding any amount of wear and tear. After this once again the equipment is thoroughly checked and tested and then the equipment of the customer is delivered back to the customer."
4. The assessing officer held that the alleged rubber labour receipts to the extent of the abovesaid Rs. 6,52,851 were actually sales exigible to tax as was held in State of Tamil Nadu v. Dunlop India Ltd. [1981] 48 STC 521 (Mad.) and the Appellate Assistant Commissioner also concurred with him, holding further that the earlier contrary judgment dated December 10, 1979 of another Division Bench of this Court in State v. Madras Industrial Lining Ltd. (T.C. Nos. 1208 to 1214 of 1979) would not apply in view of the abovesaid latter decision reported in [1981] 48 STC 521 (Mad.) referred to above. In the subsequent second appeal by the assessee to the Tribunal, the latter also noted down the typical contract order given to the assessee by its customer as follows :
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Quantity Description Rate per
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RUBBER LINING CHARGES FOR THE FOLLOWING ITEMS :1 No. Delivery casting with plug C.I. 300 each 1 No. Section cover C.I. 230 each 3 Nos. Impellers C.I. 360 each 1 No. Wear plates C.I. 215
Price : Ex-works, Madras
Packing, forwarding charges extra
Delivery : Immediate.
Payment : Credit.
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The Tribunal further observed that the materials described above belonged to the customer and on which rubber lining had to be done.
5. Then, after extracting a passage from [1981] 48 STC 521 (Mad.) (State of Tamil Nadu v. Dunlop India Limited) referred to above, the Tribunal distinguished the present case from [1981] 48 STC 521 (Mad.) on the ground that in the present case, the parties did not contemplate any passing of property in the rubber lining, but the customers entrusted the work of rubber lining on their equipments for a particular user necessitated by the industry in which the equipments are used. The Tribunal further held that the principles enunciated in Stanes Motors (South India) Ltd. v. State of Madras [1959] 10 STC 154 (Mad.), Appasamy and Sons v. State of Madras [1959] 10 STC 170 (Mad.), A. A. Jariwala and Bros. v. State of Gujarat [1965] 16 STC 942 (Guj) and Vasani Cloth Stores v. State of Maharashtra [1968] 22 STC 179 (Bom) would apply and that hence the abovesaid transaction was not a sale exigible to tax, but only a works contract, in view of the fact that there are no agreements, one for sale of rubber product and another for work, that rubber lining on customers' equipment represent job works and that the purchase order was for a consolidated sum for work as well as materials which are to be incidentally used in executing the works.
6. The learned Additional Government Pleader appearing for the State submits that the facts in State of Tamil Nadu v. Dunlop India Limited [1981] 48 STC 521 (Mad.) referred to above and the facts in the present case are similar and, hence, only the said ruling should be followed and not the above referred to earlier decision of another Bench of this Court in T.C. Nos. 1208 to 1214 of 1979 dated December 10, 1979 (State v. Madras Industrial Lining Ltd.). On the other hand, Mr. C. Natarajan, learned counsel appearing for the assessee/respondent submitted that the decision in State of Tamil Nadu v. Dunlop India Limited [1981] 48 STC 521 (Mad.) is distinguishable on facts and the decision in T.C. Nos. 1208 to 1214 of 1979 (State v. Madras Industrial Lining Ltd.) will squarely apply to the facts of this case. He also placed reliance on the following decisions, namely, Government of Andhra Pradesh v. Guntur Tobaccos Ltd. , Jariwala and Bros. v. State of Gujarat [1965] 16 STC 942 (Guj), State of Gujarat v. Kailash Engineering Co. (Pvt.) Ltd. and Hindustan Aeronautics Ltd. v. State of Karnataka [1984] 55 STC 314 (SC).
7. Let us consider the rival submissions and the ratios laid down in various decisions cited at the Bar.
8. As rightly pointed out by the learned counsel for the respondent State of Tamil Nadu v. Dunlop India Limited [1981] 48 STC 521 (Mad.) is distinguishable on facts.
9. The learned Judges, on facts of that case, pointed out as follows :
"Further, as we have noticed already, the parties themselves at the time of entering into the contract contemplated the supply as a contract for sale and purchase of so many units of tyres and there was a provision for payment of sales tax as well. The assessee charged sales tax on the turnover relating to this rubberisation of the wheels and it also gave the certificates as stated earlier. We may safely, therefore, presume that the parties also intended the transaction to be a sale and not a works contract."
Earlier also, they pointed out thus :
"The contract entered into, however, described the contracts as one for supply of specific articles ordered. There was also a clause for payment of sales tax on the amount to be paid for each unit supplied. In all these assessment years, factually, the assessee raised invoices, claimed sales tax and recovered the same. The invoices specifically refer as sale of rubber. A certificate also was given by the assessee with reference to the amounts claimed as sales tax in the invoices ....... The property in the rubber portion or any of its components did not pass till the rubberised wheel as such is delivered to the Heavy Vehicles Factory ......... It is only when the rubberised wheel as such is delivered to the Government, the property in the rubber portion passes to the purchaser-Government. This was because the contract was for delivery of the rubber portion as fitted to the wheel and the Government never intended to pass the title in the wheel to the assessee at any time."
10. In view of these features only, applying the decision in T. V. Sundram Iyengar & Sons v. State of Madras , the Bench held in State of Tamil Nadu v. Dunlop India Limited [1981] 48 STC 521 (Mad.) referred to above that the transaction in question therein was only sale and not works contract and that is why the Bench also observed as follows :
"On the facts of the present case, the decisions in Sundaram Motors (Private) Ltd. v. State of Madras [1958] 9 STC 687 (Mad.) and in Stanes Motors (South India) Ltd., Coimbatore v. State of Madras [1959] 10 STC 154 (Mad.) have no application."
So, State of Tamil Nadu v. Dunlop India Limited [1981] 48 STC 521 (Mad.) referred to above, turned very much on the above referred to facts in that case, which are not present in the present case.
11. Then, let us consider whether the principles laid down in the above referred to (T. V. Sundram Iyengar & Sons v. State of Madras) can be applied to the facts of the present case. The question there was, whether the supply for consideration by an assessee of bus bodies constructed and fitted to the chassis provided by the customers amounted to a sale chargeable to sales tax and the Supreme Court found on facts that the property in the materials used by the assessees in constructing the bus bodies never passed to their customers during the course of construction and that it was only when the complete bus with the body fitted to the chassis was delivered to the customer that the property in the bus body passed to the customer. So, the Supreme Court held that the supply of bodies constituted a sale. The following observations of the Supreme Court in that case, which follows its own earlier decision in Patnaik and Company v. State of Orissa are significant :
"The question with which we are concerned, as would appear from the resume of facts given above, is whether the construction of the bus bodies and the supply of the same by the assessees to their customers was in pursuance of a contract of sale as distinguished from a contract for work and labour. The distinction between the two contracts 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 the main object of work undertaken by the payee of the price is not the transfer of a chattel quo chattel, the contract is one for 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 is in substance one for work and labour or one for the sale of a chattel (see Halsbury's Laws of England, Vol. 34, p. 6, Third Edition)."
12. We now proceed to consider the decisions cited by the learned counsel for the respondent. In T.C. Nos. 1208 to 1214 of 1979 dated December 10, 1979 (State v. Madras Industrial Lining Ltd.), the learned Judges observed as follows :
"The question that has been considered by the Tribunal was, whether the rubber lining done by the assessee on the equipments produced by the customers would constitute sale of the goods or the transactions would be contracts of work and labour. The Tribunal has elaborately considered the facts and the law in this behalf and has come to the conclusion that the work done by the assessee was not in the nature of a sale of goods, but only in the nature of a contract of work. Having regard to the facts of these cases, we see no reason to take a view different from the one taken by the Tribunal and hence these tax revision cases are dismissed."
13. In Government of Andhra Pradesh v. Guntur Tobaccos Ltd. , the assessee was a dealer carrying on the business of re-drying in its factory raw tobacco entrusted to it by its customers and it re-dried the tobacco, packed it in packing materials purchased from the market and delivered it to the customers and for re-drying each bale of tobacco, the assessee charged the customers a certain sum, but there was no separate charge for the value of the packing materials used. In this context, the Supreme Court held that there was no sale of those packing materials since the transaction was only a works contract to re-dry raw tobacco by special process. Therein, the Supreme Court observed thus :
"In order that there should be a sale of goods which is liable to sales tax as part of a contract for work under a statute enacted by the Provincial or State Legislature, there must be a contract in which there is not merely transfer of title of 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.
No useful purpose will be served by entering upon a detailed analysis of the large number of cases cited at the Bar. The cases upon lay down no general principle and the ultimate decision in all the cases turned upon what the courts found were the true agreements between the parties."
14. Even in Sundaram Motors (Private) Ltd. v. State of Madras [1958] 9 STC 687, this Court also emphasised the following passage in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. :
"We are accordingly of opinion that on the true interpretation of the expression 'sale of goods' there must be an agreement between parties for the sale of the very goods in which eventually property passes."
15. In A. A. Jariwala and Bros. v. State of Gujarat [1965] 16 STC 942 (Guj) also, cited by the learned counsel for the respondent, customers sent saris to the applicants for getting embroidery work on the saris with instructions regarding the designs required on those saris. The applicants gave the jari materials and the saris to the workers doing the job work in their own houses and gave them piece rates according to the work done by them. After completion of the embroidery work on the saris, the applicants returned the saris to the customers along with a consolidated bill for the entire work done by them. The question was, whether the contract between the applicants and their customers was a works contract, or was a composite agreement, one for the sale of the jari materials and another for doing work. In that context, it was held that the contract was one and indivisible and was not separable into two contracts, one for service and the other for the sale of the jari materials. The contract essentially was one of work and labour and the supply of jari materials in the execution of the embroidery work was merely ancillary.
16. Further, in State of Gujarat v. Kailash Engineering Co. (Pvt.) Ltd. [1967] 19 STC 13, the Supreme Court distinguished its own earlier decision in Patnaik and Company v. State of Orissa [1965] 16 STC 364 and held that, in a case of contract for construction of coaches on chassis supplied by the Railway, the terms of the contract led to the only inference that the respondent therein was not the owner of the ready coach bodies, that the property in those bodies vested in the Railway even during the process of the construction and that hence the contract was only a works contract for galvanisation of fabricated steel work with contractor's own zinc, the use of zinc being only necessary to the execution of galvanising work (sic).
17. The learned counsel for the respondent also cited Hindustan Aeronautics Ltd. v. State of Karnataka [1984] 55 STC 314 (SC). There, 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 which the appellant supplied to the Indian Air Force. The Supreme Court held that the property in these materials which were used in the execution of the jobs entrusted to the appellant was not taxable. In that context, the Supreme Court observed as follows :
"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 ..... 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 was held by this Court in Commissioner of Commercial Taxes v. Hindustan Aeronautics Ltd. , 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 the surrounding circumstances."
18. Now, applying the principles enunciated in these decisions to the nature of the contract in the present case, as culled out by the Tribunal, it will be clear that the transaction involved in the present case cannot be construed as sale, but only as works contract, since the dominant object or the very essence of the contract in the present case was only agreement to work for a stipulated consideration and there was no sale of the very rubber content of the lining to the customer. As stated already in paragraph 5 above, the Tribunal found that in the present case the parties did not contemplate any passing of property in the rubber lining, but the customers entrusted the work of rubber lining on their equipments for a particular user necessitated by the industry in which the equipments are used. Nothing contra has become established by the Revenue. Further, from the affidavit filed by the assessee, it is found that out of Rs. 300 per square metre, the total consideration for doing rubber lining for "delivery casting with plug C.I.," only Rs. 65 in value represents the rubber component and adhesive, and the entire remaining consideration represents work to be done. From the abovesaid affidavit on behalf of the assessee it is further seen that the rubber, rubber chemicals, solvent adhesives, etc., are used only incidental to the work and the final rubber lining of the equipment is a permanent improvement to the equipment of the customer. The Tribunal also has found that the entire lining of customers' equipment represents job work, that the purchase order is for a consolidated sum for work as well as materials incidentally used therein and that the basic nature of the contract is for executing a work and not specifically for transfer of property in goods.
19. In the result, these tax revision cases are dismissed. In the circumstances of the case, there will be no order as to costs.
20. Petitions dismissed.