Gujarat High Court
State Of Gujarat vs Elecon Engineering Co. on 6 August, 1992
Author: G.T. Nanavati
Bench: G.T. Nanavati
JUDGMENT G.T. Nanavati, J.
1. The Tribunal had referred, under section 69 of the Gujarat Sales Tax Act, 1969, the following question for the opinion of this Court :
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sale as evidenced by bill No. 642 of 1976 dated December 14, 1976, which is related to the purchase order dated September 4, 1975, is not a transaction of sale of goods ?
2. The opponent is an engineering company engaged in the business of manufacture of mechanical handling equipments and other engineering products. It entered into a contract with M/s. Fertilizer Corporation of India Limited, Trombay, for complete designing, engineering, manufacturing, supplying, erection and commissioning of N.P. handling system. The contract between the parties is evidenced by the request for quotation made by Fertilizer Corporation of India and the purchase order dated September 4, 1975, given by Fertilizer Corporation of India. Under the contract the respondent-company despatched some goods being components of material handling equipment, to Fertilizer Corporation of India. One such despatch was made under bill dated December 14, 1976. A doubt arose as to whether the sales tax charged by the opponent company was really leviable. Therefore the opponent company made an application on October 8, 1979, to the Deputy Commissioner of Sales Tax for determination under section 62 of the Act, whether the transaction of supply, erection and commissioning of N.P. handling system to Fertilizer Corporation of India as evidenced by the latter's purchase order dated September 4, 1975, was a transaction of sale of goods. The Deputy Commissioner of Sales Tax held that "there was a distinct contract for sale of goods accompanied by another contract for transportation, handling, erection, etc." He further held that there was a "specific agreement to sell conveyors, belts and other equipments separately as chattel" and thus the transaction was a transaction of sale. Aggrieved by that order, the assessee preferred an appeal before the Gujarat Sales Tax Tribunal. The Tribunal did not agree with the conclusion of the Deputy Commissioner that the contract was divisible. It held that the contract was essentially a works contract and could not be broken up into two contracts - one for sale of components or equipments and another for erection and commissioning of the material handling system. Taking this view, the Tribunal allowed the appeal. The department therefore, moved the Tribunal under section 69 of the Act to refer the abovementioned question to this Court. As a question of law did arise from its order, it has referred the above stated question.
3. As pointed out by the Supreme Court in a number of cases, the primary test to be applied in such cases is whether the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale or it is carrying out of work by bestowal of labour and service and materials are used in execution of such work. This test has been recognised and approved in a number of decisions and it may now be regarded as beyond controversy; but the real difficulty arises in its application as there are a large number of cases which are on the borderline and fall within what may be called the grey area. To solve this difficulty, the courts have evolved some subsidiary tests and one of such tests is that formulated by the Supreme Court in Commissioner of Sales Tax v. Purshottam Premji [1970] 26 STC 38. It is as under :
"The primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in the person performing work or rendering service no property in the thing produced as a whole ............ 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, at some time before delivery, and the property therein passes only under the contract relating thereto to the other party for price."
4. In the case of Hindustan Aeronautics Ltd. v. State of Karnataka [1984] 55 STC 314, again it was pointed out by the Supreme Court that it is a well-settled position that the primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in the person performing or rendering service no property in the thing produced as a whole notwithstanding that a part or even the whole of material used by him may have 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 some time before delivery and the property therein passes 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. The nature and type of the transactions are important and determinative factors. What is necessary to find out, is the dominant object.
5. The observations made by the Supreme Court in Government of Andhra Pradesh v. Guntur Tobaccos Ltd. [1965] 16 STC 240 are also helpful in deciding whether the contract is a real contract for work and service or a contract for sale of goods. The Supreme Court has observed that even though 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 three forms. The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for the 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 category 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.
6. Keeping in mind these observations made by the Supreme Court, we will have to decide whether, looking to the nature of the transaction between the opponent company and the Fertilizer Corporation of India and the terms and conditions of the contract as evidenced by the quotations invited by the Fertilizer Corporation of India and the purchase order issued by it, it was really a contract for work or service or a contract for sale of goods. From the "request for quotation" we find that the Fertilizer Corporation of India had invited quotation for the "articles" mentioned therein. The terms and conditions of the purchase were given in the document described as attachment I. The terms of the purchase were described therein as "engineering, manufacture, supply, transportation to site, unloading and storage, erection, painting, testing and commissioning of product handling system consisting of belt conveyors, related equipments as per Fertilizer Corporation of India's drawing and technical specifications". The bidders were required to split-up their bid into two portions, one indicating the technical specifications only and the other indicating the price of the equipment. Clause 9 of the request for quotation was in respect of absolute performance warranty. The supplier had to guarantee quality and performance of all the equipments. If any equipment did not perform as intended or was found defective in design, material or workmanship within 18 months after delivery or 12 months after commissioning, whichever be later, the equipment was to be promptly rectified to Fertilizer Corporation of India's satisfaction without delay and at no cost. If the supplier failed to take proper corrective action to replace or repair deficiencies within a reasonable time, Fertilizer Corporation of India could take such corrective action at the supplier's cost and risk. The Fertilizer Corporation of India had also the right to reject the complete unit and to get full reimbursement of payments already made. Clause 15 thereof was in respect of scope of service and materials necessary for satisfactory execution of the contract, except in so far as any of those were expressly excluded. The supplier was to remain responsible for effective protection against damage of all finished and unfinished work, prior to such work being handed over to Fertilizer Corporation of India. Attachment No. 2 contained instructions to bidders. One such instruction was with respect to prices. The bidders were instructed to quote both unit and lump sum price. When we turn to the purchase order, we find that the order which was placed by the Fertilizer Corporation of India was in respect of "complete design, engineering, manufacture, supply, transportation to site, unloading and storage, erection, painting, testing and communication of product handling system consisting of belt conveyors, and related equipments as per annexure I to K. The lump sum price mentioned against this item was Rs. 35,35,274. Annexure 'I' to that purchase order specified the scope of the contracts, the delivery and progress schedule and other requirements. While specifying the scope, it was stated "this would consist of engineering, manufacture, supply, transportation to site, unloading and storage, erection, painting, testing and commissioning of NP product handling system consisting of belt conveyors and related equipments". The complete system was to be delivered to and installed and commissioned in the factory of Fertilizer Corporation of India at Trombay. The contractor was to use his basic arrangement of Fertilizer Corporation of India and to modify his standard equipment supporting arrangement to suit purchaser's civil works. The purchaser was to carry on its civil works independently. The civil works included all transfer towers, silo, bagging plant, filled bag storage, empty bag storage and conveyor gantries including trestles and their walkways, all electricals including electric motor and starter, etc., except otherwise specified and were excluded from the scope of the purchase order. Annexure II contains the break up of prices. Items at 1.00 to 1.06 pertained to various equipments and separate prices were shown against each one of them. The total of those items was Rs. 29,68,025. Item 2 was in respect of transportation to site, handling, storage at site, erection, testing, painting and commissioning and for that item the price shown was Rs. 4,94,000. The third item pertained to insurance charges and the price shown against the same was Rs. 73,250. Annexure III contained general terms and conditions of contract. Condition No. 8 was in respect of terms of payment. It consisted of two parts - the first part dealt with payments towards supply of equipments and the second part dealt with payment of erection and commissioning charges. Payment of erection and commissioning charges was to be made within 10 days from the date of establishment of site; condition also required execution of a hypothecation bond in order to secure the advances to be made against the goods delivered.
7. From what is stated above, it appears clearly that it was a composite contract. It not only contemplated manufacturing and supply of product handling system, but also erection thereof at the premises of Fertilizer Corporation of India. Therefore, the question which arises for our consideration is whether in substance the said contract was a contract for sale of goods or whether it was a contract for work and labour. Another question which will have to be considered is whether the said contract was divisible. It was contended by the learned counsel appearing for the Revenue that the request for quotation and the purchase order clearly indicate that the contract was for purchase of product handling system and the work of erection was a minor work. The parties themselves regarded the two things as separate and therefore, separate prices were quoted for supply of the equipment and for the services like transportation, unloading, storage, erection, testing and commissioning. Whereas the price to be paid for the equipment was Rs. 29,68,025 it was only Rs. 4,25,000 for the services to be rendered by it. Even the terms and conditions of payment of price indicate that the parties regarded supply of equipments and rendering of services as two independent things and therefore, provided for separate payments. Price of the equipment was to be paid though by way of advance, against delivery of equipment whereas price for services to be rendered was to be paid only after establishment of site office at the Fertilizer Corporation of India's premises and only against monthly progress bills. It was also urged that the whole or complete product handling system was to become the property of Fertilizer Corporation of India only after the system was commissioned and accepted as satisfactory by the Fertilizer Corporation of India.
8. As against that it was contended by the learned counsel for the respondent-company that the job which was undertaken by it was a specialised job of manufacturing equipment as per the drawings and specifications approved by Fertilizer Corporation of India. The Fertilizer to Corporation of India had a right to supervise the manufacture of various equipments necessary for completing the system and all the equipments were to be installed and erected at the premises of Fertilizer Corporation of India with the help of skilled labourers. According to the learned counsel, all these factors clearly indicate that the contract in essence was a works contract and not a contract for sale of goods. It was also submitted that price of the equipments and price of services to be rendered by it were shown separately as the parties had contemplated advance payments and for the purpose, it was necessary to bifurcate the two. It was also submitted that the system was to be regarded as completed only when the equipments were installed and erected at the premises of Fertilizer Corporation of India over the towers and structures constructed by the Fertilizer Corporation of India. The system did not come into existence at a prior stage and by the time it came into existence, it had not remained the sole property of the respondent-company.
9. While appreciating these rival arguments, what is required to be borne in mind is that the contract was for the purchase and erection of N.P. product handling system. From the description given in the quotation and the purchase order, we are able to gather that it consisted of conveyors and related equipments. Thus, a number of conveyors and related equipments were required to be supplied and fixed, so as to convert them into a product handling system. The said work of installation and erection was to be done at the premises of Fertilizer Corporation of India at Trombay. There was nothing in the contract to indicate that the respondent-company was required to do any foundation work or carry any other work which would have made the complete product handling system part of the immovable property of Fertilizer Corporation of India before the system as a whole came into existence. From the scope of the contract as indicated by the aforesaid two documents, one thing becomes clear that none of the civil works necessary for the product handling system was to be done by the respondent-company. All the equipments and components making that system were to be placed or fixed over the towers and foundations prepared by the Fertilizer Corporation of India. The exclusion clause makes this position clear. Moreover, the condition that Fertilizer Corporation of India had a right to reject the unit as a whole, if while commissioning the same it was found to be defective and not satisfactory, also indicates that till then it was to remain the property of the respondent-company. The property in the system was to pass on to the Fertilizer Corporation of India only after its successful commissioning. All these go to show that even though the respondent-company manufactured the same in parts and the comnonents were despatched to the premises of Fertilizer Corporation of India from time to time and the whole system was to be erected on the premises of the Fertilizer Corporation of India, it remained the owner not only of the various components, but also the system as a whole even after the erection at the place of Fertilizer Corporation of India, till the same was accepted by Fertilizer Corporation of India and transferred to it. The fact that the price for equipment and the price for services were shown separately, is also indicative of the fact that though it was a composite contract it was divisible. It consisted of two contracts - one for the sale of equipments and another for erection and such other incidental services. The provision for payments also supports this conclusion. The contention raised on behalf of the respondent-company that prices were shown separately as the parties had contemplated advance payments, does not appear to be correct because even while issuing the request for quotation, it was stated that the prices should be quoted separately. That is how the parties understood the contract. The respondent-company had no difficulty in quoting the price separately for each component of the system and quoting separately the price for the services to be rendered. Moreover, compared to the total price of the contract, the price which was to be paid for services was very less. It was about 1/7th of the total price. If we consider the other services also, which were to be rendered by the respondent-company, it becomes clear that the price for the services by way of erection of the system was less than 1/10th of the total price.
10. Merely because the contract contained provision for fabricating the components according to the drawings to be approved by the purchaser and the work of fabrication was also subject to right of the purchaser to inspect the same, it cannot be said that it was a contract of labour only; such a provision being not inconsistent with a contract for sale of goods. A purchaser may like to have the goods of a particular quality and therefore, may provide for approval of drawings and supervision of fabrication, while entering into a contract with the supplier. This factor may along with other factors go to show that the contract is really a works contract, but by itself it is not sufficient to lead to that conclusion. In this case, we do not find other features which can persuade us to hold that the contract was a works contract.
11. The learned counsel for the respondent had relied upon the decision of the Supreme Court in Ram Singh & Sons Engineering Works v. Commissioner of Sales Tax [1979] 43 STC 195 and State of Madras v. Richardson & Cruddas Ltd. [1968] 21 STC 245. In the case of Richardson & Cruddas Ltd. [1968] 21 STC 245 (SC) the facts were quite different. As found by the Supreme Court, there was no formal contract for fabrication and erection of steel structures required by the society. The price which was to be paid to the assessee in that case was a consolidated lump sum amount for the erection at the site of the work. As there was one consolidated lump sum price for the steel work to be done at the site of the purchaser, the Supreme Court held that it was not possible to consider one contract as two contracts, one for supply of fabricted steel parts and another for rendering service. As regards the contracts for supply of fabrication and installation of bottle cooling equipments, the Supreme Court found that the contract being one for supply 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 was a works contract. The said decision therefore, does not help the respondent-company. The learned counsel had also drawn our attention to the decision in the case of Clark v. Bulmer [1843] 11 M & W 243, which is referred to in the decision of Richardson & Cruddas Ltd. [1968] 21 STC 245 (SC) and submitted that the facts of this case are almost similar to the facts of that case and therefore, we should hold that this is a case of works contract. In that case it was found by the court that the contract which was entered into between the parties was not a contract for sale of engine as an engine but the contract in effect was for making parts of an engine, carrying them to a particular place and put them together and fix parts to the soil and convert them into a fixed engine on the land itself, so as to pump water out of a mine. It was for that reason not held to be a contract for sale of an engine. So even that decision can be of no help to the respondents. In Sentinel Rolling Shutter's case [1978] 42 STC 409, the Supreme Court took the view that till the component parts were fixed and erected on the premises of the purchaser, it did not constitute a rolling shutter. Only when the component parts were fixed on the premises and fitted into one another that they constituted a rolling shutter as a commercial article and till then they were merely component parts. The rolling shutter came into existence as a unit when the component parts were fixed in position on the premises and it therefore, became the property of the customer as soon as it came into being. The rolling shutter as a rolling shutter was not capable of being transferred to the customer after it came into existence. It was for that reason that the Supreme Court in that case held that the contract for fabrication, supply and erection of rolling shutters on the site belonging to the customer was a works contract and not a contract for sale of goods.
12. In Ram Singh & Sons Engineering Works v. Commissioner of Sales Tax [1979] 43 STC 195, the contract was for fabrication and erection of a 3-motion electrical overhead travelling crane. In that case also, the Supreme Court pointed out that fabrication and erection of a 3-motion electrical overhead travelling crane was a highly skilled and specialised job and the component parts had to be taken to the site and they were assembled and erected there and it was only when that process was completed that a 3-motion electrical overhead travelling crane came into existence. The three-motion electrical overhead travelling crane came into existence as a unit only when the component parts were fixed in position and erected at the site, but at that stage it became the property of the customer because it was by then permanently embedded in the land belonging to the customer. In both those cases the goods which were contracted to be sold came into existence only when they were fitted with immovable property of the customer and for that reason, it was held that the complete unit contracted for became property of the customer when it came into existence. Therefore, the property in the goods was not transferred under the contract for sale. The property therein was transferred otherwise than under the contract for sale. Thus, none of the judgments relied upon by the learned counsel for the respondent are of any help to him, as there is no material on which it can be said in this case that the N.P. product handling system came into existence as a product handling system only when it was permanently embedded into the immovable property of Fertilizer Corporation of India and it had ceased to be of the ownership of the respondent-company by that time. It is also not possible to say that the property in the system passed on to Fertilizer Corporation of India incidentally.
13. We are therefore of the opinion that the transaction of sale as evidenced by the request for quotation and the purchase order and also the bill dated December 14, 1976, was really a sale of the N.P. handling system consisting of conveyor belts and related equipments and also a sale of other services and that it was a divisible contract as held by the Deputy Commissioner. The Tribunal was therefore not right in holding that it was not a transaction of sale of goods. We therefore, answer the question referred to us in the negative, i.e., in favour of the department and against the assessee. No order as to costs.
14. It may be clarified that we have not considered the question as to whether the sale took place in Gujarat or outside, as no such question had been referred to us.
15. Reference answered in the negative.