1969 (2) TMI 130 - SC - VAT and Sales Tax

Whether on the proper interpretation of the contract between the applicant and the Executive Engineer, C.P.W.D., Ajmer, regarding the providing and fixing of the steel windows to the Accountant-General s Office, Jaipur, and looking to the terms of the transaction of the type undertaken by the applicant the Board were justified in holding that the contract was divisible between two parts representing the sale of the windows and the labour charges in fixing the same and thus partly liable to sales tax? Held that - Appeal dismissed. In the present case, the specifications of the windows were set out in the contract. The primary undertaking of the respondent was not merely to supply the windows but to fix the windows. This service is not rendered under a separate contract, nor is the service shown to be rendered customarily or normally as incidental to the sale by the person who supplies window-leaves. The fixing of windows in the manner stipulated required special technical skill. If the windows were not properly fixed the contract would not be complete, and the respondent could not claim the amount agreed to be paid to it. We agree with the High Court that it was only upon the fixing of the window-leaves, and when the window-leaves had become a part of the building construction that the property in the goods passed under the terms of the contract.

Issues Involved:
1. Nature of the contract (whether it is a contract for sale of goods or a works contract).
2. Taxability of the amount received under the contract.
3. Interpretation of the contract terms.
4. Applicability of sales tax on the contract.

Detailed Analysis:

1. Nature of the Contract:
The primary issue was whether the contract between the respondent and the Executive Engineer was a contract for the sale of goods or a works contract. The respondent had submitted a tender for providing and fixing steel windows, which was accepted. The Sales Tax Officer initially included the amount received under the contract in the taxable turnover, considering it a sale of goods. However, the Deputy Commissioner, upon appeal, held that the contract resulted in two separate agreements: one for providing the windows and another for fixing them. The High Court of Rajasthan concluded that the contract was a "building contract" and not taxable as a sale of goods.

The Supreme Court analyzed the terms of the tender and the circumstances of the transaction. It was noted that the tender included specifications for the fabrication and installation of the windows, which required technical skill. The Court concluded that the primary undertaking was not merely to supply the windows but to fix them, making it a works contract. The windows did not pass to the Union of India as chattels but only upon being fixed to the building, thus making the contract indivisible and not a contract of sale.

2. Taxability of the Amount Received:
The Sales Tax Officer had taxed the entire amount received under the contract, considering it a sale of goods. However, the Deputy Commissioner and the Board of Revenue held that only the price of the materials supplied was taxable, not the service charges. The High Court supported this view, stating that the contract was not taxable as a sale of goods.

The Supreme Court upheld the High Court's decision, emphasizing that the contract was a works contract. The property in the windows passed only upon their installation, and thus, the contract was not subject to sales tax as a sale of goods.

3. Interpretation of the Contract Terms:
The terms of the tender, which included providing and fixing windows according to specific designs and instructions, were crucial in determining the nature of the contract. The Court examined the detailed specifications, the requirement for technical skill in fixing the windows, and the conditions related to the completion of the work.

The Court referred to Halsbury's Laws of England and previous judgments to distinguish between a contract for sale and a works contract. The Court concluded that the main object of the contract was the execution of work involving the use of materials, making it a works contract rather than a sale of goods.

4. Applicability of Sales Tax on the Contract:
The Supreme Court reviewed previous cases, including State of Madras v. Gannon Dunkerley Co. and Government of Andhra Pradesh v. Guntur Tobaccos Ltd., to determine the applicability of sales tax on works contracts. The Court reiterated that in a building contract, the property in the materials used does not pass as movable property but only upon completion of the work.

The Court also referred to other cases like Patnaik & Co. v. State of Orissa and McKenzies Ltd. v. State of Maharashtra, where the contracts were deemed sales of chattels. However, in the present case, the Court found that the contract was for work and labour, with the use of materials being incidental to the execution of the work.

Conclusion:
The Supreme Court concluded that the contract was a works contract, not a contract for the sale of goods. The property in the windows passed only upon their installation, making the contract indivisible and not subject to sales tax as a sale of goods. The appeal was dismissed, and the High Court's decision was upheld.

Appeal Dismissed.

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