1976 (4) TMI 191 - SC - VAT and Sales Tax

Whether the transaction envisaged by the contract entered into by the applicant with the Public Works Department of the Government of Gujarat on 6th September, 1965, for the manufacture and supply of kiln-burnt bricks to the said department and the supply of bricks to the said department in terms of their running bill No. XI dated 28th October, 1967, is a sale or a works contract? Held that - Appeal allowed. The contract in this case is a contract of sale and not a works contract. The assessee is, therefore, liable to sales tax. The High Court was not right in answering the question in favour of the assessee.

Issues Involved:
1. Whether the transaction between the assessee and the Public Works Department was a sale or a works contract.
2. Applicability of the decision in Chandra Bhan Gosain v. State of Orissa to the present case.
3. Interpretation of the terms and conditions of the contract to determine its nature.

Detailed Analysis:

1. Whether the transaction was a sale or a works contract:

The primary issue in this case was to determine if the contract for the manufacture and supply of kiln-burnt bricks to the Public Works Department was a sale or a works contract. The assessee argued that it was a works contract, while the Deputy Commissioner of Sales Tax and the Tribunal held it to be a sale. The High Court initially ruled in favor of the assessee, stating that the transaction was a works contract. However, upon appeal, the Supreme Court analyzed the terms and conditions of the contract and found that the essence of the contract was the delivery of bricks after manufacture, which indicated a sale rather than a works contract.

2. Applicability of the decision in Chandra Bhan Gosain v. State of Orissa:

The appellant argued that the present case was governed by the decision in Chandra Bhan Gosain v. State of Orissa, where a similar contract was deemed to be a sale. The High Court had distinguished the present case from Chandra Bhan Gosain's case based on certain features of the contract. However, the Supreme Court found that the terms and conditions in both cases were almost identical, particularly concerning the risk and ownership of the bricks, the prohibition on selling bricks to third parties without permission, and the description of the transaction as a sale in the tender documents. Therefore, the Supreme Court concluded that the decision in Chandra Bhan Gosain's case was applicable to the present case.

3. Interpretation of the terms and conditions of the contract:

The Supreme Court meticulously examined the contract's clauses to determine its nature. Key clauses included:

- Clause 6: Required the contractor to notify the Executive Engineer before delivering materials, which needed approval.
- Clause 7: Stated that delivery was not complete until all rejected materials were removed.
- Clause 8: Specified that payment would be made only for approved materials.
- Clause 9: Allowed the removal of inferior materials at the contractor's expense.
- Clause 11: Stated that materials remained at the contractor's risk until final delivery.
- Clause 13: Prohibited subletting the contract without permission.
- Clause 16: Did not guarantee the total quantity of materials to be ordered.
- Clause 17: Fixed rates regardless of market changes.
- Clause 22: Included sales tax in the quoted rates.
- Clause 24: Guaranteed the quality and conformity of the materials to specifications.

The Supreme Court concluded that these clauses indicated a contract of sale. The contractor had ownership of the bricks until delivery, bore the risk of loss, and the transaction involved the transfer of property in the bricks for consideration. The additional terms related to manufacturing processes and compliance with legal measures did not alter the fundamental nature of the contract as a sale.

Conclusion:

The Supreme Court held that the contract in question was a contract of sale and not a works contract. Consequently, the assessee was liable to pay sales tax. The High Court's decision was set aside, and the appeal was allowed with costs. The judgment emphasized the importance of examining the true construction of the contract's terms and the intention of the parties to determine the nature of the transaction.

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