1978 (9) TMI 157 - SC - VAT and Sales Tax

Whether a particular contract is a contract of sale or a contract of work and labour? Held that - Allow the appeal, set aside the judgment of the High Court and hold that the contract in the present case was a contract for work and labour and not a contract for sale and, conformably with this view, we answer the question referred by the Sales Tax Tribunal in favour of the assessee and against the revenue

Issues Involved:
1. Whether the contract in question is a contract of sale or a contract of work and labour.

Detailed Analysis:

Issue 1: Whether the contract in question is a contract of sale or a contract of work and labour

The primary issue in this case is to determine whether the contract between the assessee and the company for the fabrication, supply, erection, and installation of rolling shutters is a contract of sale or a contract for work and labour. The court acknowledged that this determination is often complex and that past decisions on similar matters have been inconsistent. However, the court found that the present case was relatively straightforward due to a directly applicable precedent.

The assessee, a private limited company, entered into a contract dated 28th June 1972, with another company for the fabrication, supply, erection, and installation of rolling shutters. The contract specified detailed terms and conditions, including the price per square foot and the inclusion of erection at the site. The contract also included special terms and conditions regarding transportation charges and payment terms.

The assessee fulfilled its part of the contract by manufacturing the rolling shutters according to the specified requirements and installing them on the company's premises. The assessee then sought clarification from the Commissioner of Sales Tax on whether the contract was a contract for sale or for work and labour, as this would determine the taxability of the amount received under the contract. The Deputy Commissioner of Sales Tax ruled that the contract was a contract for sale, making the assessee liable for sales tax on 95% of the contract amount. This decision was upheld by the Sales Tax Tribunal, which considered the contract to be divisible into two parts: one for the sale of rolling shutters and the other for their erection and installation.

The High Court, upon review, agreed with the Sales Tax Tribunal, concluding that the contract essentially consisted of two contracts: one for the supply of materials and the other for service and labour. This led to the present appeal before the Supreme Court.

The Supreme Court noted that the distinction between a contract for sale and a contract for work and labour depends on the main object of the parties, as gathered from the terms of the contract, the circumstances of the transaction, and the custom of the trade. The court identified three types of contracts involving work and materials:
1. A composite contract for work and the supply of materials.
2. A contract for work where the use of materials is incidental.
3. A contract for the supply of goods with incidental work.

The court emphasized that the primary test is whether the main object of the contract is the transfer of property in a chattel as a chattel to the buyer or the execution of work involving labour and service. The court cited past decisions and legal principles, including those from Halsbury's Laws of England and previous Supreme Court rulings, to illustrate the application of this test.

Applying these principles to the present case, the court found that the contract was for the fabrication, supply, erection, and installation of rolling shutters, with the price inclusive of erection and installation charges. The contract did not recognize a separation between the fabrication and supply of the rolling shutters and their erection and installation. The court described the process of installing a rolling shutter, noting that it involves fixing various component parts on the premises, which only then constitute a rolling shutter as a commercial article.

The court concluded that the erection and installation of the rolling shutter were fundamental and integral parts of the contract, without which the rolling shutter would not come into existence. The manufacturer never became the owner of the rolling shutter as a unit, and the rolling shutter became the property of the customer as soon as it was installed. Therefore, the contract was a contract for work and labour, not a contract for sale.

The court rejected the revenue's contention that the contract was for sale based on the provision that delivery was ex works. The court clarified that this provision referred to the delivery of component parts, not the complete rolling shutter. The court also noted that the mode of payment specified in the contract did not alter its nature as a contract for work and labour.

In conclusion, the Supreme Court allowed the appeal, set aside the judgment of the High Court, and held that the contract was a contract for work and labour. The court answered the question referred by the Sales Tax Tribunal in favor of the assessee and against the revenue, directing the State to pay the costs of the assessee throughout.

Conclusion:
The Supreme Court determined that the contract in question was a contract for work and labour, not a contract for sale, based on the integral nature of the erection and installation of the rolling shutters as part of the contract. The court allowed the appeal and ruled in favor of the assessee.

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