1962 (11) TMI 33 - HC - VAT and Sales Tax

Issues Involved:
1. Nature of the contract between Messrs Voltas Limited and the Life Insurance Corporation.
2. Taxability of the works contract under the Madras General Sales Tax Act.
3. Interpretation of the contract as a sale of goods or a composite works contract.

Issue-wise Detailed Analysis:

1. Nature of the Contract:
The contract between Messrs Voltas Limited and the Life Insurance Corporation involved the supply and installation of an air-conditioning plant for the Bombay Mutual Insurance Building. The contract, valued at Rs. 6,95,500, required Voltas to design and install a comprehensive air-conditioning system that integrated with the building's structure. The system had to account for various factors, including temperature and humidity, and required specialized machinery to be embedded in the building. The contract specified the use of imported materials worth Rs. 2,75,000, with the overall price subject to fluctuations in exchange rates, freight, insurance, or import duty.

2. Taxability of the Works Contract:
The Deputy Commercial Tax Officer assessed Messrs Voltas on an amount of Rs. 5,02,773, representing the assessable turnover of the works contract. The assessee contended that the contract was a composite works contract and not a sale of goods. This contention was initially rejected by the assessing authority and the Appellate Assistant Commissioner. However, the Tribunal, upon further appeal, concluded that the contract did not involve the sale of individual machinery parts but was a composite contract for the supply of materials and labor, resulting in the air-conditioning plant becoming an integral part of the building.

3. Interpretation of the Contract:
The Tribunal's decision was based on the Supreme Court's rulings in the Gannon Dunkerley and Sundaram Motors cases. These cases established that for a transaction to be considered a sale, there must be an agreement to transfer title to goods, supported by money consideration, resulting in the actual passing of property in the goods. The Tribunal found that the contract between Voltas and the Life Insurance Corporation was not analogous to a simple sale of air-conditioning units but involved the design, fabrication, and installation of a system integrated with the building. The Tribunal's personal inspection of the building further supported this conclusion, noting that the refrigerating plant had become an integral part of the building and could not be removed without significant effort.

The State of Madras challenged the Tribunal's decision, arguing that the contract amounted to a sale of the air-conditioning plant. However, the court found that the contract required Voltas to supervise the building's construction to ensure efficient air-conditioning, which involved designing and installing machinery in a manner specific to the building's requirements. The court emphasized that the contract was not for the sale of individual machinery parts but for the creation of a functioning air-conditioning system integrated with the building.

The court referred to the Supreme Court's decisions in Gannon Dunkerley and Carl Still v. State of Bihar, which held that in a composite works contract, the materials used become part of the property through accretion and are not sold as movable goods. The court also cited Sundaram Motors, which applied the same principle to works contracts involving movable goods.

The court examined the entire contract and found no indication of an agreement to sell any part of the machinery as such. The references to the value of imported materials and the terms of payment did not imply a sale of goods but were necessary for the execution of the contract. The court concluded that the contract was an indivisible works contract, and no part of the turnover was taxable under the Madras General Sales Tax Act.

Conclusion:
The court upheld the Tribunal's decision, finding that the contract between Messrs Voltas Limited and the Life Insurance Corporation was a composite works contract and not a sale of goods. The petition by the State of Madras was dismissed with costs, affirming that no part of the turnover was taxable under the Madras General Sales Tax Act.

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