1964 (4) TMI 100 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the transactions constitute a contract for "sale of goods" or contracts of "work and labour".
2. Whether the assessees are entitled to exemption from sales tax for the portion of the turnover attributable to "work and labour".
3. Whether the respondent could levy sales tax at a rate higher than that mentioned in section 5(1) of the Mysore Sales Tax Act, 1957.

Issue-wise Detailed Analysis:

1. Whether the transactions constitute a contract for "sale of goods" or contracts of "work and labour":

The court examined whether the transactions in question were contracts for the sale of goods or contracts for work and labour. The assessees constructed bus bodies on chassis supplied by customers. The Tribunal found that the bodies were built piece by piece on the chassis, and not as ready-made bodies. The court referred to Halsbury's Laws of England and Benjamin on Sale to distinguish between a contract of sale and a contract for work and labour. It was noted that if the essence of the contract is to improve the customer's goods, it remains a works contract, even if materials are used. The materials used become part of the principal chattel through accession. The court concluded that the transactions were "works contracts" as they involved the improvement of the customer's property rather than the sale of a separate chattel.

2. Whether the assessees are entitled to exemption from sales tax for the portion of the turnover attributable to "work and labour":

The court referenced the Mysore Sales Tax Act, 1957, which defines "sale" and "works contract". It was noted that the State Legislature intended to tax "turnover" from works contracts, but it lacked the competence to do so under Entry 54 of List II of the Seventh Schedule of the Constitution. The Supreme Court's decision in State of Madras v. Gannon Dunkerley & Co. was cited, which established that the State cannot tax wages for labour or remuneration for services. The court reiterated that the transactions in question were indivisible contracts for work and labour, and thus not liable to sales tax. The court rejected the argument that the assessees could be taxed under the Act's definition of "works contract" since the State Legislature had no competence to levy sales tax on such contracts.

3. Whether the respondent could levy sales tax at a rate higher than that mentioned in section 5(1) of the Mysore Sales Tax Act, 1957:

The court found that if the transactions were considered "sale of goods", they would fall under Entries 70 to 73 of the Second Schedule of the Act, which pertain to motor vehicles and their components, taxed at 7%. However, since the transactions were determined to be works contracts, they were not subject to sales tax under section 5(1) of the Act. The court dismissed the argument that the materials used in building motor bodies should be taxed separately under section 5(1), as they were integral parts of the works contract.

Conclusion:

The court allowed the petitions, quashing the orders of assessment and ruling that the transactions were works contracts not liable to sales tax. The Revenue was ordered to pay the costs of the assessees.