1965 (10) TMI 52 - HC - VAT and Sales Tax

Issues Involved:
1. Whether the contract was one indivisible contract for the sale of a manufactured body for a price or purely a works contract.
2. Whether the contract was a composite agreement consisting of two distinct and separate contracts, one for the supply of materials and the other for doing the work, and whether the tax should be levied on the price of the materials only.

Detailed Analysis:

Issue 1: Nature of the Contract
The primary issue was to determine whether the contract between the applicants and the customer was a contract for the sale of goods or a contract for work and labour. The applicants argued that the contract was for work and labour, emphasizing that the contract involved constructing the body of a truck according to specific requirements and that the property in the materials used would pass to the customer as the work progressed. The revenue contended that the contract was for the sale of the truck body, as the property in the body passed to the customer only upon its completion and delivery.

The court examined the distinction between a contract for work and labour and a contract for the sale of goods, referencing Halsbury's Laws of England. The test applied was whether the main object of the contract was the transfer of property in a chattel to the buyer. If the primary objective was the transfer of the chattel, the contract would be considered a sale of goods.

The court compared the present case with previous judgments, notably the Supreme Court's decision in Patnaik & Company v. State of Orissa and McKenzies Ltd. v. The State of Maharashtra. In both cases, the contracts were deemed to be for the sale of goods because the property in the goods passed to the buyer only upon delivery.

In the present case, the contract specified that the body of the truck was to be prepared and delivered by a certain date, and a lump sum payment was agreed upon for the completed body. These factors indicated that the property in the truck body would pass to the customer only upon its completion and delivery, making the contract one for the sale of goods.

Issue 2: Composite Agreement
The secondary issue was whether the contract could be considered a composite agreement, consisting of two separate contracts: one for the supply of materials and the other for work and labour. The applicants argued that the contract involved two distinct agreements and that the amount received for work and labour should not be taxable.

The court found that the contract was indivisible and that the applicants were to build a body on the chassis belonging to the customer according to the specifications. The lump sum payment was for the completed body, and the splitting of the amount into two bills (one for materials and one for labour) by the applicants did not alter the nature of the contract.

The court rejected the applicants' contention that the contract was a composite one, emphasizing that the contract was for the sale of the truck body as a unit. The specifications and the lump sum payment indicated that the contract's essence was the transfer of the completed truck body to the customer.

Conclusion
The court concluded that the contract was one and indivisible and was for the sale of the truck body. Therefore, the entire proceeds under the contract were liable to sales tax. The court answered the first question by stating that the contract was for the sale of goods and not for work and labour. Consequently, the second question did not arise. The applicants were ordered to pay the costs of the reference.

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