1983 (9) TMI 265 - HC - VAT and Sales Tax

Summary

Issues Involved
1. Whether the contract for the construction and supply of a harbour ferry constitutes a contract for sale or a contract for work and labour.

Summary of Judgment

Issue: Nature of Contract - Sale vs. Work and Labour

The sole, but important question is whether a contract for construction and supply of harbour ferry, constitutes a contract for sale or a contract for work and labour. The facts reveal that the assessee-petitioner entered into an agreement with the Government of India for the "construction and supply of harbour ferry" at a cost of Rs. 30,60,000 with specific terms including delivery within 18 months, stage payments, and comprehensive insurance.

The court referred to multiple precedents to discern the nature of the contract:
- In Hindustan Ship Yard Ltd. v. Commercial Tax Officer, it was held that the contract was for work and labour as the ship was constructed under the owner's supervision and specifications.
- In State of Gujarat v. Kailash Engineering Co. (Pvt.) Ltd., the Supreme Court held that the property in coach bodies vested in the Railway even during construction, making it a works contract.
- In Union of India v. Central India Machinery Manufacturing Co. Ltd., the Supreme Court held that the contract was for the sale of wagons as the company owned the materials used for construction.
- In Sentinel Rolling Shutters & Engineering Co. Pvt. Ltd. v. Commissioner of Sales Tax, the contract for fabrication, supply, and installation of rolling shutters was considered a work and labour contract as the shutters came into existence only after installation.
- In Ram Singh & Sons Engineering Works v. Commissioner of Sales Tax, the contract for fabrication and erection of a crane was held to be a work and labour contract due to the high degree of skill required for erection.

The emerging guidelines for distinguishing between a contract for sale and a contract for work and labour are:
1. The essence of the contract or the reality of the transaction as a whole.
2. If the thing to be delivered has any individual existence before delivery, it is a sale.
3. If the main object is the transfer of property in a thing in which the buyer had no previous property, it is a sale.
4. Where the main object of work is not the transfer of a chattel qua chattel, it is a contract for work and labour.
5. If the bulk of the material used belongs to the manufacturer, it points towards a sale.
6. Contracts requiring both work and materials can be classified into three types, with the first type being a composite contract for sale and work, the second type being purely for work and labour, and the third type being a contract for sale with incidental work.

In the present case, the court found that the dominant factor was the manufacture or fabrication of the vessel, not the erection or installation of the end-product. The raw materials belonged to the builder, and the vessel was constructed under the builder's supervision, with the end-product being delivered to the buyer. The contract was thus held to be one for sale, not for work and labour.

The court concluded that the main object of the contract was the transfer of property in the ferry from the builder to the buyer for a price. The totality and cumulative effect of the circumstances constituted the contract as a sale. The revision was dismissed, affirming the Tribunal's decision. No costs were awarded, and the advocate's fee was set at Rs. 250.