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TMI Blog1978 (11) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... on Bench, which negatived the plea of the petitioners that the contracts in question amount to contracts for work and labour: vide A. Seshagiri Rao Co. v. State of A.P.[1973] 32 S.T.C. 51; [1973] 1 An. W.R. 111. The petitioners preferred appeals before the Supreme Court (Civil Appeals Nos. 1784 to 1787 of 1972). The Supreme Court by its judgment dated 18th August, 1978, set aside the order of the High Court and remanded the cases to the High Court for fresh disposal. The Supreme Court, while remanding the cases, felt that the material placed before the High Court was not adequate to come to a decision as to the true nature of the contracts, and directed the High Court to dispose of the writ petitions in accordance with law after giving an opportunity to the parties to produce such further material as they think fit, including the contracts in their entirety. Their Lordships, however, did not express any opinion on the correctness or otherwise of the order of the High Court, but were pleased to set aside the same on the only ground that the material produced by the parties is not adequate for enabling the court to come to a correct decision. Their Lordships observed that it would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will depend upon the facts and circumstances of each case. The question is not always easy and has for all time vexed jurists all over." In Government of Andhra Pradesh v. Guntur Tobaccos Ltd.[1965] 16 S.T.C. 240 (S.C.)., the majority consisting of J.C. Shah and S.M. Sikri, JJ., as they then were, held thus: "The question in each case is one about the true agreement between the parties and the terms of the agreement must be deduced from a review of all the attendant circumstances. But from the mere passing of title to goods either as integral part of or independent of goods it cannot be inferred that the goods were agreed to be sold, and the price is liable to sales tax." Their Lordships further observed as follows: "In order that there should be a sale of goods which is liable to sales tax as part of a contract for work under a statute enacted by the Provincial or State Legislature, there must be a contract in which there is not merely transfer of title to goods as an incident of the contract, but there must be a contract, express or implied, for sale of the very goods which the parties intended should be sold for a money consideration, i.e., there must be in the contract f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted by these petitioners are of identical nature and the terms of the agreement also are of the same nature. Therefore, it will be sufficient if we refer to the facts in Writ Petition No. 3645 of 1971, the terms of the agreement in that writ petition and the general conditions of contract which are identical and applicable to the contracts in all the cases. The petitioner obtained a leasehold right from the Government of Andhra Pradesh under the Andhra Pradesh Minor Mineral Concession Rules for quarrying out the stone by paying a fixed annual rent. It entered into agreements with the railway department during the years 1964 to 1969 for supply and stacking of stone ballast required by the railways for the repairs and improvement of the railway track. Under the agreement, the contractor agreed for supply and stacking of stone ballast. Clause II of the agreement, which is relevant, reads thus: "WHEREAS the contractor has agreed with the railway for the performance of the works 'supply and stacking 50 mm. and 25 mm. size hard stone ballast alongside the fast line and slow line from km. 305/11 to km. 312/5 for making up ballast deficiency between stations Ammanabrolu and Uppugundur i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ballast. The nature of the works executed by the other petitioners is also of the same type. Under the terms of the contract, the contractors have to make their own arrangements to obtain ballast from the quarries and the quarries do not belong to the railway department. The contractors have to supply the ballast of particular size agreed upon and stack the same either along the railway line or train out the same alongside the lines. The payment will be made after taking measurements of the ballast stacked. The agreements, no doubt, do not contemplate dissecting the value of the ballast supplied and the value of work and labour bestowed in stacking or training the same after stacking. The learned counsel for the petitioners laid great emphasis on the words "works", "workmanlike manner" and "perform the said works" in support of his contention that the contracts are for work and labour. We have seen the agreements which are in printed form. Only in clause II the description of the works is entered in the blanks. Therefore, the mere use of the word "works" here and there in these agreements, which are meant for all the types of works including the construction works, cannot by itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned from any excavation. Clause 16 lays down that the earnest money deposited by the contractor with his tender will be retained by the railways for the due and faithful fulfilment of the contract by the contractor. Clause 17(1) lays down that subject to any requirement in the contract as to the completion of any portion or portions of the works before completion of the whole, the contractor shall fully and finally complete the whole of the works comprised in the contract. Clause 20(1) lays down that the Engineer's instructions should be complied with and the contractor, however, shall not be relieved from responsibility for the due performance of the works in all respects. Clause 21 lays down that any instructions or approval given by the Engineer's representative to the contractor shall bind the contractor as though it had been given by the Engineer. Clause 22 lays down that the whole of the works shall be executed in perfect conformity with the specifications and drawings of the contract. Clause 26 is to the effect that the contractor shall place and keep on the works at all times efficient and competent staff to give the necessary directions to his workmen and shall employ only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r stage after considering the other additional materials. The learned counsel for the petitioner relied on a certificate issued by the Additional Chief Engineer, South Central Railway, dated 11th August, 1978. It appears this was also filed before the Supreme Court and their Lordships felt that the certificate is not clear and the question as to the nature of the contract cannot be decided on the basis of that letter without further material. This certificate is given as requested by the contractor by his letter dated 2nd August, 1978. This certificate reads thus: "With reference to your letter asking for a certificate clarifying the nature of works contract for supply and stacking of stone ballast on the railways, the following certificate is furnished: It is certified that the contracts for supply and stacking of stone ballast on the railway are works contracts and are governed by the general conditions of contract applicable to works contracts. The contracts for supply and stacking of stone ballast executed by M/s. Anamolu Seshagiri Rao are works contracts and not contracts for sale of goods. The stone ballast on the railways is used for the railway track and has to be man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given by the Engineer-in-charge. It only shows that for convenience sake the ballast is stacked along the railway line. However, this theory of spreading is developed for the first time after the appeal has been filed before the Supreme Court. Originally, in the writ petition, in paragraph 3, it is stated thus: "The petitioner submits that the execution of the works contracts undertaken by the firm under the aforesaid agreement involved the following operations: (1) Breaking, ballasting or quarrying of boulders from outside railway land. (2) Converting boulders into required sizes of stone ballast. (3) Transporting the broken stone ballast by the lorries to the site of the work, which is generally situated along the railway line or at different places in the station yards. (4) Screening stone ballast from any dust and removing undersized or oversized stone. (5) Stacking the ballast along the railway line or in station yards or over banks or in cuttings. (6) Training out or leading into the track the stone ballast from the stacks is also entrusted to be done by the contractor in certain cases." In the affidavit, it is further stated that all the contracts are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hows that spreading as such was there. Even otherwise, the spreading claimed is only along the railway line and it is not the contractor's job to repair the railway line. The next averment, made in paragraph 4(v) for the first time, viz., to repair or make up the deficiency was never made except in this additional affidavit filed after the Supreme Court remanded the case. Even the certificate given by the Additional Chief Engineer does not mention that the contractor has to do any repair. The above aspects only show the ingenious attempt on the part of the petitioner to bring the contracts under the purview of "works contracts". It is not in dispute that the contractor was not under an obligation to repair the track. The spreading along the railway line, even if accepted to be there, does not amount to repair of the line. That apart, even the Additional Chief Engineer has mentioned in the certificate that unskilled labour stack and spread the ballast along the railway line. Clause II in each of the agreements simply mentions "supply and stacking of stone ballast along the railway track for making up deficiency", and in none of the contracts there is a mention that the contractor ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court. The relevant portions of the letter are as follows: "Sri T.V.S. Narasimhachary, Advocate on record, Supreme Court of India, NewDelhi, required the following information in connection with the Civil Appeals Nos. 1784 to 87 of 1972 stand posted for hearing on 17th August, 1978, at the Supreme Court of India, New Delhi. So I request you to supply the following information so as to enable me to send the same to the Advocate on record, New Delhi. (i) Copies or originals in agreements Nos. 19, 47, 141 of 1964; 18, 15, 168 of 1965; 74, 75, 76, 5, 4 of 1966; 18, 59, 30, 93, 58 of 1967; 7 of 1968; 22 of 1969; 24 to 28 of 1969. (ii) Copies of the specifications/conditions specified in each of the agreements. (iii) Enquire from the South Central Railway whether they have any Railway Manual specifying standardised contract. (iv) A certificate from the railway, whether the contract contemplates spreading of the ballast. (v) Enquire from the railway whether maintenance is also part of the contract, if so, details of the same. (vi) Please send a note on the following: (a) What is meant by stacking of ballast? (b) What is meant by training out of ballast? (c) What i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s' labourers at the spots specified by the Engineer-in-charge. This operation is called 'training out of ballast'. (c) Departmental wagons will be placed in the ballast siding to facilitate loading of the ballast collected at the depot. Loading of ballast collected at the depot into the departmental wagons is called loading of trucks by ballast. (d) Stacking ballast does not imply spreading of ballast alongside the track. Separate item with rate will be provided in the agreement for this purpose. (e) When the train is not used, it is called as 'leading the ballast and dumping into the track'. (vii) It is not a fact that training out or dumping of the ballast is being done always by the contractors, unless this item is specifically provided in the contract agreement." It can be seen that the Divisional Engineer is directly connected with the works and the clarifications given by him clearly show that stacking ballast does not imply spreading of ballast alongside the railway track. The relevant clause in every contract also confirms what the Divisional Engineer has stated in his letter. It thus becomes clear that the contractors have developed the theory of spreading, for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll from the above-mentioned aspects of the contract, it becomes clear that the job of the contractors was to supply the ballast of required size, and whatever other services rendered are only incidental to the execution of the contract of supply of the ballast. The stacking along the railway line or training out the ballast along the railway line is not done by any skilled labour and these services rendered by the contractor are only incidental to the supply of the ballast. That being so, we are unable to see as to how some of the general conditions relied upon can alter the nature of the contract. After carefully going through the general conditions, we are satisfied that only some of them can be relevant. That is why there are special conditions attached to the contract to which we have already adverted. Clause 7 of the general conditions does not apply because the contractors themselves have to supply the ballast and the railway is not concerned in what manner they collect the ballast. Clause 11 simply deals with the use of the ballast trains and, therefore, it does not alter the character of the contract. Clauses 22, 26 and 27 lay down that the contract should be done in a work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty. In the case of a contract for sale, the thing produced as a whole has individual existence as the sole property of the party who produced it, at some time before delivery, and the property therein passes only under the contract relating thereto to the other party for price. Mere transfer of property in goods used in the performance of a contract is not sufficient; to constitute a sale there must be an agreement express or implied relating to the sale of goods and completion of the agreement by passing of title in the very goods contracted to be sold. Ultimately the true effect of an accretion made pursuant to a contract has to be judged, not by an artificial rule that the accretion may be presumed to have become by virtue of affixing to a chattel, part of that chattel, but from the intention of the parties to the contract." In an unreported judgment of the Supreme Court in Sentinel Rolling Shutters Engineering Company Pvt. Ltd. v. Commissioner of Sales TaxSince reported in [1978] 42 S.T.C. 409 (S.C.). (Civil Appeal No. 1001 of 1977 dated 12th September, 1978), it is again observed thus: "The difficulty, however, lies not in the formulation of the tests for determining whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. In a contract of sale, the main object is the transfer of the property and the delivery of the possession of the property, whereas the main object in a contract for work is not the transfer of the property, but it is one for work and labour. However, there is no well-settled or a standard formula by which one can distinguish a contract for sale from a contract for work and labour and it depends upon the facts and circumstances of each case. We have already carefully analysed the terms of the contracts in question and held that they involved the supply of ballast and stacking the same along the railway line. The dominant intention in these contracts is delivery of the ballast, and the labour involved is only incidental and ancillary. One other significant factor to be noted is that the railway department has no control over the actual manufacture of the ballast. The contractor can sell away the ballast produced by him to third parties also. The railway comes into the picture only after the contractor stacks the material along the railway line. Thereafter, the measurements of the stacked material, which should be according to the specifications, are taken and payments are mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price of the material as well as the labour charges and, therefore, they are works contracts. We are unable to agree. In the above decision, the contract was for fabrication, supply and erection of steel structure to be assembled and installed by specially trained technicians and it may be that the price was an inclusive one. But that by itself is not a decisive test. In the instant case, the ballast produced has an individual existence and the labour charges included in the rate of payment are only incidental to the supply. The next argument of the learned counsel for the petitioners is that the supply of ballast and the stacking of the same is an accretion to the railway property resulting in the improvement of the railway line. It is also the contention of the learned counsel that in A. Seshagiri Rao Co. v. State of Andhra Pradesh[1973] 32 S.T.C. 51; [1973] 1 An. W.R. 111., the Division Bench, which heard these writ petitions, also made an observation that stacking of the ballast along the railway line or cutting the ballast amounts to an improvement of the immovable property. Relying on this passage, the learned counsel sought to contend that the contracts are "works con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 39 S.T.C. 237 (S.C.)., the question that came up for consideration was when a photographer undertakes to take a photograph, develop the negative or do other photographic work and thereafter supply the prints to his client, whether it can be said that it amounted to contract of sale. The learned Judges of the Supreme Court pointed out that the contract on the contrary is for use of skill and labour by the photographer to bring about a desired result. In the instant case, we cannot say that any special skill and labour are used in breaking the stones into ballast of some required size. Therefore, the above decision has no application to the facts of the present case. The other decision relied on by the learned counsel is Northern India Caterers v. Lt. Governor of Delhi [1978] 42 S.T.C. 386 (S.C.); A.I.R. 1978 S.C. 1591; since reviewed by the Supreme Court in [1980] 45 S.T.C. 212 (S.C.). In that case, the question that arose was whether the service of meals to casual visitors in a restaurant located in a hotel in which lodging and meals are provided to residents, is taxable as a sale or not. Their Lordships of the Supreme Court held that the service of meals to the casual visitors i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another of service, and the fixing of windows to the building was not incidental or subsidiary to the sale, but was an essential term of the contract. In the latter case, the dealer was carrying on the business of re-drying in its factory raw tobacco entrusted to it by its customers and to pack the re-dried tobacco and deliver it to the customers. There was no separate charge for the value of the packing materials used. On the question whether the value of the packing materials was assessable, the Supreme Court held that in the absence of any evidence from which contract to sell "packing material" for a price might be inferred, the use of the "packing material" by the assessee must be regarded as in the execution of the works contract. It can be seen that the goods that were delivered to the customers were along with the packing material and, therefore, the packing material was not separately assessable as the same was not divisible. These two decisions also are not helpful to the petitioners, as we have already held that the labour involved in these contracts is only incidental and ancillary. Relying on some of the conditions in the contract, viz., that the contractor shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned judges have not referred to any of the decided cases laying down the difference between a works contract and a contract for supply of goods. We are unable to agree with this view taken by the Mysore High Court. However, as observed by the Supreme Court in the unreported judgment in Sentinel Rolling Shutters Engineering Company v. Commissioner of Sales TaxSince reported in [1978] 42 S.T.C. 409 (S.C.). (Civil Appeal No. 1001 of 1977 dated 12th September, 1978), the intention of the parties has to be gathered from the terms of the contract, the circumstances of the transaction and the custom of the trade. The Mysore High Court has not considered the nature of the work undertaken under the contract applying the necessary guidelines for differentiating the two types of contract from one another. There are however decisions of the other High Courts which are directly on the point. Mooljee Ramjee Sons v. Deputy Commissioner (Commercial Taxes), Madurai Division[1966] 17 S.T.C. 255., is a case where the ballast had to be collected and stacked alongside the railway line for a length of about 10 miles. The contractor got a permit from the concerned Revenue Divisional Officer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of the Supreme Court in Commissioner of Sales Tax v. Purshottam Premji(1), which was also a case of supply of ballast. There the main features of the contracts were extracted thus: "The assessee was to quarry stones from the quarries belonging to the South Eastern Railway and he was to break those stones into pieces and convert them into ballast of a specified size and thereafter supply them to the South Eastern Railway." On these facts, their Lordships were of the view that prima facie the South Eastern Railway was the owner of the ballast and the assessee's duty was only to do some work on the stones belonging to the South Eastern Railway administration. Their Lordships further observed that the fact that the railway had provided in the agreement that the assessee shall pay royalty due to the State Government does not in any manner detract from the legal position that the railway was the owner of the quarry and it was merely an arrangement for payment of a royalty. It can, therefore, be seen that the distinguishing feature is that the quarries belong to the railway and the payment of royalty by the contractor also does not make any difference. In the case be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court, who heard the case, held that the contract as a whole was a contract for the sale of goods. This case was referred to in State of Gujarat v. Variety Body Builders[1976] 38 S.T.C. 176 (S.C.)., wherein the assessee entered into contracts with the Western Railway for the construction of railway coaches. Their Lordships while approving the principles laid down in State of Gujarat v. Variety Body Builders (sic) however held that it depends on the facts and circumstances of each case. Yet another decision in Commissioner of Sales Tax v. S.R.U.S. Mandali Ltd.[1976] 38 S.T.C. 203 (S.C.)., wherein the contract was for supply of kiln-burnt bricks to the Public Works Department. The nature of the work was described as "manufacturing and supplying kiln-burnt bricks for construction". The tender was described as "supply of materials tender" and the assessee should supply at his own expense all tools and the materials to be supplied should be of best quality and in strict accordance with the specification and the contractor would receive payment for such materials only as were approved by the Executive Engineer or his assistant. Their Lordships of the Supreme Court, after referring to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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