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SC ruling on sale and works contract

Our Legal Correspondent

NEW DELHI, Aug. 4

THE Supreme Court has held that the distinction between a contract of sale and a works contract is not free from difficulties and has been a matter of several judicial decisions.

No straight-jacket formula can be made available nor can such quick-witted tests devised as would be infallible. It is all a question of determining the intention of the parties by culling out the same on an overall reading of the several terms and condi tions of a contract, the court said.

The ruling was given by a Division Bench comprising Mr. Justice S. Rajendra Babu and Mr. Justice R.C. Lahoti, while dismissing a batch of appeals in the case of Hindustan Shipyard Ltd. vs. the State of Andhra Pradesh.

The question that arose for decision in the appeals was whether the transaction involved in the manufacture and supply of ships by the appellant to its customers were `sale' as defined in Clause (n) of Section 2 of the Andhra Pradesh General Sales Tax Ac t, 1957 as held by the High Court or `works contract' as defined in Clause (t) of Section 2 of the Act and, hence, not exigible to sales tax as contended by the assessee appellant.

The appellant is a public sector undertaking, engaged in the activity of building of ships for different shipowners under the orders placed by them and as such evidenced by the contracts entered into between them.

The facts in brief. Between the assessment years 1974-75 and 1983-84 (both years inclusive), there were 18 ships involved and formed subject matter of different assessments. This assessing authority and the Commissioner (Appeals) held all the transaction s in question as transactions of sale liable to payment of sales tax by the appellant.

In an appeal, the Andhra Pradesh Sales Tax Appellate Tribunal held that the transactions were liable to sales tax and dismissed the appeals. The revisions filed before the High Court were also dismissed. Hence, the appeals before the Supreme Court.

After referring to the terms of contract and several decisions having bearing on the case, the apex court in its judgment said it was difficult to lay down any rule or flexible rule applicable alike in all transactions so as to distinguish between a cont ract for sale and a contract for work and labour.

The transfer of property of goods for a price is the linchpin of the definition of sale. Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of t he contract, the circumstances of the transactions and the customs of the trade. It is the substance of the contract documents and not merely the form, which has to be looked into.

``The court may form an opinion that the contract is one whose main object is transfer of property in a chattel as a chettel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour.''

``If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. On the other hand, where the main object of work undertaken by the payee or the price is not for th e transfer of a chettle qua chattel, the contract is one of work and labour'', the court observed.

The court said if the bulk of material used in construction belongs to the manufacturer who sells the end product for a price, then it is a strong pointer to conclusion that the contract is in substance one for the sale of goods and not one for work and labour.

In effect, (i) it may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (ii) it may be a contract for work in which the use of the materials is accessory or incidental to the execution of t he work; and (iii) it may be a contract for supply of goods where some work is required to be done as incidental to the sale.

``The first contract is a composite contract consisting of two contracts - one of which is for the sale of goods and the other is for work labour. The second is clearly a contract for work and labour not involving sale of goods. The third is a contract f or sale where the goods are sold as chattels and the work is done merely incidental to the sale'', the court observed.

The court was, therefore, of the opinion that the High Court and the Tribunal had not erred in taking the view which they had taken. The contracts in question involved sale of the respective vessels within the meaning of Clause (n) of the Act and were no t merely works contract as defined in Clause (t) thereof. The transactions had rightly been held exigible to sales tax, the court added while dismissing the appeals.

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