JUDGMENT
Madon, J.
1. In this reference under section 34(1) of the Bombay Sales Tax Act, 1953, we have to consider the true nature of two transactions evidenced by two contracts which came up for construction before the Sales Tax Tribunal.
2. The statement of the case shows that the respondents are a public limited company carrying on the business of manufacture and sale of fabricated materials and that they also undertake works contracts and sometimes also labour contracts which do not involve supply of materials. During the assessment period 1st April, 1955, to 31st March, 1956, the respondents entered, inter alia, into two contracts, one with the Trustees of the Bombay Port Trust and the other with Century Rayon of which the Century Spinning and Manufacturing Mills Limited are the proprietors. By his assessment order dated 24th October, 1963, the Sales Tax Officer bifurcated the transaction of the respondents with the Trustees of the Bombay Port Trust holding that the major part of it was a contract for the sale and supply of goods, while the minor part of it was a contract of work and labour. With respect to the respondents’ transaction with Century Rayon, the Sales Tax Officer held that it was a contract for the sale and supply of goods. The order of the Sales Tax Officer was confirmed in appeal by the Assistant Commissioner of Sales Tax and in revision by the Deputy Commissioner of Sales Tax. In second revision to the Sales Tax Tribunal, the Tribunal held that the contract with the Trustees of the Bombay Port Trust was a works contract and that the contract with Century Rayon was either a labour contract or a works contract, and in the case of both the contracts the amounts received by the respondents thereunder were not liable to be taxed under the Bombay Sales Tax Act, 1953. Arising out of this judgment and order of the Tribunal, two questions have been referred to us. The first question relates to the transaction between the respondents and the Trustees of the Bombay Port Trust, and the second with the transaction between the respondents and Century Rayon. In the second question we find a typographical error and we are reproducing the said question after correcting this error with the consent of both counsel. The said two questions are :
“(1) Whether, on the facts and in the circumstances of the case and on a true interpretation of the contract entered into by the respondents with the Bombay Port Trust, the Tribunal was justified in law in holding that the transaction was an indivisible contract of work and not a sale ?
(2) Whether, on the facts and in the circumstances of the case and on a proper interpretation of the terms of the contract entered into by the respondents with Century Rayon, the Tribunal was justified in law in holding that the transaction was either a labour contract or a works contract ?”
3. It will be convenient to deal with each of these two contracts separately. The contract between the respondents and the Trustees of the Bombay Port Trust is embodied in a formal contract dated 28th March, 1955, entered into between the respondents and the Trustees of the Bombay Port Trust. The Tribunal has meticulously and carefully analysed the said contract and has interpreted the various clauses and parts thereof. The said contract runs into 43 clauses. It also contains two schedules. Schedule A thereto contains the general conditions of the said contract. There are 44 such conditions. Schedule B contains a schedule of quantities and rates. Clause 2 of the said contract describes what was to be done thereunder by the respondents as follows :
“The contractor (that is, the respondents) shall supply the necessary materials and fabricate and erect the structural steelwork for the transit shed at Jetty, Princess Dock, including grouting, painting all the structural steelwork in columns, beams, roof, etc., steel-plated sliding doors including Hatfield hangers with double angle guides, steel staircases, steel windows steelwork in pinjra, office and chutes, providing and fixing rainwater pipes and cast-iron gutters, glazing in roof and windows, fixing weldmesh or expanded metal in roof ventilators, windows, pinjra and office, fixing asbestos cement shed roofing including line washing under the sheets, etc., as shown on the drawings and in accordance with the said specifications. The contractor (that is, the respondents) shall leave necessary openings with trimmer beams for the lift-wells as indicated on the drawings.”
4. Under clause 3(b), before starting the work the respondents were to submit to the Chief Engineer of the Bombay Port Trust the necessary detailed working drawings, and the Chief Engineer was given the right to make additions, alterations and amendments thereto as may appear to him to be desirable or necessary. The respondents were to supply to the Chief Engineer “carefully finished hand-made tracings on cloth of each of the final drawings for works as executed” containing “the whole of the information required”. Clause 4 was the payment clause and under it the respondents were to receive a lump sum of Rs. 12,41,169-1-6 “in respect of the works mentioned in clause 2 above”, subject to additions or deductions at the rates mentioned in Schedule B in respect of any additional work ordered to be carried out or to be omitted by the Chief Engineer, and subject further to additions or deductions in accordance with clause 6 of the contract on account of variations in the basic prices of steel, rivets, bolts and nuts. Clause 5 provided that the lump sum price mentioned in clause 4 and the rates mentioned in Schedule B were inclusive of sales tax calculated at the rate of three pies per rupee and octroi or any other duty which would be payable by the respondents. The said clause further provided that any increase or decrease in the rate of sales tax was to be debited or credited, as the case might be, to the Trustees of the Port of Bombay. Clause 6 provided for variations in rates. The rates were set out in Schedule B to the said contract, and some of the items in the said Schedule B were controlled goods in the sense that their prices were statutorily fixed, and these goods were obtainable only on the strength of a permit issued by an authorised officer. The said clause further provided that the lump sum price mentioned in clause 4 and the rates mentioned in Schedule B were based on the rates of steel, rivets, bolts and nuts set out in the said clause and that, should there be any changes in those rates at the time of purchase, the difference in the rates would be debited or credited to the said Trustees and that for the purpose of debiting the same to the Trustees, the respondents had to produce certified copies of invoices, and had further to permit the Chief Accountant of the said Trustees or his representative as also the Chief Engineer and the Assistant Engineer to inspect their books of account, bills, vouchers, etc., to enable them to verify such difference in the rates. Under clause 7 the respondents had to execute the works in the best and most substantial and workmanlike manner with materials of the best and most approved quality. Clause 8 gave the Chief Engineer a right of inspection, examination and testing of both materials and workmanship, and a power to reject any or all of the materials or workmanship which might seem to him defective or unfit or improper for the purposes for which they were applied or intended to be applied or which were not in accordance with the contract description or specifications. Clause 9 cast an obligation upon the respondents to commence the work immediately after the receipt of the Chief Engineer’s order to do so and to carry on the same expeditiously at whatever point or points and in such portions as the Chief Engineer might direct. Clause 12 provided for any additions or alterations in the work to be carried out at the directions of the Chief Engineer. Clause 18 provided for release of building materials. Under it the procurement of all necessary building and other materials was to be the sole responsibility of the respondents, except for structural steel. The respondents were to submit a statement showing the details of steel required by them. Such steel was to be supplied by the Trustees at the Bombay Port Trust Stockyard, and the respondents were to make arrangements to handle and transport the same from the stockyard at their own cost. The said clause further provided, “the steel supplied by the Trustees will be charged for at the rates mentioned in clause 6”. The respondents were to pay a sum equivalent to 5 per cent of the value of the materials supplied in advance to the Trustees and the balance was to be deducted from time to time from the progress bills submitted by the respondents to the Trustees. So far as the other steel materials were concerned, the Chief Engineer was to issue quota certificates, if necessary, and the respondents were to procure such materials at their own cost. Sub-clause (iii) of clause 18 provided as follows :
“The contractor (that is, the respondents) shall supply rivets, bolts, holding-down bolts, washers, weldmesh, expanded metal, Hatfield hangers for sliding doors, window-frames, rainwater pipes and accessories, cast-iron gutters with C.I. straps and fittings, wire and plain sheet glass and other fixtures and fittings required for the works at its own cost. The rates in respect of the several items mentioned in Schedule B are inclusive of supply, fabrication, erection and painting complete of all the steelworks.”
5. Clause 18 further provided that asbestos cement sheets, ridges, apron pieces and finals and bitumen and filled permatta washers required for the roofing of the shed were to be supplied by the Trustees at their own cost, and cement was to be purchased by the respondents. Clauses 24 to 29 dealt with defective materials, defects in workmanship, unsatisfactory work, maintenance for one year, the risk pending completion, etc. Clause 31, inter alia, conferred a right of re-entry upon the Chief Engineer in certain contingencies, such as, for example, abandonment of the contract by the respondents. Clause 33 provided for removal by the respondents, on completion of the works, of all plants, tools, materials, etc., brought on the site. Clause 36 provided for the mode of payment. Under it the respondents were to submit their progress bills every month and such bills were to be certified by the Chief Engineer as to what, according to him, was the proportionate value of the work done and approved during the preceding month, and 95 per cent of the amount so sanctioned was to be paid to the respondents, retaining with the said Trustees the balance of 5 per cent. In the case of delay in the completion of the work, under clause 39, the respondents became liable to pay a sum of Rs. 200 per day as and by way of liquidated damages. Under clause 40 the decision of the Chief Engineer was made final upon all questions. It is not necessary to set out the provisions of the general conditions contained in Schedule A to the said contract. They related to the type of materials to be used in the works, the mode of fabrication and of other work to be carried out in the execution of the said contract. Schedule B, as mentioned earlier, contained the schedule of quantities of rates, and it was headed “For the supply, fabrication & erection”.
6. After the work was completed on 6th December, 1955, the respondents submitted to the said Trustees their bill for the balance due. The said bill showed the total amount payable to the respondents and the amounts received by them, etc. It was headed “To fabrication charges and erection of steelwork, etc., as per contract”. The first item was of fabrication charges, and it showed a sum of Rs. 10,89,776 as being “supply value as per statement”. From it was deducted a sum of Rs. 29,722-1-0 as “rebate as per statement”, and a further sum of Rs. 6,89,532-5-0 described as “value of steel supplied by them”, that is, the said Trustees, leaving under this item a sum of Rs. 3,70,521-10-0 as being payable by the said Trustees to the respondents. The Tribunal has pointed out in its judgment that in the said bill the lump sum amount of Rs. 12,41,169-1-6, mentioned in clause 4 of the said contract, was reduced to Rs. 10,89,776 on account of the change in the prices of raw materials. The second item was of erection charges in the sum of Rs. 99,108. Against the total of the balance under the heading of fabrication charges and of the said erection charges, credit was given for a sum of Rs. 4,55,116-1-0 received by the respondents, leaving a balance of Rs. 14,513-9-0 due to the respondents. The Sales Tax Officer in his assessment order took a sum of Rs. 10,60,054 made up of the said sum of Rs. 10,89,776 less the rebate of Rs. 29,722-1-0 as being the price of goods sold and delivered by the respondents to the Trustees of the Bombay Port Trust, treating the erection charges of Rs. 99,180 as being the remuneration for work and labour done.
7. From the summary of the provisions of the said contract set out above, it is clear that this contract was both in form and substance a building contract. The principal material under the said contract was to be steel and, in fact, was steel as is shown by the bill and the statement submitted by the respondents. Such steel was supplied for the purpose of fabrication by the said Trustees to the respondents, and it was from this steel that the respondents carried out the work of fabrication and erection for the said Trustees. We are unable to find anywhere, either in the terms of the said contract or from any fact on the record or even from the manner in which the respondents’ bill has been drawn, any indication that such steel was sold by the said Trustees to the respondents and repurchased by the said Trustees from the respondents in the form of fabricated and erected materials. The respondents’ bill also mentions the amount given credit to the said Trustees for the value of steel supplied by them as being the “value of steel supplied”. The various clauses which we have referred to above clearly show that the intention of the parties was not to manufacture and sell any finished goods but was to have work carried out at the jetty of the Princess Dock, namely, the work of fabrication and erection of structural steelwork for the transit shed at the said jetty and the other work listed in clause 2 of the said contract. The emphasis throughout the said contract is on the execution of the work and on good and proper workmanship. The supply of steel by the Trustees to the respondents was for the due and prompt execution by the respondents of the work to be carried out by them under the contract, and was not a sale of goods by the Trustees to the respondents. This is further clear from the fact that asbestos sheets, etc., for the roofing of the shed were to be supplied by the Trustees at their own cost. The intention of the parties is also made sufficiently clear by the condition providing for one year’s period of maintenance by the respondents after the completion of the work and their liability to pay liquidated damages on a daily basis for any delay in the completion of the work. It is also significant to note that materials brought on the site and not used in the execution of the work were to be removed from the site by the respondents, which would normally not have been the case had it been a contract for the sale of goods coupled with a separate contract for work and labour embodied in the same document as contended for by the department. We are, therefore, in agreement with the finding of the Tribunal that this was an indivisible contract of work and labour.
8. So far as the transaction between the respondents and Century Rayon is concerned, the contract is to be spelt out from the correspondence. The correspondence shows that there was first an oral discussion about fabrication and supply of structural steelwork for a sub-station at the rayon plant of Century Rayon between the representatives of the respondents and Century Rayon. Following thereupon the respondents along with their letter dated 21st June, 1955, submitted a formal quotation. The said letter, inter alia, mentioned that during the course of the said discussion, it had been mentioned that it might be possible for Century Rayon to supply to the respondents structural steel at the sub-station and that, in such event, the respondents would give to Century Rayon rebate for the steel which they might supply to them at producers’ rates. The said letter further emphasized that the steel would have to be supplied and delivered at the Kurla Works of the respondents. The said correspondence shows that the estimated weight of the structures was to be about thirty tons, but the actual weight was to be calculated on the basis of the final approved drawings. Under the said quotation the price was quoted at Rs. 1,500 per ton plus sales tax, delivery ex works, subject to variation in the producers’ rates in respect of steel, and in the rates of bolts and nuts at the time of delivery during the period of manufacture, in which case the difference was to be on the account of Century Rayon. In further correspondence that took place Century Rayon desired that in case they supplied the steel, the price of Rs. 1,500 per ton should be firm. The respondents, however, did not agree thereto. The position ultimately emerging on the correspondence is that finally it was agreed between the parties that all the steel necessary for the fabrication would be supplied by Century Rayon and that whatever incidental was necessary for the purpose of fabrication, such as galvanizing and the use of bolts and nuts, etc., was to be done by the respondents. The final bill submitted by the respondents shows that the entire steel required for the work to be done under the said contract was in fact supplied by Century Rayon. Thus, the position in respect of this transaction is that certain work had to be carried out by the respondents on materials supplied by Century Rayon and that in the execution of such work some materials incidental thereto had to be used.
9. Mr. Cooper, the learned counsel for the department, however, contended that this was an indivisible contract for the sale of goods, and not a contract of work and labour or a divisible contract partly consisting of work and labour and partly of sale of goods. Tn support of his contention Mr. Cooper relied upon the decision of a Division Bench of this High Court in McKenzies Limited v. State of Bombay [[1962] 13 S.T.C. 602], We fail to see what relevance this case has to the one before us. In that case, the assessees had to construct and deliver to the Government of India several motor bodies, but they did not have to deliver the motor bodies as such but had to fit them on to the chassis supplied to them by the Government. They contended that the fact that they had to fit the motor bodies which they had to manufacture out of their own materials to the chassis supplied by the Government made this contract a contract of work and labour. This contention was rightly rejected by the court. The position before us is wholly different. The work that was carried out by the respondents was not with their own materials but with the principal materials wholly supplied by Century Rayon. The next authority relied upon by Mr. Cooper was a decision of the Andhra Pradesh High Court in Hyderabad Chemicals and Fertilizers Ltd. v. Deputy Commissioner, Commercial Taxes (Appeals), Kurnool [[1962] 13 S.T.C. 812]. This case again is clearly distinguishable on facts. In that case, the assessees agreed to supply to a sugar factory 1,300 tons of sugarcane fertilizer mixture consisting of certain chemicals and groundnut oilcake. It was further agreed that the sugar factory would supply to the assessees 1,000 tons of groundnut oilcake to be used in the mixture and that the assessees should purchase the other ingredients at prices subject to confirmation by the sugar factory. The court held that the contract between the parties was not for work and labour or a mixed contract of labour and materials called works contract in the Andhra Pradesh General Sales Tax Act, 1957, but a contract for the sale of the finished fertilizer mixture de hors its ingredients. In the course of the judgment the court referred to Benjamin’s Sale of Goods and pointed out that where the employer delivers to a workman either all or the principal materials of a chattel on which the workman agrees to do work, there is a bailment by the employer, and a contract for work and labour or for work, labour and materials, as the case may be, by the workman and that where the workman supplies either all or the principal materials, the contract is a contract for the sale of the completed chattel and that any materials supplied by the employer when added to the workman’s materials vest in the workman by accession. Referring to the facts of that case, the court pointed out that in that case the sugar factory did not supply all or the principal materials but supplied only the groundnut oilcake and that considering the chemical process undergone by all the ingredients, it was a contract for sale of the completed chattel, and not a contract for work and labour. The next case relied upon by Mr. Cooper was a decision of the Supreme Court in Chandra Bhan Gosain v. State of Orissa . In that case the appellant manufactured and supplied large quantities of bricks to a company under a contract, a clause of which provided that land would be given free by the company. After analysing the various clauses of the said contract the Supreme Court held that under the said contract there was a transfer of property in the earth by the company to the appellant and that although the contract did not use the word “sale”, there was also a transfer of property in the bricks from the appellant to the company for consideration and, therefore, the transaction was one of sale liable to sales tax. The Supreme Court arrived at this decision on a construction placed upon the terms of the said contract. We are, however, unable to find from the terms of the contract between the respondents and Century Rayon, as appearing from the correspondence which has taken place between the parties, any intention for transfer of property in such steel to the respondents. In this connection, we may refer to the following proposition appearing at page 37, paragraph 38, of Benjamin’s “Sale of Goods” in the Common Law Library Series :
“If the employer supplies the principal materials, the contract must be one for work and labour; but it should be observed that the converse does not hold, for even in the case where all the materials are supplied by the worker, the contract is not necessarily a sale.”
10. The position has been thus elucidated in the Supreme Court by Shah, J., who spoke for the majority, in Government of Andhra Pradesh v. Guntur Tobaccos Ltd. :
“The fact that in the execution of a contract for work some materials are used and property in the goods so used passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that account to sell the materials. A contract for work in the execution of which goods are used may take one of three forms. The contract may be for work to be done for remuneration and for supply of materials used in the execution of the works for a price; it may be a contract for work in which the use of materials is accessory or incidental to the execution of the work; or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances; if it is of the first, it is a composite contract for work and sale of goods; where it is of the second category, it is a contract for execution of work not involving sale of goods.”
11. The circumstances of this case clearly show that this is a contract for work in respect of which the principal materials were wholly supplied by the employer, namely, Century Rayon, and any materials of the respondents used incidentally in the execution of the work were merely incidental to the carrying out of the work contracted to be done, and there was no intention to transfer property in such materials as goods to Century Rayon.
12. For the reasons set out above, we answer both the questions submitted to us in the affirmative.
13. The applicants will pay to the respondents the costs of the reference fixed at Rs. 250.
14. Reference answered in the affirmative.
