Case Summary
Full Case Details
P.N. BHAGWATI, J. – This appeal by special leave raises the vexed question whether a
particular contract is a contract of sale or a contract of work and labour. This has always been a
difficult question, because most of the cases which come before the Court are border line cases
and the decisions given by courts are by no means uniform. But so far as the present case is
concerned, it does not present any serious difficulty and is comparatively free from complexity or
doubt, for there is a decision of this Court which is directly applicable and is determinative of the
controversy between the parties.
- The assessee who is the appellant before us is a private limited company carrying on
business as engineers, contractors, manufacturers and fabricators and in the course of its business,
it entered into a contract dated June 28, 1972 with M/s C.M. Shah & Co. (P) Ltd. (hereinafter
referred to as the Company) for fabrication, supply, erection and installation of Sentinels Pull and
Push Type and Reduction Gear Type Rolling Shutters in shed Nos. 3 and 4 of the Sidheswar
Sahakari Sakar Karkhana belonging to the company. The detailed specifications of the rolling
shutters were given in the contract and the price was stipulated to be Rs 7 per sq. ft. and rt. for
Pull and Push Type Rolling Shutters and Rs 9 per sq. rt. and ft. for the Reduction Gear Type
Rolling Shutters, the price in both cases being inclusive of “erection at site”. The contract was
expressed to be subject to the terms and conditions set out in a printed form and there were also
certain special terms and conditions which were specifically written out in the contract. Since
considerable reliance was placed on behalf of the Revenue on some of the printed terms and
conditions of the contract, we shall set them out in extenso: - Once the delivery of the goods is effected, rejection claims cannot be entertained.
- All erection work shall be carried out at-customer’s own risk and no claim for
incidental structural breakages, damages to the property of the customers or others shall
be entertained. All masonry works required before and or after erection shall be carried
out by customers at own cost. - All payment shall be on overall measurements only. Customer desiring to check
the correctness of the overall measurements shall notify their intention in advance and
shall get the measurements checked before installation. No dispute on this ground shall
be entertained once the erection is completed. - Terms of Business: 50 per cent advance with the order and the balance against
delivery of the goods ex-work prior to erection, or against through Banks.
The special terms and conditions provided that the actual transportation charges would be in
addition to the price stipulated in the contract and the delivery would be 6/8 weeks ex-works from
the date of receipt of the final confirmation of the order. The terms of payment also formed part
of the special terms and conditions and they provided “25 per cent advance, 65 per cent against
delivery and remaining 10 per cent after completion of erection and handing over of shutters to
the satisfaction” of the Company. The assessee carried out its part of the contract and
manufactured the two types of rolling shutters according to the specifications provided in the
contract and erected and installed them in sheds Nos. 3 and 4 of the Sidheswar Sahakari Sakar
Karkhana. It does not appear from the record as to when the bill relating to the contract was
submitted by the assessee to the Company, but it was dated August 19, 1972 and presumably it
was sent by the assessee after the fabrication of the two types of rolling shutters was completed,
but before they were erected and installed at the premises of the Company. Since the assessee
entertained doubt as to whether the contract was a contract for sale or a contract for work and
labour, the assessee made an application dated September 16, 1972 to the Commissioner of Sales
Tax for determining this question, for on the answer to it, depended the taxability of the amount
to be received by the assessee against fulfilment of the contract. The Deputy Commissioner of
Sales Tax, who heard the application, took the view that the contract was a contract for sale of the
two types of rolling shutters and the work of erection and installation was merely incidental to the
sale and the assessee was, therefore, liable to pay sales tax on 95 per cent of the amount
receivable by it under the contract. Since that represented the sale price of the rolling shutters, the
remaining 5 per cent being attributable to the work and labour involved in erection and
installation. The assessee, being aggrieved by the order passed by the Deputy Commissioner of
Sales Tax preferred an appeal to the Sales Tax Tribunal, but the Sales Tax Tribunal also took the
same view and held that the transaction of supply of the two types of rolling shutters embodied in
the contract amounted to a sale but so far as the price was concerned, the Sales Tax Tribunal
observed that since 90 per cent of the amount under the contract was payable at the stage of
delivery, that should be taken to be the sale price and the balance of 10 per cent should be held to
be “the charges for the work”. The contract was thus held by the Sales Tax Tribunal to be a
composite contract consisting of two parts, one for sale of the two types of rolling shutters and the
other for execution of the work of erection and installation. This led to an application for a
reference by the assessee and on the application, the following question of law was referred for
the opinion of the High Court:
Whether having regard to the facts and circumstances of the case the Tribunal was
justified in law in coming to the conclusion that the contract in question essentially
consisted of two contracts, one for supply of materials for money consideration and the
other for service and labour done?
The High Court made a detailed and exhaustive review of the decided cases and held, agreeing
with the Sales Tax Tribunal, that the contract between the assessee and the Company “was a
divisible contract which essentially consisted of two contracts, one for the supply of shutters of
the aforesaid two types for money and the other for service and labour”, and accordingly
answered the question in favour of the Revenue and against the assessee. The assessee thereupon
brought the present appeal with special leave obtained from this Court.
- Now the question whether a particular contract is a contract for sale or for work and labour
is always a difficult question and it is not surprising to find the taxing authorities divided on it.
The difficulty, however, lies not in the formulation of the tests for determining when a contract
can be said to be a contract for sale or a contract for work and labour, but in the application of the
tests to the facts of the case before the Court. The distinction between a contract for sale and a
contract for work and labour has been pointed out by this Court in a number of decisions and
some tests have also been indicated by this Court, but it is necessary to point out that these tests
are not exhaustive and do not lay down any rigid or inflexible rule applicable alike to all
transactions. They do not give any magic formula by the application of which we can say in every
case whether a contract is a contract for sale or a contract for work and labour. They merely focus
on one or the other aspect of the transaction and afford some guidance in determining the
question, but basically and primarily, whether a particular contract is one for sale of goods or for
work and labour depends upon the main object of the parties gathered from the terms of the
contract, the circumstances of the transaction and the custom of the trade.
- It may be pointed out that a contract where not only work is to be done but the execution of
such work requires goods to be 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 work 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 supply of goods where some work is required to
be done as incidental to the sale. Where a contract is of the first type, it is a composite contract
consisting essentially of two contracts, one for the sale of goods and the other for work and
labour. The second type of contract is clearly a contract for work and labour not involving sale of
goods, while the third type is a contract for sale where the goods sold as chattels and some work
is undoubtedly done, but it is done only as incidental to the sale. No difficulty arises where a
contract is of the first type because it is divisible and the contract for sale can be separated from
the contract for work and labour and the amount payable under the composite contract can be
apportioned between the two. The real difficulty arises where the contract is of the second or third
type, because in such a case it is always a difficult and intriguing problem to decide in which
category the contract falls. The dividing line between the two types of contracts is somewhat hazy
and “thin partitions do their bounds divide”. But even so the distinction is there and it is very
much real and the Court has to perform at times the ingenious exercise of distinguishing one from
the other. - The distinction between a contract for sale and a contract for work and labour has been
pointed out in Halsbury’s Laws of England, Third Edition, Volume 34, Article 3.The primary
test is whether the contract is one whose main object is transfer of property in a chattel as a
chattel to the buyer, though some work may be required to be done under the contract as
ancillary or incidental to the sale or it is carrying out of work by bestowal of labour and service
and materials are used in execution of such work. A clear case of the former category would be a
contract for supply of airconditioner where the contract may provide that the supplier will fix up
the airconditioner in the premises. Ordinarily a separate charge is provided in such contract for
the work of fixing up but in a given case it may be included in the total price. Such a contract
would plainly be a contract for sale because the work of fixing up the airconditioner would be
incidental to the sale. Then take a contract for constructing a building where considerable
quantity of materials is required to be used in the execution of the work. This would clearly be a
contract for work and labour and fall within the latter category. But, as we pointed out earlier,
there may be and indeed as the decided cases show, there are a large number of cases which are
on the border line and it is here that difficulty is often experienced in the application of this
primary test. To resolve this difficulty, the courts have evolved some subsidiary tests. One such
test is that formulated by this Court in Commissioner of M.P. v. Purshottam Premji [(1970) 2
SCC 287], where it has been said:
The primary difference between a contract for work or service and a contract for sale of
goods is that in the former there is in the person performing work or rendering service no
property in the thing produced as a whole …. 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.
This was the test applied by this Court in the State of Rajasthan v. Man Industrial
Corporation [(1969) 1 SCC 567], for holding that a contract for providing and fixing four
different types of windows of certain sizes according to “specifications, designs, drawings and
instructions” set out in the contract was a contract for work and labour and not a contract for sale.
- Now, it is clear that the contract is for fabrication, supply, erection and installation of two
types of rolling shutters and not only are the rolling shutters to be manufactured according to the
specifications, designs, drawings and instructions provided in the contract, but they are also to be
erected and installed at the premises of the Company. The price stipulated in the contract is
inclusive of erection and installation charges and the contract does not recognise any dichotomy
between fabrication and supply of the rolling shutters and their erection and installation so far as
the price is concerned. The erection and installation of the rolling shutters is as much an essential
part of the contract as the fabrication and supply and it is only on the erection and installation of
the rolling shutters that the contract would be fully executed. It is necessary, in order to
understand the true nature of the contract, to know what is a rolling shutter and how it is erected
and installed in the premises. It is clear from the statement Ex. C to the petition for special leave,
which statement was submitted before the Sales Tax Tribunal and the correctness of which was at
no time disputed before us, that a rolling shutter consists of five component parts, namely, two
brackets welded with ‘U’ type clamps, one pipe shafting with high tension springs, shutter screen
made out of 20G/18G/thickness of metal as required by the customer, side guides or guide
channels welded with iron clamps to the bottom with provision of locking arrangements with
welded handles and top cover. These component parts fabricated by the manufacturer and taken
to the site and fixed on the premises and then comes into existence a Rolling Shutter as an
identifiable commercial article. The method of fixing the component parts in position in the
premises so as to bring into existence the commercial article known as a rolling shutter is fully
described in the statement Ext. C. First of all, certain masonry work is required to be done by the
customer and that has to be carried out by the customer at his own cost. Then the brackets are
fixed on either side on the top portion of the opening by grouting holes on the masonry walls and
inserting the bolts. Thereafter the holes are filled with cement and the pipe shafting with high
tension springs is inserted into the ‘IT clamps of the brackets. Then the iron curtain of the rolling
shutter is hosted over the high tension springs and tightened by means of nut bolts and guide
channels are then fixed by grouting masonry walls where side guide clamps are to be fixed. After
fixing the clamps to the grouted portion of the wall, the same is plastered and then the iron curtain
of the shutter is lowered through the guide channels to operate the shutter manually up and down.
The rolling shutter is then ‘born’ and it becomes a permanent fixture to the premises. The Indian
Standards Specification Book for Metal Rolling Shutters and Rolling Grills also gives a similar
procedure for fixing the component parts of the Rolling Shutter on the premises. It clearly shows
that a rolling shutter consists of curtain, lock plates, guide channels, bracket plates, rollers, hood
covers, gears, worms, fixing bolts, safety devices, anchoring rods, central hasp and staple. Each
guide channel has to be provided with a minimum of three fixing cleats or supports for
attachment to the walls or column by means of bolts or screws. The guide channels are further
attached to the jambs, plumbed either in the overlapping fashion, projecting fashion or embedded
in grooves, depending on the method of fixing. All these operations take place at the site after
despatch of the component parts of the rolling shutter. Hood cover is fixed in a neat manner and
supported at the top at suitable intervals. This also has to be done at the site. Item 11.1 of the
specification shows that the rolling shutter curtain and bottom lock plate are interlocked together
and rolled in one piece, but the other parts like guide channels, bracket plates, rollers, etc., are
despatched separately. Item 12.1 shows that “all the rolling shutters are erected by the
manufacturer or his authorised representative in a sound manner, so as to afford trouble-free and
easy operation, long life and neat appearance”. It will, thus, be seen that the component parts do
not constitute a rolling shutter until they are fixed and erected on the premises. It is only when the
component parts are fixed on the premises and fitted into one another that they constitute a rolling
shutter as a commercial article and till then they are merely component parts and cannot be said
to constitute a rolling shutter. The erection and installation of the rolling shutter cannot, therefore,
be said to be incidental to its manufacture and supply. It is a fundamental and integral part of the
contract because without it the rolling shutter does not come into being. The manufacturer would
undoubtedly be the owner of the component parts when he fabricates them, but at no stage does
he become the owner of the rolling shutter as a unit so as to transfer the property in it to the
customer. The rolling shutter comes into existence as a unit when the component parts are fixed
in position on the premises and it becomes the property of the customer as soon as it comes into
being. There is no transfer of property in the rolling shutter by the manufacturer to the customer
as a chattel. It is essentially a transaction for fabricating component parts and fixing them on the
premises so as to constitute a rolling shutter. The contract is thus clearly and indisputably a
contract for work and labour and not a contract for sale.
- The Revenue leaned heavily on the provision in the contract that the delivery of the goods
shall be ex-works and once the delivery of the goods is effected, no claim for rejection shall be
entertained and relying on this provision, the Revenue contended that under the contract the
rolling shutters were to be delivered by the assessee to the company ex-works, that is, at the
works of the assessee and the property in the rolling shutters passed to the company as soon as
they were delivered and hence it was a contract for sale. We do not think this contention of the
Revenue has any force and it must be rejected. It is clear from the above discussion that a rolling
shutter as a complete unit is not fabricated by the manufacturer in his factory but he manufactures
only the component parts and it is only when the component parts are fitted into position and
fixed on the premises that a rolling shutter comes into being as a commercial article and,
therefore, when the contract provides that the delivery of the goods-shall be ex-works, what is
obviously meant is that the component parts shall be delivered to the company at the works of the
assessee and once they are delivered, they shall not be liable to be rejected by the company.But
that does not mean that as soon as the component parts are delivered to the company, the contract
is fully executed. The component parts do not constitute a rolling shutter and it is the obligation
of the assessee under the contract to fix the component parts in position on the premises and erect
and install a rolling shutter. The execution of the contract is not completed until the assessee
carries out this obligation imposed upon it under the contract and a rolling shutter is erected and
installed at the premises. It is true that clause (12) of the printed terms and conditions provides
that 50 per cent of the amount under the contract shall be paid as advance and the balance against
delivery of the goods ex-works but this clause is clearly overridden by the special term
specifically written out in the contract that 25 per cent of the amount shall be paid by way of
advance, 65 per cent against delivery and the remaining 10 per cent after completion of erection
and handing over of the rolling shutters to the satisfaction of the company. This provision
undoubtedly stipulates that 90 per cent of the amount due under the contract would be paid before
erection and installation of the rolling shutters has commenced, but that would not make it a
contract for sale of rolling shutters. The true nature of the contract cannot depend on the mode of
payment of the amount provided in the contract. The parties may provide by mutual agreement
that the amount stipulated in the contract may be paid at different stages of the execution of the
contract, but that cannot make the contract one for sale of goods if it is otherwise a contract for
work and labour. It may be noted that the contract in State of Madras v. Richardson of Cruddas
Ltd [(1968) 21 STC 245 (SC)] contained a provision that the full amount due under the contract
shall be paid in advance even before the execution of the work has started and yet the Madras
High Court held, and that view affirmed by this Court, that the contract was a works contract. The
payment of the amount due under the contract may be spread over the entire period of the
execution of the contract with a view either to put the manufacturer or contractor in possession of
funds for the execution of the contract or to secure him against any risk of non-payment by the
customer. That cannot have any bearing on the determination of the question whether the contract
is one for sale or for work and labour.
- Here the last portion of the special terms in regard to payment of the amount due under the
contract also makes it clear that it is only when the component parts are fitted into position in the
premises that a rolling shutter would be complete and this rolling shutter has to be to the
satisfaction of the company and it is then to be handed over by the assessee to the company and
then, and then alone, would the remaining 10 per cent be payable by the company to the assessee.
It is, therefore, clear that the contract is one single and indivisible contract and the erection and
installation of the rolling shutter is as much a fundamental part of the contract as the fabrication
and supply. We must, in the circumstances, hold, driven by the compulsion of this logic, that the
contract was a contract for work and labour and not a contract for sale. This view which we are
taking is completely supported by the decision of this Court in Vanguard Rolling Shutters of
Steel Works v. Commissioner of Sales Tax, U.P. [(1977) 2 SCC 250] to which one of us
(Bhagwati, J.) was a party. - We accordingly allow the appeal, set aside the judgment of the High Court and hold that the
contract in the present case was a contract for work and labour and not a contract for sale.
