1. Contract for construction of bus bodies on chassis supplied by the State — Dispute over taxability under the Orissa Sales Tax Act. (Para 2 , 13 , 15 )
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1965 Supreme(SC) 8
SUPREME COURT OF INDIA
19th January 1965
P.B. GAJENDRAGADKAR, C.J.I., M. HIDAYATULLAH, J.C. SHAH, S.M. SIKRI AND R.S. BACHAWAT, JJ.
M/s. Patnaik and Co. (In all the appeals), Appellants
Versus
State of Orissa (In all the appeals), Respondent.
Civil Appeals Nos. 179 to 181 of 1964.
Advocates appeared
Mr. A. V. Viswanatha Sastri, Senior Advocate, (Mr. R. Gopalakrishnan, Advocate, with him), for Appellants (In all the appeals); Mr. H. C. Setalvad, Senior Advocate, (M/s. R. Ganapathy lyer and R. N. Sachthey, Advocates with him), for Respondent (In all the appeals).
Advocates:
A.V.VISHWANATHA SASTRI, M.C.SETALVAD, R.Ganapathy Iyer, R.GOPAL KRISHNAN, R.N.SACH
A.V.VISHWANATHA SASTRI, M.C.SETALVAD, R.Ganapathy Iyer, R.GOPAL KRISHNAN, R.N.SACH
A contract to manufacture a chattel to be fitted onto another chattel is a sale of goods if the produced item remains the sole property of the manufacturer until delivery for a price, regardless of purchaser supervision.
Headnote:(A) Sales Tax Legislation - Distinction between contract for sale of goods and contract for work and labour - A contract of sale is one whose main object is the transfer of property in, and delivery of possession of, a chattel as a chattel to the buyer. Where the main object is not the transfer of a chattel qua chattel, the contract is one for work and labour. The test is whether the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of materials nor the value of skill and labour is conclusive. (Paras 1, 7)
(B) Contract for sale of goods - Supervision by purchaser - A contract for the sale of goods to be manufactured does not cease to be a contract for sale merely because the process of manufacture is supervised by the purchaser or because the purchaser insists on strict specifications. (Para 26)
(C) Property in movables - Accretions to movables - Whether movables fixed to another movable pass property immediately to the owner of the primary property depends on the intention of the parties. (Para 6)
Facts of the case:
A contractor entered into an agreement to construct bus bodies on chassis supplied by the state government. The agreement stipulated that the contractor be responsible for the safe custody of the chassis, guarantee the durability of the bodies, and allow the government to inspect the work and take possession of unfinished vehicles if the contractor failed to rectify defects. The contractor claimed the consideration received was for work and service and thus not taxable under sales tax laws.
Findings of Court:
The contract is one for the sale of goods. The bus body is a movable chattel that remains the property of the contractor until delivery. The agreement is for the transfer of this chattel for a price, making the consideration taxable.
Issues: Whether a contract for the construction of bus bodies on chassis supplied by the customer constitutes a contract for the sale of goods or a contract for work and service.
Ratio Decidendi: The nature of the contract depends on the intention of the parties. If the thing produced has an individual existence as the sole property of the producer before delivery and property passes for a price, it is a sale. In this case, the bus body is a movable chattel that does not lose its character as such when fixed to the chassis; since it remains the contractor's property until delivery, the transaction is a sale of goods. Supervision by the buyer does not change this nature.
Result: Appeals dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether the agreement constitutes a contract for work and labour or a contract for the sale of goods. (Para 14 , 20 , 22 , 25 , 26 )
3. Analysis of party intention, property transfer at delivery, and the effect of purchaser supervision on the nature of the contract. (Para 1 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 17 , 18 , 19 , 21 , 23 , 26 , 28 , 29 )
4. A contract is for sale of goods if the object is the transfer of property in a chattel that has individual existence before delivery. (Para 1 , 7 , 14 , 19 , 23 )
5. Appeals dismissed — Transaction held to be a contract for the sale of goods and thus taxable. (Para 31 , 32 , 33 )
6. How is a contract for the sale of goods distinguished from a contract for work and labour?
The distinction depends on the intention of the parties. A contract of sale's main object is the transfer of property in a chattel. If the work does not end in something that can properly become the subject of sale, it is a contract for work and labour. (Para 1 , 7 )
7. Does the purchaser's supervision of the manufacturing process convert a contract of sale into a works contract?
No. A contract for the sale of goods to be manufactured does not cease to be a contract for sale merely because the process of manufacture is supervised by the purchaser to ensure quality and adherence to specifications. (Para 26 )
8. Does fixing a chattel to another chattel automatically make the transaction a works contract?
Not necessarily. While fixing a chattel to land may create an accretion, fixing one movable to another depends on the parties' intention. If the item being fixed is a movable chattel whose property passes upon delivery, it remains a sale of goods. (Para 21 , 23 )
9. What is the significance of the individual existence of the produced item in determining the nature of the contract?
A strong test is whether the thing produced had individual existence as the sole property of the producer before delivery. If it did, and property passes for a price, it is generally a contract for sale. (Para 7 , 13 )
Judgment
SHAH, J. : Whether a contract is one for execution of work or for performance of service, or is a contract for sale of goods must depend upon the intention of the parties gathered from the terms of the contract viewed in the light of surrounding circumstances. If the contract is one for work or for performance of service, the mere circumstance that the party doing the work or performing the service uses goods or materials belonging to him in the execution of the contract will not be of any importance in determining whether the contract is one for sale of goods. It is common ground that under the scheme of the Sales Tax Acts enacted by State Legislatures, if in its true nature the contract is one for performance of service or for work, consideration paid is not taxable, for the States have authority under the Constitution by Schedule VII to legislate on the topics of tax on salt or purchase of goods (other than newspapers) and have no power to tax remuneration received under contracts for work or service. 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 notwithstanding that a part or even the whole of the materials used by him may have been his property. In the case of a contract for sale, there is in the first instance a chattel which belongs exclusively to a party and under the contract property therein passes for money consideration. As observed in Halsbury s Laws of England (Third Edition), Vol. 34, pp. 6-7, Para 3 :
"A contract of sale of goods must be distinguished from a contract for work and labour. The distinction is often a fine one. A contract of sale is a contract whose main object is the transfer of the property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel."
To constitute a sale there trust, therefore, be an agreement and in performance of the agreement, property belonging to one party must stand transferred to the other party for money consideration. Mere transfer of property in goods used in the performance of a contrast is, however, not sufficient; to constitute a sale there must be an agreement-express or implied-relating to sale of goods and completion of the agreement by passing of title in the very goods contracted to be sold. It is of the essence of the transaction that the agreement and sale should relate to the same subject-matter, i.e., the goods agreed to be sold and in which the property is transferred.
2. To determine the liability of the appellants to pay tax under the Orissa Sales Tax Act on the consideration received by them under the terms of the contract, the true intention of the parties must be determined. The agreement which is the subject-matter of the dispute between the parties is executed on behalf of the Governor of Orissa and the appellants, for constructing "bus bodies" on the chassis supplied by the Governor of Orissa. In the second paragraph of the preamble it is recited that the Governor had accepted the quotation and had decided to place orders for construction of "bus bodies" on the chassis supplied by the Governor at the rates specified therein. The third paragraph recites that the appellants had agreed to construct "bus bodies" at the rate quoted and on the terms an
