1. Works contract for plant installation for a lump sum — Dispute over liability to pay sales tax on materials under the Bihar Sales Tax Act. (Para 2 , 3 )
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1961 Supreme(SC) 195
SUPREME COURT OF INDIA
S.K.Das : J.C.Shah : J.L.Kapur : M.Hidayatullah : S.R.Dass : T.L.Venkatarama Ayyar
Carl Still G.M.B.H.
Versus
State Of Bihar
Case No. : 237 , 238 of 1960
Date of Decision : 4/19/61
Advocates Appeared: Banerjee S.R. : Majumdar S.C. : Sastri A.V.Viswanatha : Varma S.P.
Advocates:
A.V.VISHWANATHA SASTRI, S.C.MAJUMDER, S.P.Varma, S.R.BANERJI
A.V.VISHWANATHA SASTRI, S.C.MAJUMDER, S.P.Varma, S.R.BANERJI
A lump sum works contract is indivisible and does not constitute a sale of goods. Clauses transferring property in materials to the owner upon arrival at the site for security purposes do not create a separate contract of sale.
Headnote:(A) State Sales Tax Act - Sections 2(b), 2(c), 2(d), 2(g), 2(h)(ii), 4, 5, 9(1), 13(5) - Sale of Goods Act - Section 9 - Constitution of India - Articles 226, 227 - Entry 54, List II, Schedule VII - In a building contract where specified work is executed for a lump sum, there is no contract of sale of materials used in the works, and a tax on the supply of such materials treating it as a sale is ultra vires the powers of the State Legislature. (Paras 6, 8)
(B) Construction of Contract - Where a contract is entire and indivisible for the construction of specified works for a lump sum, it cannot be construed as a combination of two distinct agreements, one to sell materials and the other to supply labour and services. (Paras 7, 8)
(C) Transfer of Property Clause - A clause providing that materials brought to the site shall become the property of the owner is intended to ensure that materials of the right sort are used and to secure the work, rather than to constitute a separate contract of purchase. Such a clause does not amount to a sale, especially where the contractor remains liable for loss or damage to the materials. (Paras 9, 10)
(D) Writ Jurisdiction - When proceedings are initiated before a tribunal under a provision of law that is ultra vires, the aggrieved party may move the High Court under Article 226 for quashing the proceedings as incompetent without being required to exhaust the remedies provided under the Act. (Para 11)
Facts of the case:
A company entered into a contract for the assembly and installation of machinery and plants for an all-inclusive lump sum price. The contract was divided into foreign and domestic sections, with the domestic section assigned to another company. The tax authorities initiated proceedings to levy sales tax on the materials used in the execution of the works contract, treating the supply of materials as a sale. The taxpayers challenged the proceedings in the High Court, arguing that the provisions of the Act taxing materials in works contracts were ultra vires.
Findings of Court:
The agreement was a contract entire and indivisible for the construction of specified works for a lump sum and not a contract of sale of materials. The clause stating that materials become the owner's property upon arrival at the site was for security and quality assurance and did not create a sale, as the contractor retained the risk of loss.
Issues: Whether a lump sum works contract constitutes a sale of materials; whether a clause transferring property in materials upon arrival at the site creates a contract of sale; and whether the High Court can quash proceedings based on ultra vires statutory provisions.
Ratio Decidendi: A works contract for a lump sum is indivisible; unless there are distinct agreements for the transfer of materials and the rendering of services, it is not a sale of goods. A property-transfer clause does not imply a sale if the contractor remains liable for the materials. Proceedings based on ultra vires laws are incompetent and can be quashed by the High Court under Article 226.
Result: Appeals allowed.
Legal Category Hierarchy
Table of Contents
2. Whether an indivisible works contract constitutes a sale of goods — Validity of taxing materials supplied in construction contracts as sales. (Para 4 , 5 )
3. The agreement was for a lump sum for specified works — Property transfer clauses in works contracts do not necessarily constitute separate contracts of sale. (Para 7 , 8 , 9 )
4. An indivisible works contract for a lump sum is not a contract of sale of materials; taxing such supply as a sale is ultra vires. (Para 8 , 10 )
5. Appeals allowed — Writs issued to quash the sales tax proceedings. (Para 12 , 22 )
6. When does a works contract for a lump sum constitute a sale of goods for tax purposes?
A contract that is entire and indivisible for the execution of works for a lump sum is not a contract of sale of materials. It is only taxable if the parties enter into distinct and separate agreements—one for the transfer of materials and another for the rendering of services. (Para 7 , 8 )
7. Does a clause stating materials become the owner's property upon arrival at the site create a contract of sale?
No, such clauses are often intended to ensure the correct materials are used and do not constitute a separate purchase agreement, particularly if the contractor continues to bear the risk of loss for those materials. (Para 9 )
8. Can the price of materials in a works contract be determined under Section 9 of the Sale of Goods Act to establish a sale?
Section 9 presupposes the existence of a contract of sale. If the agreement is an indivisible works contract and not a contract of sale, Section 9 cannot be applied to fix a price for materials to create a taxable sale. (Para 10 )
9. Can a party invoke Article 226 to quash proceedings before a tribunal if the underlying law is ultra vires?
Yes, when proceedings are initiated under a provision of law that is ultra vires, an aggrieved party may move the court under Article 226 for quashing the proceedings without being obliged to wait for the proceedings to run their full course. (Para 11 )
T.L.VENKATARAMA AIYAR, J.
(1) BOTH these appeals arise out of the same facts and involve the determination of the same question, and this judgment will govern both of them.
(2) THE appellant in Civil Appeal No. 237 of 1960 is a company registered at Recklinghausen near Dusseldorf in West Germany, and carries on business in the manufacture and erection of plants and machinery. On 19/12/1953, it entered into a contract with a company called Sinclair Fertilisers and Chemicals (Private) Ltd., hereinafter referred to as the Owner, for assembling and, installing machinery, plants and accessories for a coke oven battery and by-products plant at Sindri in the State of Bihar for an all-inclusive price of Rs. 2,31,50,000.00. The agreement provides that the appellants were to supply all the materials and labour required for the execution of the works, and that the performance was to be split up into two categories, the German section and the Indian section, that the German section was to consist of deliveries of materials from Germany Free on Board European ports, cost of technical drawings and services of German specialists, and that the Indian section was to consist of supply of Indian materials and charges for Indian labour and services to be performed in India. The German section was to be paid out of the lump sum stated above a sum of Rs. 1,31,50,000.00 in pounds sterling in London on account of the appellant, and the Indian section was to be paid the balance of Rs. 1,00,00,000.00 in Indian currency in this country, and payments were to be made in instalments related to the progress of the contract. Subsequent to the agreement, the appellant entrusted the work of the Indian section to an Indian company called the Coke Oven Construction Company (Private) Ltd., and the Owner having accepted this arrangement the said company has become the assignee of the contract in so far as it relates to the execution of the Indian section thereof. It is this company that is the appellant in Civil Appeal No. 238 of 1960. The execution of the works was completed in 1955 as provided in the agreement, and the amounts due thereunder were also paid to the two appellants.
(3) THE present dispute between the parties is as to whether the appellants in the two appeals are liable to pay sales tax on the value of the materials used by them in the execution of the works under the contract. It will be convenient now to refer to the relevant provisions of the BIHAR SALES TAX ACT (Bihar Act No. XXX of 1947), hereinafter referred to as the Act. Section 2 (g)of the Act defines sale as including a transfer of property in goods involved in the execution. of contract. Contract is defined in s. 2(b) as meaning any agreement for carrying out for cash or valuable consideration, the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property; and goods are defined in s. 2(d) as including `all materials, articles and commodities, whether or not to be used in the construction, fitting out, improvement or repair of immovable property.` Sale price is defined in s. 2(h)(ii) as meaning the amount payable to a dealer as valuable consideration for the carrying out of any contract, less such portion as may be prescribed, of such amount representing the usual proportion of the cost of labour to the cost of materials used in carrying out such contract. Dealer is defined in s. 2(c) as meaning any person who sells or supplies any goods including goods sold or supplied in the execution of a contract. Section 2 (1) defines turnover as meaning the aggregate of the amounts of sale prices received and receivable by a dealer in respect of sale or supply of goods or carrying out of any contract, effected or made during a given period. Section 4 is the charging section, and it provides that every dealer whose gross turnover during the accounting period exceeded Rs. 10,000.00 shall be liable to pay tax on sales which take place in Biha
