Smt. Sujata V. Manohar, J.
1. In this reference the following question has been referred to us for determination :
'Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the agreement dated 20th May, 1959, between M/s. Walchandnagar Industries Ltd., the respondent, and M/s. Krishna Sahakari Sakhar Karkhana Ltd., was an indivisible works contract, and not a composite one, divisible into one for sale of machinery and another for rendering some service ?'
2. M/s. Walchandnagar Industries Ltd., who are the respondents in this reference are dealers registered under the Bombay Sales Tax Act, 1959. They entered into two contracts with M/s. Krishna Sahakari Sakhar Karkhana Ltd., under which they agreed to supply and erect a sugar plant for the said Karkhana. These contracts are dated 20th May, 1959, and 13th May, 1960. For the period 1st January, 1960, to 30th September, 1960, the respondents were assessed by the Sales Tax Officer, Poona City III Division, on 27th July, 1976. Being aggrieved by the assessment order they filed an appeal to the Assistant Commissioner of Sales Tax, Poona. In appeal the assessment order was challenged on the ground, inter alia, that sales of Rs. 1,98,602 were not liable to be taxed as these sales were in the course of inter-State trade. This ground was taken because the said goods were purchased by the respondents from a dealer in Baroda and they were discharged directly from a place outside the State to the said Karnataka to whom the goods had been sold by the respondents. Before the Assistant Commissioner the respondents also made a fresh claim for exemption which was not set out in the memorandum of appeal. They claimed that sales of Rs. 6,47,000 were not liable to tax as they were sales in the course of import. These claims were negatived.
3. The respondents thereupon went in second appeal before the Tribunal. They contended before the Tribunal for the first that there was in fact no sale of machinery by the respondents to the said Karkhana. It was for the first time argued that the first agreement of 20th May, 1959, and the second agreement constituted a composite contract for the supply and erection of a sugar plant and there was no agreement for sale of machinery as such. Hence the agreement constituted an indivisible works contract. In the alternative, the respondents also took the contentions which (they) had urged before the Assistant Commissioner.
4. The Tribunal, by its order dated 6th March, 1980, accepted the contention of the respondents that there was no sale of machinery and that the two agreements constituted an indivisible works contract. It is from this decision of the Tribunal that the present reference is made before us.
5. We have to consider whether the two agreements constitute an indivisible works contract. As pointed out by the Supreme Court in the case of Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax : 1SCR644 the question whether a particular contract is a contract for sale or for work and labour is always a difficult question, turning upon the terms of each contract. There are a large number of decisions relating to several such contracts which have come up before the Courts. Basically the answer depends upon the common object of the parties as gathered from the terms of the contract, the circumstances of the transaction and the customs of the trade. It is therefore, necessary, first, to look at the terms of the contracts in question.
6. Under the first contract of 20th May, 1959, clause 1 is as follows :
'1. The sellers agree to supply to the purchasers the machinery and equipment as described and specified in Schedule 'A' hereto (hereinafter referred to as the sugar plant) capable of crushing per day of 22 working hours 1000 tons of sugarcane with a fibre content of approximately 12 to 15 per cent. and to produce commercial white sugar by double sulphitation process, and the milling plant giving an extraction of not less than 93 per cent. based on cane with a fibre contents of 12.5 (per cent.) and maceration upto 180 per cent. on fibre, the plant being capable of being extended to 1500 tons capacity per day by suitable additions later .......'
7. Under clause 2 of the contract the total contract price of the sugar plant is mentioned as Rs. 84,00,000 f.o.r. the place of manufacture or supply or the port of entry. The price is exclusive of customs duty, sales tax and other taxes but includes rail worthy packing and/or single protective coat (of) painting as far as necessary.
8. The first part of clause 5 of the contract is as follows :
'5. ERECTION :
(a) The sellers undertake to provide the purchases with one Chief Erector and as many assistants as necessary to complete the erection of the plant before the end of December, 1960, and to supervise putting into commission and operation in accordance with guarantees. The Chief Erector will be made available to the purchases - approximately two weeks before the first machinery and equipment arrives at the factory site.
(b) The sellers undertake to hand over to the purchasers :
(i) Within four months after signing this agreement a time-schedule for all the erection work which if adhered to, will enable the erection and putting into operation of the sugar factory by the 1st January, 1961.
(ii) Within four months after signing this agreement a list of all tools and tackles needed for the erection of the machinery and equipment.
(iii) Within four months after signing this agreement, a list showing the equipment of a small workshop required for the erection and running of the factory.
(iv) Within nine months after signing this agreement, a list showing all other requirements such a first filling of oil and greases for the machinery and other stores for erection and operating the factory.'
9. In consideration of the services to be rendered by the sellers under clause 5 the purchasers were to pay to the sellers a lump sum amount of Rs. 2 lakhs in the manner set out in the agreement. Under clause 6, the respondent gave a performance guarantee as set out in that clause.
10. After the machinery under the said contract was delivered by the respondents to the purchasers a second contract was entered into between the same parties which is dated 13th May, 1960. The recitals to the said contract, inter alia, contain the following :
'Whereas the Karkhana which has purchased machinery for a complete sugar factory unit and is in need of the services of contractors to erect the same at the site of the factory at Rethre Budruk .......',
thus indicating that the Karkhana required contractors to erect machinery and plant belonging to the Karkhana. Under the said agreement the respondents were described as erectors. They undertook to perform the erection work of all the machineries and equipment supplied to the said Karkhana under the agreement of 20th May, 1959. it is not necessary to go into the details of the contract relating to erection, save and except that the erection work was to be done by the respondents for a lumpsum amount of Rs. 3,50,000.
11. Under clause 11 of the contract it was expressly provided that this amount had no relation to the amount of Rs. 2 lakhs to be paid by the Karkhana as mentioned in clause 5 of the agreement dated 20th May, 1959.
12. In the present case, therefore, there are two separate contracts, separated by a period of over one year. The first contract is in terms for the sale of machinery and equipment as described and specified in Schedule 'A' to the contract; which machinery and equipment is referred to as the sugar plant. The second contract is a separate contract for the erection of the machinery and equipment. It was contended by Mr. Vaidya, learned Advocate for the respondents, that the intention of the parties was from the very beginning, to enter into a contract both for the supply and for the erection of a complete sugar plant. He relied upon a letter dated 20th April, 1959, addressed by the Industrial Advisor to the Government of India to the respondents, in which there is a reference to the respondents' quotation for the supply of a complete sugar plant. This is a letter addressed by a third party to the respondents some time prior to the entering into of the contract of 20th May, 1959. It is difficult to see how such correspondence with a third party can indicate the intention of the contracting parties. When the intention of the parties has crystallised in the form of a contract, the intention of the parties must be gathered from the terms of the contract. The terms of the contracts in the present case are quite clear and unambiguous.. The contract of 20th May, 1959, is a contract for the sale of machinery and equipment for a total price of Rs. 84 lakhs. There is one clause in this contract, viz., clause 5, which deals with erection. But when one looks at the actual terms of this clause, this clause requires the respondents to provide one Chief Erector and as many assistants as necessary to complete the erection of the plant and to supervise the putting into commission and operation of the plant in accordance with guarantees. Apart from providing the services of these persons the sellers are required to furnish under this clause a time-schedule of the erection work, a list of all tools and tackles needed for the erection work, a list showing the equipment required for a small workshop and running of the factory and a list showing other requirements such as first filling of oil and grease for the machinery and other stores for erecting and operating the factory. For these services, the respondents are to be given a separate payment of Rs. 2 lakhs. Clause 5 does not require the respondents to carry out the work of erecting a sugar plant. The services required from the respondent are limited in nature. They have been spelt out and a separate payment is provided for these services. This would clearly indicate that these services are to be separately paid for. The payment of Rs. 84 lakhs is provided for the sale and supply of machinery and equipment.
13. The second contract of 13th May, 1960, further clarifies this position. It is a contract subsequently entered into between the parties for the erection work of the machinery and equipment which have been already supplied by the respondents under the previous contract to the Karnataka. The second agreement proceeds on the footing that the machinery so supplied belongs to the Karkhana. The respondents as erectors are required to carry out the work of erecting the machinery and equipment. For example, under clause 6 of this agreement it is the responsibility of the Karnataka to keep the material ready and well arranged and deliver it as and when required by the erectors to ensure uninterrupted erection work. Under clause 15 it is the Karkhana which has taken an insurance cover for damage to machinery and equipment is transit, storage and erection and the said clause deals with the responsibility of the erectors in relation to damage in the course of erection.
14. There are thus two separate contracts - one for sale and the other for erection work. In these circumstances there can be no question of applying the various tests laid down in the cases of composite contracts which have come up before the Courts for determining, whether the contract is one for sale, or for work, or is a divisible contract for sale and work. In the present case the parties have themselves entered into two separate contracts, one for sale of machinery and equipment and the other for erection work. It is true that both the contracts are entered into with the respondents. So that the respondents are both suppliers of machinery and equipment as well as erectors of this machinery and equipment. But two separate contracts have been entered into for these two types of obligations. The fact that the same party has incurred both these obligations cannot render two separate contracts, arrived at with an interval of one year, a single composite works contract. It is true that in the first agreement of sale, clause 5 provides for certain services to be rendered by the respondents. But a separate payment is provided for these services. These services relate to supply of personnel and furnishing various lists and schedules. The services are therefore quite distinct form the sale of machinery. This part is therefore, clearly divisible from the rest of the contract.
15. In the case of Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. : 1SCR644 , the Supreme Court pointed out that there are three types of such composite contracts for sale and work :
(i) 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;
(ii) It may be a contract for work in which the use of materials is accessory or incidental to the execution of the work;
(iii) It may be a contract for supply of goods where some work is required to be done as incidental to the same.
The present contracts do not fall in any of the above three categories since there are two separate contracts. Even the first contract which may be looked upon as a composite contract, does not fall in any of these categories. It is not in the third category either as the services contemplated under clause 5 are not incidental to the supply of machinery. They are extra services separately paid for. The first category covers those contracts where there is a composite agreement for work to be done for a remuneration which includes supply of materials to be used in the work to be executed. There is no such composite agreement before us under which the respondents have undertaken to carry out any work which requires supply of material. The respondents have first entered into an agreement for the supply of material and thereafter entered into a second agreement for doing erection work in respect of the material so supplied. Since the two agreements are separate agreements there can be no doubt that they are divisible and the parties contemplated that the two agreements should be distinct.
16. As pointed out by the Supreme Court in the case of State of Madras v. Gannon Dunkerley & Co. : 1SCR379 , the parties may enter into two contracts, one for the sale of goods and one for services. Even when such contracts are in one document they can be separate, far more so when they are in two separate documents.
17. In view of this position it is not necessary to go into other authorities dealing with composite contracts and their interpretation for the purposes of levy of sales tax.
In the premises the question is answered in the negative, that is to say, in favour of the revenue and against the assessee.
The respondents to pay to the applicants costs of the reference.