1. The short question for consideration is whether a contract for supply, erection and commissioning of a boiler is a contract for sale or a works contract. Despite adjudication by the Courts in several cases whether any given transaction is a contract for sale or a works contract, no definite or fixed principles are evolved to determine the nature of the transaction. If we may say so, the only settled principle is that each case depends upon the facts of that case. Nevertheless, Courts have laid down the board guidelines to be borne in mind while determining this question.
2. The facts may now be briefly stated :
The petitioner is a dealer in reconditioned second-hand boilers at Tenali. He purchases condemned boilers, mostly from Indian Railways, reconditions them and undertakes supply, erection and commissioning as per the orders of the customers. For the assessment year 1974-75 he claimed exemption on a turnover of Rs. 1,00,228 stating that the amount represented receipts for executing works contracts. All the authorities under the Sales Tax Act including the Appellate Tribunal rejected the claim of the petitioner and held that the transactions in question are contracts for sale and not for work.
3. In the instant case, there is no written agreement. The question has to be adjudicated with reference to the correspondence between the parties. The disputed amount of Rs. 1,00,228 was received from six customers. The letters of indent and acceptance are similar in all the transactions. It would therefore suffice to refer to the correspondence in one case.
'V. S. RAJU & SONS, ENGINEERING WORKSHOP. Prop : V. S. RAJU. C.S.T. No. 1450. Morrispet, Tenali-2. R.C. GTT. I. 1305. 15-3-1974. To M/s. Kalpana Tanning Materials, Vizianagaram. Dear Sir, Quotation for second-hand Lancashire boiler No. C.P. 616 regarding. * * *
4. I am glad to inform you that I can supply and erect the above Lancashire boiler rating 550 sft. working pressure 160 lbs. p.s.i. with current certificate, with all mounting fittings, chimney of 60' x 30' dia., for Rs. 30,000 (Rupees thirty thousand only) including erection and commissioning excluding transport and civil works.
5. Awaiting your confirmation, Thanking you,
Yours faithfully, Sd/- V. S. RAJU. KALPANA TANNING MATERIALS, VIJAYANAGARAM. * * * To M/s. V. S. Raju & Sons, Engineering Works, Morrispet, Tenali-2. Dear Sirs, Sub : Supply of used Lancashire boiler-Reg. No. 616. Ref : Your quotation dated 15-3-74. * * *
6. Inasmuch as the validity of your quotation referred cited for the supply of 1 No. used Lancashire type boiler of evaporation capacity 2,000 Kgs. per hour at 160 P.S.I.
7. We have since examined your quotation and found that the boiler is suitable to us and we take pleasure to request you to please supply the boiler as follows :-
8. Supply of 1 No. used Lancashire type boiler of capacity 2,000 Kgs. of steam per hour at a working pressure of 160 lbs. p.s.i. with all mountings and fittings and also with chimney of 60 feet high and 30' dia., fire-bars, feed water-pump and inclusive of erection and commissioning to be done by you for Rs. 30,000 (Rupees thirty thousand only).
9. F.O.R. : Ex your works, Tenali - Transport charged from your works to our factory will be borne by us.
10. GUARANTEE : The boiler will be erected and commissioned by you after observing all formalities under the Boiler Regulation Act and you will take necessary action for obtaining the test certificate, licence, etc., from the concerned authorities as required under the law and handover the same to us along with the boiler.
11. PAYMENT : We are paying herewith a cheque for Rs. 23,000 (Rupees twenty-three thousand only) as advance. Please arrange to issue official stamped receipt for the same. The balance amount of Rs. 7,000 (Rupees seven thousand only) will be paid (partly payment) after commissioning the boiler in our factory and handing over the same to us.
12. DELIVERY : Please arrange to commission the boiler in our factory by 30-9-74.
Please acknowledge receipt of this order,
Yours faithfully, Sd/- ..... 4-4-74. for KALPANA TANNING MATERIAL. V. S. RAJU & SONS, ENGINEERING WORKSHOP. PROP : V. S. RAJU. C.S.T. No. 1450. Morrispet, R.C. GTT. I. 1305. Tenali-2. To 11-4-1974. M/s. Kalpana Tanning Material, Vizianagaram. Dear Sir,
Received your cheque for Rs. 23,000 along with your order for the Lancashire boiler and thank you for the same. I am repairing the boiler No. M.P. 616 and (shall) try to send it shortly. My workers will come and see that erection is done as early as possible. Your please arrange to get all the firebricks, seating blocks, fire cover and fire-clay.
I agree for the condition of our agreement for payment and guarantee.
Sd/- V. S. RAJU.'
The following facts emerge from the above correspondence :
(1) As per the quotation, the appellant has to supply a loco boiler bearing the particular number and erect the same for an agreed price.
(2) After the receipt of the quotation from the petitioner, the customer accepted the quotation and set out the terms and conditions of acceptance.
(3) The receipt of letter of acceptance was confirmed by the appellant.
13. The manner in which the work had to be executed has been explained to us in the following manner.
14. After the boiler is reconditioned, it is loaded into a lorry or a trailer with the help of pully blocks and tripoles. The loading is done by experienced persons as it involves risk to human lives. The boiler has to be erected at the site, on a foundation which is designed and constructed on the guidelines provided in the Indian Boilers Regulations. A chimney has to be provided. The height of the chimney varies from 25 ft. to 150 ft. The erection of the chimney involved skilled work. A furnace has also to be constructed in front of the boiler with firebricks and fireclay. The furnace construction will depend upon the size and capacity of the boiler. As the heat is supplied from the furnace for working the boiler, designing has to be carefully done. It is said that the whole process of erection including the chimney takes about 1 1/2 to 2 months depending upon each case and the erection work cannot be undertaken by all persons except those who are authorised by Chief Inspector of Steam Boilers, Andhra Pradesh, Hyderabad. As regards commissioning, it is stated that all pipe connections, both steam and water pipe lines, have to be connected to the boiler. The steam pipe line installation is done by a firm which is authorised by the Chief Inspector of Boilers, Hyderabad. The boiler is then to be fixed and has to undergo the steam test. On being satisfied, the concerned authority issues a licence. It is only then that the contract is completed. This explanation which now offered to us, about the manner in which the erection and commissioning is done, had also been submitted to the Sales Tax Appellate Tribunal by filing a memo. But the attention of the Tribunal was not drawn to this memo and the Tribunal expressed in the order that there was no material to show the nature of the service that has to be rendered under the contract. We have called for the record from the office of the Tribunal, and the record contained the memo filed by the petitioner. So it is not as though the explanation is offered here for the first time. We do not think that it is necessary to remand the matter as this is an old case relating to the year 1974-75.
15. Before analysing the nature of the transaction, the relevant case law may be adverted to :
16. In State of Rajasthan v. Man Industrial Corporation Ltd.  24 STC 349 (SC), the assessee submitted a tender for fabricating and fixing certain windows in accordance with specifications, designs, drawings and instructions pursuant to an invitation of the Executive Engineer. The work was to be completed within 6 months from the date of its acceptance and the windows were to be fixed to the building with rawl plugs in cut stone-works. The assessee quoted the price based on the current price of mild steel billets and the price was to be revised if there is a change in the controlled price of billets supplied to the assessee. The tender was accepted and the assessee carried out the contract. The question was whether the sum received under the contract could be included in the taxable turnover for the purpose of sales tax. It was held by the Supreme Court that the contract undertaken by the assessee was to prepare the window-leaves according to the specifications and to fix them to the building. There were not two contracts, one of sale and another of service. Fixing the windows to the building was also not incidental or subsidiary to the sale, but was an essential term of the contract. The window-leaves did not pass under the terms of the contract as window-leaves. Only on the fixing of the windows as stipulated could the contract be fully executed and the property in the windows passed on the completion of the work and not before. The contract was for execution of work not involving sale of goods.
17. In Vanguard Rolling Shutters & Steel Works v. Commissioner of Sales Tax : 3SCR165 the facts were that the assessee manufactured iron shutters according to specifications given by the parties and fixed the same at the premises of the customers. Under the terms of the contract the assessee was required to fabricate the rolling shutters, bring them to the site of the customers at the cost of the customers and thereafter erect them at the premises. The masonry work had to be done by the customers at their cost, according to the assessee's instructions. The assessee was entitled to receive full price of the shutters against delivery prior to despatch of documents by bank and there was no such thing as to make payment after fixing. The price charged by the assessee from the owner of the premises was one lump sum without specifying as to what part was meant for the materials used or fabricated and what part for the services or labour put in by the assessee. The High Court held that the contract entered into by the assessee was not a works contract but a contract for the supply of goods simpliciter and the assessee was, therefore, liable to pay tax. On appeal, the Supreme Court held that the contract was a works contract observing as follows :
'One of the important tests is to find out whether the contract is primarily a contract for supply of materials at a price agreed to between the parties for the materials so supplied and the work or service rendered is incidental to the execution of the contract. If so, the contract is one for sale of materials and the sale proceeds would exigible to sales tax. On the other hand, where the contract is primarily a contract for work and labour and materials are supplied in execution of such contract, there is no contract for sale of materials but it is a works contract. The circumstance that the materials have no separate identity as a commercial article and it is only by bestowing work and labour upon them, as for example, by affixing them to the building in case of window-leaves or wooden doors and windows that they acquire commercial identity, would be prima facie indicative of a works contract. So also where certain materials are not merely supplied but fixed to an immovable property so as to become a permanent fixture and an accretion to the said property, the contract prima facie would be a works contract. This is exactly what has happened in the present case.'
18. In Sentinel Rolling Shutters & Engineering Co. P. Ltd. v. Commissioner of Sales Tax : 1SCR644 the assessee was carrying on business as engineers, contractors, manufacturers and fabricators. They entered into a contract with a company for fabrication, supply, erection and installation of two rolling shutters in two sheds belonging to that company for a price which was inclusive of charges for 'erection at site'. The contract provided, among others, that the delivery of the goods was to be ex works and once the delivery was effected rejection claims would not be entertained. All masonry works required before and/or after erection was to be carried out by the company at its own cost. Payments were to be made on overall measurements which should be checked by the company before installation. The actual transportation charges were to be in addition to the price stipulated in the contract and the terms of payment 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 submitted the bill to the company after completion of the fabrication of the rolling shutters, but before they were erected and installed at the premises of the company. On the question whether the contract was a contract for sale or a contract for work and labour, the High Court held, agreeing with the Sales Tax Tribunal, that the contract was a divisible contract, which essentially consisted of two contracts, one for the supply of rolling shutters for money and the other for service and labour and that the amount payable at the state of delivery represented the sale price of rolling shutters and it was liable to sales tax. On appeal, the Supreme Court was of the view that the contract was one single and indivisible contract and the erection and installation of the rolling shutters was as much a fundamental part of the contract as the fabrication and supply. The Contract was clearly and indisputably a contract for work and labour and not a contract for sale. In so holding the Court observed that 'the test to distinguish between a contract for sale and a contract for work and labour 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 one 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 transactions and the custom of the trade'.
19. In Ram Singh & Sons Engineering Words v. Commissioner of Sales Tax : 2SCR621 the question was whether a contract for fabrication and erection of a 3-motion electrical overhead travelling crane was a contract for work and labour or a contract for sale. The relevant observations of the Supreme Court are as follows :
'The fabrication and erection of a 3-motion electrical overhead travelling crane is a highly skilled and specialised job and the component parts have to be taken to the site and they are assembled and erected there and it is only when this process is complete that a 3-motion electrical overhead travelling crane comes into being. The process of assembly and erection of such a crane requires a high degree of skill and it cannot be said that its erection at the site is merely incidental to its manufacture and supply. The fabrication and erection is one single indivisible process and the crane comes into existence only when the erection is complete. The erection is thus a fundamental and integral part of the contract, because without it the crane does not come into being. The manufacturer would be the owner of the component parts when he fabricated them, but at no stage does he become the owner of the crane as a unit so as to transfer the property in it to the customer. The crane comes into existence as a unit only when the component parts are fixed in position and erected at the site, but at the stage it becomes the property of the customer, because it is permanently embedded in the land belonging to the customer. The result is that as soon as the crane comes into being, it is the property of the customer and there is, therefore, no transfer of property in it by the manufacturer to the customer as a chattel. It is essentially a transaction for fabricating component parts and putting them together and erecting them at the site so as to constitute a 3-motion electrical overhead travelling crane.'
20. Bearing the principles enunciated in the aforesaid decisions, let us examine the facts of this case. After reconditioning the boilers it had to be erected at the customers site. The boiler should be placed in a proper position on a foundation which is designed and constructed on the guidelines provided by the Indian Boiler Regulations. A chimney has also to be erected which is a laborious process. The furnace in front of the boiler has to be laid with firebricks and fireclay. The furnace construction depends upon the size of the boiler. It is said that the whole process of construction including the chimney erection, will take about 1 1/2 to 2 months and the process involves great skill. The pipe connections have to be provided and pipe lines are to be connected to the boiler. It is only after satisfying that the boiler is in a working condition and conforms to the requirements of the relevant rules a licence is issued. The delivery and the guarantee clauses show that the assessee has undertaken the obligation of obtaining licence and test certificate. The ownership in the boiler sold passed only after it is imbedded in the immovable property, i.e., after it was mounted and fixed on the foundation at the customer's premises. The fact that the customers took delivery of the boiler ex factory and transported at their own cost to the work spot is of no consequence. The contract between the assessee and the customer was both for supply and erection. It is a single and indivisible contract. The erection is thus an integral part of the contract and is as much an important part of the contract as the reconditioning and supply. The Appellate Tribunal held that it is a contract for sale under the erroneous impression that there was no material on record to show the nature of service rendered by the assessee for erecting and commissioning the boiler. It had failed to take into account the memo filed by the assessee in which the entire process was explained. The memo which now forms part of the record clearly discloses that the work of erection is as much important as the supply of the boilers and the whole contract is a single and indivisible one. The amount stipulated for the contract was in a lump sump. There is nothing to show that separate amounts were charged towards cost and services. In the circumstances, we have no hesitation in holding that the contract is one for work and labour and not for sale.
21. In the result, the tax revision case is allowed and the orders of the lower Tribunals are set aside holding that the assessee is not liable to pay sales tax. No costs. Advocate's fee Rs. 150.