V. Balakrishna Eradi, J.
T.R.C. Nos. 61, 65 and 66 of 1973
1. Messrs. Construction Company, Changanacherry, a firm of contractors, is the petitioner in these three tax revision cases. In assessing the' petitioner-firm to sales tax for the years 1968-69, 1969-70 and 1970-71, the Sales Tax Officer, Changanacherry, brought to tax the turnover of the petitioner relating to the execution of a contract entered into by it with the Kerala State Electricity Board (hereinafter called the Board) for the manufacture and supply of concrete poles of varying sizes. The assessee had raised the contention that the contract entered into by it with the Board was only one for work and labour and not for sale of specific chattels and that hence the turnover in question pertains to a works contract and was not taxable. The said plea was rejected by the Sales Tax Officer as well as by the Appellate Assistant Commissioner before whom the matter was taken in appeal. The assessee thereupon filed three second appeals before the Kerala Sales Tax Appellate Tribunal. Those appeals were dismissed by the Tribunal by a common order dated 25th July, 1973. On a consideration of the terms of the agreement entered into between the petitioner and the Board, the Tribunal came to the conclusion that the contract, in essence, involved the transfer by the petitioner of the concrete poles manufactured by it to the Board for valuable consideration in the course of trade and that hence the turnover was taxable. The legality and correctness of the said finding entered by the Tribunal has been challenged by the assessee in these tax revision cases. The question of law arising for determination is whether the turnover in dispute relates to a transaction of sale or to a contract for work and labour.
2. For determining whether a contract was for sale of goods or for labour supplied and materials found one has to look into the essence of the arrangement and find out whether it was the intention of the parties in making the contract that a chattel should be produced and transferred as a chattel for consideration, or whether, on the other hand, the transaction is substantially one for execution of a work or performance of some service. The distinction between the two, though often quite fine, rests on a clear principle. In a contract for sale the main object is the transfer of property in, and the delivery of possession of, a chattel as a chattel to the buyer. In a contract for work or service the principal object of the arrangement is the execution of some work involving the application of skill and labour or the performance of some service by the payee of the consideration and not the transfer of a chattel qua chattel. When the arrangement is a contract for sale of an article to be produced, the finished product will have an individual existence as the sole property of the party who produced it, at some time before its delivery. Where the contract is for work or service there is in the person performing the work or rendering the service no property in the thing produced as a whole notwithstanding that some of the materials used for the work may have been his property. To constitute a sale there must be an agreement, express or implied, relating to the sale of goods and a completion of the said agreement by the passing of title in the very goods contracted to be sold. The mere fact that in a contract for work or service the party performing the service or executing the work makes use of some goods belonging to himself for carrying out such work or service will not convert the contract into one for sale of those materials. As tersely put by Blackburn, J., in Appleby v. Myers (1867) L.R. 2 C.P. 651, in a contract for repairing a coat the parties cannot be regarded as having entered into an agreement for sale of the thread which was stitched into the coat and which thereby became part of the coat in the process of carrying out the repair. There will be no taxable sale if there was no agreement to sell the materials as such. Whether a contract for service or for execution of work involves a taxable sale of goods will, of course, have to be decided on the basis of a careful scrutiny of the facts and circumstances of each case. A contract for works can be said to involve a sale of goods which is liable to sales tax only if there is an independent term in the said contract for the sale of any specific goods by one party to the other for money consideration and not merely an incidental transfer of title to some goods as ancillary to the performance of work or service. These principles are now well-settled by the pronouncements of the Supreme Court: see Government of Andhra Pradesh v. Guntur Tobaccos Ltd.  16 S.T.C. 240 (S.C.), State of Madras v. Richardson & Cruddas Ltd.  21 S.T.C. 245 (S.C.), Commissioner of Sales Tax, M. P. v. Purshottam Premji  26 S.T.C. 38 (S.C.), State of Himachal Pradesh v. Associated Hotels of India Ltd.  29 S.T.C. 474 (S.C.) and Sales Tax Officer, Palghat v. I. V. Somasundaran 1973 K.L.T. 814.
3. Having noticed the legal principles to be applied let us now proceed to examine the facts of this case. The material terms of the agreement entered into between the assessee and the Kerala State Electricity Board have been set out in paragraphs 6 and 7 of the Tribunal's order. A full copy of the agreement, which was in the assessment file, was made available for our perusal by the learned Government Pleader appearing in the case. The agreement begins with the following preliminary description :
Agreement made this third day of January one thousand nine hundred and sixty-nine between the Superintending Engineer, Electrical Circle, Ernakulam, for and on behalf of the Kerala State Electricity Board (hereinafter referred to as the Board) of the one part and the Manager, Construction Company, Changanacherry-4 (hereinafter referred to as the Contractor) of the other part for the work of manufacturing 500 Nos. 7.315 M. R. C. C. poles at Kunnamkulam.
Then follows the opening paragraph of the agreement, which reads :
Whereas the Board has decided to get the work done by contract, vide Notification No. DBS-1419/68-69 dated 19-10-68.
The contractor hereby agrees to do the work as per the accompanying schedule, drawing, specification and conditions.
Amongst the conditions incorporated in the agreement are included the following:
1. The work is to be started immediately and completed in all respects within three months from the date of execution of agreement.
2. Every item of work should be carried out as per Board's specifications and instructions of the engineer at site.
3. The value of Board's materials except cement and steel issued to the contractor for work and not accounted for, will be recovered from him at issue rates plus 20% or market value whichever is higher, for cement and steel, vide item 6 below.
* * * *5. The undersigned shall be at liberty to undertake and carry out the work in any portion by the Board or otherwise whenever found expedient.
6. The following materials will be supplied departmentally to the contractor at the Electrical Division Store at Trichur and their value recovered at the rates noted against each.
1. Cement at Rs. 200 per M. ton.
2. M. S. Rod at Rs. 90 per qtl.
The balance materials after the work shall be returned to the Board in good condition. Cost of these materials not used for the work and not returned to the Board in good condition will be recovered at the penal rate of Rs. 400 per metric ton of cement and at double the issue rates for the other materials.
* * * *9. The contractor shall be bound to carry out all extra items not provided for in the agreement but found necessary during the execution of work. Where there are allied items in the tender, the rates for the extra items will be worked out from the rate of allied items adding or substracting, as the case may be, the difference in labour and materials. The rate so fixed shall be subject to the schedule of rates. Such difference will be worked out on the basis of departmental schedule of rates, without profit. For the purpose of this clause an extra item will be considered to have an allied item in the tender if there is no alteration in the nature and position of the work and the change consists merely in difference in proportion of ingredients.
10. When there is no allied item to extra item, these extra will be paid for on the basis of departmental schedule of rates (without contractor's profit) decreased by the same proportion as existing between the amount of contract according to the accepted tender and the total of the estimate for the items tendered as a whole in case where the contract amount is less than the estimate amount. In other cases the rates will be on the basis of departmental rates (without contractor's profit).
* * * *12. Empty cement bags if cement is supplied departmentally may be returned in good condition to stores by the contractor. Cost of unreturned and damaged bags will be recovered at the ruling rates per bag.
13. The materials supplied and used by the contractor for the work shall be subject to the approval of the Executive Engineer, or any other officer authorised by him.
The nature of a transaction has to be judged not by considering any individual clause, term or condition of the agreement in isolation from the rest but by a combined reading of all the provisions incorporated in the contract. In our opinion, such an overall consideration of the terms and conditions of the agreement entered into between the assessee and the Board clearly leads to the conclusion that the transaction was in essence only a contract for the performance of the work of manufacture and supply of the stipulated number of concrete poles of varying sizes in accordance with the specifications mentioned -in the schedule to the agreement. Both in the preliminary portion of the agreement as well as in the operative part thereof the emphasis is on the performance of work by the contractor under the supervision and direction of the Board's engineer at site. The main ingredients for the manufacture of the poles, namely, cement and M. S. rods, were supplied by the Board with the stipulation that the balance materials remaining unused after the work had to be returned to the Board in good condition. If the unused materials were not so returned to the Board in good condition, their cost would be recovered from the contractor at the penal rate of Rs. 400 per metric ton of cement and at double the issue rates for the other materials. Even the empty cement bags had to be returned intact by the contractor to the Board. The agreement stipulated that in addition to the stipulated work the contractor was bound to carry out even extra items of work not provided for in the agreement and that payment for such extra work was to be made only on the basis of Board's departmental schedule of rates (without contractor's profit). This provision is totally incompatible with the agreement being one for sale of specific chattel. The stipulation that while cement and M. S. rods required for the work would be supplied by the Board, the balance materials not used for the work should be returned to the Board in good condition and that their cost at double the issue rates would be recovered from the contractor in the event of his failure to return such unused materials clearly indicates that the title to those materials had not passed to the contractor when the materials were issued to him for utilisation in the work and that the Board continued to have control over these materials even after they were issued to the contractor. As cement and M. S. rods were supplied by the Board the only other items of raw material that the contractor had to find on his own for utilisation in the work were sand and granite, which were comparatively of much lesser value. Going by the terms of the agreement it cannot be said that the title to the concrete poles was vested in the contractor at any time before their delivery to the Board and that there was a transfer of such title by him in favour of the Board for consideration in pursuance of the agreement. On the other hand, the position in this case is that the poles, when manufactured, automatically became the property of the Board on whose behalf the work of manufacture was carried out by the assessee in execution of the contract and no element of sale of specific chattel was involved in the transaction. The consideration stipulated to be paid to the contractor was for the work which he had undertaken to perform and not by way of sale price of the poles to be produced and delivered by him.
4. In the light of the foregoing discussion we have no hesitation to hold that the assessee's turnover relating to the execution of the agreements for the manufacture and supply of concrete poles to the Board is not liable to be subjected to sales tax since it pertains to a works contract. The conclusion recorded by the Tribunal and the taxing authorities that the transactions under which the assessee was supplying poles to the Board were sales is incorrect and unsustainable and the said finding will stand set aside. The tax revision cases will accordingly stand allowed and the orders of assessment passed against the revision petitioner are set aside. We direct the parties to bear their respective costs in these tax revision cases.
T. R. C. Nos. 41 and 45 of 1974.
5. The question of law raised in these cases in substantially the same as the one raised in T. R. C. Nos, 61, 65 and 66 of 1973 and hence all the five cases were heard together. These two tax revision cases arise out of two orders of assessment to sales tax made for the years 1968-69 and 1969-70 against the same assessee who is the revision petitioner before us. The assessee is a contractor and, like the revision petitioner in T. R. C. Nos. 61, 65 and 66 of 1973, this assessee had also entered into a contract with the Board for the manufacture of 500 cement concrete poles in accordance with the detailed specifications contained in the agreement. The assessee's contention that the contract was one for work and labour and that the turnover relating to its execution was not liable to be taxed was rejected by the Sales Tax Officer. The assessment was confirmed by the Appellate Assistant Commissioner as well as by the Kerala Sales Tax Appellate Tribunal. The question arising for determination in these tax revision cases filed by the assessee is whether the aforesaid conclusion reached by the Tribunal and the taxing authorities is correct and tenable.
6. The material terms of the agreement entered into between this assessee and the Kerala State Electricity Board are substantially the same as those contained in the similar contract executed between the Board and the revision petitioner in T. R. C, Nos. 61, 65 and 66 of 1973. Hence the reasons stated by us for holding that the transaction between the petitioner in T. R. C. Nos. 61, 65 and 66 of 1973 and the Board was a works contract, are fully applicable to these cases. However, there are also some additional features in the agreement executed by this assessee which give further support to the conclusion that the arrangement was only a works contract. It is made specifically clear by a clause in the agreement in this case that the cement issued to the contractor continued to be the property of the Board even after such issue. That clause reads :
The recovery rate of cement would be as given in the schedule. Cement is issued only for bonafide use in the work (including auxiliary works) and should not be misused in any manner.... In addition, this will render the contractor liable to such other penalties as are ordered by the Board whose orders shall be final and binding on the contractor. The cement supplied for use on departmental works shall be stored suitably at the work spots or in stores approved by the department. Accounts of receipt and issues should be maintained in the stores and all facilities shall be afforded by the contractor to the departmental officers to check the stock at any time. If any shortage is noticed, penal value at the rate fixed above will be recovered. In addition, the contract is liable to be cancelled and the contractor concerned is liable to be black-listed and proceeded against under the law for misuse of property of the Board and loss thereof.
Another additional provision of significance contained in this agreement is the one relating to transportation of the manufactured poles. It says that:
the successful tenderer has to transport the R. C. C. poles from the site at Nadapuramto various work spots....
the contractor shall be held responsible for any loss or damage caused to the poles entrusted to him for transport during the period in which they are in his custody.
The damaged poles due to careless handling will not be accepted and the cost of such poles will be recovered from the contractor.
The incorporation of such a provision entitling the Board to recover from the contractor the value of the poles damaged during the transportation shows beyond doubt that the whole basis of the arrangement was that the poles were to be manufactured by the contractor for and on behalf of the Board by making use of the cement and M. S. rods belonging to the Board and that the poles, when manufactured, were to be the property of the Board. It is then manifest that the transaction was not one of sale, but was only a works contract. The contrary view taken by the Tribunal and by the taxing authorities is not sustainable in law.
7. In the result, T. R. C. Nos. 41 and 45 of 1974 will also stand allowed and the orders of assessment to sales tax passed against the petitioner for the years 1968-69 and 1969-70 will stand set aside. We direct the parties to bear their respective costs in these tax revision cases also.