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Sabarmati Reti Udyog Kamdar Sahakari Mandal Ltd. Vs. Commissioner of Sales Tax, Gujarat State - Court Judgment

LegalCrystal Citation
Overruled ByCommissioner of Sales Tax, Gujarat Vs. Sabarmati Reti Udyog Sahakari Mandali Ltd.
SubjectSales Tax
CourtGujarat High Court
Decided On
Case NumberSales Tax Reference No. 3 of 1970
Judge
Reported in[1972]29STC419(Guj)
ActsBombay Sales Tax Act, 1959 - Sections 52 and 61
AppellantSabarmati Reti Udyog Kamdar Sahakari Mandal Ltd.
RespondentCommissioner of Sales Tax, Gujarat State
Advocates: R.D. Pathak, Adv.
Cases ReferredM.P. v. Purshottam Premji
Excerpt:
sales tax - contract - sections 52 and 61 of bombay sales tax act, 1959 - whether contract entered into by assessee with department for manufacture and supply of kiln-burnt bricks sale or works contract - contract was composite contract for service and work for remuneration and supply of materials - contract was one and indivisible - not separable into two contracts - contract would not be for sale by mere passing of property to department - property passed on as result of incident of contract of work and labour - contract cannot be separated into contract of work and supply of material - held, contract for manufacture and supply of bricks was work contract. - - 1. a short but interesting question of law arises in this reference and the question is whether the contract entered into.....desai, j.1. a short but interesting question of law arises in this reference and the question is whether the contract entered into between the assessee, on the one hand, and the executive engineer, capital project, division no. ii, ahmedabad, on behalf of the public works department of the state of gujarat, on the other, for the manufacture and supply of kiln-burnt bricks for construction of gandhinagar is a works contract or a contract of sale of bricks or a composite contract for work to be done for remuneration and for supply of material used in the execution of the work for a price. the question arises in these circumstances : the assessee, messrs sabarmati reti udyog kamdar sahakari mandal ltd., entered into a contract with the public works department of the government of gujarat on.....
Judgment:
Desai, J.

1. A short but interesting question of law arises in this reference and the question is whether the contract entered into between the assessee, on the one hand, and the Executive Engineer, Capital Project, Division No. II, Ahmedabad, on behalf of the Public Works Department of the State of Gujarat, on the other, for the manufacture and supply of kiln-burnt bricks for construction of Gandhinagar is a works contract or a contract of sale of bricks or a composite contract for work to be done for remuneration and for supply of material used in the execution of the work for a price. The question arises in these circumstances :

The assessee, Messrs Sabarmati Reti Udyog Kamdar Sahakari Mandal Ltd., entered into a contract with the Public Works Department of the Government of Gujarat on 6th September, 1965, for manufacture and supply of kiln-burnt bricks to the said department for the construction of Gandhinagar. The assessee manufactured and supplied a large quantity of bricks under the contract and received payment for the same.

2. The assessee made an application to the Commissioner of Sales Tax under section 52 of the Bombay Sales Tax Act, 1959 (hereinafter referred to as 'the Act') on 19th November, 1967, for the determination of the question as to whether, for the purposes of the Act, the transaction of supply of bricks to the Government amounted to a sale. The Deputy Commissioner of Sales Tax, who heard the application, by his order dated 15th July, 1968, determined that the supply of bricks was a transaction of sale within the meaning of the Act.

3. The assessee, being dissatisfied with the determination of the Deputy Commissioner of Sales Tax, preferred an appeal to the Gujarat Sales Tax Tribunal (hereinafter referred to as 'the Tribunal'). The Tribunal, upon a review of the several terms and conditions of the contract and relying upon the decision of the Supreme Court in Chandra Bhan Gosain v. State Of Orissa ([1963] 14 S.T.C. 766 (S.C.)) came to the conclusion that the contract under consideration was a contract for sale of bricks by the assessee to the Government. In that view of the matter, the Tribunal by its judgment and order dated 13th March, 1969, dismissed the appeal of the assessee.

4. The assessee, being aggrieved by the decision of the Tribunal, made an application under section 61 of the Act requiring the Tribunal to refer to this court the question of law arising out of its order and the Tribunal has accordingly referred to this court the following question of law :

'Whether on the facts and in the circumstances of the case the transaction envisaged by the contract entered into by the applicant with the Public Works Department of the Government of Gujarat on 6th September, 1965, for the manufacture and supply of kiln-burnt bricks to the said department in terms of their running bill No. XI dated 28th October, 1967, is a sale or a works contract ?'

5. The question whether a given contract is a contract of work simpliciter, or a contract for sale of goods or a composite contract for work to be done for remuneration and for supply of materials used in the execution of the work for a price, is not always easy of answer because the dividing line between the different types of contracts is thin and the decision as to on which side of the line the contract in a given case falls is often rendered difficult by inclusion in such a contract of some provisions peculiar to a contract of work and a few others peculiar to a contract of sale. The question has, however, often arisen before the courts in a number of cases and there is a catena of judicial decisions which lay down certain guiding principles in the light of which the answer to the question may be found. Recently, we ourselves had an occasion in the case of M/s. Variety Body Builders, Baroda v. Commissioner, of Sales Tax [S.T.R. No. 5 of 1969 decided on 7/9th November, 1970; [1971] 28 S.T.C. 339] to consider the question whether a contract for building the bodies of railway coaches is a works contract or a contract of sale of coaches built according to specifications. In the decision given in that case, upon the review of a number of authorities, my learned brother T. U. Mehta, J., who delivered the judgment of the Bench, deduced certain principles which govern the determination of the question whether a contract in a given case is a works contract or a contract of sale simpliciter. The principles there enunciated may be briefly summarised as under :

(1) Whether a contract is a contract of work, or a contract of sale, or a composite contract of work to be done for remuneration and for supply of material for use in the execution of the work for price, is a question which must be decided on the facts and circumstances of each case.

(2) The determination of the question must depend upon the real intention of the parties gathered principally from the construction of the terms of the contract itself viewed in the light of the surrounding circumstances of the case.

(3) In determining the true nature of a contract, it is permissible to consider how the contract was intended to be performed. It is not the letter of the document but its spirit and essential character which would help in ascertaining whether the transaction evidenced by the document partakes of the nature which renders it either a works contract or a contract of sale simpliciter or a composite contract of work and labour and supply of materials for price.

(4) One basic difference between a contract for sale of goods and a works contract is that while in the former the goods are sold as goods without the purchaser bothering in the least about the manner and method of employment of labour in producing the goods, in the latter, the emphasis is mainly on the manner, method and skill with which the labour is employed in producing the goods.

(5) If after scrutinising the terms of the contract and the manner in which the contract is required to be executed, it is found that the real object was the employment of a particular type of skill and labour with a view to obtain the desired result, then there should be no difficulty in reaching a conclusion that it is a works contract and not a contract to purchase a chattel. If ownership of a chattel having a desired description and design is eventually obtained as a result of such a contract, the contract would not be thereby converted into a contract of sale and purchase of goods because what is sold and purchased in such a contract is not a chattel but is the labour and skill of a particular type, which results in producing that chattel.

(6) In a works contract, the person executing the same has to use his own material partly or even wholly but when he uses these materials, he does it not with an idea to sell them (for there is no agreement for purchase or sale of these specific materials), but with an idea to render his services for bringing into existence the desired article. The fact that in the execution of a contract for work some materials are used and property in the goods so used passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that account to sell the materials.

(7) The fact that as a result of the contract, title to a particular property passes from one person to the other person, may be taken as one of the factors which would indicate the real nature of a contract. But it cannot be taken as the only factor which would finally determine the true nature and character thereof.

(8) To determine whether a given contract is for work or for sale of goods, one of the tests that may be applied is that in the case of a contract for sale, the thing produced as a whole has individual existence as the sole property of the party who produced it at some time before delivery, and the property therein passes only under the contract relating thereto to the other party for price. If the thing produced has no independent existence as the sole property of the party who produced it, the contract would be one for work or service.

(9) The burden of proving that in a given case a contract for service for execution of work also involves a taxable sale of goods is upon the taxing authorities who must clearly show that there was a taxable sale and that burden is not discharged by merely showing that property in the goods which belonged to the party performing service or executing the contract stands transferred to the other party.

6. It is in the light of these principles that we shall have to determine the question which has been posed for our opinion in this reference.

7. As indicated above, the answer to the question, viz., whether the contract in the instant case is a contract for execution of work, i.e. a contract, the principal object of which is to render service which requires employment of skill and labour, or whether it is a contract of sale, i.e., a contract, the main object of which is the transfer of property in and the delivery of possession of bricks as bricks to the buyer or whether it is a composite contract either divisible or indivisible which involve supply of labour for remuneration as well as supply of material for a price in the execution of the work, must ultimately turn upon the true agreement between the parties which may be gathered from the contract itself. In the present case, the contract with which we are concerned sets out all the covenants and conditions upon which the bricks were to be manufactured and supplied by the assessee to the Government and we shall, with a view to ascertain the real intention of the parties, now examine the important terms and incidents of the contract so as to determine the question which falls for our consideration, in the light of the principles set out above.

8. The terms of the contract, in the present case, are to be found in annexure 3 to the statement of the case where the tender for 'manufacturing and supplying kiln-burnt bricks for construction of Gandhinagar', issued to the assessee is reproduced. It contains in the forefront a note to the following effect :-

'If the tender is accepted, no separate agreement shall be necessary and the tender itself shall be treated as the contract.'

9. The tender also contains a stipulation that if it were accepted, the contractor would agree to abide by and to fulfil all the terms and provisions of the specifications and conditions of the contract annexed to the tender in 'so far as they may be applicable'. The terms and conditions of the contract are thereafter set out in the tender under three different sub-headings : (i) conditions of contract, (ii) general conditions of contract, and (iii) specifications. Under each of the said three sub-headings, are found the material provisions of the contract, which by the terms of the contract are required to be read together. On a conjoint and harmonious reading of the various conditions set out under the aforesaid three sub-headings, we find that the main features and important conditions of the contract having a direct bearing on the question which arises for our determination are as under :-

(1) The assessee had to manufacture and supply bricks according to the specifications and design against payment of a lump sum for a unit of 1,000 bricks. No separate rate of remuneration for the work done or no separate price for the supply of materials used in the execution of the work was fixed under the contract.

(2) The contract had to be carried out on the land placed at the disposal of the assessee by the Government at a nominal rent.

(3) The Government had also to make available suitable land as per the requirements of the assessee for excavating soil for the manufacture of bricks free of rent and the assessee was not required to pay any royalty or quarry charges for excavating earth for manufacturing bricks.

(4) The assessee had to make arrangements for other raw materials, equipments, water, coal, labour etc. The Government would, however, assist the assessee, if possible, in supply of water and procurement of coal.

The coal procured under the permit issued by the Government or supplied by the Government at fixed price from its stock, was to be utilised only in the manufacture of bricks on site.

(5) The work of excavation of soil for manufacturing bricks and the utilisation of soil in the process of manufacture had to be done by the assessee as per the directions of the Executive Engineer and the bricks had to be dried and burnt in kilns of the type specified in the contract or approved by the Executive Engineer.

(6) The assessee was required to make security deposit with a view to securing expeditious execution of the work. The contract had to be executed within the specified time-limit and the supply had to be made according to the schedule of supply fixed under the contract. Failure to fulfil the terms of the contract relating to the supply of material within the specified time-limit would entail not only the liability of payment of liquidated damages at certain agreed rate, which amount was recoverable from the security deposit, but also annulment of the contract and it would also empower the Government to have the supply completed at the cost and risk of the assessee.

(7) The assessee had no right to sell the bricks manufactured by him or any portion thereof or brick-bats or chharas or any other material manufactured on the site to any other private party.

(8) The Government agreed to purchase not only the bricks which were manufactured according to the specifications laid down in the contract but also bricks which were inferior in quality or which were burnt, as also brick-bats and chharas, at specified rates mentioned in the contract. The option of the Government to reject the material and to direct the removal of the said material from the site was confined merely to such material as would not fall even within the classification of brick-bats and chharas.

(9) The assessee was not entitled to make any claim or claims for increased rates on the ground that the market or other rates of the items included in the contract had risen during the period of the contract and he was bound to complete the work and to supply the materials at the rates mentioned in the contract.

(10) The Government had the option to give an intimation to the assessee in writing that he was not required to execute the whole or any part of the work as specified in the tender and thereupon the assessee had to cease working without making any claim to payment of any compensation whatsoever on account of any profit or advantage which he may have derived from the execution of the work in full but which he did not derive from the execution of the work not having been carried out.

(11) The assessee could not sub-let the contract without the written permission of the Executive Engineer and in case he did so, it would amount to a breach of the contract resulting inter alia in forfeiture of the amount of security.

(12) The contract contained a stipulation to the effect that the assessee had to provide to the satisfaction of the Executive Engineer fully qualified or experienced and trustworthy personnel who will be available at the site of work during the progress of the work and the Executive Engineer had full power to remove such personnel and thereupon the assessee was under an obligation to appoint another qualified personnel to the satisfaction of the Executive Engineer.

(13) The assessee was not to employ any person below the age of 12 years, or any animal suffering from any disease or infirmity and the Executive Engineer had the authority to remove such person or animal from the site of work. The assessee was also under an obligation to pay fair and reasonable wages to the workmen employed for the work undertaken by him and the dispute, if any, regarding fairness or reasonableness of wages between the assessee and his workmen was to be resolved by the Executive Engineer whose decision was conclusive and binding on the contractor. The responsibility to pay compensation under the Workmen's Compensation Act for injuries caused to any of the workmen was also in terms fastened on the assessee.

10. These, then, are the important features of the contract and, in our opinion, they are not usually found in a contract, pure and simple, of sale of goods - indeed some of them such as the requirement to carry out the work on the site, prohibition against selling of manufactured goods to any person other than the Government, prohibition against sub-letting of the contract, provisions regarding the conditions of employment of labour, payment of fair wages to the labourers and control over the employees of the contractor including the right of removal of such personnel vesting in the Executive Engineer, the obligation to purchase all materials, whether according to the specifications or not, upon the Government at the rates specified in the contract, are all wholly inconsistent with a contract of sale of goods, pure and simple. Furthermore, the Government had agreed to procure, as far as possible, practically all the essential materials required for the manufacture of bricks including clay for the excavation of which the Government undertook to place at the disposal of the assessee its land free of rent. Neither clay nor coal supplied by or procured through the Government could be utilised by the assessee for making supply of bricks to any person other than the Government. The Government, moreover, retained control over the assessee at all stages of manufacture. All these various features indicate that throughout the process of manufacture, the assessee used the materials mostly supplied by the Government and that the ultimate product bore the stamp of ownership of the Government at all the different stages of manufacture. Taking an overall view of the matter and considering several features of the contract and effect of the various clauses thereof read as a whole, we are of the opinion that the real intention of the contracting parties was that the assessee should provide to the Government his skill and labour to bring about the desired results, viz., to supply to the Government - and none other - bricks of specific design and quality manufactured out of clay excavated at out of Government land on specific terms and conditions. The contract was, therefore, essentially a works contract, pure and simple. Even if it is assumed that the property in the clay excavated out of Government land passed to the assessee at some stage prior to the completion of the contract and the property in the said clay ultimately passed to the Government on the completion of the contract and upon delivery of the bricks manufactured out of the said clay, the mere passing of property in the finished articles would not, in our opinion, change the essential character of the contract in this case because the property which so passed as a result of the execution of the contract was merely ancillary or incidental to the contract of work undertaken by the assessee.

11. Mr. B. R. Shah, learned Assistant Government Pleader, appearing on behalf of the revenue, however, laid great stress on two features, of the contract which in his submission were determinative of the question and to the inescapable conclusion that the contract was one of sale of bricks as bricks to the Government and not a works contract or a composite and indivisible contract of work and labour for remuneration as well as of supply of materials for price. He urged, firstly, that the contracting parties had used in the contract words such as 'sale', 'purchase', 'delivery' and 'rate of supply' in connection with the supply of bricks and the language employed was clearly indicative of the manifest intention of the parties that it was a transaction of sale, and, secondly, that there were several clauses in the contract which showed that the property in the whole of the materials, which went into the making of the bricks, was of the assessee and the bricks produced as a whole also had individual existence as the sole property of the assessee before delivery thereof to the Government and that the property in the bricks passed to the Government against price only upon the fulfilment of the contract. These two features of the contract, contended Mr. Shah, were conclusively determinative of the fact that the contract was for sale of chattel qua chattel and not a works contract. We shall now examine these contentions.

12. As regards the first contention, it is true that in the contract, words such as 'sale', 'purchase', 'delivery', 'rate of supply' etc. are used at some places by the contracting parties. Undoubtedly the language employed in the contract may throw some light on the intention of the contracting parties. But we are unable to hold that the absence or presence of words such as those relied upon by Mr. Shah would furnish a conclusive test as to the nature of the contract. We have held already in the case of Messrs Variety Body Builders, Baroda v. The Commissioner of Sales Tax, Gujarat State ([1971] 28 S.T.C. 339) that it is not the letter of the document but its spirit and essential character as gathered from the contract read as a whole which would help to determine the true nature and character of the contract. The relationship between the parties has manifestly to be ascertained from the real intention of the parties as gathered from the whole scope and effect of the language used in the contract and mere verbal formula employed therein or designation which a party chooses to give to the transaction, if inconsistent with the real intention, are to be disregarded. In our opinion, in cases of liability to pay tax, they are especially of little consequence and the court must look beyond those formulas and designation to the real nature of the agreement and determine the true relationship from all its provisions taken together and its legal character and effect must not be determined merely from the manner in which parties have chosen to describe the transaction at some places in the contract or from one isolated provision of the contract.

13. We have in this case analysed the various terms of the contract above and shown that the contract read as a whole reveals that what was really intended to be procured therein was the skill and labour of the contractor so that bricks of a specified design and quality may be obtained. It would, therefore, be a works contract notwithstanding that words such as sale', 'purchase', 'delivery' or 'rate of supply' are used at some places in the contract. Besides, we cannot lose sight of the fact that the tender as well as the general conditions of the contract and specifications are each to be found under the heading 'Name of work : Supply of kiln-burnt bricks for construction of Gandhinagar', and not under the heading 'contract for sale of bricks'. Further, we also find that the language employed in the several clauses of the contract is not uniform and the contracting parties have very often used the words 'work', 'supply' etc. in some of the clauses of the contract. In any case, therefore, this particular feature of the contract does not throw much light in the present case on the real intention of the parties nor does it finally clinch the issue raised for our determination.

14. As regards the second contention, Mr. Shah drew our attention to the following few features of the contract which, according to him, show that the property in the whole of the material which went into the making of the bricks was of the assessee and that the bricks produced as a whole were also sole property of the assessee before they were delivered to the Government against payment of price :-

(1) All the necessary arrangements for raw material, water, coal, etc. required for the manufacture and supply of bricks were to be made by the contractor at his own costs. The Government was only to give the land for excavating soil for manufacture of bricks to the contractor free of rent from the land reserved by the Government for the purpose and no royalty or quarry charges for excavating the land were leviable from the contractor. The property in the earth dug out for making the bricks would, however, stand transferred to the assessee because the rate of bricks was fixed taking into account the cost of clay thus supplied. These provisions indicated that the property in all the raw materials, including that in the clay was of the assessee prior to the delivery of the bricks against payment of price.

(2) The assessee had no right to sell the bricks, brick-bats, chharas or any other material manufactured on the site to any other party. The provision clearly indicated that the bricks manufactured out of the raw materials also belonged to the assessee because otherwise there was no need to place such a restriction on the assessee's right to sell the bricks.

(3) The bricks were to remain at the risk of the assessee till the date of final delivery. The assessee was also required under the contract to remove from the site at his own costs any material which the officer in charge of the work considered to be inferior to that described in the specifications. These provisions also led to the same conclusion and would not have found place in the contract unless the property in the whole of the raw materials and finished product was absolutely in the assessee.

15. According to Mr. Shah, these features collectively show that the property in the whole of the raw materials as well as in the bricks manufactured out of the raw materials throughout continued to be vested in the assessee and the assessee was at all times the sole proprietor of the bricks which were manufactured and the property therein passed to the Government only against payment of price on the fulfilment of the contract. These features of the contract, contended Mr. Shah, conclusively and irrefutably showed that the contract was a contract of sale of bricks as bricks. In support of his contention Mr. Shah relied upon the decision of the Supreme Court in Chandra Bhan Gosain v. State of Orissa ([1963] 14 S.T.C. 766 (S.C.)) to which we shall presently advert and upon the following passage in the commentary on the Sale of Goods Act by Pollock and Mulla, Third Edition, at page 24 :

'Generally a contract to make a chattel and deliver it, when made, is a contract of sale, but not always. The test would seem to be whether the thing to be delivered has any individual existence before delivery as the sole property of the party who is to deliver it ...... It will be observed that in the cases where there is no sale there is never a moment when the thing produced is as a whole the maker's absolute property, notwithstanding that part, or even the whole, of the materials may have been his property, whereas in the other case he might, if he found it possible and profitable, and if not restrained by patent, copyright or any other similar breach of laws, make in duplicate or in greater numbers chattels of the kind ordered, appropriate one at his will to fulfil the special contract, and sell the others to other persons.'

16. The submission, if well-founded on facts, has undoubtedly great force. We shall, therefore, have to examine the validity of the submission which proceeds on the assumption that the property in the whole of the raw material as well as in the bricks manufactured out of them was at all stages in the assessee before the bricks were delivered to the Government.

17. The assessee was, under the contract, undoubtedly under an obligation to procure all raw materials required for the execution of the contract. It is however clear from the contract that the Government had agreed to provide the assessee with land for excavating soil for manufacture of bricks free of rent and without the liability for the payment of royalty or quarry charges. Earth would undoubtedly be the most important raw material which would be required to be extensively used in the manufacture of bricks. If, therefore, the property in the brick-earth excavated out of the land placed at the disposal of the assessee did not pass to the assessee at any stage, it would be futile to urge that the property in the whole of the raw materials employed in manufacturing the bricks was vested in the assessee. Now in this context, it has to be borne in mind that under the contract, the assessee had no right to sell bricks, brick-bats, chharas or any other material manufactured on the site to any other private party. Besides, the Government was under obligation under the contract not only to take over from the assessee bricks manufactured in accordance with the specifications, but also bricks of inferior quality and burnt bricks as well as brick-bats and chharas at specified rates. It is difficult to envisage how such terms could have found place in the contract if the property in the clay, which constituted the most important raw material for bricks, had passed to the assessee. These two clauses, read together, cast a mutual obligation on both the contracting parties which can only be reconciled on the hypothesis that the earth dug out continued to remain the property of the Government. It must, therefore, follow that the property in the earth did not pass to the assessee and that the intention of the parties at all times was that the property in the earth would remain in the Government and the earth would be placed at the disposal of the contractor for the purpose of carrying out the contract of supply of bricks of specified design at agreed rate after applying necessary labour and skill in the manufacture of bricks. In this context, we may also note that the owner of the land undisputedly was the Government and the land was placed at the disposal of the assessee only for a specified purpose and for a limited duration. The assessee was under an obligation to return the land to the Government after excavating necessary earth for manufacturing bricks in requisite quantity. At no stage had the appropriate authority under the Bombay Land Revenue Code made the assessee occupant of the land and granted him necessary permission to put the land to non-agricultural use as required by law nor had any other appropriate authority concerned with the administration of the law pertaining to mines and minerals at the relevant time granted to the assessee the necessary lease for excavating the land and exempted the assessee from the payment of royalty, assuming that the appropriate authority had the power to exempt a person from payment of royalty. It only on such action being taken by the appropriate authority under the relevant law that the assessee could have excavated the soil in his own right and the property in the earth so excavated could conceivably have passed to the assessee. It is inconceivable that the Government as a contracting party could have, by waiving all the aforesaid statutory requirements, intended to pass the property in the earth excavated from the soil placed at the disposal of the assessee to him. We are, therefore, of the opinion that having regard to the aforesaid circumstances, it is not possible in the facts and circumstances of this case to hold that the property in the earth dug out from the land placed at the disposal of the assessee by the Government had passed to the assessee.

18. It is true that under the contract, the bricks were to remain at the risk of the assessee till they were finally delivered to the Government. But that would, in the facts of this case, undoubtedly be so because the work of manufacturing bricks was to be carried on by the assessee on the land given to him for the purpose by the Government and it is conceivable that this condition may have been introduced in the contract by way of abundant caution so that it may not be open to the assessee to contend that since bricks manufactured were stoked on the land belonging to the Government, he was not responsible for their safe custody. Besides, in view of the fact that the property in the earth out of which the bricks were manufactured was in the Government, such a condition may have been introduced also with a view to fastening the responsibility for the safe custody of the bricks, which may be manufactured out of such earth, on the assessee. We do not see how this clause, in the context of the other facts and circumstances of this case, could be determinative of the true nature and character of the contract.

19. Then there is a clause which provides that the contractor shall have no right to sell the bricks, brick-bats, chharas or any other material manufactured on the site to any other private party. This clause, in our opinion, is also in the facts and circumstances of this case only indicative of the fact that the property in the earth supplied to the contractor, free of any charges, continued to remain in the Government and, therefore, the Government by way of abundant caution introduced such a clause in the contract lest the contractor sells the bricks manufactured out of such earth to any person other than the Government.

20. Mr. Shah urged that unless the contracting parties assume that the assessee was the sole owner of the bricks which were manufactured, such a condition could not have found place in the contract. Since however the other terms of the contract lead to the inference that the bricks manufactured out of the earth supplied by the Government had no individual existence as that of being of sole ownership of the assessee, such an assumption cannot legitimately be made from one isolated provision in a contract of the nature with which we are concerned.

21. As regards the provision regarding removal of material inferior to that described in the specifications from the site of work, it must be borne in mind that the Government had under the contract agreed to purchase not only the bricks of the type and specifications for which the contract was entered into but also inferior and burnt bricks as well as brick-bats and chharas. The assessee would therefore be required to remove from the site only such material which did not conform even to the specifications of brick-bats and chharas and which would be wholly useless to the Government. The said condition requiring the removal of material wholly useless to the Government, from the site, cannot therefore be construed to mean that the property in the earth or in the bricks manufactured out of the earth was in the contractor. We find that in a recent decision of the Supreme Court in Commissioner of Sales Tax, M.P. v. Purshottam Premji ([1970] 26 S.T.C. 38 (S.C.)) while construing a similar term in a contract the Supreme Court has also taken the same view. Under the contracts in that case, the assessee was to quarry stones from the quarries belonging to the railways and to convert those stones into ballast of a specified size and supply them to the railways. The assessee was also required under the contracts to remove from the railway premises all rejected ballast. The Supreme Court held that from the mere fact that the assessee was required to remove from railway premises all rejected ballast it could not be inferred that the assessee was the owner of the ballast because the arrangement for the removal of rejected ballast was made under the contracts inasmuch as the said ballast was useless for the railways. The observations of the Supreme court made in that case, with reference to the terms in the contract with which it was concerned, would apply with equal force to the relevant conditions of the contract in the present case. Besides, we find that under the contract the assessee was not only restrained from selling bricks, brick-bats and chharas but also 'any other material manufactured on the site' which would also include rejected material. The assessee therefore would not be able to sell the material and obviously had no property even in the material that be was required to remove from the site. In our opinion, therefore, this clause, read along with the other clauses of the contract, does not indicate that the property in the bricks was in the assessee who was the sole proprietor thereof before the stage of delivery to the Government.

22. None of the circumstances or features of the contract relied upon by Mr. Shah, therefore, support the submission made by him to the effect that the assessee was the sole owner of the bricks which were manufactured and that the property in the bricks passed to the Government only against payment of price at the time of delivery. Mr. Shah, however, strongly relied upon the case of Chandra Bhan Gosain ([1963] 14 S.T.C. 766 (S.C.)) and contended that terms similar to those which are found in the contract in the present case have been construed by the Supreme Court in that case to mean that the property in the earth as well as in the bricks was vested in the contractor and that the property in the bricks passed to the other contracting party only at the stage of delivery against price. We shall, therefore, examine the decision of the Supreme Court in Chandra Bhan Gosain's case ([1963] 14 S.T.C. 766 (S.C.)).

23. A perusal of the decision of the Supreme Court shows that the terms of the contract with which the court was there concerned, are not extensively set out in the judgment. However, it would be reasonable to assume that all the relevant and material terms and conditions of the contract must have been set out in the judgment. The bricks in that case were to be manufactured by the contractor for a company and the company had for that purpose agreed that 'land will be given free'. There was further a condition in the contract that the bricks were to remain at the appellant's risk till the delivery to the company. Another clause in the contract provided that the contractor would not be able to sell the bricks to other parties without the permission of the company. Besides, in the contract, the contracting parties had used such words as : 'quantities to be delivered', 'rate at which materials are to be supplied' and 'value of the bricks will be paid finally' and such other words and phrases. It was urged before the Supreme Court that when the bricks were to be made out of the earth belonging to the company, the bricks had all along been its property and there could be no transfer of property in the bricks to the company from the supplier at the stage of delivery. This argument was founded on the term that land will be given free to the contractor. The Supreme Court negatived this contention and held that there was a transfer of property in the earth to the supplier in the first instance and that there was a subsequent transfer of property in the bricks for consideration to the company and there was consequently a sale of bricks. The Supreme Court also relied upon the fact that under the contract the bricks were to remain at the appellant's risk till delivery to the company, that there was a condition that the contractor could not sell bricks to other parties without the permission of the company and further that the language employed by the contracting parties in the contract was indicative of the intention of the contracting parties and held that having regard to these features of the contract in that case, it was a contract of sale and not a contract for work.

24. In our opinion, the decision of the Supreme Court in Chandra Bhan Gosain's case ([1963] 14 S.T.C. 766 (S.C.)) is clearly distinguishable on facts. The contract in that case, though prima facie worded as regards the relevant clauses in similar fashion as the contract in the instant case, is in fact cast in a different mould and it would be difficult to hold in the light of the special features and characteristics of the contract with which we are concerned that the decision of the Supreme Court in that case would completely govern the facts of this case. We have already held above that having regard to the special features of the contract in the present case, the property in the earth had not passed to the assessee and as such the first and most important feature which was present in the contract with which the Supreme Court was concerned, is absent in the present case. We have, while discussing that point earlier, indicated as to why we are taking the view that the property in the earth excavated from the land placed at the disposal of the assessee did not pass to the assessee. We need not repeat here all that we have said earlier and would rest content by saying that having regard to the two peculiar features of the contract with which we are concerned, viz., mutual obligation cast on both the contracting parties regarding the sale and purchase of all types of bricks, brick-bats and chharas as well as the circumstance that the assessee was permitted to dig out earth from Government land not only free of rental charges but also without having to pay royalty or quarry charges, it would not be possible to say that the relevant clause in the contract with which we are concerned, must necessarily be interpreted in the same manner in which the Supreme Court has interpreted the relevant clause in Chandra Bhan Gosain's case ([1963] 14 S.T.C. 766 (S.C.)), especially when the abovenoted features are not found to be present in like manner in the said contract. The same reasoning must also apply to the three other conditions in Chandra Bhan Gosain's case ([1963] 14 S.T.C. 766 (S.C.)), which prima facie appear to be worded in the same manner as the relevant conditions in the contract with which we are concerned. There is, however, one distinction in one of the conditions which needs to be particularly noted. In the contract with which the Supreme Court was concerned, the right of the contractor to sell the bricks was not altogether taken away because it was open to him to sell the bricks to other persons with the permission of the company. This clearly indicated that the property in the bricks was in the contractor though merely the right of disposal was restricted. In the contract with which we are concerned, we find that the contractor had no right to sell the bricks or any other material on the site at all. No officer or competent authority could have permitted him to sell the bricks or other material. This is clearly indicative of the fact that the contracting parties have treated the bricks manufactured out of the earth supplied by the Government to be of the sole ownership of the Government unlike the contracting parties in the contract with which the Supreme Court was concerned in Chandra Bhan Gosain's case ([1963] 14 S.T.C. 766 (S.C.)). Besides, we find that there are several other distinguishing features in the present case such as the requirement to manufacture the bricks on the land placed at the disposal of the assessee by the Government, the right to closely supervise the process of manufacture of bricks, the obligation to purchase all the bricks, brick-bats and chharas manufactured by the assessee, the prohibition against sub-letting the contract, the control exercisable by the officers of the Government on the method and manner of employment of the labour by the assessee and their right to remove the employees of the assessee and such other terms which go to show that the contract in the instant case is substantially different in nature and character from the contract in Chandra Bhan Gosain's case ([1963] 14 S.T.C. 766 (S.C.)), where such terms are not to be found.

25. We may in this context point out that in Government of Andhra Pradesh v. Guntur Tobaccos Ltd. ([1965] 16 S.T.C. 240 (S.C.)), the Supreme Court has observed that whether a contract for service or for execution of work involves a taxable sale of goods must be decided on the facts and circumstances of the case, and that the question in each case is one about the true agreement between the parties and that the terms of the agreement must be deduced from a review of all the attendant circumstances. It would therefore be futile to contend that the decision of the Supreme Court in Chandra Bhan Gosain's case ([1963] 14 S.T.C. 766 (S.C.)) would apply to the facts of the present case although property in some of the materials used in the execution of work may incidentally pass because there are distinguishing features between the contract in that case and the contract in this case. As regards the passage referred to and relied upon by Mr. Shah from the commentaries on the Sale of Goods Act by Pollock and Mulla, we find that the test therein laid down is satisfied in the present case. In this case, the property in the whole of the materials was not that of the assessee; the thing produced, that is, the bricks as a whole did not have any individual existence before delivery as the sole property of the assessee and it was not open to the assessee, if he found it possible and profitable, to manufacture bricks of the kind which he had agreed to supply to the Government in greater number and to sell the same to others after fulfilling his obligation to the Government, under the contract. In our opinion, therefore, the passage relied upon by Mr. Shah does not help him in his contention.

26. In the view that we are taking, we are supported by a decision of the Madras High Court in C. Krishnaswami Rao v. State of Madras ([1968] 22 S.T.C. 146). In that case the assessee had entered into a contract with the Neyveli Lignite Corporation for the manufacture and supply of bricks of specified size and design at agreed rates at kiln site in the land placed at the disposal of the assessee by the Corporation. The contractor, under the contract, was to quarry earth free of cost from the land of the Corporation. The contractor had to put up kiln only at places approved by the Corporation. The Corporation undertook to supply coal for burning the bricks and the contractor was to use the clay, coal etc. only for manufacturing the bricks required to be supplied to the Corporation. At the end of the period of the contract, the contractor had to clear the survey numbers of structures put up by him and also level the ground as required by the Corporation. An important condition of the contract was that the rejected bricks and brickbats were not to be sold to outsiders but were to be dumped in excavated pits for levelling up the ground. There were also other conditions of the contract which dealt with the manner in which the contract was to be carried out, particularly with regard to the use of the earth and the putting up of the kilns and other details. The Madras High Court on an overall view of the various terms of the contract, came to the conclusion that in that case the bricks at every stage of manufacture continued to be the property of the Corporation and what the assessee was called upon to do was only to manufacture bricks out of the earth supplied and to deliver the bricks at the places indicated by the officials of the Corporation and that it was a works contract pure and simple. The decision of the Supreme Court in Chandra Bhan Gosain's case ([1963] 14 S.T.C. 766 (S.C.)) was distinguished on the ground that the contract in that case was differently worded and the inferences made by the Supreme Court from those facts cannot legitimately be made upon the clauses governing the contract with which the Madras High Court was concerned. It may be observed that the contract with which we are concerned has many common features with the contract with which the Madras High Court was concerned and the reasons which led the Madras High Court to take the view that it was a works contract must also apply with equal force to the contract in this case. In the light of the various terms of the contract with which we are concerned in this case, it would be proper and legitimate to hold that the bricks at every stage of manufacture, continued to be the property of the Government and what the assessee was called upon to do was only to manufacture bricks out of the earth supplied by the Government and to deliver the same to the Government as per specifications. The contract, in our opinion, is therefore a works contract, pure and simple.

27. Assuming, however, that the property in the earth supplied by the Government to the assessee in the present case was transferred to the assessee at some stage prior to the delivery of bricks and the property in the material ultimately passed to the Government on the fulfilment of the contract, it would not yet be possible to hold that the contract in the present case, merely on account of that fact, was a contract for sale of bricks. As observed by the Supreme Court in the case of Government of Andhra Pradesh v. Guntur Tobaccos Ltd. ([1965] 16 S.T.C. 240 (S.C.)) :

'The fact that in the execution of a contract for work some materials are used and property in the goods so used passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that account to sell the materials ............... The burden in such a case lies upon the taxing authorities to show that there was a taxable sale, and that burden is not discharged by merely showing that property in goods which belonged to the party performing service or executing the contract stands transferred to the other party.'

28. In our opinion, the contract in the present case, having regard to its other distinguishing features, would still be a composite contract for service and work for remuneration as well as for supply of materials for price. The contract is one and indivisible and is not separable into two contracts, one for service and the other for sale of bricks. Even if the property in the goods passed to the Government on completion of the contract, by mere passing of the property, the contract would not be rendered into a contract for sale because the property passed not as a result of the contract of sale but as an incident of the contract of work and labour.

29. Mr. Shah next relied upon the decision of the Andhra Pradesh High Court in State of Andhra Pradesh v. Kalva Suryanarayana ([1962] 13 S.T.C. 317), the decision of the Madhya Pradesh High Court in Seth Pamandas Sindhi v. State of Madhya Pradesh and Others ([1963] 14 S.T.C. 74) and the decision of the Madras High Court in Mooljee Ramjee & Sons v. Deputy Commissioner (Commercial Taxes), Madurai Division ([1966] 17 S.T.C. 255), and urged that in each of the said three cases, the courts had taken the view that as a result of the right conferred upon the contractor to pick up the produce of the land or to excavate the soil with a view to winning minor minerals from the land belonging to the Government without the liability to make payment therefor resulted in the transfer of property in the produce or the minor minerals as the case may be, to the contractor. We have perused the decisions upon which reliance has been placed by Mr. Shah and find that the decision in each of the said three cases has turned upon the peculiar terms of the different contracts and those decisions do not assist us in deciding, on the facts and circumstances of this case, the true nature and character of the transaction with which we are concerned. Besides, we find that in Krishna Chandra Acharya v. The Board of Revenue, Orissa ([1955] 6 S.T.C. 400), the Orissa High Court has on the terms of the contract with which it was concerned, taken the view that the stipulation in the contract that the earth would be supplied free of cost to the contractor by the Government from their land and used by him in the process of preparing the embankment, did not result in passing the property in the earth to the contractor. Similarly, in the case of Commissioner of Sales Tax, M.P. v. Purshottam Premji ([1970] 26 S.T.C. 38 (S.C.)), a reference to which has already been made above, the Supreme Court has held that the property in the ballast which was obtained from the stones quarried from the quarries belonging to the railway did not pass to the contractor although the contractor in that case was required to pay royalty on the stones excavated by him from the quarries of the railway. These cases go to show that a contrary view may also be taken on the question and it is possible to hold that on supply of materials free of cost to the contractor by the other party to the contract, property in the materials does not necessarily pass to the contractor and the question must in each case be determined on the terms of the contract. We do not, therefore, think it necessary to deal in greater detail with the decisions on which reliance is placed by Mr. Shah.

30. Mr. Shah next urged that the incidents of the contract noted above, which in our opinion make it inconsistent with a contract of sale, are in fact not such and that such features could also be found in contracts of sale, pure and simple. The restriction on the right to sell the product manufactured or the restriction against sub-letting the contract for supply of materials, in the submission of Mr. Shah, is not unusual to find in a contract of sale. So also, contended Mr. Shah, that having regard to the labour legislation, conditions with regard to the employment of labour and payment of wages and compensation were also not inconsistent with a contract of sale. The requirement that the process of manufacture must be carried on at site designated by the intending purchaser is also, according to Mr. Shah, not inconsistent with a contract of sale. In our opinion, these arguments are not well-founded. A purchaser of a commodity is only interested in seeing that goods of specified type or design are supplied to him, as desired, against price and so long as the said condition is fulfilled, he is normally not concerned to look behind the transaction of sale and to insist upon the fulfilment of conditions such as those noted above. The matter has to be judged in the light of normal course of conduct and, in our opinion, if it is looked at from that angle, the terms to which we have made a reference above as found in the contract in the present case would be inconsistent with a contract of sale.

31. From the foregoing discussion, it would be clear that in our opinion, the contract in the present case is a contract for work, pure and simple, or at any rate a composite and indivisible contract for work and labour which also incidentally involved supply of materials and that it cannot be separated into two distinct contracts of work and supply of material.

32. In the result, our answer to the question referred to this court for our opinion is that the transaction envisaged by the contract entered into by the assessee with the Public Works Department of the Government of Gujarat dated 6th September, 1965, for manufacture and supply of bricks is a works contract and not a contract of sale of bricks. The opponent Commissioner of Sales Tax will pay the costs of the reference to the assessee.

33. Reference answered accordingly.


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