1. These two sales tax cases relate to Chitram and Co. Private Limited, which carries on business as structural and mechanical engineers and manufactures of cranes and winches. Of the two cases before us, one is an appeal against the Board of Revenue's order, and it relates to an assessment of this assessee under the Tamil Nadu General Sales Tax Act, 1959. The other tax case is a revision arising out of an assessment under the Central Sales Tax Act, in respect of the same assessee. There are different transactions in each case, whose tax treatment has got to be considered by this Court; but the common question, which arises in respect of all the transactions is, whether they are taxable sales or merely works contracts. We shall take each of the transactions independently.
2. The tax case appeal raises the question, whether the assessee's receipts from Satyanarayana Brothers, Madras, of Rs. 21,32,500 can be included in the taxable turnover under the Tamil Nadu General Sales Tax Act. A reference to the terms of the contract between the parties, which has to be culled out from the correspondence between them, shows that the assessee undertook to design, manufacture and construct at the workspot of Satyanarayana Brothers, 8 Nos. of 20 tonnes capacity Goliath cranes and 6 Nos. of 7.5 tonnes capacity revolving cranes, for an overall consideration of Rs. 21,32,500. The responsibility of the assessee was to design and construct at the site of the customer the cranes described above. The time for completing the construction on the site was from 6 to 9 months. The payment of the consideration was one-third of the consideration by way of advance, another one-third within four months from the date of the order and the balane after the crane was made ready at the spot. The final bill made out by the assessee to Satyanarayana Brothers also refers to the subject-matter of the contract between the parties as to the designing, manufacture and construction at the site of the customer of the several cranes in question.
3. The assessing authority, however, treated the transaction as a sale pure and simple. The Appellate Assistant Commissioner took a different view. He held that the receipts or realisations were from a works contract undertaken by the assessee to construct and erect at the customer's place of work the steel cranes with accessories. The Board of Revenue took up on revision the order of the Appellate Assistant Commissioner on the score that the view taken by him about the transaction was erroneous. After hearing the assessee, the Board held that Rs. 21,32,500 must be subject to tax as sales turnover. According to the Board, the contract nowhere stated that it was the responsibility of the assessee to erect the cranes at the site. Although the board noticed that in the quotations as well as in the bills, the subject-matter of the contract was design and construction of the cranes at the site, the Board thought that erection of cranes was not referred to when the contract included construction of cranes. This seems to be a quibble on words, for it is quite clear from the terms of the bargain between the parties that what the assessee has undertaken was to go to the workspot of the customer and there design, according to the customer's specification, a crane, which has got to be constructed on the spot. One of the clauses in the general terms and conditions clearly provided for the laying of rails by the assessee to serve the lateral movements of Goliath cranes as well as for the swivelling movement of the revolving cranes. The condition of the contract was that the assessee had to fix the rails in their correct position after being levelled and aligned. Referring to this clause in the contract, the Board observed that what was contemplated in this term was only construction and not erection. This observation of the Board shows that the Board was merely playing upon words and not minded to look to the reality and materiality of the transaction. We must hold that there is no difference whatever between design and construction of a crane at the site of the customer and the erection of a crane at the same place. Both are one and the same kind of operation. Indeed, in the case of erection of a crane at the spot, the designing part of it may or may not be at the site. But, in the present case, even the designing part of it, under the terms of the contract, has got to be done only at the customer's site. This only makes a case for a works contract a fortiori. The Board was not justified in reversing this order.
4. The revision before us which is the other connected tax case, involves the consideration of as many as three transactions, which we will take up and consider one by one.
5. The assessee entered into a contract with the Cochin Shipyard. The terms and conditions of the contract between the parties can be elicited from the purchase order of the Cochin Shipyard dated 25th September, 1972. In the very forefront of the purchase order, the Cochin Shipyard States as follows :-
'You offer to design, supply, erect and commission the following equipments at the rates noted against each and as per the 'terms and conditions stipulated in our conditions of contract ...........' is hereby accepted.'
6. The details of the order, as set out in the same purchase order, referred to the design, manufacture, supply, erection and commissioning of 50 tonnes capacity, class II outdoor service E.D.T. cranes. The order form mentions the cost of the cranes, per unit, as well as the cost of erection and commissioning of the cranes at the site. There is also a provision for supply of tools along with the equipment. The order form appends certain terms and conditions in an annexure. The terms as to the payment show that 15 per cent of the cost of the crane, excluding the erection and commissioning charges, shall be paid on the acceptance of the order; another 15 per cent on completion of procurement of steel required for the crane; 65 per cent against despatch of documents; and the balance of 5 per cent after completion of the erection and the commissioning of the cranes. The entire cost of the erection charges will be paid after the commissioning of the crane. These terms as to payment also show that the subject-matter of the contract was not merely the supply at a price of the crane as such, but the erection of the crane at the site of the customer.
7. The second transaction, which is before us is between the assessee, on the one hand, and the Kashmir Government authorities, on the other, who had contracted with the assessee for the supply and erection of a crane for the Lower Jhelum Hydel Project. There is on record the copy of a formal agreement dated 27th April, 1973, in writing between the parties setting out the subject-matter of the contract as well as the other attendant circumstances thereof. Clause 5 of the agreement is to the effect that the work covered under that agreement comprises design, manufacture, testing, supply and erection of 150/25 tonnes E.O.T. crane at Lower Jhelum Hydel Project, Kashmir. One of the conditions of the contract is that the equipment must pass the tests both at the tests both at the assessee's factory site and, after erection, in the project location. This agreement also sets out the mode of payment by instalments at different stages in progress of the work. The erection charges are separately referred to in the schedule of payment, and it is provided therein that they are payable within one month of the completion of the erection and satisfactory commissioning of the crane at the site. As if these conditions were not enough to indicate the nature of the contract between the parties, clause 24 specifically declares that the contract between the parties shall be deemed to have been successfully executed, when all the equipment is received and commissioned at the site as required under the terms of the agreement and given fault-free performance during the guarantee period. The guarantee period, it may be observed, is one of 12 calendar months from the date of taxing over of the equipment by the project authorities.
8. The terms and conditions of the agreement, which we have briefly summarised above, leave no doubt in our minds that the contract under which the assessee undertook to place at the disposal of Lower Jhelum Hydel Project authorities, cranes of their manufacture, was not a contract for the sale of the equipment, but a contract of work and labour, involved in the erection of the crane at the workspot of the project. We also hold that although the charges for erection are separately mentioned, the subject-matter of the contract is an integrated transaction, the erection and commissioning of the crane being inseparable from the rest of the subject-matter of the contract. We are accordingly of the view that the receipts from this contract, cannot be treated as taxable turnover involved in the sale of goods.
9. The last transaction, which requires our examination from the point of view of its assessability or exemption, as the case may be, from the provisions of the Central Sales Tax Act is a contract between the assessee and the Himachal Pradesh Government, which was entered into in connection with the provision of a crane in Baira Siul Project. The terms of the bargain between the project authorities in this case and the assessee are to be found in a piece of writing described as 'acceptance of tender', bearing the date 4th September, 1972. It would appear from the acceptance of tender that what was contracted for by the project authorities was the supply of a crane f.o.r. Madras at a price agreed to. The crane has to be sent to the Assistant Engineer in the project area by being despatched to a nearby railway station by goods train, freight to be paid by the consignee. A schedule is attached to the acceptance of tender, which carries the heading 'description of articles ordered'. In the schedule is to be found briefly described the specification of a crane and its accessories. One of the items set out in the Schedule is erection charges. There are provisions in the acceptance of tender for inspection of the crane by the Director of Inspection after the erection and commissioning of the crane. It is stipulated that the balance of 10 per cent of the overall payment would be made only after the Director of Inspection had completed his test-check.
10. The learned counsel for the assessee urged before us that on the terms of the acceptance of tender, the transaction must be treated as works contract and not a mere sale at a price of the crane. He referred to the provision for inspection of the crane after the commissioning and also the schedule to the acceptance of tender, which refers separately to the erection charges. We are not, however, in a position to say that merely because in the schedule wherein articles are ordered or described, erection charges are separately mentioned, the transaction must be regarded as an integrated contract of work and labour.
11. On the other hand, we have to give due significance to the fact that under the terms of the contract, the crane should be delivered f.o.r. Madras on freight to be paid by the consignee. This shows that the contract was a pure and simple contract for supply of the crane at a price. The learned Government Pleader drew our attention to the ultimate bill made out by the assessee against the project authorities. That bill is dated 8th February, 1975. The bill is made out for Rs. 10,88,200. The recital in the bill is to the following effect :
'Design, manufacture and supply 1 No. 125/20 tonnes capacity E.O.T. crane together with lifting beam, tools, etc., as per your A/T cited above.'
12. Although the terms of the contract cannot be unerringly gauged by the way the ultimate bill is made out, the fact that the bill has been made out by the assessees themselves in this particular form cannot be rejected as possessing no significance whatsoever. Restricted, as it is, to the design, manufacture and supply of the crane, the bill clearly shows that the assessees themselves made a clear-cut distinction between the supply of the crane, as such, and the rest of the charges, which they had recovered from the project authorities. On a consideration of the contract as well as the surrounding circumstances, we are satisfied that the receipts by the assessee from Baira Siul Project authorities of the sum of Rs. 10,85,236 must be held to be taxable as sales turnover in cranes.
13. The three transactions, which we have referred to above, between the assessee on the one hand, and the Cochin Shipyard, Lower Jhelum Hydel Project authorities and Baira Siul Project authorities, respectively on the other, were considered by the Tribunal in the appeal. The Tribunal, in its order, has referred to the acceptance of tender which is the basis of the contract between the assessee and the Baira Siul Project authorities and pointed out that the cranes in question were to be delivered f.o.r. Madras. They also referred to the other terms in the acceptance of tender and held that the receipts by the assessee from this project administration only represent sales turnover. Our own independent consideration of the terms of the contract has led us to the same conclusion. This part of the order of the Tribunal will, therefore, have to be sustained.
14. As for the other two transactions, we do not find any detailed discussion by the Tribunal of the terms of the contract and the nature of the transactions in question. The Tribunal seems to have assumed that even in respect of the contract by the assessee with the Cochin Shipyard and with the Lower Jhelum Hydel Project authorities, there was an outright sale f.o.r. Madras at a price. We have earlier referred to the terms of the contract in each case and endeavored to show that on the construction of those terms, it could not be said that the assessee was merely being engaged in the supply at a price of the cranes to third parties. In one case, viz., Cochin Shipyard, the order form clearly indicated that the customer should be satisfied not merely with the supply of a crane, but of its erection at the site. Likewise, the project administration in the Lower Jhelum Hydel Project have clearly set out the scope of the work as not being complete till the crane was erected in the project area and commissioned and till the period of guarantee was over. The Tribunal's decision to the contrary has been arrived at without a proper examination of the terms of the contracts between the parties and by assuming, without any investigation, that the contracts in those two cases were also on a par with the contract in the case of Baira Siul Project. This error vitiates the Tribunal's final conclusion.
15. We have approached the problems posed in this case by directly addressing ourselves to the terms of the contracts between the parties. This is because, it is well-settled by the decisions of the Supreme Court, that the question whether a particular transaction is a sale, or on the contrary, a works contract, has got to be decided upon a consideration of the terms of the contract, the circumstances of the transaction and even the custom of the trade in proper cases; vide Sentinel Rolling Shutters & Engineering Company P. Ltd. v. Commissioner of Sales Tax : 1SCR644 . But there is a nearer case decided by the Supreme Court, which might almost be regarded as a direct decision on the subject, vide Ram Singh & Sons Engineering Works. v. Commissioner of Sales Tax : 2SCR621 . That was a case where an assessee, a firm carrying on business in the manufacturing and erection of cranes, entered into certain contracts with its customers and earned trading receipts therefrom. The question before the Supreme Court was, whether those receipts can be regarded as sales turnover, or on the contrary, receipts from works contracts. While addressing themselves to the particular terms of the contract, which related to fabrication and erection of three-motion electrical overhead travelling cranes, the learned Judges with the opportunity to make certain observations of a somewhat general character. Those observations may be reproduced as being of general application in cases of this kind.
'The fabrication and erection is one single indivisible process and a 3-motion electrical overhead travelling 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 3-motion electrical overhead travelling crane does not come into being. The manufacturer would undoubtedly be the owner of the component parts when he fabricated them, but at no stage, does he become the owner of the 3-motion electrical overhead travelling crane as a unit so as to transfer the property in it to the customer. The 3-motion electrical overhead travelling crane comes into existence as a unit only when the component parts are fixed in position and erected at the site, but at that stage it becomes the property of the customer because it is permanently embedded in the land belonging to the customer ..... 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 ....... There can, therefore, be no doubt that the contract in the present case was a contract for work and labour and not a contract for sale.'
16. Adopting the language of the Supreme Court, we may say that in all the transactions we have considered in this judgment, excepting that relating to the supply of a crane by the assessee to the Baira Siul contract, the assessee was at not time the owner of the particular cranes, which became subsequently the property of the customers. The assessee, no doubt, was the owner of the component parts of the cranes in question, but they were not supplied as such to the customers. On the contrary, they were assembled together at the workspot, constructed into cranes and installed in the site at the spot required by the customers. It was then, not earlier that the property in the cranes as such became the property of the customers. Indeed, there was no crane in existence before that point of time to be named as the property of the assessee. Besides the task of fitting together the component parts, constructing then into full-fledged cranes and erecting the cranes at the site, the assessee had also the responsibility for commissioning them and seeing it to it that they worked properly, for some time. The erection of the cranes is thus a fundamental and integral part of the contract. The whole process can be designated properly as the entering into and performance of a works contract.
17. For all the aforesaid reasons, the appeal is allowed and the revision is allowed to the extent indicated earlier. Having regard to the circumstances of the case, there will be no order as to costs.