CONSTRUCTION COMPANY CHANGANACHERRY Vs. STATE OF KERALA

JUDGEMENT

(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 sold 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 covert 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 tread 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. ([1965] 16 S. T. C. 240 (S. C. ).), State of Madras v. Richardson & Cruddas Ltd. ([1968] 21 S. T. C. 245 (S. C. ).), Commissioner of Sales Tax, M. P. v. Purshottam Premji ([1970] 26 S. T. C. 38 (S. C. ).), State of Himachal Pradesh v. Associated Hotels of India Ltd. ([1972] 29 S. T. C. 474 (S. C. ).) and Sales Tax Officer, Palghat v. I. V. Somasundaran ([1974] 33 S. T. C. 68; 1973 K. L. T. 814. ).

(3.) 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 sale 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.