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Judgment
V. Ramaswami, J.—These two tax cases have been filed u/s 38 of the Tamil Nadu General Sales Tax Act, 1959 (hereinafter called the Act)
and relate to the assessment years 1963-64 and 1965-66. For the assessment year 1963-64, the petitioners disputed the turnover of Rs.
5,94,244.96 taxed at 2 per cent, on the ground that the receipt of that amount was towards works contract for the manufacture and supply of
bricks by the petitioners to the High Pressure Boiler Plant Project (hereinafter referred to as the Project Administration) at Tiruvarambur. On the
same ground for the assessment year 1965-66, the petitioners disputed the liability to sales tax on a turnover of Rs. 10,51,330.27. For both these
assessment years the Joint Commercial Tax Officer, Mylapore Division, held that the amounts represented the value of the bricks supplied by the
petitioners to the Project Administration and the transaction was a sale liable to levy of sales tax under the Act. The Appellate Assistant
Commissioner, Commercial Taxes and the Sales Tax Appellate Tribunal confirmed the assessment. The question for consideration in these cases is
whether the transaction envisaged by the contract entered into by the petitioners with the Project Administration for manufacture and supply of
second class common burnt clay building bricks"" to the Project Administration in terms of the contract in question is a sale or a works contract.
The Project Administration called for tenders for the manufacture and supply of bricks at the project site. The petitioners submitted tenders and
the same were accepted. An agreement was entered into between the petitioners and the Project Administration on 10th April, 1963. As per that
agreement, the petitioners manufactured standard bricks by taking clay from the project land, moulded the clay into bricks, burnt them with the
coal supplied by the Project Administration and supplied the bricks and received the various amounts. The question arising for consideration has to
be determined on a consideration of the terms and conditions of the contract and in the light of certain principles laid down by courts. The terms
and conditions of the contract in the present case are to be found in the tender submitted by the petitioners, the letter of acceptance, the agreement
executed by the petitioners (who are called contractors in the agreement), which takes with it the general conditions of contract for manufacture
and supply of bricks, specification for ""second class common burnt clay building bricks"" and special conditions of brick burning, as part of the
agreement.
Some of the features of the contract are: The work is designated as ""manufacturing and supplying second class common burnt clay building
bricks of size 190mm X 90mm X 60mm at project lands at Thogur-kilns Nos. 3, 4, 5 and 6"". The petitioners have to manufacture and supply
bricks according to the specification and design and in accordance with the stipulations and conditions of the contract and at the rates specified in
the schedule. The quantity given in the annexure to the documents is only approximate and no guarantee is given as to the quantity that will be
ordered for supply. Lands for putting up the brick kilns will be leased to the petitioners for the period of the duration of the contract on a yearly
rent of Rs. 25 per acre. The project kilns are to be left at the site as they are at the close of the contract. For each brick kiln an area of 6 acres of
land belonging to the Project Administration will have to be allotted to the petitioners free of rent on which the petitioners will mark the area for
burrow of pits, sheds, drying fields, etc. and get it approved by the engineering department of the Project Administration. The petitioners shall not
be entitled to use the land for any purpose other than taking the clay for the manufacture of the bricks to be supplied to the Project Administration.
Coal slack/dust required for burning shall be supplied to the petitioners by the Project Administration at Rs. 60 per metric ton for .-Tiruchirapalli
railway station or at Rs. 65 per metric ton at project site. For every 22.35 metric tons of coal supplied, the petitioners shall supply not less than
one lakh number of bricks and not more than 15 cubic metres of well-burnt brick jellys . The cost of coal will be recovered from the petitioners''
bills at the rate of 22.35 metric tons per every lakh of bricks supplied. The coal shall not be sold by the petitioners to anybody, but any unused
coal can be sold only to the public if and when released for such purpose by the Project Administration. Any quantity of coal overdrawn shall be
returned to the Project Administration and if they are not returned within three weeks, they shall be charged at the rate of Rs. 120 per metric ton.
The petitioners shall not have the option to refuse to take delivery of any coal offered to them by the Project Administration and if the petitioners
refuse to take the coal the contract itself could be terminated. The petitioners will have to make their own arrangements for the supply of water and
also sand, clay, or ashes, if any, needed to be mixed with the earth so as to produce bricks of the specified quality. The tenderer''s rates shall
include supply of materials at the place stipulated in the schedule of quantities duly stacked and including all charges of transport, stacking, sales
tax, excise duty or any other local and Government taxes. The rate at which the contract is accepted for supply is at Rs. 64 per thousand bricks. If
the workmanship of the brick supplied is inferior, the rate shall be reduced according to the decision of the engineer-in-charge of the Project
Administration. If the rates offered are not acceptable to the petitioners the matter shall be referred to the project engineer, whose decision will be
final. The Project Administration shall not, however, be bound to purchase the undersized or oversized or inferior quality bricks even at. reduced
rates. If inferior quality bricks or bricks which may otherwise be found unacceptable are rejected by the Project. Administration, they shall be
removed by the petitioners. If not removed within the time allowed they shall be forfeited and become the property of the Project Administration.
None of the products of the brick kilns will be removed from the site unless authorised by the Project Administration in writing and on payment of
royalty of Rs. 5 per one thousand bricks. In case of neglect or refusal on the part of the petitioners to manufacture and supply in the manner
aforesaid, the Project Administration shall be entitled to purchase elsewhere and from any other person or persons whomsoever such quantities of
materials as shall not have been duly supplied and delivered by the petitioners. The Project Administration shall pay all the bills at the rates
provided in the agreement within 30 days from the receipt by the accounts officer of the bill or bills for supply of the materials. The petitioners shall
have to give a security deposit of a sum of Rs. 54,200 of which Rs. 28,000 was deposited in cash at the time of entering into the contract and the
balance of the security deposit to be recovered at 10 per cent, of the value of the running bills. The petitioners and their servants shall at all times
during the continuance of the contract obey and carry out in all respects the orders and directions of the Project Administration and of all the
officers and servants acting under their orders and by them authorised to act in all matters and things relating to the contract. The petitioners shall
not sub-let; or assign the contract or any part thereof without the written permission of the project engineer. If the clause is contravened, the
contract is liable to be cancelled. The quantities of bricks given in the schedule are approximate, based on anticipated annual production, but the
petitioners shall endeavour to produce extra quantities of bricks over and above that specified in the schedule and supply the same to the Project
Administration at the rates specified in the schedule. If, at any time after the conclusion of the agreement, the Project Administration shall for any
reason whatsoever not require whole or any part of the supply, the accepting officer shall give notice in writing of the fact to the petitioners
specifying the steps to be taken by the petitioners to complete or otherwise manufacture of the bricks in a semi-manufactured state and the extent
to which the supplies or any part thereof may further be delivered by the petitioners. The petitioners shall have no claim to any compensation or
otherwise howsoever on account of any profit or advantage which they might have derived from the execution of the supplies in full; but which they
did not have in consequence of foreclosure of the contract. They shall be only entitled for a reasonable payment as decided by the accepting officer
for any expenses sustained on account of labour and materials collected and structures erected but which could not be utilised on the supplies.
These are the main terms of the contract.
Though some of the clauses above-stated are peculiar to a contract of sale, many of the terms are usually found only in a works contract. The
requirements as to carry on the work on the site, prohibition against selling of manufactured goods to any person other than the Project
Administration, prohibition against sub-letting the contract, provision regarding the control and direction over the petitioners and their servants by
the Project Administration in respect of every aspect in the manufacture and supply of the bricks, provision for purchase of even inferior quality
bricks though at reduced rates, conditions requiring the Project Administration to give the land free of cost for taking the clay for manufacture of
the bricks and at nominal rent for locating the brick kilns and for supply of coal and the terms of supply are all important conditions which bear the
stamp of a works contract.
On a consideration of all the terms and conditions as a whole it seems to us that the contract is for work and labour though payment is
calculated on the basis of the supply of the final product. The learned Assistant Government Pleader strongly relied on the fact that, under the
contract the bricks were to remain at the risk of the petitioners till they were finally delivered to the Project Administration and the petitioners had
no right to sell the bricks or any other material manufactured at the site to any other private party. These conditions, according to him, are
consistent with the petitioners being the owners of the bricks till they were delivered to the Project Administration. But we have seen that the
Project Administration had agreed to provide to the petitioners with land for excavating soil for manufacture of bricks free of rent. There was no
liability for payment of any royalty also for excavating the earth. ''The coal were also to be supplied by the Project Administration, the price of
which, of course, would be deducted at the time of final bill. But the quantity to be used had been restricted and the Project Administration
retained the right to take back the coal if they required it for any other purpose. Even the surplus coal could not be sold by the petitioners to
anybody as they like, but would have to be sold only to the public after getting the consent in writing of the Project Administration. None of the
bricks could be removed from the site unless authorised by the Project Administration to do so in writing and on payment of a royalty of Rs. 5 per
thousand bricks. These clauses show that the petitioners were not the full owners of the bricks manufactured and that the clauses relied on by the
learned Assistant Government Pleader are part of the terms of the works contract itself.
As we have already seen, even the inferior quality bricks were to be purchased at reduced rates, subject to the condition that the Project
Administration is not bound to take those bricks. The petitioners were permitted to remove only such of those materials which did not conform to
the specifications, subject to payment of a royalty of Rs. 5 per thousand bricks. In Commissioner of Sales Tax v. Purshottam Premji [1970] 26
S.T.C. 38, the Supreme Court held that from the mere fact that the assessee was required to remove the rejected materials under a contract,
similar to the one on hand, it could not be inferred that the assessee was the owner of the materials because that provision in the clause was
intended not to benefit the assessee but the railways which entered into the contract with the assessee because those materials were useless for the
railways. The learned Assistant Government Pleader also referred to the decision of the Supreme Court in Chandra Bhan Gosain v. State of Orissa
[1963J 14 S.T.C. 766. The terms of the contract which fell for consideration in that case before the Supreme Court, though similar in many
respects to the present case, differ in some of the important points. There was no clause in that case preventing the assessee selling the bricks to
any other party. The only requirement was that he should get the permission of the company. But in the case on hand, the bricks manufactured will
have to be supplied only to the Project Administration and the rejected materials alone were permitted to be removed. In addition to this, we have
the rights and liabilities of the parties with reference to the earth removed and the coal to be supplied. One other important factor, which has to be
borne in mind and which distinguishes this case from all other cases, is the right of the Project Administration to control and direct the petitioners
and its employees at all stages of the manufacture. In Krishnaswami Rao v. State of Madras [1968] 22 S.T.C. 146, this court construed a similar
contract entered into by an assessee with the Neyveli Lignite Corporation for the manufacture and supply of bricks of specified size and design at
agreed rate at kiln site in the land placed at the disposal of the assessee by the corporation. This court relied heavily on the fact that the bricks at
every stage of manufacture continued to be the property of the corporation and that the contract was a works contract pure and simple and was
not a contract of sale of goods.
A case very similar to the one on hand is the one decided by a Division Bench of the Gujarat High Court in S. R. U. K. S. Mandal Ltd. v.
Commissioner of Sales Tax [1972] 29 S.T.C. 419. The learned Judges have elaborately discussed the entire law relating to the subject and, after
distinguishing the decision in Commissioner of Sales Tax v. Purshottam Premji [1970] 26 S.T.C. 38, (sic) held that the transaction in question was
a works contract and not a contract for sale of bricks. In particular, the learned Judges relied on the facts that the Government in that case 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, the liability of the Government to take even inferior quality bricks, prohibition against selling any materials manufactured at site to
any other party, the control of the Government over the assessee and its employees in the matter of manufacture of bricks and the non-liability of
the Government for any compensation or damages for foreclosure of the contract before it was executed fully. The learned Judges also held that
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"". This decision, which we respectfully follow, completely answers the contentions of the learned Assistant Government Pleader.
We, accordingly, hold that the contract in the present case is a contract for work and labour and not a contract for sale of goods. The tax
revision petitions are, therefore, allowed with costs-one set. Counsel''s fee is fixed at Rs. 150.