Richardson and Cruddas Ltd. vs The State of Madras

Ramamurti, J.—The petitioner in the tax revision case is Richardson and Cruddas Ltd., a limited liability company, carrying on business in

structural engineering work, and as contractors at the First Line Beach, Madras. It is admitted that in the course of its business the petitioner-

company fabricates and erects heavy steel structures on behalf of its customers in connection with the construction of sugar factories, etc. It is also

admitted that in the course of its business the petitioner-company receives order for the manufacture, fabrication and installation of cooling

apparatus, like air coolers, bottle coolers, which are specially manufactured according to the special requirements and specifications of the

customers and installed in the latter''s premises by the use of skill and labour bestowed by experienced mechanics and specialists engineers of the

petitioner-company.

In this revision petition, which relates to the assessment year 1957-58, the dispute relates to three items. The first item is with regard to the

turnover of a sum of Rs. 3,26,075.20 nP. received from its customers, Pandavapura Sahakara Sakhare Karkhane Ltd. (hereinafter called the

sugar factory), for the fabrication, supply and erection of steel structures at the site of the sugar factory in Pandavapura, Mysore State, according

to the written contract which was entered into between the sugar factory and the petitioner. The objection of the petitioner is that this item

represents moneys received in respect of a ""works contract"" entered into between the petitioner, and its customer, the sugar factory, while the

contention of the State is that it represents the price paid for the goods sold by the petitioner-company. The question for determination is whether

the turnover in question relates to a works contract or a contract for the sale of goods.

The second item relates to a sum of Rs. 43,349-05 nP. representing payments received from the customers by the petitioner, for the

manufacture and installation of bottle coolers as per the special orders placed by the customers for the purpose. Here again the point in issue is

whether the contracts in question are "" works contracts "" or contracts for the sale of goods.

The third item relates to a sum of Rs. 9,273.70 nP., representing sales tax collected by the petitioner from its customers. The contention of the

petitioner on this matter is that even though the amendment came on 16th November, 1957, in the middle of the assessment year, the amendment

should apply for the entire year both before and after the amendment came into force, while the contention of the State is that the petitioner can

have the benefit of the amendment only in respect of the turnover subsequent to the date of the amendment, that is, 16th November, 1957.

It may be mentioned at the outset that in respect of the first item a petition for enhancement was filed by the State before the Tribunal, and the

Tribunal enhanced the turnover by Rs. 3,26,075.20 nP. holding that the contract in question was not a ""works contract,"" reversing the finding of

the Appellate Assistant Commissioner. With regard to the other two items, items 2 and 3, the Tribunal affirmed the findings of the Appellate

Assistant Commissioner.

We shall first take up the first item in dispute, Rs. 3,26,075.20 nP. The Tribunal has disposed of this aspect of the case in a very summary and

mechanical manner by simply referring to some cases without making any effort to understand the principles decided therein, and how far they are

applicable to the facts of the instant case. The principles and the tests for determining whether a contract is a ""works contract"" for work and labour

or whether it is a contract for the sale of goods are now well-settled by a series of decisions, both in England and in India. The problem is only the

application of the true principles to any particular case. In some cases the real character of the contract can be easily ascertained by the application

of a simple and clear-cut principle; equally, the dividing line may be very difficult to draw in many cases. Often, the distinction between a ""works

contract"" for work and labour, and a contract of sale is a fine one, and it is neither feasible nor practicable to formulate in the abstract, an all

comprehensive and universal rule applicable to all cases. In a majority of works contracts, the contractor, while carrying out his work supplies

some component parts to complete the work, either by manufacturing or fabricating such parts or by delivering or supplying them simply from out.

of his stock. But that does not necessarily mean that there is a sale of those component parts by the contractor. The crucial question is whether the

agreement between the parties was that such parts should be treated as sold separately or they were merely supplied in the course of carrying out

a works contract. In order to make it a contract for sale of goods, there should be clear proof of an intention to sell and purchase the materials as

such, independently of the work that was to be carried out. If the contract is an entire indivisible contract in the sense that the consideration for the

entire work including the fabrication and supply of materials is the payment of an inclusive lump sum, there is no scope for applying the notion of a

contract of sale of goods. The materials supplied for the performance of a contract are merely accessory to the work and labour.

In cases, where the contract in question consists of the fabrication and erection of steel structures or buildings on the site of the employer, the

main test is to find out whether the employer ever bargained for the sale and purchase of the component parts used in the work of fabrication and

erection or construction. If under the contract structural materials are to be affixed to the land and only thereafter the property therein would pass

to the employer notwithstanding that they were approved by him, and even paid for, the contract would be a works contract. The fact that

payments are made before the work is completed in its entirety is not of decisive significance. If under the contract, the contractor would not be

entitled to ask for payment of the value as such of the materials stored in the work spot as "" the price "" of the materials, and if under the contract

the property in the materials would pass only when the erection work is over after they are affixed to the land in question, the contract should be

treated as an entire contract for work and labour as there is really no element of sale of materials and component parts in such a contract.

The property in the materials supplied by the contractor passes to the owner of the site not by reason of the delivery of the materials ""as goods

in pursuance of and under an agreement of sale"" with a stipulation for a particular price. The property in the materials passes to the owner only

when. they are affixed in pursuance of the works contract. If the amount payable by the employer as provided under the contract is one

consolidated sum, and could not be split up in part as the price for the materials supplied and in specific part as remuneration for labour and work

done, it is clear that the contract is a works contract.

We may refer to the following statement of the law contained in 34 Halsbury, page 6, paragraph 3:

Contract of sale distinguished from contract for work and labour: A contract of sale of goods must be distinguished from a contract for work and

labour. The distinction is often a fine one. A contract of sale is a contract whose main object is the transfer of the property in, and the delivery of

the possession of, a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua

chattel, the contract is one for work and labour. The test is whether or not the work and labour bestowed end in anything that can properly

become the subject of sale; neither the ownership of the materials, nor the value of the skill and labour as compared with the value of the materials,

is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract

is in substance one for work and labour or one for the sale of a chattel.

In order to ascertain the real intention of the parties, we shall now consider the true scope and the proper interpretation of the contract

between the parties. It must be mentioned at the outset that the petitioner-company are not dealers in raw steel materials, like girders, trusses,

rivets, nuts, bolts, etc., but they carry on business essentially as structural engineers and contractors, employing experienced and specialised

engineers and mechanics. Such stock of steel materials as they have in ready stock are not for sale in the market, but are only used by them in the

course of the aforesaid businesses. This important aspect touching the nature of the business activity of the petitioner should be borne in mind in

determining the true meaning and scope of the contract entered into by the petitioner.

In 1956-57 negotiations started between the sugar factory and the assessee-petitioner, in connection with the designing, fabrication and

erection of steel structures for the factory building at Mysore. The terms of the offer of the petitioner for the work in question (which were

ultimately accepted by the factory) are contained in the quotation given by the assessee in its letter dated 17th January, 1957. It is necessary to set

out the relevant clauses thereof:

The Secretary,

The Pandavapura Sahakara Sakhare Karkhane Ltd.,

Pandavapura, Mandya District,

(Mysore State).

Dear Sir,

Sugar Factory Building for Pandavapuram.

We refer to your valued enquiry and subsequent correspondence ending with your letter dated 3rd January, 1957, regarding the above and very

much regret the delay in our submitting a quotation which we assure you was not intentional.

We have now gone through your requirements and as already advised, are not in a position to give you a complete design until after the order is

placed with us. As such, our offer at present is worked out only on a tonnage basis, further details to be furnished at a later date.

We are pleased to quote as follows: -

I. Fabrication, supply and erection at site of all steel work in columns, trusses, purlins, bracings, side cladding supports crane girders, etc., including

supply of all rivets, bolts and nuts and painted one shop coat of red oxide before despatch. Price: per ton of steel work...Rs. 1,160 (Rupees one

thousand one hundred and sixty only).

II. Erection only of A.C. roofing and side cladding sheets with A.C. accessories including supply of all G.I. bolts, nuts, washers, the A.C. materials

being delivered by you to us free at site of work.

Price: Per 100 square feet of laid area Rs. 25 (Rupees twenty-five only).

Our prices for gutters, downpipes, louvres, etc., will be submitted later if required.

Our prices quoted are subject to the following conditions:--

Conditions 1 to 3 merely indicate how the petitioner proposes to secure the requisite steel, rivets, bolts and nuts for the work and also provide for

payments over and above inclusive of lump price (Rs. 1,160 per ton in the contingencies referred to therein. It is unnecessary to set out those

clauses in extenso).

Delivery.--Our rates quoted for the fabrication and supply of all steel work will be for delivery F.O.R. our works siding, Madras.

All freight, unloading and cartage charges from Madras to site will be your responsibility and at your cost.

All A.C. materials to be delivered to us at site, free of cost.

Loss or Damage.--We regret we cannot accept liability for loss or damage after the goods have left our works unless the loss or damage results

from negligence on our part. Further, we cannot undertake any steps to recover losses from the parties responsible as such steps must be taken by

your goodselves, but all necessary assistance will be rendered by us wherever possible.

Method of payment.--We will require payment to be made as follows:

Structural steelwork.--To be paid on the weight calculated according to B.S. weight from the nett lengths and sizes of sections as shown in our

material lists, without deductions for holes, notches and skew cuts. Additions will be made for the weights of rivets and bolts and nuts at 5% of the

above calculated weight. 9. Terms of payment:

(a) 100% of the value of raw materials received in our Madras works to be paid against invoiced value of materials as received from time to time.

Certified copies of the supplies invoices will accompany the bills.

Where the raw steel is being used from our stocks, bills will be prepared and submitted to you on the basis of the current column: 11. Price for

steel from Indian producers.

(b) When any materials have been fabricated and placed F.O.R. our works siding, Madras, 100% of the contract rate for the supply to be billed

on R/R weights, less the corresponding amount billed in (a).

If, for any reasons, materials cannot be despatched to site these bills to be based on our certification of the calculated weight and paid for, as

despatched materials. Bills in (a) and (b) will be submitted monthly, and to be paid within 30 days of submission.

(c) Progress payments to be made during erection at the contract rate less amounts billed in (a) and (b).

This offer was accepted by the factory by their letter dated 26th February, 1957, as follows:

Dear Sirs,

Reference: Sugar Factory Buildings for the Pandavapura Sahakara Sakhare Karkhane Ltd.

With reference to your quotation No. E/4003/57 dated 17th January, 1957, and our discussion with your representative, Mr. F. C. Mathias, on

the 13th February, 1957, at Pandavapura, 14th at Mandya and 25th February at Bangalore, we are pleased to inform you that it has been decided

to place orders with you for items 1 and 2 of your above quotation on the lines discussed with you at Bangalore on 25th February, 1957.

We request you kindly to proceed with the preparation of working drawings, etc., in anticipation of our entering into an agreement with you in due

course.

It is requested that efforts may kindly be made to improve the delivery period quoted by you.

Several letters passed between the factory and the assessee while the work was in progress, a perusal of which will show that at no stage was

there any idea of any sale of materials (whether fabricated or not) by the assessee to the factory, and that at every stage it was only a works

contract. For instance, we may refer to a letter by the factory to the petitioner, dated 1st August, 1957:

The Secretary,

The Pandavapuram Sugar Factory Ltd.,

Pandavapura,

Mysore State.

Dear Sir,

Erection of Steelwork, etc. for New Sugar Factory Buildings.

We are in receipt of your letter of the 22nd ultimo and note therefrom the revision in the programme of fabrication, delivery and completion of

erection of the buildings by us to suit the machinery erection programme.

Due to this change the programme already given to you by our letter dated 19th July, 1957, has been cancelled and the following will be the

revised tentative programme:

(a) Boiling House.--Fabrication of stanchions will be completed by mid September, 1957. Fabrication of trusses, purlins, and beams will be

completed by end of September, 1957: Provided the stanchions and trusses are received at site by the end of the first week of October, 1957, we

will commence erection of the stanchions by mid October, 1957, and complete all steelwork and trusses, stanchions and purlins in this House by

mid November, 1957.

(b) Boiler House.--Fabrication of stanchions will be completed in the first week of November, 1957, and trusses, etc., by end November, 1957.

Assuming the stanchions will -arrive at site by the 3rd week of November,

1957, and complete the steelwork erection in stanchions, trusses, purlins by 3rd week of December, 1957.

(c) ''C Boiler House.--Completion of fabrication of stanchions, trusses and purlins will be completed by mid December, 1957. Erection of

steelwork will commence by end December, 1957, and completed by end of January, 1958.

(d) Workshop and Storage.--This portion of the steelwork was not planned to date because it was given the last priority by you. We expect,

therefore, that the drawings for this section will be sent to our shops by August 10th, when we expect to complete the fabrication by mid February,

1958. The erection of steelwork in this section will be taken up immediately after the completion of the Mill House Steelwork when we expect to

complete the erection by mid March, 1958.

(e) Power House Filter Station and Sugar Godown.--We expect to complete fabrication of all steelwork in this section by end March, 1958, when

erection will be taken up at site and completed by mid April, 1958.

(f) Cladding steelwork.--The despatch of cladding steelwork is expected to be taken up by January, 1958, and we expect that as and when the

steelwork in each section is completed, aligned and grouted it will be possible for us to take up the erection of the cladding steelwork and

complete the same in time.

The same would be the case for the erection of A.C. roofing sheets, etc.; and it is expected that, if there are no hold-ups in the receipt of the A.C.

materials at site, the complete erection of the same could be completed by end May/mid June, 1958.

This programme is given to you in all good faith and is therefore without commitment. We have already assured you that it will be our endeavour to

see that there is no delay and we assure you therefore, that we will do our best to keep to the same if not to improve. We have now to once again

remind you that as far as despatch of steelwork from our workshop is concerned, the same will depend on the receipt of suitable wagons from the

Madras Port Trust immediately on indent and we sincerely hope that you will give us your assistance in this direction. Delays therefore in despatch

on this account will correspondingly alter the erection programme.

Yours faithfully,

We may also extract by way of sample two receipts passed by the assessee when they received payments:

The Secretary,

The Pandavapura Sahakara Sakhare Kharkhane Ltd.,

Pandavapura,

Mysore State.

On Account Bill No. 1/A,

New Sugar Factory at Pandavapura.

Your letter dated 26th February, 1957.

The Secretary,

The Pandavapura Sahakara Sakhare Kharkhane Ltd.,

Pandavapura,

Mysore State.

On Account Bill No. 2.

New Sugar Factory at Pandavapuram,

Your letter dated 26th February, 1957.

Rupees seventy-eight thousand, one hundred and fifty-seven and naya Paise twenty only.

We have perused all the relevant clauses of this agreement and we are clearly of the opinion that judged by all tests the contract in question is

one entire indivisible contract for the execution of works, and it is impossible to read into this contract any notion of an element of a contract for

sale of goods. The predominant intention of the parties is the performance or carrying out of certain works, and there is no contract for the sale of

goods separately . Whether one looks at the terms of the quotation or considers the real intention and the animus of the parties, there is not the

slightest warrant for dissecting or splitting up this contract into parts, one portion for labour charges, and the rest as a contract for the sale of

goods. We have no hesitation in stating that such a view of the matter is impossible on the facts of the instant case.

In respect of the first clause of the quotation, a consolidated lump payment is stipulated and the payment has got to be made on the basis of the

weight of steel consumed in the work of fabrication and erection. This clause "" of an all inclusive price"" is the main foundation of the agreement, and

it is impossible to read into this clause any idea of a contract of sale. The fabrication and erection work has got to be made according to the

specifications of the customer, and the final payment and account has got to be settled only on the basis of the turnover of the work; the measure of

payment (as mentioned above) being the unit of steel consumed in the work. The, other clauses in the quotation merely furnish, in general outline,

the scheme of the assessee as to how it proposed to procure the materials and on what basis roughly the total lump sum payment of Rs. 1,160 per

tonnage of steelwork was quoted. The contract expressly provides that if there should be any increase in the price of the raw materials, which the

petitioner would be purchasing in the market, such increase should be borne by the sugar factory. The contract provides other details with regard

to cartage, freight, unloading, etc. It may be that having regard to the high reputation and the experience of the petitioner in the particular nature of

work, and having regard to the special nature of the engineering and structural skill and labour involved, the assessee was in a position to bargain

and stipulate very onerous and advantageous terms for payment of practically the entire amount even before the erection work is complete, and

even when the fabricated materials are to be despatched from the place of business. But that will not have the effect of converting a works contract

into a contract for the sale of goods.

The learned Additional Government Pleader relied upon Clause 4, which provides that the rates quoted for the fabrication and supply of

steelwork will be for delivery F.O.R. and that all freight, unloading and cartage charges from Madras to site will be the responsibility and cost of

the factory. He also relied on Clause 9 (a) and (b) providing for payment of 100 per cent. of the value of the raw materials, as well as 100 per

cent. of the contract rate in the case of fabricated materials placed F.O.R. work siding, Madras. We see no substance in this argument as it

proceeds upon a misconception and misunderstanding of the purpose and object for which Clauses 4 and g have been included in the quotation of

the petitioner. It should not be overlooked that the petitioner had stipulated for the payment at the rate of Rs. 1,160 per ton of steelwork for

fabrication and supply and erection at site of the entire steel structure. Clause I, standing alone, by itself, would mean that as the contract is for the.

construction of the structure at the site the petitioner should be deemed to have undertaken the entire responsibility for every portion of the work,

supply of materials, fabrication, erection as well as the charges for loading, unloading, cartage, railway freight, etc. In other words, clause I would

take in every piece and every incident of the work till the erection work is completely over. But the petitioner is specially bargaining that Rs. 1,160,

the lump sum payment for ton of steel work, should not include the loading and unloading charges, cartage, freight, etc., but that the same should

be borne by the factory. Clauses 4 and 9 have been put in only to make that position clear in favour of the petitioner and as a safeguard against any

claim that may be made by the petitioner with regard to the incidental charges. If the contract is otherwise a works contract, as unambiguously

declared in Clause I, providing for a lump payment, the fact that the contract stipulates that the employer should take the responsibility for the

payment of the loading, unloading charges, etc. cannot convert the contract into a sale of goods.

It is significant to note that throughout the contract, there is no provision for the passing of the property in the goods at any stage prior to the

completion of the erection work. The learned Additional Government Pleader relied on Clause 5 as supporting his contention that the property in

the goods would pass to the employer the moment the goods leave out of Madras. We do not agree with this contention. In our opinion, Clause 5

properly understood proceeds on the footing that the property in the goods had not passed to the employer while they are in transit. It is obvious

that if the property in the goods had so passed there would be no need to provide that the liability for loss or damage should be borne by the

employer. The special stipulation for this condition, in our opinion, emphasises that the property in the goods had not passed to the employer.

A reading of the quotations makes it clear that the petitioner would become entitled to the consolidated sum of Rs. 1,160 per ton of steelwork

only if and after the erection work is complete. If by reason of any default on the part of the petitioner the contract falls through, in the middle, the

petitioner cannot make a claim for the price of the goods supplied and delivered at the spot upto that moment. The employer will be within his

rights in contending that they are liable to pay the price only if the erection work is completed. The fact that advance payments had been made

does not affect the legal position, and if the contract breaks through on account of default on the part of the petitioner, the petitioner would in law

be obliged to give restitution of all the payments made by the factory. So long as the petitioner does not complete the work, the factory will be

entitled to refund of all the moneys paid by it.

This aspect of the matter can also be looked at from a different angle, from the point of view of the factory. The factory cannot put an end to

the contract and stop the erection work in the middle and offer to pay to the petitioner the value or the price of the materials as gathered and

assembled at the spot, making a proportionate allotment for the labour involved, on the ground that the factory had become the owner of the

goods stocked at the spot from time to time. The petitioner would be entitled to take away the goods gathered at the spot as their own and make a

claim for damages against the factory for breach of contract. In other words, so far as the property in the goods is concerned, it throughout

remains with the petitioner till the erection work is over and the fabricated materials are fastened to the site proper. To sum up, therefore, the

following features are conclusive and decisive to hold that the contract in question is a works contract for work and labour; (a) The stipulation for a

consolidated lump payment of Rs. 1,160 per ton for fabrication, supply and erection at site of all steelwork, etc.; (b) No provision for the passing

of the property in the goods to the factory before the actual completion of the erection work; (c) No provision under the contract for dissecting the

value of the goods supplied and the value of the remuneration for the work and labour bestowed in the execution of the work; (d) The petitioner

not being a dealer carrying on business in the steel and component parts required for the erection work and the component parts had to be

specially fabricated so as to be suitable for particular erection work; (e) The predominant idea underlying the contract being the bestowing of

special skill and labour by the experienced engineers and mechanics of the petitioner-company.

The learned Additional Government Pleader relied upon the two receipts for the payments already referred to as evidence of the agreement

between the parties that Rs. 1,100 per ton was subsequently agreed to between the parties as being the value of the supply of the fabricated

materials; the balance of Rs. 60 representing the value of labour and skill employed by the petitioner for the erection work proper. We have no

hesitation in saying that there is absolutely no substance in this argument and it is developed only by reason of the fact that when a part payment

was made, it was paid at the rate of Rs. 1,100 per ton. The learned Additional Government Pleader accepted the position (and could not possibly

argue contra) that the original quotation for item (i) was one indivisible sum of Rs. 1,160 per ton both for supply of materials and for fabrication

and erection and that there was no question of splitting up that item. He, however, contended that as a result of the receipts passed, a subsequent

agreement between the parties should be inferred modifying the quotation with regard to item (i). Factually there is no basis for any such theory.

Further, even the receipt for payment does not lend support to any such argument. It is a receipt simpliciter for payment received, and it merely

mentions how the particular figure was arrived at. It also mentions that the payment is a payment for part work done to date, in other words it is

only a part payment. There is not the slightest warrant for understanding this contract as consisting of two separable and distinct component parts,

(a) contract for the supply of fabricated steelwork at Rs. 1,100 per ton, and (b) Rs. 60 as charges for erection work. Any such theory based upon

such an interpretation of the receipts would completely militate against and destroy the basic structure and features of the agreement between the

parties as set out in the quotation referred to above.

We have discussed the matter so far, on the footing that the property in the materials had not been transferred to the employer, i.e., the factory,

as that is regarded as one of the tests. But it does not necessarily follow that in all cases in which the property in the component parts used in the

work in question passes to the employer the contract will be regarded as a contract for sale of goods. Even if property had passed it is merely

accessory to work and labour and the contract will nevertheless be an indivisible contract for work and labour if the paramount intention of the

parties was a bargain for work and labour and not for sale and purchase of goods. In other words, in such a case the property in the goods passes

in pursuance of the contract for work and labour, and not in pursuance of any independent contract for purchase and sale, as the intention is plainly

not to make a sale of movables but to fabricate and erect a steel structure. It is sufficient to refer to the following statement of the law in Sundaram

Motors (Private) Ltd. v. State of Madras [1958] 9 S.T.C. 687:

It has been pointed but that a mere passing of the property in the particular chattel is not decisive of the question whether the component parts of

that chattel were sold or not. That is to say if a particular motor part, e.g., king pin bushes, is put in the car while reconditioning and repairing it, it is

undoubted that title to that motor accessory passes when the repairer delivers the car to its owner; but to constitute sale of that part it is necessary

that there should have been an agreement between the parties for the sale of that accessory. In the Gannon Dunkerley case [1954] 5 S.T.C. 216,

this Court held that in the case of a chattel which has to be produced by the supply of labour and work of the contractor and also by the supply of

materials necessary for producing the thing, when the property in the larger corpus passes to the other party, the contract is one for the supply of

the larger chattel, and that there is no contract for the sale or purchase of the component materials separatim. In the instant case there is no

question of the transfer of property in the larger corpus, viz., car, as the car belonged to the customer. The contract was to execute works on the

car of the customer, and in the course of such repairs certain new accessories or parts had to be put in. There is no doubt that the property in

those materials would eventually pass to the customer, but the question would be whether the agreement between the parties was that such parts

should be treated as sold separatim or were they merely supplied in the course of carrying out a works contract of repair and charged as such.

We are of the opinion that this statement of the law directly applies here. In the instant case the contract was to execute works on the site of

the sugar factory and in the course of such work, steel materials, fabricated and otherwise, have to be put in and the property in those materials

would pass to the employer only after they are fastened to the site and the erection work is complete.

In this connection we may also refer to the decision in Seath v. Moore (1886) 11 App. Cas. 350 in which the question arose whether the

materials manufactured and provided by a certain ship-builder, whether wholly or partially finished, could be regarded as appropriated to the

contract or are sold before they were actually affixed and formed part of the ship. The argument on behalf of the shipowner, i.e., the person who

bargained for the building of the ship, was that as and when the parts were manufactured they vested in him and became his property whenever he

made payment to the account of the price such as they considered proportionate to its value. The House of Lords negatived that contention and

held that the property of that part of an unfinished ship which had not been actually constructed could not be held to have passed to the purchaser.

Lord Watson observed at page 381 as follows:--

There is another principle which appears to me to be deducible from these authorities and to, be in itself sound, and that is, that materials provided

by the builder and portions of the fabric, whether wholly or partially finished, although intended to be used in the execution of the contract, cannot

be regarded as appropriated to the contract, or as sold, unless they have been affixed to or in a reasonable sense made part of the corpus. That

appears to me to have been matter of direct decision by the Court of Exchequer Chamber in Wood v. Bell (1856) 6 E. & B. 355. In Woods v.

Russell 5 B. & Al. 942, the property of a rudder and some cordage which the builder had bought for the ship was held to have passed in property

to the purchaser as an accessory of the vessel; but that decision was questioned by Lord Chief Justice Jervis, delivering the judgment of the Court

in Wood v. Bell (1856) 6 E. & B. 355 who stated that the real question to be ''what is the ship, not what is meant for the ship'' and that only the

things can pass with the ship ''which have been fitted to the ship and have once formed part of her, although afterwards removed for convenience''.

I assent to that rule, which appears to me to be in accordance with the decision of the Court of Exchequer in Tripp v. Armilage (1839) 4 M. & W.

687.

As observed in that case we held the ""parties never intended nor agreed that the contract work so far as then completed and existing in form a

specifica should be sold to the purchaser"" as on the dates of the several dates of payments.

This question as to how far goods which are manufactured in the progress of a work could be regarded as appropriated to the contract and

sold thereunder again came up for consideration in Reid v. Macbeth & Gray [1904] A.C. 223. In that case the manufacturers of a ship had

prepared some of the parts of the ship, and before the ship was completed the ship-builders became bankrupt and the question arose whether the

parts manufactured could be regarded as assets of the bankrupt or assets in which the property in the goods had passed to the other party who

had stipulated for the purchase of the ship. The House of Lords followed Seath v. Moore (1886) 11 App. Cas. 350 and held that there was no

sale at all of those materials as distinguished from a contract of sale of the ship, and that there was no acceptance of those materials in any sense as

a purchaser. Lord Davey, stated the legal position thus at page 232:

My Lords, it seems to me that those sections have no application whatever to the case before your Lordships, for the simple reason, which was

mentioned by my noble and learned friend on the Woolsack, that here, there was no contract for purchase of these materials. The learned counsel,

and also the learned Judges in the Court below seem to me to have proceeded on the supposition or hypothesis that this contract contained, not

only a contract for the purchase of the ship but a separate contract for the purchase of the materials also; and that seems to me to be a complete

fallacy. There is only one contract--a contract for the purchase of the ship. There is no contract for the sale or purchase of these materials

separatim; and unless you can find a contract for the sale of these chattels within the meaning of the Sale of Goods Act, it appears to me that the

sections of that Act have no application whatever to the case.

It is unnecessary to refer to other cases, and it is sufficient to refer to the decision of the Supreme Court in Carl Still g.m.b. H. v. State of Bihar

[1961] 12 S.T.C.449 as the contract involved and the facts of that case bear close resemblance to the instant case. In that case, the contractor

agreed to set up a complete coke oven battery and by-products plants according to the specifications given by the customer. The installation was

to be made at the site of the owner, and the contractor was to erect and construct buildings and plants and machineries and deliver and supply

accessories and articles from Germany and also locally from India and rendering service fully described in the agreement for an all inclusive price of

Rs. 2,31,50,000. The Supreme Court held that on a true construction of the contract, it was not a combination of two distinct agreements, one to

sell materials and the other to supply labour and services, but it was one agreement, entire and indivisible, for execution of the works for an all

inclusive price.

In this connection it may be noticed that the learned Judges applied the principle of an earlier decision of the Supreme Court in Peare Lal Hari

Singh v. Stale of Punjab [1958] 9 S.T.C. 412 relating to a military engineering contract for the construction of certain buildings known as ""Married

Accommodation"" at Ambala Cantonment. There the Supreme Court took the view that the provision ""that all stores and materials brought to the

site by the contractor shall become and remain the property of the Government"", thereby vesting the materials in the Government, should not be

regarded as decisive of the question that the contract is a contract for the sale of goods, and that even if there should be any such provision, the

true meaning and effect of that provision should be ascertained with reference to the other clauses of the contract. We, therefore, hold that this item

of Rs. 3,26,075.20 nP. should be deleted from the assessable turnover.

We shall now pass on to the second item in dispute, namely, Rs. 43,349.05 nP., moneys received by the petitioner for the fabrication and

installation of bottle cooling equipment at the hotel premises of its customer. We are free to confess that this portion of the case gave us some

difficulty, as the dividing line is not clear-cut and there is considerable overlapping of the incidents of a works contract and a sale of goods. But

after a careful consideration of all the relevant aspects of the matter, we are of opinion that the assessee''s claim should be upheld. In determining

the true character of the transaction in question, it must be borne in mind that the petitioner does not sell in the course of business a bottle-cooler as

a finished product, like a refrigerator. No customer entering the place of business of the petitioner can ask for the sale of a bottle-cooler equipment

across the counter. The customer desiring such an equipment has got to place an order and the petitioner manufactures and fabricates the

component parts according to the requirements and specifications of the customer, despatches those component parts to the site and installs the

same on a suitable base and foundation. As we will presently show the work done by the assessee at the premises of the customer while the

bottle-cooler equipment is installed is of equal importance and significance as the fabrication and supply of the component parts. It can by no

means be said that the installation of the cooler equipment in the premises of the customer is merely auxiliary or mechanical or incidental, and that

the predominant part of the contract relates only to the supply of the equipment. The terms of the contract and the affidavit filed by the assistant to

the petitioner clearly show that the skill and labour employed by the specialist engineers of the petitioner-company both while manufacturing and

fabricating the component parts as well as during the installation of the unit play a predominant part in the transaction. We may now extract one

sample of an order placed by a customer with the petitioner-company, as well as the report of the assistant at the time of the installation of the

equipment. The sample of an order is as follows:

713/58-FW(C) 6/58,

29th November, 1957.

B. Govinda Rao Esq.,

Proprietor,

Sri Gajanana Restaurant,

Bus Stand, Hospet.

Your order placed with our Mr. V. K. Visweswaran on 20th October,1957.

Rupees four thousand six hundred and twenty four only.

Despatched by goods train to Hospet Railway Station, R/R. No. 057537 of 23rd November, 1957, together with a B/E for Rs. 2,000 sent thro:

The Canara Industrial and Banking Syndicate Ltd., Hospet, for collection.

Your Advance Rs. 2,624-00 deducted.

Report of the Assistant at the time of the installation is as follows:

Work Done: Unpacked the crates of the cooler, condensing unit, etc., and found the sheet panel on the front right side of the cooler broken about

6"" square due to transhipment and reported that matter to officer.

Given instructions to carpenter and mason for erecting suitable concrete plinth for the unit, etc., placed the condensing unit and cooler in position

given pipe connections evacuated system allowed gas pressure, tested all joints for leaks, etc., charged oil to crank case and left the machine

working suction line throttled. Mixed and filled up master tanks with calcium chloride, while checking up cooler, compressor ceased. Removed

compressor dismantled and found one of the suction filter plate bolts slipped and fallen within the crank case, removed the damaged bolt and

refitted to the unit, evacuated and started the machine. The TMV 65 valve was developing leak at the check nut and reported to office. Replaced

one new TMV 65 valve, adjusted expansion valves, etc., loaded the cooler checked up a few cycles of operation and left the cooler in working

order.

Measurement of size panel:

P. N.--Given complete information to the client regarding handling of ice cans, cleaning and lubricating motors etc.

A perusal of the order will show that an all inclusive price is for the entire work of fabrication and installation of the equipment, and that the

order cannot be dissected as one portion comprising a contract for work and labour and another portion for a contract for the sale of goods. The

affidavit of the assistant (at page 69 of typed papers Vol. II) shows that in the first instance the petitioner fabricates a suitable mild steel brine tank

with the required number of storage sleeves according to the requirements and specifications of the customer. Then the tank after processing is

insulated with the required thickness of insulating materials mounted on a suitable reinforced wooden frame fabricated at the premises of the

petitioner; then the required size of evaporator coils are selected and they are shaped to form coils specially suitable for housing inside the tank.

After the insulation work is over a template of the top is taken and the selected top will be manufactured to cover the top of the cooler.

Required size of connections and fittings will be attached to the evaporator coils along with the suitable gasket sheets. The compressor, motor

pulley drive belt, etc., required for the installation will be selected and fitted with suitable slide rails. The insulated tank with all the component parts

as fitted above will be moved to the spot by rail or lorry. As soon as the customer makes the place of installation ready with the required electric

supply the engineer of the petitioner will take up the erection work. He selects a suitable site with a compact lay-out and arranges for the suitable

base and foundation for the cooler and the refrigerating unit. After the building work is completed the cooler and the refrigerating unit will be fixed

in their respective position.

It is unnecessary to set out the further process of the work in great detail. It is sufficient to mention that after the motor is attached and fixed the

motor will be energised to draw a vacuum in the evaporator coils. The requisite gas pressure will be applied to the coils and to the controls and

fittings installed. Thereafter the calcium chloride will be broken and the required quantity will be mixed with water to form a non-freezing brine

solution of about 1.2 density. The required quantity of brine solution will be filled into the respective section of the cooler and after this the

refrigerating unit will be started with a charge of refrigerant recommended for the unit with the suction line to the compressor throttled. The

performance of the unit will be observed till the brine temperature reaches about 500 Fahrenheit and at that stage the pressure will be checked up

and the additional gas required will be charged till the fixture temperature drops down to about 40� F . Finally the automatic control switch will

be connected to the power supply and the range and differential settings of the switch will be calibrated so as to allow the refrigerating unit to start

when the fixture temperature lowers down to the predetermined limit.

From the nature of the work as described above, it is clear that the customer who had entered into the contract to a substantial extent relies

and depends upon the skill and labour to be exercised in the manufacture and fabrication of the bottle-cooler equipment and upon the engineering

skill and labour while it is installed in the premises of the customer. It is specially designed and after the fabricated unit is taken over to the spot the

various pieces of work done through the special technical assistance of the petitioner, including the insulation of coils, etc., make the position clear

that an overall view of the contract is one for execution of work. This is certainly not a case where Richardson & Cruddas, Ltd., could pick up the

various pieces of the component parts either from its own stock or from the ready market and just put them together and leave it at the customer''s

premises. Further as observed earlier, this cooler equipment is not available for sale across the counter, and a customer cannot take delivery and

begin working it by simply switching the plug or switch as in the case of refrigerators or frigidaires.

The learned Additional Government Pleader contended that the principles which are applicable to works contracts like construction of

buildings and erection of heavy steel structures which are fastened to the land would not apply to contracts of sale of a chattel. He urged that the

case of a contract of the sale of a chattel should not be viewed as a contract for works merely because a particular chattel is manufactured by the

dealer according to the special specifications and requirements of a customer. By way of illustrative instances he referred to the case of a customer

entering a shoe-mart and placing an order for a particular pattern of shoe, or a customer entering a shop where ready-made garments are sold and

ordering a particular pattern of dress, say a dinner suit, or the case of a customer walking into a furniture mart and ordering a particular pattern of

furniture for his drawing room. He urged that even though in all these cases a high degree of skill and craftsmanship goes into the manufacture or

the making of the chattel in question nobody would regard these contracts as works contracts. He also urged that in the case of refrigerating units,

or bottle-cooler units, services that are rendered at the premises of the customer by the dealer concerned are merely to assure and satisfy the

customer that the particular unit has been supplied in a perfect working condition and that such auxiliary services are also rendered oftentimes with

a view to please the customer and maintain the trade. He, therefore, urged that either the fact that the chattel is manufactured upon a special order

with particular specifications or that some incidental or auxiliary services are rendered while installing or fixing the same should not make the

contract any-the-less a contract for the sale of goods, on the ground that the predominant idea is a sale, the transfer of property, and the use of

skill and labour is an incidental and subordinate element. He also drew our attention to the following observations of the Allahabad High Court in

Commissioner of Sales Tax v. Haji Abdul Majid & Sons [1963] 14 S.T.C. 435 :

If a customer purchases an article from an assessee with the stipulation that the assessee will do some work to it, or in relation to it, in order to

make it usable or secure, it is a case of sale even though the assessee has to do some labour and skill. For example, if a customer buys a

refrigerator or a radio from an assessee on condition that he will install or fix it in the customer''s premises, the element of transfer of property in the

refrigerator or radio far predominates over the element of labour and skill and one would have no hesitation in saying that it is a case of sale and

not of contract of work. The assessee has, when fixing the price of the refrigerator or radio, taken into consideration the labour and skill that he will

have to use in fixing or installing it. The contract is one indivisible contract because the price of the refrigerator or radio was not separated from the

charges of fixing or installing it.

He also placed considerable reliance on the observations in a Bench decision of this Court in State of Madras v. Voltas Ltd. (I Voltas case)

[1963] 14 S.T.C. 446

An examination of both the contract and the note clearly indicates that this is not analogous to a case where a dealer in refrigerating machinery

supplies a self-contained unit for the purpose of air-conditioning one or more rooms. Where such air-conditioning on a small scale is called for,

there are units indicated as 1 ton , 2 tons, etc., upto 5 tons, which can, without modification air-condition spaces of limited area and volume.

Provision of such air-conditioning calls for nothing more than making the room more or less air-tight and fixing the unit in question to a window or

other aperture and sealing off any draught of air except through the air-conditioning apparatus. Had it been a case of a dealer supplying air-

conditioning units of that type in large numbers to air-condition individual rooms even of a large building, it might perhaps follow that what was

really involved was a sale of the air-conditioning unit, though certain charges might be levied for the purpose of fixing the unit.

We are free to confess that there is some force in this argument and as we prefaced, the dividing line is rather difficult to draw in cases relating

to chattels.

We are of opinion that the instant case is governed by the principle of the Bench decision already referred to, i.e., State of Madras v. Voltas

Ltd [1963] 14 S.T.C. 446 at p. 449), as well as State of Madras v. Voltas Ltd. No. 2 [1963] 14 S.T.C 861. The latter case dealt with a

particular variety of air-conditioning unit installed in the business premises and the nature of the work is set out at page 864. We are of opinion that

the instant case is a fortiori one as the nature of the engineering work and skill involved is far greater and more significant than in the case in State of

Madras v. Voltas Ltd. No. 2 [1963] 14 S.T.C 861.

In this connection we may first refer to the statement of the law in Benjamin on Sale, 8th edition, pages 167-168:

Where a contract is made to furnish a machine or a movable thing of any kind, and before the property in it passes, to fix it to land or to another

chattel, it is not a contract for the sale of goods. In such contracts the intention is plainly not to make a sale of movables, as such, but to improve

the land or other chattel, as the case may be, the consideration to be paid to the workman is not for a transfer of chattels, but for work and labour

done and materials furnished. The authorities which have been considered appear to support the following propositions:--

A contract whereby a chattel is to be made and affixed by the workman to land or to another chattel before the property therein is to pass, is

not a contract of sale, but a contract for work, labour and materials, for the contract does not contemplate the delivery of a chattel as such.

When a chattel is to be made and ultimately delivered by a workman to his employer, the question whether the contract is one of sale or of a

bailment for work to be done depends upon whether previously to the completion of the chattel the property in its materials was vested in the

workman or in his employer. If the intention and result of the contract is to transfer for a price property in which the transferee had no previous

property then the contract is a contract of sale. Where, however, the passing of property is merely ancillary to the contract for the performance of

work such a contract does not thereby become a contract of sale .

In 77 Corpus Juris Secundum, the law is stated in the following terms at page 585:--

The distinction has been made that, if the property is not such as the seller usually has on hand for sale and in existence at the time of the sale, but is

made specially for the buyer and on his special order, the contract is one for work and labour, and not of sale; but that if the property ordered is

exactly such as the seller makes and keeps on hand for sale to anyone, and no change or modification of it is made at the buyer''s request, it is a

contract of sale, even though it may be entirely made after, and in consequence of, the buyer''s order for it.... A contract to furnish a movable thing

and affix it to the freehold is not a contract for the sale of goods, but one to furnish materials and affix them to the freehold by work and labour,

and, until the materials are affixed, title to the materials does not pass.

The following foot-note referring to the case of Crystal Recreation v. Seattle Ass''n of Credit Men 209 Pac. Rep. (Second Series) 358, is of

great relevance to the instant case:

(2) Contract whereby contractor agreed to construct and install fixtures and equipment for a restaurant to be operated by owner, which fixtures

were to be specially constructed and were adapted to a particular location, was a contract for work, labour and materials, and not a contract for

the sale of future goods within the Uniform Sales Act.... Auto trailer: Where plaintiff agreed to construct automobile trailer for defendant, on

chassis, frame and wheels furnished by defendant, to be used in his business, and where trailer as agreed to be made was not saleable in usual

course of plaintiff''s business contract was one for work, labour, and materials, and not one of sale, and rights, remedies, and liabilities of parties

were determined by their agreement--Sidney Stevens Implement Co. v. Hintze 67 Pac. Rep. (Second Series) 632.

In 37 Corpus Juris Secundum, Section 141 , pages 627-628, the 141distinction between a works contract and a contract for sale of goods is

dealt with from which it will be clear that if the goods are to be manufactured by the seller, specially for the buyer, and they are not suitable for sale

to others in the ordinary course of the seller''s business the contract is to be construed as a works contract.

We think that the instant case is clearly governed by the principle of the oft-quoted case of Clark v. Bulmer 152 E. R. 793; 11 M. & W. 243.

In that case the plaintiff, a dealer contracted to build an engine of a specific horse-power for a particular sum, the engine to be completed and fixed

in the defendant''s colliery, and it appeared that the plaintiff constructed the different parts of the engine at his factory and sent those component

parts at different intervals to the defendant''s colliery where they were fixed piece-meal and made into an engine. It was held that the plaintiff cannot

recover the amount as in an action for sale of goods but his remedy was only an assumpsit for work and labour for erecting and constructing an

engine. The argument of the counsel in that case on behalf of the plaintiff may be extracted as that tersely and fully brings out the points of view

pressed by the learned Additional Government Pleader in this case:

There is therefore a price fixed, and as soon as it is finished, there is a chattel for which the price is to be paid. This is not an engine until it is put

together, which done at the defendant''s colliery. An engine of this nature is never sent out as a whole, but in parts, which are afterwards put up

together in the spot where it is to be used. The plaintiffs contract to build an engine to be completed and fixed; but it is not an engine until it is

completed and fixed.... But he cannot maintain an action for work and labour, because his labour was bestowed on his own materials, and for

himself, and not for the person who employed him. Here is a chattel to which everything that is to be done for it to render it complete is to be done

by the plaintiffs, cost what it may, and they cannot maintain an action for work and labour, because it is employed on their own materials. It is not

work done for the defendants, but for themselves, the plaintiffs, until the thing contracted for is completed. The contract was for an engine--not for

the several parts but the whole. Fixing is as much a part of the engine as putting in the first screw; and it is not a main engine until it is fixed and put

up fit for work.

Parke, B., dismissing the plaintiffs'' action holding that the plaintiffs'' claim should be a claim for work and labour observed as follows at page

796:

Whenever a simple contract is executed, and terminates in a debt, which it is the duty of the defendant to pay, instanter, it is no doubt the subject

of an indebitatus count; but the executed contract must be described properly; and the question here is, whether it is proper to describe this as a

debt for a main engine or goods sold and delivered. We think not. The engine was not contracted for to be delivered, or delivered as an engine, in

its complete state, and afterwards affixed to the freehold; there was no sale of it, as an entire chattel, and delivery in that character; and therefore it

could not be treated as an engine sold and delivered. Nor could the different parts of it which were used in the construction, and from time to time

fixed to the freehold, and therefore became part of it, be deemed goods sold and delivered, for there was no contract for the sale of them as

movable goods; the contract was in effect that the plaintiff was to select materials, make them into parts of an engine, carry them to a particular

place, and put them together, and fix parts to the soil, and so convert them into a fixed engine on the land itself, so as to pump water out of a mine.

We think it unnecessary to refer to any further cases. We are of opinion that the special features and the incidents in this contract are such that

it should be regarded as a works contract. We, there fore, uphold the claim of the assessee-petitioner with regard to this item.

42.As regards the third item, the learned Additional Government Pleader fairly conceded that in view of the judgment of the Supreme Court in

Mathra Parshad & Sons v. State of Punjab [1962] 13 S.T.C. 180, the claim will have to be allowed even though the amendment that a dealer is

not bound to pay sales tax upon sales tax collected by him came in the middle of the year. In view of this, the claim of the assessee also should be

upheld.

We, therefore, allow the tax revision case. No costs.