Steel Pipes and Fabrication Works vs State of Gujarat

C.V. Jani, J.—The Gujarat Sales Tax Tribunal, Ahmedabad, has referred the following questions for the decision of this Court u/s 69 of the

Gujarat Sales Tax Act, 1969, hereinafter, referred to as ""the Act"" :

(1) Whether, on the facts and in the circumstances of the case and on the interpretation of the agreement and terms and conditions thereunder, the

Tribunal erred in law in holding that the supply of pre-stressed concrete cement poles by the applicant to the Gujarat Electricity Board would

amount to sale of such poles by the applicant to the Gujarat Electricity Board ?

(2) If the answer to the above question is in the negative, whether on the facts and in the circumstances of the case, the Tribunal erred in holding

that the amount of sale price to be determined for such sale would be the amount charged for at the price fixed for the poles as a unit and not the

amount of net realisation which remained after adjustment of the value of cement and steel supplied by the Gujarat Electricity Board ?

These questions arise in the background of the following facts :

(i) The applicant, M/s. Steel Pipes & Fabrication Works, is a dealer registered under the Act, manufacturing and selling articles of cement, mainly

pre-stressed concrete cement poles. It entered into a written contract with the Gujarat Electricity Board (hereinafter referred to as ""GEB"" for

short) under which it was required to manufacture and supply poles out of cement and steel supplied by the GEB. The contract appears to have

been contained in a booklet issued by GEB on ""Tender and contract for works"" as well as the works order dated July 1, 1977, placed by GEB

along with Schedules A and B thereto. The booklet containing the tender form submitted by the applicant is not on the record of this reference.

The applicant had to purchase minor materials like sand, grit, kapachi and to supply labour, machinery, tools, equipment, etc., for manufacturing

and supplying cement poles as per specifications.

(ii) While assessing the applicant for the years 1977-78, 1978-79 and 1979-80, the Sales Tax Officer, held that the supply of cement poles to

GEB was not sale but a works contract and, therefore, the materials supplied was not liable to tax. The Assistant Commissioner of Sales Tax took

up the matter in suo motu revision u/s 67 of the Act, and after hearing the assessee, he imposed sales tax on the gross value of cement poles at the

rate of 1 per cent up to March 31, 1979 and at the rate of 3 per cent from April 1, 1979 onwards. The additional tax and penalty u/s 45(vi) of the

Act was not levied.

(iii) The applicant challenged these revisional orders before the Gujarat Sales Tax Tribunal by filing revision applications Nos. 38, 39 and 40 of

1984. The Tribunal heard and decided the revision applications by a common order dated June 28, 1985, along with second appeals filed by other

parties. The Tribunal held that supply pre-stressed concrete poles by the contractor to GEB would amount to sale of poles, and that the amount of

valuable consideration receivable for the sale of such goods was the amount charged as the price fixed per pole as a unit, and not the amount of net

realisation which remained after adjustment of the value of steel and cement supplied by the GEB. The applicant, therefore, submitted reference

applications Nos. 1, 2 and 3 of 1986 for referring the aforesaid two questions for the decision of this Court.

Before adverting to the rival submissions, it would be helpful to refer to the conclusions arrived at by the Tribunal, and the salient features of the

contract as summarised by it. The Tribunal found that -

(a) Contract is for the manufacture and supply of pre-stressed concrete poles.

(b) As per Schedule B which is a part and parcel of the contract, certain quantity of poles of particular specifications was to be supplied by the

contractor to GEB within a specified time-limit, at a particular price fixed per pole as a unit. According to ''terms of payments'', 100 per cent

payment is agreed to be made after the receipt of the goods in correct order and in good condition at site and inspection thereof duly certified by

the consignee that the goods are according to the specifications laid down in the tender, subject to the condition that cost of materials, if any, issued

by the Board will be recovered as agreed upon.

(c) As per Schedule A which also is a part and parcel of the contract, GEB was to issue particular quantity of cement and steel to the contractor at

a particular price per metric ton as a unit, for use in the manufacture of such poles. G.I. wire for earthing was of course to be supplied free of cost.

It was clarified by the applicant at the time of hearing before the Tribunal that the value of such wire was hardly Rs. 4 in the price of pole costing

more than Rs. 100 per unit.

(d) Other materials like sand, grit, kapachi, machinery, tools, equipment and labour, etc., were to be supplied by the contractor.

(e) The contractor was obliged to utilise cement and steel received by him from GEB in the manufacture of only those poles, to be supplied by him

to GEB alone. In so far as surplus material, if any, is concerned, contractor is obliged to return it to GEB only if the Board so chooses but not

otherwise. Similarly, contractor shall have to pay for the cement and steel used by him even in the manufacture of damaged or rejected poles which

GEB might refuse to accept, in accordance with the terms of the contract. It would be pertinent to note that even for G.I. wire used in

broken/rejected poles, cost would be charged at market rate plus 15 per cent supervision charges.

(f) Under various terms and conditions of contract, GEB has been empowered to exercise control and supervision over the manufacture of poles

to be supplied by the contractor to it.

(g) In the final bills prepared by the contractor initially gross amount for the supply of poles, as mentioned in Schedule B, has been charged.

Thereafter from the gross amount so charged, the amount representing the value of cement and steel received from GEB in terms of Schedule A is

deducted and the net amount remaining after such deduction is sought to be recovered by the contractor from the GEB.

The Tribunal did not accept the contention that the applicant was employed by the GEB for manufacture and supply of pre-stressed concrete

poles of particular specification out of the principal materials, namely, cement and steel entrusted to it by the GEB itself, and that the contractor

was expected only to process as such raw materials by employing labour and other minor materials, without being the owner of the principal raw

materials at any point of time, as per the specific condition contained in the contract. The Tribunal arrived at the following conclusions :

(i) The materials supplied were not without consideration.

(ii) The contractor was made liable for the payment of price of cement and steel used in making the price of rejected or damaged poles which

points to the passing of property in cement and steel to the contractor.

(iii) The predominant intention was ''sale'' even though the same was expressed in the agreement and conditions as a works contract. It was only a

case of supply of scarce or controlled commodities by the employer.

(iv) Even though it was stated that cement and steel remained the absolute property of the GEB, the Board also stated that the contractor was

responsible for the loss, destruction or deterioration of the materials supplied to him. This could be done only if the property had passed to him.

(v) What was received were cement and steel and what was supplied were poles and, therefore, the property must pass.

(vi) The condition of the material remaining absolute property of the GEB was only made for avoiding possibility of pilferage, etc. In spite of such

condition, the property should be taken as having passed to the contractor.

(vii) The use of materials in the manufacture of poles to be supplied to GEB only and to no one else and exercise of supervision and control were

also consistent with the sale contract.

(viii) The contractor was to use his own material to supply the required number of poles in case the consumption of steel or cement was likely to

exceed the specified limits due to rejected or breakage and there was also a provision of replacement of defective poles.

(ix) The treatment of supply of cement and steel being not a purchase did not alter the situation. The property in the materials could get transferred

from the GEB to the contractor even otherwise than by way of sale and purchase. This was a case of transfer of property in and delivery of the

possession of chattel as a chattel to the buyer and neither the ownership of the material nor the value of the skill and labour as compared to the

value of the material was conclusive. Therefore, the intention must be taken as transfer of property in the poles.

(x) Sales tax was stipulated to be paid discloses the intention of a sale.

(xi) The rulings of the Supreme court regarding Hindustan Aeronautics Ltd. Vs. State of Karnataka, and Hindustan Aeronautics Limited Vs. State

of Orissa, , State of Gujarat (Commissioner of Sales Tax, Ahmedabad) Vs. Variety Body Builders, and of the Bombay High Court in Kamani

Engineering [1976] 38 STC 503 (SC) , were not relevant and applicable.

These conclusions were challenged by Mr. R. D. Pathak, learned advocate, appearing for the applicant by making the following submissions :

(i) That the contract between the applicant, M/s. Steel Pipes & Federation Works and the Gujarat Electricity Board was a works contract, and

not a contract of sale, as culled out from the conditions incorporated in the order placed by the Gujarat Electricity Board with Schedules A and B

thereto. The main materials of cement and H.T. steel were to be supplied by the Electricity Board and other materials were to be procured by the

contractor at his own cost. The contractor was required to establish a pre-stressed concrete pole factory in the vicinity of area at his own cost, and

was required to make his own arrangement for the land and power and regarding the actual location of the factory, the electricity board was to be

intimated within one month from the date of the issue of the order. The contractor was not proceed with the erection of the factory until the site and

plans were approved by the GEB. The contractor was required to provide free of charge adequate space to the Board for storage of raw

materials, manufactured poles, cement, etc., and the contractor was to provide watch and ward service at his own costs. All the material supplied

to the contractor was to remain the absolute property of the GEB and could not be removed from the site of the work and any material which was

left unused was required to be returned to the Board. The contractor was to supply the plants, tools, implements, ladders, scaffolding, and minor

materials like sand, grit and kapachi in the manufacture of electric poles. All these conditions cumulatively lead to the inference that the contractor

carried out only the job work in terms of the contract and the supply of electric poles as manufactured by the contractor did not amount to sale,

subject to sales tax.

(ii) In any case, the entire gross price of the electric poles would not attract sales tax which would be leviable only on the amount of net realisation

by the contractor after adjustment of the value of cement and steel supplied by the GEB in view of the condition incorporated in the GEB''s order

to the effect that all charges like sales tax, octroi and other duty shall be borne by the contractor for all times for all items except those supplied by

the GEB. As per this condition the contractor would be liable to pay sales tax only on the minor materials supplied by the contractor.

Mr. Y. F. Mehta, learned A.G.P. appearing for the State on the other hand made the following submissions :

The material term of the contract between the parties expressed an intention to enter into the sale of electric poles to be manufactured by the

contractor out of the materials supplied by the GEB as well as the other materials bought by the contractor himself. The price agreed upon

between the parties was fixed with reference to not only the manufacture, but also for supply of the poles and at the time of delivery of the poles

the contract of sale of the poles was concluded. The prices were exclusive of sales tax or any other taxes on finished poles, and no sales tax was

payable against issue of H form by the GEB. The other conditions of the contract regarding establishing pole factory in the vicinity using minor

materials of constructional tools and plants by the contractor were neutral facts which were agreed upon by the parties in order that the poles of

satisfactory quality were supplied to the GEB. The GEB was also described as ""purchaser"" reserving the right to get supply of satisfactory poles if

the defective poles were not replaced within a period of three months. Thus, according to the Revenue sales tax was leviable on the price of poles

supplied by the applicant-contractor to the GEB and so the price of such poles would be subject to sales tax.

The Supreme Court has dealt with the difference between the contract of sale of goods and contract for work and labour in Hindustan

Aeronautics Ltd. v. State of Karnataka [1984] 55 STC 314 (Kar). It was observed that in every case the court would have to find out what was

the primary object of the transaction and the intention of the parties while entering into it. The distinction between the contract for work and a

contract for sale is a fine one. The contract of sale is a contract of which the main object is the transfer of the property in, and the delivery of the

possession of, a chattel as a chattel to the buyer. Where however, the main object of work undertaken by the payee of the price was not the

transfer of chattel qua chattel, the contract is one of work and labour. It was observed that the test would be whether or not the work and labour

bestowed end in anything that can properly become the subject of sale; and 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 was in substance, one for work and labour, or one for the sale of a chattel.

In yet another case, namely, Hindustan Aeronautics Limited v. State of Orissa [1984] 55 STC 327 (Ori), the Supreme Court again referred to the

test and observed that the primary difference between the contract for work or service, and contract for sale of goods, is that in the former there is

in the person performing or rendering service no property in the thing produced as a whole notwithstanding that a part or even the whole of

material used by him may have been his property, while in the case of a contract for sale, the thing produced as a whole has individual existence as

the sole property of the party who produced it some time before delivery and the property therein passes only under the contract relating thereto to

the other party for price. In the facts of the case, it was held that the manufacturing programme of MIG engines for sending it to Indian Air Force

as per the instructions from the Ministry of Defence regarding which the appellant received payment from the Indian Air Force, did not involve sale

of such engines.

In Commissioner of Sales Tax v. Sabarmati Reti Udyog Sahakari Mandali Ltd.1976] 38 STC 203, the Supreme Court was concerned with the

question whether the manufacture and supply of kiln-burnt bricks to the Public Works Department of the Government of Gujarat, was a contract

of sale or a works contract. The nature of the work was described as ""manufacturing and supplying kiln-burnt bricks for construction"". The

following terms of the contract, inter alia, were taken into consideration. The assessee was bound to complete the work and supply the materials at

the rates mentioned in the contract. All rates quoted by the assessee were inclusive of sales tax and the assessee was liable to pay the same

himself. All the necessary arrangement of raw materials, equipment, water, coal, labour, etc., needed for supply and manufacture of bricks was

required to be made by the assessee at his own cost. The Government was expected to give land for excavating soil free of rent, and the land was

to be handed over back to the Government after manufacturing of the brick work was completed. The assessee had no right to sell bricks, or any

other materials manufactured to any other private parties. On the question whether supplies of bricks by the assessee to the Public Works

Department were sales or works contract, the Deputy Commissioner and, in appeal, the Tribunal came to the conclusion that the supplies of bricks

were sales. But the High Court on a reference, held that the transaction was a works contract. In appeal by special leave taken by the Revenue,

the Supreme Court held that the contract was a contract of sale, and not a works contract, and the assessee was liable to sales tax. It was

observed that the terms regarding supervision of work, restriction on employment, labour welfare provision, non-payment of royalty, manner of

execution of work related to a stage in the process of proper and efficient manufacturing of bricks and they were not inconsistent in a contract of

sale. The Government in its overall interest and anxiety for general welfare will insist on compliance with certain beneficial legal measures. The

aforesaid features did not negate the concept of contract of sale of the bricks that are ultimately manufactured, and the true test was whether in

making the contract brick produced was transferred as a chattel for consideration, and the essence of the contract was delivery of bricks after

manufacture.

We, therefore, examine the terms and conditions of the contract so far as they appear in the record of this reference. The contract between the

parties was specifically described as a contract for manufacture and supply of pre-stressed concrete poles. As per Schedule A to the works order,

GEB was to issue particular quantity of cement and steel to the contractor at particular rates and the empty cement bags were to be returned by

the contractor in serviceable condition after the purpose was served. Reference to the term ""rates"" containing in Schedule A merely indicates the

intention to charge for cement and steel supplied to the contractor. As per Schedule B, certain number of poles of particular specifications were to

be supplied by the applicant-contractor to GEB within a specified time-limit and the price was fixed per pole as a unit. Therefore, what was

intended to be sold by the contractor to GEB was pre-stressed concrete poles at a particular price per pole. The other materials like sand, grit,

kapachi were to be supplied by the contractor who was also expected to employ its own machinery, tools, equipment and labour. So far as the

cement and steel received by the contractor from the GEB for manufacturing the poles was concerned, the contractor was obliged to use the same

only for manufacturing such poles to be supplied to GEB and not to any other party, and in so far as the surplus material was concerned, the

contractor was under an obligation to return it to GEB and he was liable to pay for the cement and steel used by him in the manufacture of

damaged or rejected poles, which the GEB might refuse to accept. In the final bills, the contractor has treated the net realisation after deducting the

value of cement and steel received from GEB from the gross amount for the supply of poles, as the sale price of poles and has collected sales tax

also on that basis. Regarding sales tax there was a clear stipulation in the following terms :

The prices are exclusive of sales tax or any other tax on finished poles .......... No sales tax is payable against issue of H form by the Board.

There is, therefore, a specific condition that the prices to be quoted by the contractor would not include sales tax on finished poles, implying

thereby that the sales tax was payable on finished poles unless the GEB supplied H forms.

The aforesaid terms and conditions clearly indicate that the transaction of manufacturing and supplying concrete poles to GEB was a transaction of

sale, and not a mere works contract.

Emphasis is placed by the learned advocate for the applicant on the fact that the contractor was required to establish a factory in the vicinity of

the area at his own cost and he had to make arrangement for the land and power and also intimate the actual location of factory along with four

copies of site plants for approval of GEB within one month from the date of issue of order, and contractor was not expected to proceed with the

erection of the factory until the site and the plans relating thereto were approved by the GEB. The contractor was also expected to provide

adequate space to the GEB free of charge for strong raw materials and manufactured poles, etc., and also to supply watch and ward service at his

own costs. It was submitted that this stipulation was consistent only with a works contract and a purchaser would hardly be concerned with

location and plans of the factory for the storage of raw materials and finished products. However, as observed by the Supreme Court in the case

of Commissioner of Sales Tax, Gujarat Vs. Sabarmati Reti Udyog Sahakari Mandali Ltd., such terms and stipulations are not inconsistent in a

contract of sale, and the Government in its anxiety for general welfare and overall interest would insist on supervision and maintenance of quality of

finished goods.

Emphasis was also placed on the reference to cement and steel wire supplied by the GEB in the following terms :

All materials supplied to the contractor shall remain the absolute property of the Board, and shall on no occasion be removed from the site of the

work.

The obvious intention was to prevent pilferage of materials. The insertion of this clause in the contract, unhappy though it is, is explained by the

Tribunal by observing that the cement and steel supplied to the contractor would remain the absolute property of the Board so long as it remains

cement and steel implying thereby that once the cement and steel entered into the manufacture of concrete poles at the hands of the contractor, the

said materials lose their identity, and the new product of concrete poles become the property of the contractor to be sold to GEB at the prescribed

rate. Thus, the essence of the contract was to deliver ready-made poles to GEB at the prescribed rate. The Tribunal, therefore, rightly held that the

contract of manufacture and supply of concrete poles to GEB was a contract of sale and not a works contract.

Mr. R. D. Pathak, however, relied on the Supreme Court judgment in State of Gujarat v. Variety Body Builders [1976] 38 STC 176 (Guj) .

The respondent-contractor in that case had entered into three contracts with the Western Railway for construction of railway coaches on

underframes supplied by railway. The contractor had to supply constructional material and fittings, and also carpentry labour for equipping coaches

with electric lights, fans, switches and regulators. The contractor was to provide all essential equipment, tools and plants, for satisfactory execution

of the work, and to deliver a minimum number of two coaches per month. A question arose whether the contracts entered into by the respondent

with the railway were contracts for sale of goods or a works contract. The Gujarat High Court held that contracts were works contract. On appeal

to the Supreme Court it was held that it would be necessary for the court to find out the intention of the parties executing the contract. The intention

at the time of entering into the contract was not to transfer any completed railway coach by the contractor to the railway. The end-produce being

the railway coach, is the result of work, labour and materials of the contractor as well as of the railway under the latter''s constant supervision and

control. It was held that there was no standard formula by which one could distinguish the contract of sale from a contract of work and labour.

There may be many common features in both the contracts, some neutral in a particular contract and yet, certain quantity terms in a given case may

fortify a conclusion one way or the other. The Supreme Court after approving a passage from Halsbury''s Laws of England, and appreciating the

facts on record, found that the materials and labour were supplied by the Railways, and the railway coach when constructed would not be the

property of the contractor, which was the clinching circumstance to show that the contractor had entered into a works contract, and not a contract

to transfer the railway coach. In the present case, the facts are otherwise. The concrete poles after being manufacture, do not become the

properties of the GEB automatically. There are stipulations regarding payment of price and also stipulations prescribing the rates for supply of

cement and steel and there is also a stipulation regarding exclusion of sales tax from the price of finished poles. It cannot therefore be held that the

manufacture and supply of concrete poles to the GEB was similar to the manufacture of railway coaches on the underframes supplied by the

railway in the case of State of Gujarat (Commissioner of Sales Tax, Ahmedabad) Vs. Variety Body Builders, .

Mr. Pathak also relied on the Kerala High Court judgment in Construction Company v. State of Kerala0 [1975] 36 STC 32o (Ker). The

applicant-Construction Company which was a firm of contractors entered into an agreement with Kerala State Electricity Board for manufacture

and supply of concrete poles of different sizes. The applicant contended that the turnover pertained to the works contract which was not liable to

sales tax. The agreement provided, inter alia, that cement and rods which were the main ingredients for the manufacture of poles were to be

supplied by the Board and unused materials and empty cement bags were to be returned to the Board by the contractor. On consideration of these

terms, the Kerala High Court held that the title to the concrete poles did not vest in the applicant-contractor at any time before the delivery, and

that the poles when manufactured automatically become the property of the Board on whose behalf the work of manufacture was carried out by

the applicant. The Kerala High Court, therefore, held that the price stipulated to be paid to the petitioner was for the work that the petitioner had

undertaken to perform and not by way of sale price of the poles to be produced and delivered by the petitioner. Exactly this very result is lacking

in the instant case. The poles when manufactured do not automatically become the property of GEB. The poles have to be supplied to GEB at a

price and at the rate stipulated in the contract. The facts are, therefore, different in the present case and the result envisaged by the Kerala High

Court would have not be the result in the instant case.

The question No. 1 will, therefore, have to be answered in the negative. So far as question No. 2 is concerned, it really raises a delicate and

ticklish aspect. It is contended on behalf of the assessee that even if tax is leviable on the price of concrete poles supplied to GEB the said price

has to be determined by deducting the value of cement and steel supplied by GEB from the gross price. The Tribunal was hesitant in drawing a

logical conclusion when it observed that element of purchase of such materials like cement and steel, could perhaps be said to be absent in law and

the fact of ""non-treatment of supply of materials as a purchase of the contractor from the GEB by the taxing authority cannot affect the position of

transfer of property in the said materials from GEB to the contractor for valuable consideration"". We have held that what was sold to GEB was

concrete poles. The sale price was indicated in Schedule B to the works order which referred to the rate per pole, and at the same time, Schedule

A referred to the rates to be charged for cement and steel wire to be supplied by the GEB for which no payment was to be made at the time of

supply. Ultimately, at the time of submitting the final bills the applicant-contractor deducted the exact value of cement and steel from the gross price

at the rate stipulated in Schedule A and was paid the net price. If it is held that the materials like cement and steel were deemed to be sold to the

contractor in the manufacture of concrete poles, the question would be whether any sales tax was paid on such a sale by the seller. Apparently it

may seem that the contractor is required to pay tax on sales effected by the GEB, even though, he gets only the net realisation after deducting such

sales. This may raise equitable consideration, but so far as the questions referred to us are concerned, such an inquiry will be beyond the scope of

our consideration. Once we hold that the sales tax is leviable on the price of concrete poles supplied by the applicant to the GEB, the question of

deducting the value of cement and steel supplied by GEB cannot arise. If the applicant-contractor has any equity in his favour he may agitate the

same before the Tribunal by referring to the relevant clauses of the agreement between the parties, which are not on record before us. In law,

therefore, the question No. 2 has to be answered in the negative.

Both the questions, therefore, are answered in the negative, and against the assessee.

There will be no order as to costs in the circumstances of the case.

Reference answered in the negative.