Distinction between contract of supply of goods and a ‘works contract’
Some contracts are for contracts for labour, work or service and not for sale of goods, though goods are used in executing the contract for labour, work or service e.g. when a contractor constructs a building, the buyer pays for cost of building which includes cost of building material, labour and other services offered by the Contractor. Property in building is passed on to buyer and there is no contract for supply of building material as such.
An air conditioner manufacturer may undertake a ‘works contract’ for designing, fitting and commissioning of air conditioning equipment. This is contract for sale of labour and material and not contract of sale. Property in air conditioning equipment passes as an incidental to the works contract. Here, there is no sale of ‘goods’. It is a ‘works contract’ and not liable to CST – State of Madras v. Voltas Ltd. (1963) 14 STC 446 and 861 (Mad HC) – also indirectly approved in Batliboi v. STO (2000) 119 STC 583 (Guj HC DB).
Laying of pipeline is yet another example of works contract, where passing of property in the pipe is incidental to works contract.
Contract on turnkey basis for laying of Pipes is a works contract – National Organic Chemicals Industries Ltd. v. State of Maharashtra (2012) 54 VST 271 (Bom HC DB).
It is difficult to establish whether a particular contract is ‘contract for work’ or ‘contract of sale’ and rigid and inflexible fast tests cannot be laid down. It depends on main object of the parties, circumstances and custom of trade. Generally, a contract of sale is a contract whose main object is the transfer of the property in, and delivery and possession of, a chattel as 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 labour and work. The aspects like ownership of material, value of skill and labour compared to value of material can be considered, but these are not conclusive. – Halsbury’s Laws of England – quoted with approval in State of Gujarat v. Variety Body Builders – AIR 1976 SC 2108 = (1976) 38 STC 176 (SC). – same view in State of Himachal Pradesh v. Associated Hotels – (1972) 29 STC 474 (SC) = AIR 1972 SC 1131 = 1972(2) SCR 937 = (1972) 1 SCC 472 * Hindustan Aeronautics Ltd. v. State of Karnataka – 55 STC 314 = (1984) 1 SCC 706 = AIR 1984 SC 744 (SC 3 member bench) * Ram Singh v. CST AIR 1979 SC 545 = 43 STC 195 (SC).
In Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = 3 STT 245 = 3 VST 95 = 145 STC 91 = 282 ITR 273 = AIR 2006 SC 1383 (SC 3 member bench), it was held that a contract has to be characterized according to dominant nature (i.e. whether sale or service). The whole contract must be treated as a sale where the dominant intention of the contract is a sale even if some incidental or ancillary services were provided and vice versa. However, dominant nature test would be irrelevant in case of deemed sale of goods under works contract [Though dominant nature is not relevant, the fact remains that contract has to be a works contract i.e. contract for work].
In Vanguard Rolling Shutters v. CST – (1977) 39 STC 372 (SC) = AIR 1977 SC 1505, it was observed that it is difficult to lay down any rule of universal application to decide whether a contract is a works contract or contract for sale of goods. If the contract is primarily for supply of materials at prices agreed and the work or service is incidental to the execution of contract, it will be contract for sale. On the other hand, where contract is primarily a contract of work and labour and materials are supplied in execution of such contract, it is a works contract.
In Hindustan Aeronautics Ltd. v. State of Orissa 55 STC 327 (SC) = (1984) 1 SCC 706 = AIR 1984 SC 744 (SC 3 members), HAL imported materials and components on behalf of Government of India and manufactured aircrafts on behalf of Government of India. The goods belonged to Government of India but were entrusted to HAL for manufacture of aircraft to be delivered to Air Force. It was held that it is a works contract. It was observed that in contract for work, person producing has no ‘property’ in the thing produced as a whole, even if part or even whole of material used by him may have been his property. In contract of sale, the thing produced as a whole has individual existence as sole property of the party who produces it some time before delivery and the property therein passes only under the contract relating thereto to the other party for a price.