Bombay High Court
M/S Bharat Heavy Electricals Ltd vs The State Of Maharashtra on 20 December, 2017
Bench: A. K. Menon
STRL-10-2005
rrpillai
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
SALES TAX REFERENCE (L) NO. 10 OF 2005
WITH
SALES TAX REFERENCE NO. 35 OF 2017
M/s. Bharat Heavy Electricals Ltd. ... Applicant
vs.
The State of Maharashtra ... Respondent
Ms. Nikita Badheka a/w. Mr. Parth Badheka for the Applicant.
Mr. B. B. Sharma, Spl. Counsel a/w. Mr. Himanshu Takke, AGP for the
respondent - State.
CORAM : A.S. OKA & A.K. MENON, JJ.
RESERVED ON : 21st NOVEMBER, 2017
PRONOUNCED ON : 20th DECEMBER, 2017
JUDGMENT (PER A. K. MENON, J.)
1. This reference under Section 61 of the Bombay Sales Tax Act, 1959 has
been made by the Maharashtra Sales Tax Tribunal, Mumbai on the application
of M/s. Bharat Heavy Electricals Ltd.
2. The reference was admitted on the following question :
"Whether, on the facts and circumstances of the case and on a
true and correct interpretation of the terms and conditions agreed
between the parties as embodied in the work order dated 20-10-1978,
the Tribunal was justified in law in holding that the impugned
supplies of materials made by the Applicant's Mumbai unit to RCF of
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Mumbai, were sales of those materials liable to tax under the Bombay
Sales Tax Act, 1959?"
The facts in brief leading to the reference are as set out below.
3. The applicant is a Government of India undertaking having branches
throughout India. The applicant was duly registered under the Bombay Sales
Tax Act 1959 as well as and Central Sales Tax Act, 1956. During the period in
question M/s. Rashtriya Chemicals & Fertilizers Ltd. ("RCF") had engaged the
applicant apparently for designing, engineering, supplying, erection,
installation and Commissioning of the Trombay-V Expansion Project at RCF
site for a total price of about Rs.22 crores under a contract dated 20 th October
1978.
4. It is reported that during the period in question from 1 st April, 1979 to
31st March, 1980 the contract was performed. The Assistant Commissioner of
Sales Tax Assessment treated the transaction as a transaction of sale. The
applicant produced the relevant documents and correspondence before the
Deputy Commissioner of Sales Tax claiming that the contract was a divisible
contract for supply of labour and could not be treated as a contract for sale. It
was contended that the property in the case was not simply transferred and
delivered, but the same was erected and installed.
5. The Deputy Commissioner, however, held the transaction to be one of
sale and not of the nature of a works contract. The Sales Tax Officer levied
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penalty under Section 36(3) of the Bombay Sales Tax Act,1959 (the said Act)
apparently without giving an opportunity of being heard. It was found
although the goods were located in Maharashtra, the sales were finalised from
various other states. The Mumbai office of the applicant was required to
reflect the transaction in the returns and pay the applicable taxes. The taxes
were deposited by the applicant as and when instructions were received from
other places. The penalty levied was challenged.
6. Being aggrieved by the demand made pursuant to assessment orders
dated 16thMarch,1984 and 20thMay,1984 appeals were filed. The appeals
came to be partly allowed upon certain part payments being made. However,
not being satisfied with the partial relief granted, Second Appeals came to be
filed before the Tribunal. The Second Appeals were decided on or about 6 th
February, 1993. The main issue raised in these Second Appeals was whether
the transactions between the applicant and the RCF pursuant to the work
order dated 20th October, 1978 was a works contract transaction or a sales
transaction. If they were work contract transactions, then they would not be
liable to tax under the said Act otherwise tax was payable. The Tribunal found
that the transaction was a Sales transaction and there was clear cut break-up
therein of the total contract price of Rs. 22 crores being cost of the material,
compressors supplied and other costs of transportation. Rectification
Applications filed were rejected. Accordingly, the transaction was to be treated
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as sales liable to sales tax under the said Act. The levy of tax having been
confirmed, the applicant filed Reference Application nos. 9 and 10 of 1993
seeking to raise certain questions of law under Section 61 of the said Act.
Today the primary question we are concerned with is whether the transaction
amounted to a Sale or not. The Tribunal had held that supplies of material
were sales, liable to tax under the said Act.
7. Ms. Badheka, learned Counsel appearing on behalf of the applicant
contended that the transaction was clearly a works contract. She invited our
attention to the contract dated 20 th October, 1978 which is in the form of a
letter agreement addressed to the applicant at Hyderabad. The contract is
issued by the Fertilizer (Planning and Development) India Ltd. (FPDIL) on
behalf of RCF Ltd., Trombay V Expansion Project. The contracting parties are
therefore FPDIL and the applicant. Reference is made to the minutes of
meeting held between 24th March 1977 and 26th March, 1977, a subsequent
proposal, related correspondence and discussions. Ms. Badheka submitted that
the reading of the contract will reveal that it was for complete Design,
Engineering, Manufacture, Testing, supply, transportation to site, storage at
site, erection, testing, supply, transportation to site, storage at site, erection
and and pre-commissioning of one set each Carbon Dioxide Compressor with
Turbine, Air compressor with Turbine along with accessories and spares. She
invited our attention to the scope of the contract described in the second
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schedule of the contract viz. to adopt complete design, manufacture, testing,
supply, erection and pre-commissioning of the four compressors of certain
specifications.
8. Ms. Badheka submitted that the price payable described in the third
schedule of contract also refers to complete design, engineering, manufacture,
testing, supply, transportation to site, storage at site, erection and per-
commissioning of one each of Carbon Dioxide Gas compressor, Air
compressor, Ammonia Refrigeration compressor and Synthesis Gas
Compressor each with turbine and other accessories for a sum of Rs.22 crores.
Ms. Badheka submitted that only Central Sales Tax was payable on prices of
certain equipment described in first schedule. She further submitted that it
would be improper to consider the contract as one of sale and the contract
was in fact for design, erection and commissioning of the plant, hence not
susceptible to payment of tax under the Bombay Sales Tax. She therefore
submitted that the question referred may be answered in the negative in
favour of the applicant assessee and against the revenue.
9. In the course of submissions Ms. Badheka relied upon the following
judgments in support of the Applicants case:
(i) Commissioner of Sales Tax vs. Steel Plant Pvt. Ltd. 1
(ii) Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v.
Commissioner of Sales Tax 2
1 99 STC 532 (BOM)
2 [1978] 42 STC 409
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(iii) Ramsingh & Sons Engineering Works v. Commissioner of Sales Tax,
U.P.3
(iv) Kone Elevator India Pvt. Ltd. vs. State of Tamil Nadu and Others4
10. Mr Sharma, learned Counsel appearing on behalf of the respondent
submitted that the applicant's contentions are flawed, inasmuch as the
transaction was essentially one of supply of equipment. The contract is clearly
mentioned as a "divisible" contract. He invited our attention to the Work
Order dated 20th October, 1978 which clearly makes reference to the word
"divisible works contract". Mr.Sharma pointed out that the description of
complete designing, engineering, manufacturing, testing, supplying,
transportation work were secondary and in fact the transaction involved sale
of relevant equipment.
11. In the first schedule to the agreement Mr. Sharma invited our attention
to the definition of "equipment". In the second schedule he referred to clause
2.2.1 with regard to supply of equipment under the contract. As also clause
2.9.0 deals with final acceptance. He submitted that the contract read as a
whole will be one that which is essentially one of supply and installation.
Given that meaning and intention the contract has been described as
"divisible works contract", firstly for supply of parts being the main
transaction and secondly for erection and commission of equipment.
3 1979 SCR (2) 621
4 [2014] 71 VST (SC)
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12. Mr. Sharma had invited our attention to the definition of "equipment"
on the site in clause 2.2.1 and 2.9.1. We have since perused the entire
contract and found that there is scope of the contract which is restricted to
four different processes each of them complete with drive turbine, accessories
and spares. The scope of contract also includes provision of certain data
sheets. The works contracts requires the contractors i.e. the applicants to
furnish all documents drawings, test certificates and manuals as seen from
clause 2.5.1. The contractor is also required to furnish the Civil design data to
enable FPDIL to design the foundation. Thus it is clear that the foundation is
being carried out by FPDIL and not the applicant. He therefore submitted that
the question be answered in the affirmative.
13. We have heard counsel at considerable length and with their assistance
scrutinised the impugned order and the contractual provisions. At the outset
we will deal with the contractual provisions since it these provisions that will
determine the factual aspects of the nature of the contract and parties
obligations thereunder. The relevant provisions are as set out hereafter;
(A) Clause 2.6.1. envisages import license for import of equipment and
components and supply of the same to FPDIL against payment. The said
clause is material and is reproduced :
2.6.1. IMPORT LICENCE : Contractor shall make their own
arrangements for import license for import of equipment, and
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components and supply the same to FPDIL against rupee payment.
(B) Clause 2.8.1. provides for inspection and testing at the contractors works.
FPDIL has the right to access the contractors works for inspecting the material
and workmanship used in relation to manufacturing and testing of the
equipment.
(C ) Clause 2.9.0 talks of final acceptance which contemplates that after
erection the equipments will be tested for satisfactory Commercial running to
prove guaranteed performance for rated capacity.
(D) Under clause 2.10.0 contractor is to furnish a phased schedule for
erection of the equipment with a time bar chart for various stages. The said
clause is material and is reproduced below;
2.10.0 : Phased schedule for erection of contract
Contractor shall furnish a phased schedule for execution of the
contract giving time bar chart for various stages of manufacture,
inspection, shipping, clearance and dispatch. Contractor shall also
furnish monthly progress report to FPDIL.
It will be seen from the said clause that execution of the contract largely
involves manufacture, inspection, shipping, clearance and dispatch.
14. The third schedule deals with prices.The total price is stated as
Rs.22 crores out of which the sum of Rs.18.10 crores is the cost of
Compressors-Turbine sets including condensing system, Lube oil/Sea oil
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system, complete instrumentation, spare rotors, 2 years maintenance spares
and instrument spares, the sum of Rs.2.12 crores is cost of complete piping,
transportation, handling, insurance, erection testing and pre-commissioning is
estimated at Rs.1.78 crores. Clause 3.2 provides that Central Sales Tax is
payable extra on the prices set out at clause 3.1.0 (a & b). Thus it will be seen
that Rs.20.22 crores is only value of goods supplied the remaining 1.78 crores
includes transportation, handling, insurance, erection, testing and pre-
commissioning. We do not have the benefit of break up of Rs.1.78 crores nor
has the applicant made any attempt to disclose the same.
15. The fourth schedule deals with payment terms which includes reference
to preparation of invoices and provision of performance bond. The
requirement for preparation of invoices refers to the obligation of the
applicant to prepare item wise challan packing-wise. No reference is made to
any invoices being required to specify work to be carried out for erection of a
plant and in relation to the works contract. The Performance Bond referred
to in clause 4.5.0 also holds a contractor fully responsible for proper
workmanship and specific performance of the equipment under the contract.
No reference is made to the work to be carried out in relation to installation.
16. It is the fifth schedule that refers to the time schedule for erecting the
four compressors. As seen earlier, the foundation is to prepared by FPDIL and
not the applicant. The applicant is to supply equipment and erect it on the
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site. Work of erection is not separately valued but is tied with transportation
costs and insurance. In any event this is only a fraction of total cost of Rs.22
crores. In the circumstances, it is difficult to accept the contention of the
applicant that the contract is one of work. In value terms, we find that the
amounts spent for erection is minuscule. This notwithstanding, the
transaction seems to be for supply of the compressors at a site prepared by
FPDIL in terms of foundation and merely fixing four compressors. The fifth
schedule also provides for materials and workmanship guarantees which are
restricted to specification laid down in the contract and free from defects in
design and material in relation to equipment and not in relation to the work of
installation. Repair and replacement of the equipment is also contemplated at
site. There is nothing to indicate that the guarantees also include the entire
erection work.
17. Reference to clause 5.3.0 is material. Under the said clause the
applicant is to guarantee performance of the equipment. Said clause is
reproduced below :
5.3.0 : PERFORMANCE GUARANTEE
Contractor shall guarantee that the performance of the equipment
supplied shall be strictly in compliance with the contract specifications
and shall perform the duties specified in the contract, provided that
the equipment has been properly installed under the supervision of
contractor's personnel and has been under normal and proper use and
maintenance. Before tests are performed contractor reserve the rights
of inspection, checking for proper setting of every unit and component
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parts.
18. The sixth schedule deals exclusively with packing, marking and
despatch instructions since there is no dispute over the fact that the equipment
with the contract envisages to a large extent supply of equipment. It is not
necessary to rely upon detailed provisions of this schedule except that in
clause 2.0 we find the obligations of FPDIL which are reproduced here for
ease of reference :
2.00 FPDIL'S / OWNER'S / OBLIGATION
FPDIL/ OWNER obligations shall be limited to the following :
2.01 To make available sufficient leveled area for erection of the
contracted equipment and construction of site office / stores.
2.02 To make available bench marks, elevation and such
reference lines as may be necessary for locating equipment.
2.03 To undertake execution of all civil works.
2.04 To provide for water for drinking and construction
purposes at one point.
2.05 To supply electricity at one point near to the job site at
usual charges, as applicable to other Contractors working at Site.
2.06 To provide Crane facilities, subject to availability, usual
hire charges as applicable to other contractors. The following
capacity cranes are available.
Name of Capacity With normal Capacity With
Crane Boom Length Boom Maximum
Capacity Boom length Capacity length Boom
(Tonnes) (FT) (Tons) length (FT)
2. 22 RB 16 30 11/2 70+30 (Jib)
fixed boom
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2.07 To make available medical facilities at owner's hospital for
the Contractor's staff/labour to the extent available at usual
charges.
19. Now coming to the case law cited by Ms. Badheka in Steel Plant Pvt.
Ltd.(supra), this Court considered the scope of contract between assessee and
the Bombay Municipal Corporation as a contract for work and labour and not
a contract for sale. The court had found that the taxing authority had failed to
establish that the contract in question involved sales of machinery and
equipment and that the mere fact that provision had been made for payment
of sales tax on value of machinery cannot convert a works contract into a sales
transaction. This observation was made in the context of the fact that the
revenue had relied upon the bill of quantity which formed part of the contract
wherein there was specific mentioning of general sales tax leviable on the
value of machinery required for erection of the plant and which was a subject
matter of the contract. The Court did not choose to rely upon the bill of
quantities to conclude that it was a contract of sale and also observed that the
burden of proving that a work contract involved physical sale of material is
upon the revenue and that such burden cannot be discharged merely by
showing that the property could be so transferred to the other party.
20. In the case of Sentinel Rolling Shutters & Engineering Company Pvt. Ltd.
(supra), the contract was a contract for work and not a contract of sale. The
question referred by the Tribunal was answered in favour of the assessee and
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in the course of rendering the said decision, the Supreme Court found that the
contract in that case was one for installing rolling shutters. Rolling Shutters
came into existence in a unit when component parts were fixed in position at
location and laying property of the customer as soon as came into being.
There was no transfer of property in the rolling shutter by the manufacturer as
in a chattel. It was essentially found to be a transaction for fabricating
component parts and fixing them on the rails so as to constitute a rolling
shutter. Thus it was found that the contract was a contract for work and
labour and not a contract of sale. It was also found that the masonry work
required to be carried out before and after erection was to be carried out by
the customer at his own costs.
21. In the case of Ramsingh & Sons Engineering Works (supra), the Court
went on to examine how the erection of the crane was carried out in a step by
step process. Each column has to be placed on a grouted foundation, seven
feet deep. The column thus becomes permanently fixed to the earth and rose
to about 40 feet made in three or four pieces joined together with nuts and
bolts at the time of erection. The Court examined in great detail the process
by which the crane was set up, all of which indicated that the process is
certainly not one which could have been described as a mere sale of a crane.
22. In Sentinel Rolling Shutters (supra) in which the Apex Court observed
that fabrication and erection is one indivisible process. In that case the
process of assembling and erection was found to require high degree of skill
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and it was not a contract of sale, since it had involved a three motion
electrical overhead traveling crane. The Court found similarity between the
decision of Sentinel Rolling Shutters (supra) and the facts in Ramsingh & Sons
Engineering Works (supra). It was found that the Indian Standard Institution
publication laying down the code of practice for design of overhead traveling
Cranes shows that a three motion electrical overhead traveling crane consists
of 44 main component parts and it is only when they are put together and
assembled at the site they assume the shape of a crane. Hence it was found
that the contract was one of indivisible kind. Fabrication and erection
involved one indivisible process.
23. In the instant case when we examine the facts and the document on
record before the Tribunal we have the benefit of perusing the following
invoices which are annexed at Exhibit-J to the Reference:
Invoice/Debit Note No. Work Order No. Billing advice No. Amount
and date Rs.
HY-XX-05-9-2069 1-0-465-805-71 1694 /2.1.80 4,69,080.00
HY-XX-05-9-2068 1-0-557-504-71 1695/2.1.80 4,80,546.40
HY-XX-07-9-2235 1-2-477-515-03 1853/24.1.80 12,17,840.00
HY-XX-07-9-2234 1-2-465-515-02 1854/24.1.80 2,39,304.00
HY-XX-07-9-2233 1-2-463-515-02 1855/24.1.80 4,70,704.00
HY-XX-07-9-2232 1-2-467-515-03 1856/24.1.80 2,39,096.00
Apart from these documents nothing else is placed before the Tribunal which
will help us to analyse the transactions as already stated.
24. Ms. Badheka had also relied upon a recent decision of the Supreme
Court in the case of Kone Elevator India Pvt. Ltd.(supra). The issue involved
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was whether a contract for manufacture, supply and installation of lift is a
works contract and not a contract of sale. It was held by the majority
judgment that a contract for manufacture, supply and installation of lift is a
works contract and not a contract for sale. The judgment deals with the fact
that the lift has to be understood in the conceptual context of the manufacture
of components such as the lift car, motor, ropes, rails etc. having their own
identity prior to installation and without which installation lift cannot be
mechanically functional because it is a permanent fixture of the building and
installation of a lift in building cannot be regarded as transfer of a chattel or
goods but composite contract.
25. Kone Elevator (supra) deals with a composite contract for the purchase
and installation of the lift and the various technical aspects that go into the
installation of the lift including the obvious labour and service elements. The
Court considered the concept of "works contract" and held that a works
contract is an indivisible contract but, by legal fiction it is divided into two
parts one for sale of goods, and other for supply of labour and services.
Secondly "Dominant nature tests" or "degree of intention tests" or the
"Overwhelming component tests" [See paragraph 44 of Kone Elevator
(Supra)] require to be administered before treating the contract as a works
contract. Thirdly it holds that the term "works contract" as used in clause 29A
of Article 366 of the Constitution takes in its sweep all genre of works
contracts and is not to be narrowly construed to cover one species of contract
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to provide for labour and services of work and lastly once the characteristics of
work contract are met in a contract entered into between the parties, any
additional obligation incorporated in the contract would not change the
nature of the contract.
26. In Kone Elevator (supra) the Supreme Court has considered the issue of
re-opening of assessment and orders of assessment under challenge before
the Court were set aside and assessment which have attained finality were
treated as closed. In a dissenting judgment, in the facts of that case, it was
found that supply of lift by the assessee satisfies the definition of "Sale" under
the Sale of Goods Act and therefore does not question the deemed sale and
the entire contract should not be held to be works contract. Even after the
Constitutional amendment introducing Article 366(29A)(b), it will have to
be duly examined whether a particular contract would fall within the
expression "works contract" and only thereafter, the incidence of taxation
could be provided in the contract. It was observed that the contract must in
no uncertain terms that it was one for carrying out "the work" and the supply
of material parts. The dissenting view holds that in the facts of Kone Elevator
(supra) the contract was only for supply of lifts and other element of works
were virtually insignificant compared to the element of sale which was
paramount.
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27. In our view considering the factual matrix and the law and after
applying the tests in Kone Elevator, it is evident that in the facts of the present
case the contract was clearly one for supply and erection of equipment,
supply of equipment being dominant purpose. No doubt the State of
Maharashtra had enacted the Maharashtra Sales Tax on "Transfer" of
property of goods involved in works contract Act only in 1982 but the
contention that during the period under consideration 1979-80 and 1980-81
the State had no power to levy the tax on Works contract will not be of any
assistance to the applicant. In our view the contract in the instant case is
predominantly for supply of equipment, erection and installation. FPDIL was
required to carry out all preparation work , provide foundation, provide all
civil works required, the equipment was merely supplied and installed.
28. We also found that in the Second Appeal vide order dated 30 th March,
1998 partial relief was given while considering the applicants contention that
the transaction with RCF Limited was a works contract. It had considered the
applicants claim that the transaction with RCF was a works contract but the
applicant had not produced, at that time, a copy of the agreement or
correspondence or certificate from RCF that it is works contract. Later it was
found that upon perusal of the contract that an invoice was raised by the
appellant. The transaction entered by the applicant with RCF is one for sale
and not for works contract. While allowing the appeal party some relief was
granted in a sum of Rs.1,49,368/- balance of claim to be demanded.
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29. In Kone Elevator (supra) the Supreme Court has considered a series of
judgments including that of Sentinel Rolling Shutters (supra) and has
concluded that the question will depend upon intention of parties executing
the contract and there can be no standard formality that one can distinguish a
contract of sale from contract of work and labour. The Supreme Court also
reiterated that as held in the case of Larsen and Toubro Limited vs. State of
Karnataka5 the dominant nature of a contract must be examined. The
"dominant nature test" can be culled out in what is reproduced below :
"Whether the contract involved a dominant intention to
transfer the property in goods, in our view, is not at all material. It
is not necessary to ascertain what is the dominant intention of the
contract. Even if the dominant intention of the contract is not to
transfer the property in goods and rather it is the rendering of service
or the ultimate transaction is transfer of immovable property, then
also t is open to the States to levy sales tax on the materials used in
such contract if it otherwise has elements of works contract..."
30. The aforesaid extract read with four concepts that the Supreme Court
has identified in paragraph 44 of the Kone Elevator (supra) will help to
establish whether the contract in question is a works contract. Applying the
aforesaid tests to the facts of the case we have no hesitation in concluding that
reading the terms of the contract referred to herein above merely because
there are small element of work in the contract, it cannot be concluded that
the contract in the present case is a works contract. It is essentially a contract
5 [2013] 65 VST 1 (SC)
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for supply of compressors and allied equipment with a minuscule amount of
work. It is also seen that the contract is itself described as a "divisible
contract".
31. Furthermore, Clause 2.00 detailing FPDIL'S / OWNER'S obligations in our
view clinches the issue inasmuch as, it is FPDIL obligation to make available
erection of the contracted equipment, make available bench marks, elevation
and reference lines for locating equipment and undertake execution of all civil
works including supply of electricity and providing crane facilities each for
hire charges. Thus this is not turnkey job for manufacturing, supplying and
erection of compressor as contended by the learned Counsel for the applicant.
In a turnkey contract, save and except the site being made available, most
other activities would have been undertaken by the contractor, but not so in
the instant case as evident from the above. This brings us to the numerous
invoices and debit notes all of which are addressed to the Finance Manager,
RCF. Invoices are drawn by the applicant. They make reference to the Work
Order and provide for supply of compressors. The prices includes Central
Sales Tax as is 4% on the compressors and spares supplied. Administering the
three tests contemplated in Kone Elevator and taking an overall yet balanced
view on facts we are unable to accept the contention of the appellant that the
contract dated 20th October, 1978 is a Works Contract.
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32. The Advanced Law Lexicon by P. Ramnatha Aiyar defines "Works
Contract" as follows : "WORKS CONTRACT" means an agreement in writing for
the execution of any work relating to construction, repair, or maintenance of any
building or superstructure, dam weir, canal, reservoir, tank, lake, road, well,
bridge, culvert, factory, workshop, powerhouse, transformers or such other works
of the State Government or public undertakings as the State Government may by
notification, specify in this behalf at any of its stages, entered into by the State
Government or by an official of the State Government or public undertaking or
its official for and on behalf of such public undertaking and includes an
agreement for the supply of goods or material and all other matters relating to
execution of any of the said works. It also refers to the phrase "Work Contract"
as including a contract for sale of goods involved in the works contract.
Applying the aforesaid definition to the facts of the present case, in our view,
it is not possible to hold that contract in the case at hand would amount to a
Works Contract.
33. Furthermore in Rainbow Colour Lab and Another vs. State of M. P.
and Others6 the Supreme Court had occasion to consider whether the State
can divide works contract into a contract for Sale of Goods and Contract for
supply of labour and services and for that purpose the dominant intention was
to be ascertained. In the facts of that case it was held that prior to
amendment of Article 366 of the Constitution by the 46 th amendment State's
6 (2000) 2 SCC 385
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could divide works contract into a contract for sale of goods involved contract
for labour supply and service. For that purpose the dominant intention of the
works contract should be transfer of property. The 46 th amendment permitted
the States to divide the Works Contract into two contracts by legal fiction,
one a contract for sale and other for supply of labour and services. The
division of the contract could be made only if the works contract involved
dominant intention of transfer of property but not a contract where the
transfer of property takes effect as incidental to the contract of service.
34. Although in Rainbow (Supra) it was held that the State cannot impose
sales tax on the works contract simpliciter in the guise of an expanded
definition found in Article 366 [29-A](b) read with Section 2(n) of the M.P.
General Sales Tax Act, 1959, in the instant case, even assuming a contract was
a works contract, we are of the view that the labour element was only
incidental. The contract is itself described as a divisible contract. The
intention of parties as derived from the diverse contractual provisions set out
above leaves us in no manner of doubt that the contract in question was not a
works contract but the dominant intention was of sale of equipment. Having
reached that conclusion the question referred for our opinion is answered in
the affirmative, in favour of the revenue and against the appellants with
consequences to follow.
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35. In the result, the following order must follow :
(i) The question referred to this Court is answered in the
affirmative, in favour of the revenue and against the assessee.
(ii) No order as to costs.
(A.K. MENON, J.) (A.S. OKA, J.)
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