1965 (1) TMI 44 - SC - VAT and Sales Tax

Whether a contract is one for execution of work or for performance of service or is a contract for sale of goods? Held that - Appeal dismissed. The finding that the contract as a whole is a contract for the sale of goods. Agreeing with the High Court we hold that the answer to the question referred is against the appellant. The appeal accordingly fails and is dismissed with costs. In the other two appeals relating to assessments for the quarters ending September 30 1957 and December 31 1957 the agreements are similar and these also fail and are dismissed with costs. There will be one set of hearing fee in all the three appeals.

Summary

Issues Involved:
1. Nature of Contract: Whether it is for work/service or for the sale of goods.
2. Taxability under the Orissa Sales Tax Act.
3. Interpretation of Contract Terms.
4. Transfer of Property and Risk.

Issue-Wise Detailed Analysis:

1. Nature of Contract:
The primary issue is whether the contract for constructing bus bodies on chassis supplied by the State of Orissa constitutes a contract for work/service or a contract for the sale of goods. The court emphasized that the intention of the parties, as gathered from the terms of the contract and surrounding circumstances, determines the nature of the contract. The court cited Halsbury's Laws of England, which distinguishes a contract of sale from a contract for work and labor: "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 as a chattel to the buyer."

2. Taxability under the Orissa Sales Tax Act:
The court examined whether the consideration received by the appellants for constructing bus bodies is taxable under the Orissa Sales Tax Act. It was noted that if the contract is for work/service, the consideration paid is not taxable as the State does not have the power to tax remuneration received under such contracts. The court concluded that the contract in question is for work and not a contract for sale, as the appellants were to construct bus bodies on the chassis supplied by the State, making the consideration non-taxable.

3. Interpretation of Contract Terms:
The court analyzed various clauses of the contract to determine the intention of the parties. Clauses 1 to 4 were found to be consistent with both a contract for sale and a contract for work/service. However, Clauses 5 and 6 indicated a clear intention that the contract was for work. Clause 5 imposed an obligation to carry out the work with due diligence, and Clause 6 allowed the Controller to inspect and stop work if it was unsatisfactory, which is inconsistent with a contract for the sale of goods. The court emphasized that these clauses indicate the contract was for work and not for the sale of bus bodies.

4. Transfer of Property and Risk:
The court discussed the transfer of property and risk under the contract. It was noted that the property in the bus bodies did not pass to the State until the completed vehicles were delivered. The appellants were responsible for the chassis and materials supplied until delivery, and they had to indemnify the State for any loss or damage. This responsibility indicated that the contract was for work/service. The court also mentioned that if the chassis and bus bodies were destroyed before delivery, the loss would fall on the appellants, further supporting the conclusion that the contract was for work and not for the sale of goods.

Separate Judgment by Shah, J.:
Shah, J. delivered a separate judgment, agreeing that the contract was for work/service. He emphasized that the intention of the parties was to construct bus bodies on the chassis supplied by the State, and the appellants were responsible for the chassis and materials until delivery. He concluded that the contract was for work and not for the sale of goods, making the consideration non-taxable under the Orissa Sales Tax Act.

Conclusion:
The majority opinion held that the contract was for work/service, and the consideration received by the appellants was not taxable under the Orissa Sales Tax Act. The appeals were dismissed with costs, in accordance with the majority opinion.