CONTRACT OF WORK Vs. A CONTRACT OF SALE

[Mr. M. GOVINDARAJAN]

The Supreme Court in 'Government of Andhra Pradesh V. Guntur Tobaccos Limited' -AIR 1965 SC 1396 noted that a contract for a work in the execution of which goods are used may take one of the three following forms:

* The contract may be used for work to be done for remuneration and for supply of materials used in the execution of the works for a price;

* It may be a contract for work in which the use of materials is accessory or incidental to the execution of the work; or

* It may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous.

In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances; if it is of the first it is a composite contract for work and sale of goods. Where it is of second category, it is a contract for execution of work not involving sale of goods.

The question as to whether a contract is a contract of work or a contract of sale is the subject matter of precedents on the subject. The principles, as decided cases would show, are well defined but the application of those principles to individual cases often poses a difficulty. In determining as to whether a contract constitutes one for work or is a contract of sale, it is the dominant interest and object of the parties in entering into the contract, as evinced by the terms of the contract, the circumstances of the contract and the customs of the trade that provide a guiding indicator. The object of the parties is of necessity to be deduced from the terms of the contract.

In 'State of Punjab and Haryana V. Associated Hotels of India Limited' - AIR 1972 SC 1131 the Supreme Court held that a contract for sale is one whose main object is the transfer of property in, and the delivery of the possession of a chattel as a chattel to the buyer. Where the principal object of the work undertaken by the payee of the price is not the transfer of a chattel, the contract is one of 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 material, nor the value of the skill and labour as compared with the value of the material, is conclusive, though these circumstances may be taken into consideration in deciding whether a subsisting contract is a contract of work and labour or contract for a sale of a chattel.

In 'State of Tamil Nadu V. Anandam Viswanathan' -AIR 1989 SC 962 the contract in question involved supply and printing of question papers to universities. The assessee entered into those contracts for printing and the question involved was whether the taxable turnover for the purpose of Tamil Nadu General Sales Tax Act, 1959 would include the printing and block making charges. The Supreme Court held that the contract in question was a contract of work, having regard to the nature of the job to be done and the confidence reposed in the contractor for work to be rendered. The supply of paper was merely incidental.

In 'State of A.P. V. Kone Elevators (India) Ltd.,'-(2005) 3 SCC 389 the distinction between a contract of sale and a works contract found elaboration - "If the intention to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuance to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a 'contract of sale', the main object is the transfer of property and delivery of possession of the property, whereas the main object in a 'contract for work' is not the transfer of the property but it is one for work and labour. Another test often to be applied is - when and how the property of the dealer in such a transaction passes to the customer- is it by transfer at the time of delivery of the finished articles as a chattel or by accession during the procession of work on fusion to the moveable property of the customer? If it is the former, it is a 'sale'; if it is latter it is a 'works contract'. Therefore, in judging whether the contract is for 'sale' or for 'work and labour' the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provide a guide in deciding whether transaction is a 'sale' or a 'works contract'. Essentially, the question is of interpretation of the 'contract'. It is settled law that the substance and not the form of the contract is material in determining the nature of transaction.

In 'Hindustan Shipyard Ltd., V. State of Andhra Pradesh' - (2000) 199 STC 533, the Supreme Court held that the court may form an opinion that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the contract is the carrying out of work by bestowal of labor and services and materials are incidentally used in execution of such work then the contract is one for work and labor.

With reference to the case laws a contract for sale has hence to be distinguished from a contract of work. Whether a particular agreement falls within one or the other category depends upon the object and intent of the parties, as evidenced by the terms of the contract, the circumstances in which it was entered into and the custom of the trade. The substance of the matter and not the form is what is of importance. If a contract involves the sale of moveable property as moveable property, it would constitute a contract for sale. On the other hand if the contract primarily involves carrying on of work involving labor and service and the use of materials is incidental to the execution of the work, the contract would constitute a contract of work and labor. One of the circumstances which is of relevance is whether the article which has to be delivered has an identifiable existence prior to its delivery to the purchaser upon the payment of a price. If the article has an identifiable existence prior to its delivery to the purchaser, and when the title to the property vests with the purchaser only upon delivery, that is an important indicator to suggest that the contract is a contract for sale and not a contract for work.