T. Ramaprasada Rao, J.
1. The petitioners, the General Electric Company of India Private Ltd., are dealers in all kinds of electrical goods, and they undertake also works contracts on behalf. of others. During the year 1957-58 an overall assessment of all the transactions of the petitioners was made by the Additional Commercial Tax Officer IV, South Madras. An appeal was preferred by the petitioners against the order of the Assessing officer, in which inter alia the petitioners disputed their liability on a turnover of Its. 7,00,958-20 alleging that they constituted receipts on account of alleged works contracts. Five contracts Were in all involved. Being unsuccessful before the appellate authority, the petitioners filed an appeal before the Sales Tax Appellate Tribunal, Madras, regarding the receipts relating to the works contracts executed by them for the benefit of the Life Insurance Corporation of India and the Superintending Engineer, Basin Bridge Power Station, and other items of their dealings as well. Their contention did not find favour with the Tribunal, with the result the petitioners have now come up to this Court and contended in the main that a sum of Its. 2,44,121-62 received by them from the Life Insurance Corporation of India, and a sum of Rs. 1,26,195(8-55 received by them from the Superintending Engineer, Basin Bridge Power Station, are sums received by them in the course Of execution of works contracts, which did not involve an independent sale of goods or materials and hence are exempt from taxation. No other point was urged before us,
2. The contract with the Life Insurance Corporation of India Was for electrification of the fourteen storeyed L.I.C. building at Mount Road, Madras. On 29th October, 1956, the petitioners tendered for the Work of installation of eloctric services for the L.I.C. buildings at Mount Road, Madras. It was a lumpsum contract. On a reading of the contract, it is clear that the job undertaken by the petitioners involved specialised work, skill and judgment. The complexity of the work, the enormity of the same and the meticulous details furnished in the tender afford a ready indicia as to the type of the work to be done by the petitioners. The work involved a load of 1,870 kilowatts of electrical energy. The M.E.S. regulations permit a minimum load of only 75 H.P. at 44b volts. As the load in the instant case exceeded the permissible limit, a sub-station has to be erected with the transformer provided with switchgears of a high and low tension variety. As the load is heavy, the M.E.S. was to provide a current at 11,000 Volts. The Voltage of the supply used in the premises is 440 volts. Therefore special adaptation was required to regularise and maintain the supply. The transformer and switch gear both cost about Rs. 76,180-0 and were designed and fabricated in England. These were imported from London against an actual user's licence held by the Life Insurance Corporation of India. Particular care was to be taken in the execution of the work and in the taking of the current for different purposes inside the massive structure. The wiring to this building has been done during and in the course of construction of the building so that lighting is provided from fluorescent tubes, 5 feet in length, two tables placed in fittings specially designed and manufactured for that purpose and fitted at the time of the construction in necessarily built-in recesses in the false ceiling. The wiring for this is of the concealed type, i.e., steel conduits are buried in the conduit as and when roof slabs are concreted when the building is under construction, for lights and plug points. In the case of wiring for telephone points, a special method was adopted. That is, a collapsible rubber hose pipe was laid and inflated before the laying of concrete and after the concrete was cured, this hose pipe was deflated and withdrawn, thereby leaving a circular duct inside the concrete in which the cables were laid. This kind of work requires special design and arrangement.
3. Apart from the specialised skill involved in the execution of the contract, the following notable features therein may be usefully referred to, for appreciating the scope and purport of the contract: (1) The price Variation clause which provided for an increase in the event of an increase in cost; (2) Provisions for payment of increased rates in the event of the exchange rate being charged (3) Provisions for taking final measurements for payment; (4) Liability for defects discovered-within 12 months; (5) Provision for payment of damage at the rate of Rs. 8,500 per week if the work was not completed within a specified date; (6) Contract to be carried as per drawings; (7) Alteration in the work entitling the contractor to additional or lower payment depending upon the nature of the alteration; (8) Provisions for overtime wages for causes beyond the contractor's control; (9) Liability to rectify defects; (10) Provision for use by the contractor of the scaffolding, erected by the main contractor; (11) Provision for workshops by the contractor; and (12) Provision for payment of part bills at 90 per cent, of the value of the; work executed.
4. We shall now consider the elements and ingredients of the other contract entered into between the petitioners and the Superintending Engineer, Basin Bridge Power Station. This was also a lumpsum contract and quotation to that effect Was made. This involved equally high technical skill and knowledge. Mainly it was for providing underground cables and accessories including fire-proof sealing for cables below the oil-filled switch gears and wood bushes for cables in other locations, 7/029 Single Core Cambric Insulated Cable with necessary weak back as per rules and paper sleeves for terminating PILC. control cables. Here also a security deposit is taken, a delivery period is provided and a penalty envisaged in case there is a breach. There is scope for variation of the price of the material involved in the contract. The nomenclature used is a purchase contract; but, as will be shown hereinafter this is a misdescriptional nomenclature.
5. In our opinion, it is not necessary to set out further details regarding the elements of the above two contracts, as the tests of both of them are not in dispute. The Revenue, however, took up the stand that though the recitals in the contracts do refer to execution of a work, the course of the transactions that actually transpired indicates that the petitioners had in effect supplied materials and that it is in essence a contract for supply of materials though it is linked with the fixing them up in the immovable properties of the contractee. In so far as the second contract with the Superintending Engineer, Basin Bridge Power Station, was concerned, the Revenue was prompted to treat the transaction as involving only sale of material because of the bills or invoices raised by the petitioners against the Superintending Engineer. The Tribunal laid its decision on the words, expressions and the language used by the contractors, which in fact have been quoted in extenso in its order. The Tribunal mainly relied upon the decision of this Court in Udani Engineering Co. v. State of Madras T.C. 55 of 1960 (unrepored), and held that both the contracts in question are not works contract pure and simple, but involved sale of material supplied by the contractors to the contractees and that the dealings were rightly to be brought to tax and that the turnover involved is assessable.
6. As the fundamental concept to be borne in mind is that the incidence of passing of title in certain goods not as a result of contract express or implied to that effect, by itself does not tantamount to a sale within the meaning of Section 2(h) and (i) of the Madras General Sales Tax Act, the two contracts in question have to be scrutinised under this perspective.
7. We shall now take up the contract With the Superintending Engineer, Basin Bridge Power Station, which We shall hereafter refer to as the second contract. The Tribunal was obsessed with the idea that since bills were raised by the contractors as against the contractee, that by it self was sufficient to bring the transaction in the net of taxation. Those bills no doubt reflect the charges claimed by the contractor in respect of the goods supplied and affixed in the course of working of the contract. But it does not afford a guide to interpret the contract as such. Normally, the issuance of such a bill by itself cannot militate against the work involved being a works contract.
8. It does not refer to the terms of the contract which have to be studied, scrutinised and adverted to before any conclusion, one way or the other, can be drawn. A bill by itself can never reflect the terms of the contract nor can it establish whether the transactions inter se between the parties is a contract for work or for sale of goods. As pointed out in Arm Electrics v. Commissioner of Sales Tax (1966) 17 S.T.C. 576, by the Supreme Court:
The question whether in respect of a transaction sales tax is exigible may be determined only on the terms of the contract and not from the invoice issued by the person entitled to receive money under the contract.
The Appellate Tribunal, while considering the second contract, laid stress upon the bills submitted by the contractor, though incidentally they refer to the terms of the contract. Such reliance by the Tribunal to come to the conclusion (hat the contracts in question are not works contracts, is therefore not sustainable.
9. The other question involved is whether the contract of the petitioners with the Life Insurance Corporation of India, hereinafter referred to as the first contract and the second contract do involve sale of goods only and whether all such transactions are to be brought to tax. The content on of the Revenue in the main, which gained favour with the Sales Tax Appellate Tribunal, is that these transactions primarily involved sale of material and goods and therefore the turnover in question is assessable under the Madras General Sales Tax Act. Reliance was placed on the decision of this Court in Udani Engineering Co. v. State of Madras T.C. 55 of 1960 (unrepoted). No doubt, in a works contract, a superficial examination of the elements there to would indicate that there is passing of property of the materials from the contractor to the contractee. But it has to be examined further to find outwhether the pith and substance of the contract is only execution of the work agreed to between the parties without there being any element of sale of goods or materials. It is also an accepted principle by new that if a given contract is separable and divisible such that a clear cut distinction can be made between the work involved in the same and the sale of the goods under such a contract, then in so far as the latter is concerned, it may be separated from the totality of the contract and dealt with separately. Each case has to be decided on its own merits. In Udani Engineering-Co. v. State of Madras T.C. No. 55 of 1960, the learned Judges held, that it was fairly clear that the contract established a sale of electric material and equipment by the petitioner to the Defence Department. That was also a case wherein the contractor undertook to fit the materials in the building without stipulating any special remuneration for carrying out that work. In these circumstances, the learned Judges held in that case that the contract primarily was one in which sale of goods were involved and the elements of works contract were totally absent therein. It was this case which was relied upon by the Sales Tax Appellate Tribunal when it came to the conclusion that the turnovers in both the contracts in question are exigible to tax. We are, however, unable to be persuaded that the contracts in question involved such sale of materials.
10. A narrow and a pendantic interpretation of a contract has to be avoided. Broadly and liberally, the contracts in question have to be scrutinised for purposes of exigibility to tax. If there are overwhelming indications in the contract that it is a composite and an indivisible one and what has been agreed to and intended between the parties was not to supply materials in the course of the contract. but as and: when such materials are imbedded in the contractual work involved they became the property of the other party, then there would be no question of the sale of such materials by the contractor to the other. In a recent case disposed of by us, McKenzies Ltd. v. Board of Revenue Since reported in (1968) 21 S.T.C. 279, we have summarised the legal position as follows:
Whether a given transaction is a works contract or a sale of goods is a mixed question of law and fact, and will have to be answered invariably in relation to the terms of a particular contract. The test will be the intention of the parties as gathered from the entirety of the contract, whether on a fair reading of the contract the parties agreed to sell and purchase a finished or a completed article or commodity or meant to treat the transaction as one for labour to be bestowed on an article or commodity serving as the base. It may also be useful and necessary to keep in mind whether the transaction relates to a movable or an immovable. In the case of the lattes question will be whether the entire construction or product in the nature of the immovable property is meant to be sold or where a construction or works are to be carried out on immovable property the property in materials, by what is done on or to immovable property, passes by affixture in the process of the works. In other words, if the contract is a composite one, it is to be found out whether it can be split up and a part of it can be regarded as an agreement to sell specifie goods incorporated to immovable pioperty. The same test may also to some extent apply, to works relating to a movable.
It is elementary to note that in a sale there should bean agreement between the parties to the effect that one intends to transfer title in the goods to the other and as a result of such a transaction, the property in such goods must actually pass title in the goods to the other. These and other elements are absolutely essential before a given deal can be characterised as a sale. As pointed out by the Supreme Court in Government of Andhra Pradesh v. Guntur Tobaccos Ltd : [1965]2SCR167 .:
A contract for work in the execution of which goods are used may take one of three forms. The contract may be 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 (he 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 prosses, 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; when it is of the second category, it is a contract for execution of work not involving sale of goods.
This Court again had occasion recently to consider one other decision of the Supreme Court reported in John Mowlem & Co., Ltd. v. Commissioner of Sales Tex (1967) 19 S.T.C. 59, as providing a guide to determine whether a contract is a works contract or not. The following observations therein is apposite:
In a works contract, the agreement between the parties is that the contractor should construct the Works according to the specifications contained in the agreement, and in consideration therefor receive payment as provided therein, and in such an agreement there is neither a contract to sell the materials used in the ccn-struction, nor does property pass therein as movables.
One other principle has also been recently settled by the Supreme Court in State of Gujarat V Kailash Engineering Co. (P.) Ltd : [1967]1SCR543 It is as follows : If the teims of the contract indicate that the contractee is not to be the owner of the product contracted or built upon by the contractor and if the property in the finished product vests in the contractee even during the process of construction, the transaction is clearly works contract and does not involve any sale.
Reference may also be usefully made to a decision of this Court in Richardson and Cruddas Ltd. v. State of Madras (1965) 16 S.T.C. 827, where the learned Judges observed as follows:
The distinction between a works contract for work and labour, and a contract of sale is a fine one, and it is neither feasible nor practicable to formulate in the abstract, an all comprehensive and universal rule applicable to all cases...
11. In cases where the contract consists of the fabrication and erecttion of steel structures or buildings on the site of the customer, the main test is to find out whether the customer ever bargained for the sale and purchase of the component parts used in the work of fabrication and erection or construction. If, under the contract, structural materials are to be affixed to the land and only thereafter the property therein Would pass to the customer notwithstanding that they Were approved by him, and even paid for, the contract would be a works contract. The fact that payments are made before the work is completed in its entirety is not of decisive significance.
12. In the two contracts in question, it has not been urged by the Reveriue that they are severable and that that portion of the contract which might refer to the supply of materials can be taken out of the context of the contract and treated as an independent one. On the other hand, it is fairly clear from the terms of the contract and from the intention of the parties that both the contracts are composite in nature. What weighed With the Tribunal was the meticulous details quoted by the contractor when he tendered for the contract and obtained a part-payment towards the lump sum contracts., As already stated, the receipt-of a part-payment towards a lump sum contract cannot decrde the issue whether a given contract is a works contract or a contract for sale of material. The intention of the parties and the course of working of the contract has to be taken as a whole before coming to the conclusion that it is not a works contract. In the cases in question, we have already stated that much of complexity was involved and technical skill and labour called for in the matter of designing erection and completion of the context in question. As and when the materials referred to in the bills or invoices Submitted by the contractor, are imbedded in the base of the work, they become the property of the contractee. There is no agreement that the title in the material so imbedded should pass to the contractee only after the completion of the contract. The various tests laid down by this Court and by the Supreme Court do not enable us to construe the contracts in question as contracts of sale of material pure and simple. The supply of material and the erection are so knitted together that one aspect is not divisible fie m the other, such that both the contracts in question are composite contracts to render work to the contractee. The Tribunal has not rightly appreciated the principle in Udani Engineering Co. v. State of Madras T.C. No. 55 of 1960, and has therefore wrongly approached 'the subject. We have no hesitation in holding that, having regard to the various clauses in the contracts already referred to by us and the predominant indicia which overwhelms the contracts in question, these are works contracts and they do not involve m any manner or in any Wise a sale of material as is popularly or legally understood.
13. No other question Was argued before us though it was raised before the Tribunal We, therefore, set aside the order of the Tribunal, excepting to that portion of the same relating to remand, in so far as they directed the inclusion of the turnover relating to both the contracts in question as assessable turnover. T.C. No. 28 of 1964 is therefore allowed with costs. Counsel's fee Rs. 150.