Puri Sons Engineers Pvt. Ltd. Vs. State and ors. - Court Judgment

Mansoor Ahmad Mir, J.

1. Petitioner has invoked the jurisdiction of this Court under Article 226 of the Constitution of India read with Section 103 of the Constitution of Jammu and Kashmir for quashing order dated 16th of June, 1998, passed by respon-dent-3, i.e., Deputy Commissioner, Sales Tax Department, Check Post, Lakhanpur, Jammu, whereby Air Conditioners, came to be seized and petitioner was directed to pay Sales Tax, while holding that the contract in question was a 'works contract', and not a 'contract for sale'.

2. Precise case of the petitioner is that the petitioner is a Private Limited Company, registered under the Companies Act, and is manufacturer of Air Conditioners. In the course of its business, the petitioner had entered into a contract with Director General Supplies and Disposal (for short DGS&D;) for its DGS&D; Rate Contract vide No. ME-3/RC-4298/Split AC/03/97-98/Purisons/COAD/899 dated 23-10-1997 (for short DGS&D; Rate Contract). As per the mandate of DGS&D; Rate Contract, the Executive Engineer (E), Telecom Electric Division, Jammu, vide his supply order No. 6/SO/97-98/2071-78 dated 20-10-1998, placed Supply Order for supply of Split-Type Room Air Conditioners to the petitioner Company at Delhi. After inspection, goods were delivered to M/s Nagpal Transport Service for its delivery in the office of Executive Engineer (E), Telecom Electric Division, Jammu, after Central Sales Tax was charged against Form-D. Respondent-3 at Lakhanpur detained the vehicle of M/s Nagpal Transport Service along with goods and asked the petitioner to pay local tax, i.e., Sales Tax under the Jammu & Kashmir General Sales Act, 1962. Petitioner was constrained to file an application and, accordingly, impugned order came to be passed.

3. Petitioner could not file appeal in terms of mandate of Section 11 of the (Unamended) Jammu & Kashmir General Sales Tax Act, 1962, for the reasons that appeal could have been preferred before the Special Tribunal, but composition of Special Tribunal had not started at that point of time. The main challenge to the impugned order is that contract/supply order is a 'contract for sale' and not a 'works contract'.

4. Respondents have filed reply and resisted the petition on the grounds taken in the reply, which can be aptly summarized as under:

5. That petitioner had efficacious remedy available in terms of the Jammu & Kashmir Sales Tax Act, 1962, which he has not availed and thus, writ petition is not maintainable. Contract/supply order is not a 'contract for sale' but a 'works contract' and it is not correct that the petitioner had delivered the goods to the Executive Engineer (E), Telecom Electric Division, Jammu. In fact, the sale was not complete because the petitioner had to install Air Conditioners at Jammu in the premises of the purchaser, i.e., the Executive Engineer (E), Telecom Electric Division, Jammu.

6. Learned Counsel for the parties addressed arguments while keeping in view the stand taking by them in the writ petition as also in their reply.

The following two points need to be considered:

(i) Whether the petitioner had an efficacious remedy available;

(ii) Whether the contract/supply order is a 'works contract' or 'contract for sale'.

7. The decision on these points would clinch the issue. The argument of Mr. Naik that in terms of the provisions of Section 11 of Jammu & Kashmir General Sales Tax Act, 1962, the petitioner could have filed an appeal before the Tribunal, is devoid of any force, for the following reasons:

8. When the impugned order came to be passed, at that relevant point of time, any order passed by Deputy Commissioner or by the Commissioner was appealable before Tribunal and, thereafter, in terms of amendment, which came to be introduced in 2001, against an order passed by the Deputy Commissioner, an appeal may be preferred by the petitioner before the Commissioner. But this law was not in force at the relevant point of time, as discussed above.

9. Thus, the petitioner could have also filed an appeal before Tribunal. But the petitioner has taken a stand that Tribunal was not functioning at that point of time. The said fact has not been rebutted by the respondents-State, thus, cannot be said now at this stage after the lapse of eight (8) years that the Tribunal was functioning at that point of time. This Court has also to take note of the fact that the writ petition is on board of this Court for the last eight years and came to be admitted vide order dated 10th of May, 2000. Thus, this objection could not be taken now. Accordingly, objection, raised by Mr. Naik fails and question No. (i) is answered accordingly.

10. Thrashing out question No. (ii), it is to be noticed that what was the contract/supply order. As per the terms and conditions and as pleaded by both the parties, the contract/supply order was for supply of Air Conditioners. Supply order came to be placed at Delhi. DGS&D; Rate Contract provides/mandates how Sales Tax is charged, how payment is to be made, who has to conduct inspection, etc. After going through the relevant provisions of DGS&D; Rate Contract, it is implicit in it that every thing was to be done at Delhi.

11. Now question remains whether the contract was for sale or a works contract. As per the terms of contract/supply order read with terms contained in DGS&D; Rate Contract, the petitioner had to install those Air Conditioners at Jammu. They had not to execute any other work; only had to charge from the purchaser for installation. Whether that installation can be treated as a 'works contract'. 1 am of the constrained view that it was not a 'works contract', but it was a 'contract for sale', because everything was done at Delhi. Air Conditioners were also supplied at Delhi and only installation was to be done at Jammu.

12. Apex Court in a case titled State of A.P. v. Kone Elevators (India) Pvt. reported as : 2005(181)ELT156(SC) held that there could be no standard formula by which one can distinguish a 'contract for sale' from a 'contract for works'. The question is largely one of fact depending upon the terms of the contract on proper construction of terms and conditions of the contract between the parties including the obligations to be discharged in terms of the contract. It is profitable to reproduce para 5 of the judgment hereunder:

5. It can be treated as well settled that there is no standard formula by which one can distinguish a 'contract for sale' from a 'works contract'. The question is largely one of fact depending upon the terms of the contract including the nature of the obligations to be discharged thereunder and the surrounding circumstances. If the intention is 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 pursuant 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 transaction passes to the customer: is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a 'sale'; if it is the latter, it is a 'works contract'. Therefore, in judging whether the contract is for a '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. No definite rule can be formulated to determine the question as to whether a particular given contract is a contract for sale of goods or is a works contract. Ultimately, the terms of a given contract would be determinative of the nature of the transaction, whether it is a 'sale' or a 'works contract'. Therefore, this question has to be ascertained on facts of each case, on proper construction of terms and conditions of the contract between the parties.

13. Further, it is also held that if seller only makes installation as per the drawings and site of the works is to be prepared by the purchaser, it is a simple 'contract for sale'. It is profitable to reproduce para 12 of the judgment hereunder:

12. On a careful study of the aforestated clause in the Delivery Schedule, it is clear that the customer was required to do the actual work at the site for installation of lift. On reading the above clause, it may be observed that the entire onus of preparation and making ready of the site for installation of lift was on the customer. It was agreed that under no circumstances would the assessee undertake installation of lift if the site was not kept ready by the customer. Under Clause 4(g) of the 'Customers' Contractual Obligations', the assessee reserved the right to charge the customer for delay in providing the required facilities. These facts clearly indicate that the assessee divided the execution of the contract into two parts, namely, 'the work' to be initially done in accordance with the specifications laid down by the assessee and 'the supply' of lift by the assessee. 'The work' part in the contract was assigned to the customer and 'the supply' part was assigned to the assessee. This 'supply' part included installation of lift. Therefore, contractual obligation of the assessee was only to supply and install the lift, while the customer's obligation was to undertake the work connected in keeping the site ready for installation as per the drawings. In view of the contractual obligations of the customer and the fact that the assessee undertook exclusive installation of the lifts manufactured and brought to the site in knocked-down state to be assembled by the assessee, it is clear that the transaction in question was a contract of 'sale' and not a 'works contract'....

14. Apex Court in case titled Manganese Ore (India) Ltd. v. The Regional Assistant Commissioner of Sales Tax Jabalpur reported as : [1976]3SCR99 has laid down the guidelines in order to ascertain and prove, which is the 'contract for sale' and which is the 'works contract' and whether the sale is in the nature of contract for sale.

15. It is profitable to reproduce para 7 of this judgment hereunder:

7. ...In a recent judgment of this Court in Balabhgas Hulaschand v. State of Orissa Civil Appeals Nos. 449-454 of 1971, Decided on 9-12-1975 (SC) after review of all the authorities on the point, this Court held as follows:

That the following conditions must be satisfied before a sale can be said to take place in the course of inter-State trade or commerce:

(i) that there is an agreement to sell which contains a stipulation express or implied regarding the movement of the goods from one State to another'

(ii) that in pursuance of the said contract the goods in fact moved from one State to another; and

(iii) that ultimately a concluded sale takes place in the State where the goods are sent which must be different from the State from which the goods move.

If these conditions are satisfied then by virtue of Section 9 of the Central Sales Tax Act it is the State from which the goods move which will be competent to levy the tax under the provisions of the Central Sales Tax Act.

On a careful consideration of the facts and circumstances of the present case we are satisfied that the present case is directly covered by the decision of this Court in Balabhgas Hulaschand's case.

16. Apex Court also in a recent case titled Hindustan Shipyard Ltd. v. State of Andhra Pradesh reported as (2000) 16 PHT 219 (SC) held that which contract is 'contract for sale' and which contract is 'works contract'. It is profitable to reproduce paras 14 and 15 hereunder:

14. The principles deductible from the several decides(d) cases may be summed up as under:

(1) It is difficult to lay down any rule or inflexible rule applicable alike to all transactions so as to distinguish between a contract for sale and a contract for work and labour.'

(2) Transfer of property of goods for a price is the linchpin of the definition of sale. Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. It is the substance of the contract document's and not merely the form, which has to be looked into. 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 sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour.

(3) If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. If A may transfer properly for a price in a thing in which B had no previous properly then the contract is a contract for sale. On the other hand 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 work and labour.

(4) The bulk of material used in construction belongs to the manufacturer who sells the end product for a price, then it is a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not one for work and labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee which have to be weighed. If the major component of the end product is the material consumed in producing the chattel to be delivered and the skill and labour are employed for converting the main components into the end products, the skill and labour are only incidentally used and hence the delivery of the end product by the seller to the buyer would constitute a sale. On the other hand if the main object of the contract is to avail the skill and labour of the seller though some material or components may be incidentally used during the process of the end product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour.

15. There may be three categories of contracts, (i) The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (ii) It may be a contract for work in which the use of the materials is accessory or incidental to the execution of the work; and (iii) It may be a contract for supply of goods where some work is required to be done as incidental to the sale. The first contract is a composite contract consisting of two contracts one of which is for the sale of goods and the other is for work and labour. The second is clearly a contract for work and labour not involving sale of goods. The third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale.

17. Applying the test, laid down by the Apex Court, in this case, the Supply Order is a 'contract for sale' because as discussed hereinabove, the petitioner had sold Air Conditioners at Delhi and after completing all the formalities as per the DCS&D; Rate Contract at Delhi, dispatched those Air Conditioners through Nagpal Transport Service and had to install those Air Conditioners in the premises of the Executive Engineer (E), Telecom Electric Division, Jammu, thus, no work was to be done by the Company, only it had to charge for the installation of Air Conditioners at Jammu.

18. In the given facts and circumstances of the case, respondent-3 had fallen in an error to hold that it was not a 'contract for sale', but it was a 'works contract'.

19. Accordingly, I allow this writ petition, quash the impugned order and discharge the petitioner from the Bank Guarantee, which came to be executed by Syndicate Bank, Old Rajinder Nagar, New Delhi, on 25th of June, 1999.