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PETITIONER: HINDUSTAN AERONAUTICS LIMITED

       Vs.

RESPONDENT: STATE OF KARNATAKA

DATE OF JUDGMENT16/12/1983

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) TULZAPURKAR, V.D. PATHAK, R.S.

CITATION:  1984 AIR  744            1984 SCR  (2) 248  1984 SCC  (1) 706        1983 SCALE  (2)1090  CITATOR INFO :  R          1989 SC 962  (24,25)

ACT:      Sales Tax  Law-Karnataka Sales  Tax Act-Exigibility  to tax-Contracts for  servicing reassembling I.A.F Planes which includes supply  of materials  by the  "contractor"  if  the "owner" did  not supply  them, and  only if  the owners  Dy. Financial Advisor  authorises them-Whether  the contracts in question were sales contract or were part of one contract of executing the works contracts not attracting Sales Tax.

HEADNOTE:      The appellant  is a  manufacturer of  spare  parts  and accessories of  various aircrafts  and has  also established facilities for assembling, servicing, repairing, overhauling of aircrafts,  their instruments  and accessories.  The  job done by the appellants were servicing, assembling, repairing and overhauling  "Airforce planes"  entrusted to them. These works were  done on  the basis  of contracts  or job  orders issued  from  time  to  time.  While  on  contract  directly concerning the  repairing servicing  and  overhauling  of  a specified aircraft,  instrument or  accessory in  which  the spare parts  had been  used  in  the  execution  of  service contracts was  on record,  there was an agreement dated 23rd June 1951  described as  "contract for  the flight servicing and  maintenance   of  the   H.Q.  Training   Command  I.A.F Communication Flight,  "wherein the  President of  India has been described  as the  "owner" and  the  appellant  as  the contractor. The  agreement provided  that the works would be carried out  by the contractor and payment made by the owner "at cost  plus 10%  profit  basis  or  at  the  contractor’s standard fixed  rates, where applicable. Under clause 3, the owner will  provide the  contractor with  all the  necessary spares and  materials (other  than expendable materials such as paints,  dopes, cleaning  rages etc.)  and where  however there was  delay in  the supply  of the essential items, the contractor will  provide those whenever possible by purchase or manufacture  within expenditure authorised by the owner’s Deputy Financial  Adviser at  the contractor’s  request from time to time.      The Sales Tax authorities sought to tax that portion of

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the total  turnover of  the appellant for the relevant years in question  which was  equivalent to the money value of the spare parts  of the  air-crafts which it had supplied to the Indian Air  Force as a result of their use in the process of repairing, servicing and overhauling of the aircrafts, their instruments and accessories which were sent to the appellant for the  said purpose.  The Appellate  Tribunal and the High Court held  these to  be composite contracts. The High Court was of  the view  that sale  of spare  parts was  clearly in contemplation of  the parties  and the documents in question constituted  composite   contracts,  one   relating  to  the remuneration for the services rendered and the other for the sale of goods. Hence the appeals by special leave.      Allowing the appeal, the Court ^      HELD :  1:1 It  is well  settled  that  the  difference between contract of 249 service and  contract for  sale of  goods, is,  that in  the former, there  is in the person performing work or rendering service no  property in  the  things  produced  as  a  whole notwithstanding that  a part  or even the whole of materials used by him had been his property. In the case of a contract for sale,  the thing  produced as  a  whole  has  individual existence as  the sole property of the party who produced it some time  before delivery  and the  property therein passed only under  the contract relating thereto to the other party for price. [257 D-E]      1:2 It  is necessary,  therefore, in every case for the courts  to  find  out  whether  in  essence  there  was  any agreement to  work for  a stipulated  consideration. If that was so, it would not be a sale because even if some sale may be extracted that would not affect the true position. Merely showing in  the bills  or invoices,  the value  of materials used in  the job  would not  render the  contract as  one of sales. The nature and type of the transactions are important and determinative  factor. What is necessary to find out, is the dominant object. [257 F-G]      1:3 A  contract of  sale of goods must be distinguished from a  contract for  work and  labour. The  distinction  is often a  fine one.  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. Where  however the  main object of work undertaken by the payee  of the  price was not the transfer of chattel qua 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 the materials, nor the value of the skill  and   labour  as  compared  with  the  value  of  the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case,  whether the  contract was in substance one for work  and labour and one for the sale of a chattel. [258 G-H; 259 A-B]      2:1. The  tests indicated  in several decisions of this Court to  distinguish between  a contract  for  sale  and  a contract for work and labour were not exhaustive and did not lay down  any rigid  or inflexible  rule applicable alike to all transactions.  These did  not give  any magic formula by the application of which one could say in every case whether a contract  was a  contract for  sale or a contract for work and labour. These merely focussed on one or the other aspect of the transaction and afforded some guidance in determining the  question,   but  basically  and  primarily,  whether  a

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particular contract  was one  for sale  of goods or for work and labour  depended upon  the main  object of  the  parties gathered from  the terms  of the contract, the circumstances of the transactions and the custom of the trade. [259 C-D]      Sentinel Rolling  Shutters &  Engineering Company  Pvt. Ltd. v.  The Commissioner  of Sales  Tax, 42 Sales Tax Cases 409; referred to.      2:2 It  cannot be said as a general proposition that in every case  of works  contract, there is necessarily implied the sale  of the  component parts  which go  to make  up the repair. That  question would naturally depend upon the facts and circumstances  of each case. Mere passing of property in an article  or commodity during the course of performance of the transaction  in question does not render the transaction to be  transaction of  sale. Even  in a  contract purely  of works or  service, it  is possible that articles may have to be used  by the  person executing  the work, and property in such articles or materials may pass to the other party. That would not  necessarily convert the contract into one of sale of those materials. 250 In every case, the Court would have to find out what was the primarily object of the transaction and the intention of the parties parties while entering into it. It may in some cases be that  even while  entering into  the contract  of work or even service,  parties might enter into separate agreements, one of  work and  service and the other of sale and purchase of materials  to be used in the course of executing the work or performing  the service.  But, then  in  such  cases  the transaction would not be one and indivisible, but would fall into two separate agreements, one of work or service and the other of  sale.  In  order  to  constitute  a  sale,  it  is necessary that  there should  be an  agreement  between  the parties for  the purpose  of transferring  title  to  goods, which of  course pre-supposed  capacity to contract, that it must be supported by money consideration that as a result of transaction, the  property must  actually pass in the goods. Unless all  these elements  were present,  there would be no sale. [260 C-H]      State of  Himachal Pradesh & Others v. Associate Hotels of India  Ltd, 29  Sales Tax  Cases 474;  State of Madras v. Gannon Dunkerley  & Co.,  Madras Ltd,  9 Sales Tax Cases 353 [1959] S.C.R.  379; Robinson  v. Graves,  [1935] 1 K.B. 579; referred to.      2:3 Whether  a given  transaction is  a works  contract pure and  simple or  it involves  sale of  goods also  is of course a  mixed question  of law and fact depending upon the facts of  each case. It is true, that it cannot be said that parties did  not contemplate  and apply  their minds  to the question of  spare parts  and other  materials necessary for the execution of the works. [262 F-H]      3:1 The  High Court  of Karnataka  was not right in its conclusion on  the taxability  of the  turnover of the spare parts and materials supplied in execution of appellant’s job works. [266 D]      3:2  It  is  clear  from  clause  3  that  it  was  the expenditure to  be incurred  for providing the materials for the jobs  to be  done  were  subject  to  the  approval  and sanction of  the  Government.  The  expressions  "All  items provisioned by  the contractor  will be  the property of the owner and  will be issued on contract loan." are significant and indicative of the real intention of the parties. [263 F]      3:3  "The   expression  "contract   loan"  is   not  an expression of  art. It  has no generally accepted meaning in dictionary, legal or otherwise, as such. There is no meaning

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of this  expression provided  in the  contract  between  the parties or  in the  correspondence between  the  parties  in connection with  the  execution  of  the  works.  But  these expressions indicate  that the  ‘provisions’ which  would be required for  carrying out the contracts, which could not be anticipated before  the beginning  or in  execution  of  the contracts will be the property of the owner i.e. that though gathered and procured or manufactured by the contractor, the contractor will have no property in the said goods or spares or materials  and would  not be able to either dispose of or deal with those but these will be treated for the purpose of this contract  to be the property of the owner and, then the contract stipulated  that on  fictional basis  these will be lent out  to the  contractor for being used in the execution of the jobs entrusted to the contractor. [263 G-H; 264 A]      3:4 The  idea was  that the  moment  these  spares  and materials were  required  for  the  jobs  entrusted  to  the appellant and there was delay in supplying these spare parts and materials,  the contractor  would be  free to procure or obtain these spares 251 and materials  either by  manufacturing or  by purchase from the market  local or  foreign, these  goods to be identified and would  be treated by the operation of the contract to be the goods  of the  owner of  the planes.  It is true that in order to  be given  out  on  loan  by  the  ’owner’  to  the contractor, the  owner must  have property in the spares and materials in  question. But  the ’owner’ i.e. the Government in the  context of  1951 agreement,  and it  is indisputable that the transactions in this case were done on the basis of the agreement  of 1951, became the owner of the property the moment the  goods were  identified and  there was  delay  or inability on  the part of the government in supplying spares and materials. [264 C-F]      In the  instant case,  the property  in  the  materials which are used in the execution of the jobs entrusted to the contractor became  the property  of the Government before it was used.  Further there  was no  possibility of  any  other materials to be used for the contract. [265 H; 266 A]      Commissioner of  Commercial Taxes,  Mysore v. Hindustan Aeronautics  Ltd,  [1972]  2  SCR  927;  Ram  Singh  &  Sons Engineering Works v Commissioner of Sales Tax, U.P. 43 Sales Tax Cases 195; followed.      State of  Gujarat v  Variety Buildings,  38  Sales  Tax Cases 176 distinguished.

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1386-91 of 1977      Appeals by  Special leave  Petitions from  the Judgment and Order  dated 1st  December, 1976  of the  Karnataka High Court in S.T.R.P. Nos. 24-29 of 1975.)      S.T. Desai,  S.J. Chandran  & Mrs.  A.K. Verma  for the Appellant.      S.S. Javali and Swaraj Kaushal for the Respondent.      The Judgement of the Court was delivered by:      SABYASACHI MUKHARJI,  J. These appeals by special leave are from  the judgment  and decision  of the  High Court  of Karnataka dated  1st December,  1976 involving the questions of assessability of the appellant Sales Tax, Central as well as State.  While granting  leave, this  Court  excluded  the question whether  the sales  effected in  the canteen by the appellant were  assessable to  Sales Tax.  By  the  impugned

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judgment, the  High Court of Karnataka had dismissed several Writ Petitions  against several  orders being S.T.R.Ps. Nos. 28, 27 and 29 of 1985 under the Karnataka Sales Tax Act, for the year  1960-61, 1961-62 and 1962-63 respectively and also three others  namely; S.T.R. Ps. Nos. 25, 26 and 24 of 1975, under the  Central Sale  Tax Act for the corresponding years respectively, at  the instance  of  the  present  appellant. These involved  common questions  of law  and facts and were disposed of by a common judgment. We also propose to do the 252 same.  As  stated,  one  of  the  questions  was  about  the taxability of  the turn-over in respect of the sales made in the canteen  of the  appellant company. This question is not before us.  Before the Tribunal, the two following questions relevant for appeals before us were agitated, namely;      (i)  Whether the  turnover  apportioned  from  the  job           works undertaken  by the  appellant related to the           sales of  materials by the appellant to the Indian           Air Force  or other  private parties,  as the case           may be,  and as such whether these were taxable as           held by the ower appellate authority.      (ii) Whether, in  the case of job works undertaken from           the  private   parties  mainly   on  quotation  on           inclusive price-basis,  the Sales  Tax authorities           were  right  in  apportioning  a  portion  of  the           turnover  as   attributable   towards   sales   of           materials.      In  order   to  appreciate  the  controversy  in  these appeals,  it  is  necessary  to  state  certain  facts.  The appellant is  a manufacturer  of spare parts and accessories of various aircrafts and has also established facilities for assembling, servicing,  repairing, overhauling of aircrafts, their instruments and accessories. The Sales Tax authorities sought to  subject to tax that portion of the total turnover of the  appellant for  the relevant  years in question which was equivalent  to the money value of the spare parts to the aircrafts which  the appellant  supplied to  the Indian  Air Force as  a result of their use in the process of repairing, servicing  and   overhauling   of   the   aircrafts,   their instruments and accessories which were sent to the appellant for the  aforesaid purposes  during the  relevant  years  in question.      At the  outset, it  is important  to emphasise that the jobs done  by  the  appellant  were  servicing,  assembling, repairing and overhauling ’Airforce Planes’ entrusted to the appellant. In  the second appeal being Civil Appeal No. 1387 (NT) of  1977, the  main job  done was assembling; sales tax was levied  in respect  of the  turnover for  doing the same job. These  works were done on the basis of contracts or job orders issued  from time to time. While no contract directly concerning the  repairing, servicing  and overhauling  of  a specified aircraft,  instrument or  accessary in  which  the spare parts  had been  used  in  the  execution  of  service contracts was  on record,  there  is,  however,  a  specimen contract that was entered into between the appellant and 253 I.A.F. being  agreement dated  23rd June,  1951, hereinafter referred to  as ’1951’ Contract’. The agreement is described as "Contract for the flight servicing and maintenance of the H.Q. Training  Command  I.A.F.  Communication  Flight".  The agreement was  between Hindustan Aircraft Limited, described in the  agreement as  the ’Contractor’  and the President of India, described  in the agreement as the ’Owner’. It may be mentioned that  the Hindustan  Aircraft Limited has later on become the appellant i.e. M/s Hindustan Aeronautics Limited.

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As the  contentions of the parties in these appeals centered on the  question whether  the  contracts  in  question,  the income of  which has been subjected to sales tax, were works contracts only  or were  agreements to  sell spare parts, it would be  relevant to refer in detail to some of the clauses of the "1951 Contract".      The agreement  states that  the ’contractor’  agrees to accomplish for  the ’owner’ the servicing and maintenance of the H.Q.  Training Command, I.A.F. Communication Flight, and works required  on visiting  aircrafts, to  the standard  as specified in the said agreement at Bangalore or at any other place required  by  the  ’owner’.  Then  the  specifications according to  which the  works had to be done were mentioned thereafter. The agreement also provides that the works would be carried  out by  the contractor,  and payment made by the owner "at Cost plus 10% profit basis" or at the contractor’s standard fixed  rates, where  applicable. Sub-clause  (b) of clause  2  provides  that  any  additional  works  to  those specified in clause I, items (a), (b) and (c), authorised by Air Headquarters  should also  be charged  for separately as per sub-clause (a) of clause 2 of the agreement.      As  the  question  of  the  price  of  the  spares  and materials is  involved, it  is necessary to set out clause 3 which deals with spares and materials:           "Generally, the  owner will provide the contractor      with all the necessary spares and materials (other than      expendable materials  such as  paints, dopes,  cleaning      rages etc.).  Where, however,  there is  delay  in  the      supply of  essential items, the contractor will provide      those  wherever   possible  either   by   purchase   or      manufacture, within  an expenditure  authorised by  the      owner’s Deputy  Financial Adviser  at the  Contractor’s      request from time to time. All items provisioned by the      contractor will  be the property of the owner, and will      be issued on Contract Loan. The owner agrees to pay the      contractor for  provision of  spares at  the  following      rates:- 254      (a)  for items manufactured by the contractor-Cost plus           10%      (b)  for items  purchased from  indigenous and overseas           sources-actual  invoice   price  plus   all  other           charges the contractor is called upon to pay, such           as packing and shipping etc. plus 5%."      Regarding Technical  advice and  publications, clause 4 of the  1951 agreement  stipulated that all relevant service publications and  manuals would be made available on loan to the contractor  through I.A.F.  Liaison Officer  attached to the  contractor’s   Factory.  Regarding   delivery,  it  was provided by  clause 5 that subject to the owner’s compliance with clause 3, the contractor would keep ready for flight as many of the available planes as possible.      Clause 6  of 1951 agreement deals with terms of payment and stipulated that the contractor would submit to the owner monthly bills  as per clause 2(a) supported by cost analysis showing, inter  alia, of certain details and the details are set out in different sub-clause mentioned in clause 6 of the agreement. The  other incidental  provisions of clause 6 are not relevant  for the  controversy in  question. Clause 7 of the 1951  agreement dealt  with indemnity for loss or damage which is  not relevant for our purposes. Clause 8 dealt with right to cancel the agreement, Clauses 9 and 10 provided for ’inspection".  Clause  11  prohibited  the  contractor,  the appellant, from  in any  way assigning  or transferring  any rights or  benefits under  the  agreement  except  with  the

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previous consent of the owner in writing. Clauses 12, 13 and 14 are also not relevant for our purpose.      We may  mention that reliance was also placed on behalf of the  appellant on  an affidavit  by one  Shri S.  Krishna Murthy who was the Sales Officer of the Overhaul Division of the Appellant  Company and  which affidavit  had been  filed before the  Sales-Tax Tribunal  in Mysore, Bangalore. In the said affidavit,  he had  described the  nature of  the works done by  the appellant  in connection  with repairs  and had mentioned that  two  types  of  works  were  done;  one  was overhaul of  Aircrafts, accessories  and equipments thereof, and the  other known  as fixed  quotation basis.  It is  not necessary to  refer to  the said affidavit in detail. He had mentioned in  the said affidavit the procedure for preparing the  bills   and  had  stated  that  after  the  works  were completed, a  final  inspection  of  the  repairs  done  was checked  by  the  Works  Inspection  Department,  whereafter delivery orders  were prepared  and thereafter  he described how bills were prepared thus: 255           "After the  work is  completed, a final Inspection      of the  repair done  is checked by the Works Inspection      Department, whereafter a delivery order is prepared and      the  billing  section  prepares  the  bill.  As  it  is      required by  the Defence  Audit  purposes,  the  labour      charges and  material charges are shown which is worked      out on cost plus 10% basis.           In the  case of  private Aircraft owners and other      airlines for  a similar contract for repairs, we give a      fixed price  quotation unlike in the case of repairs to      Defence Aircraft  which by virtue of the contract is on      cost plus 10% basis, wherein a break up had to be given      as aforementioned for purposes of defence audit."      The Sales Tax authorities sought to tax that portion of the total  turnover of  the appellant for the relevant years in question  which was  equivalent to the money value of the spare parts  of the  aircrafts which  it had supplied to the Indian Air  Force as a result of their use in the process of repairing, servicing  and  over-hauling  of  the  aircrafts, their instruments  and accessories  which were  sent to  the appellant for  the said purpose during the relevant years in question. The works undertaken and executed by the appellant in assembling,  repairing, servicing and overhauling were on cost plus  10% profit  basis as  well as  on fixed inclusive quotation basis.  The appellant  with regard  to the  latter types of  contracts succeeded  before the Appellate Tribunal who held  such contracts  to be  exclusively works contract. The controversy before the High Court and before us in these appeals is  only  with  regard  to  the  first  category  of contracts, which the Appellate Tribunal held to be composite contracts. The appellant contended that so far as the supply of spare  parts to  the Indian Air Force during the relevant period was  concerned, there  had been  no sale of the spare parts to  the I.A.F.,  for that spare parts in question were used during the course of and in the process of execution of the works contracts relating to the servicing, repairing and overhauling  of   the  aircrafts,   their  instruments   and accessories and  that there was no sale contracts as such in pursuance whereof, the spare parts in question could be said to have  been sold  to the I.A.F. The Tribunal had negatives the contention  of the  appellant and the appellant had gone up in  revision before the High Court. The High Court was of the view  that whether  the supply of the spare parts by the appellant would  amount to  sale or  not would depend on the fact as  to whether  there was  a sale  contract between the

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appellant and  the I.A.F. in that regard. The High Court was of the view that, 256 in the  light of  certain  documents  which  we  would  also incidentally note, it could not be said that supply of spare parts and  other materials  was not  in contemplation of the contracting parties  and the  spare parts in question became the property  of the  owner  i.e.  I.A.F.  only  by  way  of accretion to  the aircrafts for being used in the process of executing the contracts and not as a result of the agreement between the  contracting parties. The High Court referred to certain decision  and came  to the  conclusion that  in  the present case  what was  sought  to  be  brought  within  the purview of  Sales Tax Act was the cost to the vendees of the spare parts  supplied by  the appellant. In such a case, the High Court  was of  the view  that the  stage at  which  the property therein  passed to the owner was not material. What was material  was as  to whether  the goods in question were the property  of the  assessee before  the same  became  the property of the President of India under the contracts.      Dealing with  the contention  of the  parties, the High Court was of the view that in providing separately the basis of payment of spare parts in the contracts, the intention of the parties  was clear  and  unambiguous  i.e.  the  parties clearly agreed  to the  sale of spare parts according to the contract. Certain  invoices were  placed on  record, namely, the Invoice  dated 28.2.1962 being Invoice No. HT2/CAT.B/F-1 which indicated  separately the  labour  charges  being  Rs. 26,837.69 and  materials and spares used by the appellant as per schedule  attached as  Rs. 32,187.92, reference was also made to  another Invoice  dated  31.3.1962  which  had  also mentioned separately  labour charges as well as the costs of the materials  and spares.  To the  same effect  was another Invoice dated  28-2-1962. The  Tribunal was of the view that these Invoices  supported the  conclusion  that  the  labour charges had  been separately  itemised from the price of the spare parts  and whenever  any spare parts had been provided by the  I.A.F.  authorities,  the  price  thereof  had  been deducted indicating  that the  spare parts  supplied by  the appellant. For  the aforesaid  reasons as  indicated in  the judgment of  the High  Court, the High Court was of the view that sale of spare parts was clearly in contemplation of the parties and  the documents in question constituted composite contracts, one relating to the remuneration for the services rendered and  the other  for the sale of goods. In that view of the  matter, the  High Court  was of  the view  that  the Tribunal  was   right  in  dismissing  the  appeals  of  the appellant on the particular turnover of the appellant.      The question  before us,  is,  therefore,  whether  the payments made  for spare parts in executing the contracts in question were also 257 sales contracts  or were  part of  one contract of executing the works contracts.      On behalf  of the  appellant, it  was urged  before  us referring to  the terms  of the  contracts which are more or less in  the form  of "1951  contract" mentioned before that the contracts  in question  manifested the  clear  intention that in substance and reality these were agreements to carry out works  of assembling, repairs, servicing and overhauling of the aircrafts being the property of the Indian Air Force. We must  emphasise that  the property in such planes was and had all  along continued  to  remain  with  the  Air  Force. Relevant contracts  and the  whole transactions  between the parties indicate  that the  materials used in the process of

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such assembling,  repairs, servicing  and  overhauling  were either supplied  by the  Indian Air  Force or  were  of  the appellant, the  bulk was  supplied by the Govt. The question therefore  is,   was  it  the  intention  to  do  the  works undertaken as  one job  or not.  Counsel on  behalf, of  the appellant contended  that that  was the  intention and there was no  intention whatever  to  pass  any  property  in  any chattel qua chattel.      It is well settled that the difference between contract of service  and contract  for sale of goods, is, that in the former, there  is in the person performing work or rendering service no  property in  the  things  produced  as  a  whole notwithstanding that  a part  or even the whole of materials used by him had been his property. In the case of a contract for sale,  the thing  produced as  a  whole  has  individual existence as  the sole property of the party who produced it some time  before delivery  and the  property therein passed only under  the contract relating thereto to the other party for price. It is necessary, therefore, in every case for the courts  to  find  out  whether  in  essence  there  was  any agreement to  work for  a stipulated  consideration. If that was so, it would not be a sale because even if some sale may be extracted that would not affect the true position. Merely showing in  the bills or invoice, it was contended on behalf of the  appellant, the  value of  materials used  in the job would not render the contract as one of sale. The nature and type of  the transactions  are important  and  determinative factors. What  is necessary  to find out, in our opinion, is the dominant object.      It was  urged before  us that  contract of  sale is one whose main  object was  to  transfer  property  in  and  the delivery of the possession of a chattel to the buyer. If the principal object  of works  undertaken by  the party  was  a transfer of a chattle qua chattel, the contract would 258 be for  sale. It  is  necessary  to  find  out  whether  the contract was primarily a contract for supply of materials at a price  agreed to  between the  parties  and  the  work  or service rendered  is only incidental to the execution of the contract. Mere  transfer of  property in  goods used  in the performance of  a contract was not sufficient. To constitute a sale,  there must  be an  agreement expressed  or  implied relating to  the sale  of goods  and the  performance of the agreement by passing of title in those very goods.      On behalf of the respondent, counsel contended that the spare parts  in question  had been supplied by the appellant against  payment   of  price   in  pursuance   of   specific stipulations in the contracts. He, therefore, urged that the transactions constituted  sale which  was liable  to tax. It was highlighted  that the  appellant  manufactured  and  did business in the sale of materials in question. The fact that the appellant  was a  dealer in  the spare parts supplied to the  I.A.F.   and  other  parties,  is  undisputed.  It  was emphasised that  the appellant  supplied the  spare parts in question to  I.A.F. against  payment of  price  and  it  was submitted that  it was  not the  case of  the appellant  nor there was  any material on record, to suggest that the spare parts in  question were  either manufactured  or supplied as being incidental  to the  work of  servicing and maintenance entrusted to  the appellant  or were loaned to the I.A.F. It was urged  on behalf  of the revenue that the correspondence on record  and bills  and invoices  clearly demonstrated the intention of the parties to incorporate a separate agreement for the  sale  of  spare  parts  by  the  appellant  in  the agreement.  According  to  counsel,  the  contract  of  1951

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consisted  of  two  separate  agreements.  The  parties  had consciously treated  the works  and the supply of materials, separately and  our  attention  was  drawn  to  the  clauses dealing with  the same.  It  was  urged  that  the  contract contained separate  stipulation for  the work  and  for  the supply of  spare parts.  It was  also  emphasised  that  the appellant was  a regular  manufacturer of  the  spare  parts involved in the case of supply to the I.A.F.      As has  been clearly  stated in  the Halsbury’s Laws of England, Third  Edition, Volume  34, a  contract of  sale of goods must  be distinguished  from a  contract for  work and labour. The  distinction is  often a fine one. 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. Where however the main object of  work undertaken by the payee of the price was not the transfer  of chattel qua chattel, the contract is one of work and labour. The 259 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 the materials, nor the value of the skill  and   labour  as  compared  with  the  value  of  the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case,  whether the  contract was in substance one for work and labour and one for the sale of a chattel.      In the  case of Sentinel Rolling Shutters & Engineering Company Pvt.  Ltd. v. The Commissioner of Sales Tax,(1) this Court reiterated  that tests  indicated in several decisions of this  Court to  distinguish between  a contract for sales and a  contract for  work and labour were not exhaustive and did not  lay down  any rigid  or inflexible  rule applicable alike to  all transactions.  These did  not give  any  magic formula by  the application  of which one could say in every case whether  a contract  was  a  contract  for  sale  or  a contract for work and labour. These merely focused on one or the other  aspect  of  the  transaction  and  afforded  some guidance in  determining the  question,  but  basically  and primarily, whether a particular contract was one for sale of goods or  for work  and labour depended upon the main object of the  parties gathered from the terms of the contract, the circumstances of  the transactions  and the  custom  of  the trade. In  that case,  the  assessee  who  was  carrying  on business  as   engineers,  contractors,   manufacturers  and fabricators had  entered into  a contract with a company for fabrication,  supply,   erection  and  installation  of  two rolling shutters  in two sheds belonging to that company for a price  which was  inclusive of  charges for  "erection  at site".  The   contract  provided,  among  others,  that  the delivery of  the goods  was to  be  ex-works  and  once  the delivery  was   effected,  rejection  claims  would  not  be entertained. All  masonry works  required  before  or  after erection were  to be  carried out  by the company at its own cost. Payments were to be made on overall measurements which should be  checked by  the company  before installation. The actual transportation  charges were to be in addition to the price stipulated  in the  contract and  the terms of payment provided "25  per cent advance, 65 per cent against delivery and remaining  after completion of erection and handing over of the  shutters to  the satisfaction"  of the  company. The assessee  had  submitted  the  bill  to  the  company  after completion of  the fabrication  of the rolling shutters, but before they  were erected  and installed  at the premises of the company.  On the  question whether  the contract  was  a

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contract for  sale or  a contract  for work  and labour, the High Court had held, 260 agreeing with  the Sales Tax Tribunal, that the contract was a divisible  contract, which  essentially consisted  of  two contracts, one  for the supply of rolling shutters for money and the  other for  service and  labour and  that the amount payable at  the stage of delivery represented the sale price of rolling  shutters and  it was  liable to  sales  tax.  On appeal, by  special leave, this Court held that the contract was one single and indivisible contract and the erection and installation  of   the  rolling   shutters  was  as  much  a fundamental part  of the  contract as  the  fabrication  and supply. The contract was clearly and indisputably a contract for work and labour and not a contract for sale.      It cannot  be said  as a  general proposition  that  in every case  of works  contract, there is necessarily implied the sale  of the  component parts  which go  to make  up the repair. That  question would naturally depend upon the facts and circumstances  of each case. Mere passing of property in an article  or commodity during the course of performance of the transaction  in question does not render the transaction to be  transaction of  sale. Even  in a  contract purely  of works or  service, it  is possible that articles may have to be used  by the  person executing  the work, and property in such articles or materials may pass to the other party. That would not  necessarily convert the contract into one of sale of those  materials. In  every case, the Court would have to find out  what was the primary object of the transaction and the intention  of the parties while entering into it. It may in some  cases be that even while entering into the contract of work  or even  service, parties might enter into separate agreements, one  of work  and service  and the other of sale and purchase  of materials  to be  used  in  the  course  of executing the  work or  performing the service. But, then in such cases the transaction would not be one and indivisible, but would  fall into two separate agreements. One of work or service and  the other  of sale.  These  principles  can  be deduced from  the decision  of this  Court in  The State  of Himachal Pradesh  and Others  v. Associated  Hotels of India Ltd.(1) In  the decision  in the case of The State of Madras v. Gannon  Dunkerley &  Co. (Madras) Ltd.,(2) this Court had stated that  according to  the law,  both of  England and of India, in  order to  constitute a sale, it is necessary that there should  be an  agreement between  the parties  for the purpose of transferring title to goods, which of course pre- supposed capacity  to contract, that it must be supported by money consideration  that as  a result  of  transaction  the property must actually pass in the goods. Unless all 261 these elements were present, there would be no sale.      In the  instant case  it is  indisputable  as  we  have referred to  the "1951  Contract" and  the substance  of the invoices and, it is not disputed that the other works orders were on  the basis  of the  principles agreed  by  the  1951 agreement set  out hereinbefore,  that the transactions were as a  result of  composite contracts involving the execution of works  viz. overhauling,  repairing, servicing and in one year  assembling,   air  force   planes,  entrusted  to  the appellant. The question, is, whether this composite contract was divisible  into one  exclusively for work and labour and another for sale of materials. The fact that there is supply of materials  for the  purpose  of  execution  of  the  work contracts undertaken  by the  appellant cannot  be disputed. But the  question then  arises whether  that can be taken as

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pursuant to  a distinct  contract with a view to execute the work  undertaken.   In  this   connection  we  have  already mentioned the  principles enunciated  by  the  statement  of Halsbury’s Laws  of England, Third Edition Volume 34 pages 6 and 7 para 3.      It would  be appropriate,  in our  opinion, because  it clearly enunciates the principles, to refer to the statement of law in Benjamin’s Treatise on the Law of Sale of Personal Property with reference to the French Code and Civil Law,(1) where the  learned Editor  has deduced  the principles  that would be  applicable in  deciding the controversy before us. These principles are:-           "1. A contract whereby a chattel is to be made and      affixed by  the workman  to land  or to another chattel      before the  property therein  is  to  pass,  is  not  a      contract of  sale, but  a contract for work, labour and      materials, for  the contract  does not  contemplate the      delivery of a chattel as such.           2. When  a chattel  is to  be made  an  ultimately      delivered by  a workman  to his  employer, the question      whether the  contract is  one of  sale or of a bailment      for work  to be done depends upon whether previously to      the completion  of the  chattel  the  property  in  its      materials was vested in the workman or in his employer.      If the  intention and  result of  the  contract  is  to      transfer for  a price  property in which the transferee      had  no  previous  property  then  the  contract  is  a      contract of sale. 262           Where, however,  the passing of property is merely      ancillary to  the contract  for the performance of work      such a  contract does  not thereby become a contract of      sale.      3. Accordingly           (i)  Where the  employer  delivers  to  a  workman                either all  or the  principal materials  of a                chattel on  which the  workman agrees  to  do                work, there  is a  bailment by  the employer,                and a  contract for  work and  labour, or for                work, labour  and materials  (as the case may                be), by the workman.                     Materials added by the workman, on being                affixed to  or blended  with  the  employer’s                materials thereupon  vest in  the employer by                accession and not under any contract of sale.           (ii) Where the  workman supplies either all or the                principal  materials,   the  contract   is  a                contract for  sale of  the completed chattel,                and any  materials supplied  by the  employer                when added to the workman’s materials vest in                the workman by accession."      The learned Editor has emphasised that where passing of property was  merely  ancillary  to  the  contract  for  the purpose of the work, such a contract does not thereby become a contract for sale. This principle can also be deduced from the observations of the decision of Robinson v. Graves.(1)      Whether a  given transaction  is a  works contract pure and simple  or it involves sale of goods also is of course a mixed question  of law  and fact depending upon the facts of each case.  We have  noted in the instant case the contracts in question.  It is true, as was emphasised on behalf of the respondent and  has been  emphasised by the Tribunal as well as the  Karnataka High  Court, that  it cannot  be said that parties did  not contemplate  and apply  their minds  to the question of  spare parts  and other  materials necessary for

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the execution  of the  works. It was emphasised on behalf of the respondent  and on  this aspect the decision of the High Court of Karnataka as well as the 263 decision of  the Tribunal  were relied  upon to  stress  the point that  the price  separately provided as cost plus 10%. The  bills  and  the  invoices  were  also  made  separately indicating the prices involved in these transactions. But it is important  to emphasise that clause I of the contract was to accomplish for the owner the servicing and maintenance of the  Headquarters   Training  Command  I.A.F.  Communication Flight, and  works required  on visiting aircrafts according to the  standard as  specified hereunder as these air-planes were necessary  to be  kept in  readiness and  that as there should be no delay in getting the materials, the contract in detail provided  that the  works would be carried out by the contractor and  payment to be made by the owner at cost plus 10% profit  or at  the contractor’s  standard fix-rates. The additional work  that would  be  required  as  specified  in clause 1 in the different sub-clauses was also to be charged as in  clause 2(a). Regarding spares and materials, the idea was that  the owner  would provide to the contractor all the necessary spares  and materials except expendable materials, such as  paints, dopes,  cleaning rages  etc. and  it may be mentioned that  these were  necessary tools  in carrying out the works  entrusted to the appellant. It also stipulated in order to ensure that there should be no delay in keeping the air-planes ready  at all  times, that  in cases  of delay in supply of materials, the contractor would provide those from wherever possible, either by purchase or manufacture but the expenditure to be incurred for the same should be authorised by the  owner’s Deputy Financial Adviser at the contractor’s request from  time to  time. Therefore it emphasises that it was the expenditure limited not only for the jobs to be done but expenditure  to be  incurred for providing the materials for the  jobs to  be done  were subject  to the approval and sanction  of   the  Government.  The  expressions  following thereafter in  clause 3 are, in our opinion, significant and indicative of  the real  intention  of  the  parties.  These expressions are  "All items  provisioned by  the  contractor will be  the property  of the  owner, and  will be issued on Contract Loan." (Emphasis supplied).      The expression  "Contract Loan" is not an expression of art. It  has no  generally accepted  meaning in  dictionary, legal or  otherwise, as  such. There  is  no  definition  or meaning of  this expression provided in the contract between the parties  or in the correspondence between the parties in connection with  the execution  of the  works.  But  in  our opinion, these  expressions indicate  that the  ’provisions’ which would  be required  for carrying  out  the  contracts, which could  not be  anticipated before  the beginning or in execution of the contracts will be the property of the owner i.e. that though gathered and procured or 264 manufactured by  the contractor, the contractor will have no property in  the said goods or spares or materials and would not be  able to  either dispose  of or  deal with  those but these will  be treated for the purpose of there contracts to be  the  property  of  the  owner  and,  then  the  contract stipulates that on fictional basis these will be lent out to the contractor  for being  used in the execution of the jobs entrusted to the contractor.      It was urged before us that the contractor in this case the appellant  is also  a dealer  and manufacturer  of these spares and materials, to emphasise that these materials were

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not prepared  or produced  or procured  by the contractor on ad-hoc basis  for the  purpose  of  execution  of  the  jobs entrusted to  the contractor.  This position is indisputably true. But it has also to be emphasised that what spare parts or materials  that would  be required  were  not  identified goods and it was submitted that these would be treated to be the goods  of the  owner, and  given on  ’Contract Loan’. It appears to us that the idea was that the moment these spares and materials  were required  for the  jobs entrusted to the appellant and there was delay in supplying these spare parts and materials,  the contractor  would be  free to procure or obtain these spares and materials either by manufacturing or by purchase from the market local or foreign, these goods to be identified  and would  be treated by the operation of the contract to  be the  goods of the owner of the planes. It is true as was emphasised that in order to be given out on loan by the  ’owner’ to  the contractor,  the ’owner’  must  have property in  the spares  and materials  in question. But the ’owner’, i.e. the Government, in our opinion, in the context of  1951   agreement,  and   it  is  indisputable  that  the transactions in  this case  were done  on the  basis of  the agreement of  1951, became  the owner  of the  property  the moment the  goods were  identified and  there was  delay  or inability on  the part of the government in supplying spares and materials.  It was  emphasised that  not a  consolidated price  was   contemplated  but  what  was  contemplated  was separate price for the materials. Indeed the invoices relied upon by  the parties  in the specific works orders indicated those were  charged for  separately. The  basis for this has been explained  in the  affidavit  of  Shri  Krishna  Murthy mentioned  hereinbefore.   The  affidavit   was  before  the authorities below as also before the High Court of Karnataka and there  is no  dispute  as  to  the  correctness  of  the statements made in the said affidavit.      In  the  case  of  Commissioner  of  Commercial  Taxes, Mysore, Bangalore  vs. Hindustan  Aeronautics Ltd.,(1)  this Court construed the 265 correspondence between  Railway  Board  and  the  respondent assessee, which  correspondence to our opinion has a ring of similarity to  the  terms  and  conditions  of  the  present transaction, for  the  manufacture  and  supply  of  railway coaches, and  the indemnity bond in respect of the contract. It was  held by  this Court  that the answer to the question whether a contract is a works contract or a contract of sale depends upon  the construction  of the terms of the contract in the  light of surrounding circumstances. It was held that when all  the materials  used in the construction of a coach belonged to  the Railways there could not be any sale of the coach  itself.  It  was  a  pure  works  contract,  and  the difference between  the price  of a  coach and  the cost  of materials being  only the  cost of  service rendered  by the assessee. This  Court emphasised that whether the wheel sets and under  frames were  supplied free of cost or not made no essential difference.  The material  and wage  escalator and adjustments regarding  final price mentioned in the contract were neutral  factors. The  facts which should be emphasised in transactions  in question  with which  we are  concerned, that the  transactions related  to the  entrustment  of  the maintenance of  the airplanes  of the I.A.F. These had to be kept ready  for  all  times  to  meet  all  situations.  All avoidable  and   conceivable  delays   were  planned  to  be eliminated and  in the  background of this second factor, it is further  to be  emphasised  that  for  the  bulk  of  the materials, the Government undertook to supply the spares and

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materials  and  it  is  only  in  those  cases  where  these materials could  not be  supplied or  provided  for  by  the Government or  there was  delay, that it was stipulated that these could  be procured  or manufactured  by the contractor within the  prices sanctioned  by the  Government. and after being procured  or manufactured  by  the  contractor,  these could not be used for any purpose except in the execution of the jobs  entrusted to the contractor. The contractor had no disposing power  or property  in these spares and materials. The fact that these materials were separately placed at cost plus 10% profit were to ensure quick and proper execution of the works  and were  like the  railway coaches’ case neutral factors. This  conclusion is strengthened by the expressions we have extracted from the 1951 Contract itself.      It is  manifest in  the instant  case from the terms of the contracts  and transactions,  as in  the railway coaches case and  as was emphasised by Sikri, C.J. that the property in the materials which are used in the execution of the jobs entrusted to the contractor in this case became 266 the property  of the  Government before  it was  used. It is also manifest  that there  was no  possibility of  any other materials, to  be used  for the  construction  as  would  be manifest from  the affidavit  and the correspondence and the invoices, and  works orders  in these transactions. Emphasis was placed  before the  Tribunal as  well as before the High Court of  Karnataka on  the case  of  State  of  Gujarat  v. Variety Buildings(1)  where the court was concerned with the ’bus  bodies’.  In  the  ’bus  bodies’  case,  the  assessee contractor had continued to have the ownership rights and it was held  that the ’bus body’ had to be transferred from the contractor to  the other  party as  a result of contract for sale but  in the  instant  case  it  is  manifest  that  the specified spares  and materials  were not  the properties of the contractor,  in the  sense that the contractor never had any ownership over these. The conclusion arrived at by us is in consonance with the principles laid down by this Court in the  case   of  Ram   Singh  &  Sons  Engineering  Works  v. Commissioner of Sales Tax, U.P.(2)      For the  reasons aforesaid,  we are of the opinion that the High  Court of Karnataka was not right in its conclusion on the  taxability of  the turnover  of the spares parts and materials supplied in execution of appellant’s job works. As a result  except for  the item on canteen sales which is not in  dispute  before  us,  these  appeals  are  allowed.  The necessary adjustments  in the assessments should be made. In the facts and circumstances of these cases, the parties will bear their own costs throughout. S.R.                                        Appeal allowed. 267