The judgement although related to Sales Tax Regime but lays down a significant principle for arriving at the valuation of supply in GST wherein goods are being supplied to the contractor and are being debited from the final bill.
The appellant-company is a building contractor at Rajnandgaon in Madhya Pradesh and is registered as a dealer under the Madhya Pradesh General Sales Tax Act. The appellant’s tender for construction of foodgrains godown and ancillary buildings at Rajnandgaon was accepted by the Central Public Works Department. It was an item rate tender.
Contract for construction included cost of iron, steel and cement however subsequently the same was agreed to be supplied by awarder and to be deducted from the billing raised by contractor-In the tender so submitted by the appellant the prices of the materials to be used for the construction including cost of iron, steel and cement were included. The PWD, however, had agreed to supply from its stores the said iron, steel and cement for the construction work and to deduct the prices of materials so supplied and consumed the construction from the final bill of the appellant.
Reference to Clause 10 of the Contract by the Supreme Court-
Clause 10. If the specification or Schedule of terms provides for the use of any special description of materials to be supplied from Engineer-in-charge’s Stores, or if it is required that the Contractor shall use certain stores to be provided by the Engineer-in-charge as shown in the Schedule of materials hereto annexed, the contractor shall be bound to procure and shall be supplied such material and stores as are from time to time required to be used by him for the purposes of the contract only, and the value of the full quantity of materials and stores to supply at the rates specified in the said Schedule of materials may be set off or deducted from any sums then due or thereafter to become due to the contractor under the contract or otherwise, or against or from the Security deposit, or the proceeds or sale thereof if the same is held in Government securities, the same or a sufficient portion thereof being in this case sold for the purpose.
It further provided
All materials so supplied to the contractor shall remain the absolute property of Government and shall not be removed on any account from the site of the work, and shall be at all times open to inspection by the Engineer-in-charge. Any such materials remaining unused and in perfectly good condition at the time of the completion or determination of the contract shall be returned to the Engineer-in-charge at a place directed by him, if by a notice in writing under his hand he shall so require; but the contractor shall not be entitled to return any such materials unless with such consent and shall have no claim for compensation on account of any such materials so supplied to him as aforesaid not being used by him or for any wastage in or damage to any such materials. Provided that the contractor shall in no case be entitled to any compensation or damage on account of any delay in supply or non-supply thereof all or any such materials and stores. Provided further that the contractor shall be bound to execute the entire work it the materials are supplied by the Government within the scheduled time for completion of the work plus 50 per cent thereof (scheduled time plus 6 months if the time of completion of the work exceeds (12 months) but it a part only of the materials has been supplied within the aforesaid period, then the contractor shall be bound to do so much of the work as may be possible with the materials and stores supplied in the aforesaid period. For the completion of the rest of the work, the contractor shall be entitled to such extension of time as may be determined by the Engineer-in-charge whose decision in this regard shall be final”
Observation by the Supreme Court on the above Clause-As mentioned hereinbefore, under the said clause, all materials supplied to the contractor remained the absolute property of the Government and could not be removed on any account from the site of the work and were at all times open to inspection by the Engineer-in-charge. Any such materials remaining unused and in perfectly good condition at the time of completion or determination of the contract were to be returned to the Engineer-in-charge at a place directed by him by a notice in writing in his hand if he so required but the contractor was not entitled to return any such material unless he was required to do so. There was no dispute that for the construction the appellant was supplied iron, steel and cement by the PWD and it had purchased other materials from the market. The prices of iron, steel and cement supplied to the appellant for the work were deducted from its final bill.
Question before the Supreme Court
The question, therefore, is whether there was sale and whether the property in the goods in question passed to the appellant or continued to remain with the PWD although the PWD had in the final bill debited the prices of the goods so supplied to the appellant under clause (10) of the contract. The question, therefore, is whether there was sale of goods in view of the contract between the parties whereunder the custody and control of the goods remained with the PWD and goods were only used in the construction under the contract.
Reference by the Supreme Court to the judgement in Government of Andhra Pradesh v. Guntur Tobaccos Ltd.
Even if property of some goods might get transferred to the recipient but that in itself would not be the only reason for holding that goods have been sold by the supplier-The majority of the judges in a Bench of three learned Judges, viz., Justice Shah and Justice Sikri held that although in the execution of a contract for work some materials were used and property in the goods so used passed to the other person, the contractor undertaking the work would not necessarily be deemed, on that account, to sell the materials.
Contract for work in the execution of which goods were used might take three forms which are enumerated as under-
- The contract might be for the work to be done for remuneration and for supply of materials used in the execution of the works for a price- It is composite contract for work and sale of goods
- The contract for work in which the use of the materials was necessary and incidental to the execution of the work- It is a contract for execution of work not involving sale of goods.
- The contract for work and use and supply of materials, though not accessory to the execution of the contract, was voluntary or gratuitous- There is no sale because though the property passed, it did not pass for a price.
Facts of the Case- In that case, the assessee company was a dealer carrying on the business of redrying in its factory raw tobacco entrusted to it by its customers. The assessee redried the tobacco, packed it in packing materials purchased from the market and delivered it to the customers. For redrying each bale of tobacco the assessee had charged the customers a certain sum but there was no separate charge for the value of the packing materials used. The assessee was assessed to sales tax under the Madras General Sales Tax Act, 1939, on the value of the packing materials on the ground that there was a sale of the packing materials.
Held by the High Court-The High Court found that the packing of the redried tobacco and its storage for the requisite period was an integral part of the redrying process and held that there was no sale of packing materials.
Held by the Supreme Court-On appeal in that case, the Supreme Court by majority held that finding recorded by High Court that it was intended by the parties that the packing material should form an integral part of the process of redrying the without the use of the “packing material” redrying process could not be completed, and that there was no independent contract for sale of “packing material”. It was only as an incident of redrying process and as a part thereof that the assessee had to seal up the package of tobacco, after it had emerged from the reconditioning chamber, with a view to protect it from atmospheric action. In the absence of any evidence from which contract to sell “packing material” for a price might be inferred, the use of the “packing material” by the assessee must be regarded as all execution of the works contract and the fact that the tobacco delivered by the constituent was taken away with the “packing material” would not justify an inference that there was an intention to sell the “packing material”.
Reference to Hindustan Steel Ltd. v. The State of Orissa, 25 STC 21
Where company supplies to the contractor for use in its construction coal, steel and cement etc. for a consideration, it amounts to a “sale” and the company becomes a “dealer” for the purpose of sales tax.
Distinguishing Judgement in the case of Brij Bhushan Lal Parduman Kumar etc. v. Commissioner of Income- Tax, Haryana, Himachal Pradesh and New Delhi-III, 115 ITR 524
The Court distinguished the judgement in the above case since it pertained to Income Tax and Income-Tax Officer sought to estimate the profits of the appellant at a percentage of the net cash payments received by the appellants against the contracts as well as the cost of the materials supplied by the Government.
The Court distinguished it by holding that Since no element of profit was involved in the turnover represented by the cost of the materials supplied by the Government to the appellant, the income or profits derived by the appellant from such contracts had to be determined on the basis of the value of the contracts represented by the cash payments received by the appellant from the Government exclusive of the cost of the materials received for being used, fixed or incorporated in the works. There the question was whether there was profit taxable to income-tax on the sale of the materials. There was none and it was so held.
Observation and Decision by the Court
For the purpose of performance, the contractor was bound to procure materials. But in order to ensure that quality materials are procured, the PWD undertook to supply such materials and stores as from time to time required by the contractor to be used for the purpose of performing the contract only. The value of such quantity of materials and stores so supplied was specified at a rate and got set off or deducted from any sum due or to become due thereafter to the contractor. Though, in a transaction of this type there is no inherent sale; a sale inheres from the transaction. Clause (10) read in the proper light indicates that position.
In the instant case, by use or consumption of materials in the work of construction, there was passing of the property in the goods to the assessee from the PWD. By appropriation and by the agreement, there was a sale as envisaged in terms of clause (10) set out hereinbefore. Therefore, in our opinion, there was a sale which was liable to tax.