JUDGMENT Satish Chandra, J.
1. The assessee M/s. Ram Singh & Sons Engineering Works, Khatauli, District Muzaffarnagar, carries on the business of manufacturing and sales of sugarcane machines, parts and cranes, etc. For the assessment year 1965-66 the books of account of the assessee were rejected, and the turnover was estimated at Rs. 11,30,236.32, on which sales tax of Rs. 51,307.08 was imposed. According to the assessee, a turnover of Rs. 3,72,500 was not liable to tax, because it did not represent the proceeds of any contract of sale but of works contract, which did not attract sales tax. This turnover represented two transactions of supply of cranes installed at the site of the purchaser-mills, namely, Upper Doab Sugar Mills, Ltd., Shamli, and M/s. Kamlapati Motilal Sugar Mills, Motinagar.
2. The Sales Tax Officer repelled this contention of the assessee. He held that the substance of the contract was sale of ready-made cranes. The price that the purchaser paid was for the crane, though in fixing the price regard was kept for the installation and erection charges. The turnover was liable to sales tax. This view was upheld in appeal.
3. The assessee took the dispute to the revising authority. The revising authority considered the terms of the contract and the attending circumstances and held that the contract was an indivisible one, and there was no element of sale of goods in it. Consequently, the assessee was not liable to pay sales tax on this turnover. The revising authority went into the discrepancies pointed out in the assessee's books of account and held that the books of account were properly maintained and were liable to be accepted. Accepting the books of account and deleting the turnover in respect of the two transactions of supply of cranes, the assessable turnover of the assessee was determined at Rs. 7,41,422.29.
4. At the instance of the Commissioner, Sales Tax, the revising authority has referred the following questions of law for the opinion of this court:
(1) Whether, in the facts and circumstances of the case, the turnover of Rs. 1,34,500 made by the assessee in respect of Kamlapati Motilal Sugar Mills amounts to works contract or sale of goods; if so, to what extent ?
(2) Whether, in the facts and circumstances of the case, the turnover of Rs. 2,38,000 made by the assessee in respect of Upper Doab Sugar Mills amounts to works contract or sale of goods; if so, to what extent ?
5. In State of Rajasthan v. Man Industrial Corporation Ltd. [1969] 24 S.T.C. 349 (S.C.), the Supreme Court held that whether a particular contract is one for sale of goods or is a contract for service depends upon the main object of the parties gathered from the terms of the contract, the circumstances of the transaction, and custom of the trade, and no universal rule applicable to all transactions may be evolved.
6. The test to distinguish between a works contract and a contract of sale was laid down in Halsbury's Laws of England, Third Edition, Volume 34, Article 3, at page 6, as follows :
A contract of sale of goods must be distinguished from a contract for work and labour. 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 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. 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 is in substance one for work and labour or one for the sale of a chattel.
7. In Government of Andhra Pradesh v. Guntur Tobaccos Ltd. [1965] 16 S.T.C. 240 at 255 (S.C.), the Supreme Court pointed out:
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 the execution of the work ; or it may be a contract for work and use or supply of materials, though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances ; if it is of the first, it is a composite contract for work and sale of goods ; where it is of the second category, it is a contract for execution of work not involving sale of goods.
8. In respect of a contract which involves labour and skill as well as supply of goods and the contract is indivisible and not splittable into two- one of sale and the other, of work-then according to the Bench of this Court in Commissioner of Sales Tax v. Haji Abdul Majid & Sons [1963] 14 S.T.C. 435, the contract must be held to fall in one class or the other according to the predominant intention of the parties to that contract. If the predominant element is that of sale, it must be held to be contract of sale, and if the predominant element is of performance of contract of work, it is a contract of work. It was observed in this case:
If an article is sold it makes no difference whether the assessee prepared it in accordance with the specifications given by the customer or had prepared it in anticipation of the order and exposed it for sale. When an assessee enters into a contract for sale of an article to be manufactured by him it is a contract of sale and not a contract of work even though he has to spend his labour and skill in producing it. The reason is that the essential contract between the parties is that he should transfer property in the article, after preparing it, to the customer. Transfer of property is the predominating element and the use of labour and skill is only an incidental and subordinate element.
9. It was also observed that if under a contract an article is to be prepared from the assessee's materials and it is to be fitted to something belonging to the purchaser, it is immaterial whether the assessee takes the article to the purchaser's premises and fixes it on the thing.
10. Thus, one has to find what, in substance, was the predominant intention or the main object of the parties in entering into the transaction.
11. In T. V. Sundram Iyengar & Sons v. State of Madras [1975] 35 S.T.C. 24 (S.C.) (Civil Appeals Nos. 2229 to 2231 of 1969 decided on 10th October, 1974), the Supreme Court referred to its earlier decision in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 S.T.C. 353 (S.C.), and observed that in that case the Supreme Court was concerned with a building contract which is one and indivisible. It was held that in the case of such a contract the property in the materials used does not pass to the other party to the contract as movable property. It would so pass if that was the agreement between the parties. If there was no such agreement and the contract was only to construct a building, in that case the materials used therein would become the property of the other party only on the theory of accretion.
12. The theory of accretion being that whatever is embedded or affixed to immovable property becomes the property of the owner of the immovable property, as and when it is embedded or fixed ; if the contract is to construct a building, then the various materials, like bricks, cement, doors, etc., become the property of the owner of the land, the moment they are affixed to it.
13. In order to find the basic intent of the parties, one has to look to the terms and conditions of the contract and the surrounding circumstances.
14. The assessee carries on the business of manufacture and sale of machines and cranes, etc. It is not suggested that its business is to erect or instal machines or cranes. Out of a total turnover of about seven and a half lacs of rupees, there were only two transactions, which are to be considered by us, that involved erection of the cranes manufactured by the assessee.
15. One transaction was with Kamlapati Motilal Sugar Mills, Motinagar. This was for supply of a three-motion electrical overhead travelling crane after erecting it on the spot. This crane was to be used for unloading sugarcane from motor trucks and railway wagons. The terms of the contract were :
With reference to the above and the personal discussions held with your Shri Ram Singh on 30th January, 1965, we have pleasure in placing our order for three-motion electrical overhead travelling crane for unloading sugarcane from motor truck and rail wagons. We confirm all the specifications given in your above-referred quotation with the following changes :
1. Structural capacity will be suitable for safe-load of two unloading crabs, i. e., 10 tons.
2. Span of the long gantry which is given 50' will be confirmed shortly.
3. Your supply will also include gantry of 35' x 50' to make the crane three-motions.
4. We shall not be required to give any material except electric line up to the crane.
5. You will be supplying crane-driver's cabin with automatic control panel free, provided its trial is successful.
6. The minimum number of operations will be 30 per hour approx.
7. You will give us working trial of the equipment at least by 30th September, 1965.
8. The price of the above equipment will be Rs. 1,34,500, f. o. r. Khatauli, sales tax, excise duty will be extra, if payable. This price includes erection charges.
9. Terms of payment : 40% advance with the order.
10% after one month from the date of the order.
25% after the erection of bridge and columns.
15% after trial.
10% after one month's satisfactory performance.
16. A penalty of 1/2 per cent will be payable per week by you in case of delay per week after 30th September, 1965, and to a maximum of 5 per cent of the total value.
17. You will send your staff for erecting the unloader and we shall be providing you necessary tools and tackles and welding set when required. Available accommodation will also be provided.
18. We are enclosing herewith a cheque No. GG/9-58629 dated 1st February, 1965, for Rs. 50,000 over the State Bank of India, Faizabad, as advance. Please acknowledge. Thanking you."
19. The other transaction was in respect of supply of two cranes to Upper Doab Sugar Mills, for Rs. 2,38,000. The terms of the contract were as follows :
That the contractor will supply the company two cranes with two crabs each as under :
1. Crane bridge-The structural design of the crane bridge will be in accordance with the structural specifications of B. S. S. 466 for electric overhead travelling crane. The structural parts will be fabricated from good quality Tata tested steel sections. The girders, for the main bridge will be of lattice construction type heavy duty.
2. Driver's cabin-The driver's cabin will be of weather-proof outdoor construction. It will be with material in a position that the operator's view is not obstructed during the load handling and will travel along with the crane crab.
3. Electrical equipment for driver's cabin-The driver's cabin will be provided with the following electrical equipment and other necessary fittings :
(i) One protective panel for electrical equipment. (ii) Drum controllers for all the motors, (iii) Plug and sockets for head lamp. (iv) One electric light point.
(v) One alarm bell and all other necessary fittings. Step ladders will be provided from the crane bridge for easy access to the cabins.
4. Wiring-Wiring with V. I. R. wire in steel conduit pipes will be provided between individual motors and controllers, current contactors and resistance in the cabin.
20. For connection of current to the trolley, a set of bare copper conductors complete with insulators and strainers mounted on the bridge will be provided. A set of current contactors will be mounted on the trolley, containing renewable graphitic carbon contactors.
21. Price : That for two complete cranes of the above-mentioned specifications with two crabs each including erection, the company will pay to the contractor at the rate of Rs. 1,19,000 per crane with two crabs each including erection complete in all respects with necessary equipment.
Mode of payment :
1. 30% with the order.
2. 20% after two months of the actual commencement of work.
3. 25% after the completion of erection of columns and bridge.
4. 15% after completion and giving satisfactory trials,
5. 10% after one month's satisfactory work.
22. That the contractor will execute the entire work, i. e., fabrication, erection and construction latest by the 30th September, 1964, so that the trials can begin on the 1st October, 1964. The defects will be rectified by the 10th October, 1964. If the work is not completed by the 30th September, 1964, a penalty of Rs. 400 per day from the 1st October, 1964, will be paid by the contractors to the company till the date of completion and satisfactory operation of the cranes.
23. That all materials will be provided by the contractor and electricity will be charged at cost if consumed by the contractor. Only such tools which are available in the stores of the company will be given to the contractor on loan on returnable basis and the contractor will pay to the company the cost of such materials which are not returned to the company. The final payment of the bills of the contractor will be made on his getting nothing due clearance certificate from the stores department of the company.
24. That there will be no liability and responsibility of the company whatsoever besides payment of price of the cranes.
25. That sales tax or excise duty and other government duty, if any, will be extra. Packing and forwarding charges will also be extra."
25. In both the cases the assessee furnished certificates from the purchaser-mills that the price included erection and installation at the site of the sugar mills. In both the transactions the assessee charged, and was paid, sales tax on the total price.
26. The assessee fabricated and manufactured the cranes at its factory. At the site of the sugar mills it constructed structures like columns, bridges, and installed iron rails thereon, and thereafter it fitted the cranes, on them. It gave trials of the cranes and handed over the cranes, after satisfactory trials, in working order.
27. In substance, the transaction was for supply of complete crane in running order, which was possible only after it had been erected on the spot and satisfactorily tried as being in good working condition. In the case of Kamlapati Motilal Sugar Mills the price of Rs. 1,34,500 was for the "above equipment" including erection charges. In the case of Upper Doab Sugar Mills the price was for "two complete cranes of the above-mentioned specifications at the rate of Rs. 1,19,000 per crane with two crabs each including erection complete in all respects with necessary equipment". To us it appears that what the sugar mills paid for was the price of the complete cranes with all necessary equipment, like crane bridge, driver's cabin, electrical equipment for driver's cabin, wiring, etc., etc., the details of which were specified in the contract.
28. The assessee had to bestow labour and skill of a specialised kind in fabricating and manufacturing the crane at its factory. It had also to undertake the cost of labour in erecting and fitting up the cranes at the spot after making the requisite constructions of columns and bridges. The purchaser did not concern itself with the kind of labour and skill the assessee would employ in fabricating or manufacturing or in installing the crane. All it wanted was the delivery of a ready-made crane in working order at the site within the specified time. The subject-matter of the contract was the crane as a complete unit. Since this complete unit was agreed to be sold after being put in working order, regard was had in settling the price to the cost of labour involved in installing it at the site. The predominant object was supply of crane as a complete unit. The bestowing of labour and skill in the execution of the contract appears to us to have been incidental to the supply of the machine.
29. The title in the crane passed to the sugar mills at the time of delivery after it had been completed and installed and shown to be in good running condition. The property did not pass in the various materials or parts of the crane as and when they were fitted or erected at the site. It cannot be said that the property passed to the purchaser as an accretion to land. The theory of accretion was inapplicable. The parties, in our view, intended the property to pass in the subject-matter of the contract, namely, the completed crane as movable property. It was a contract of sale of goods. It was not a contract where the main object was to buy labour or specialised skill. It was a case where the work and labour bestowed by the assessee ended in a product, namely, a completed crane, which became the subject of sale.
30. For the assessee reliance was placed upon State of Rajasthan v. Man Industrial Corporation [1969] 24 S.T.C. 349 (S.C.). In that case the contract was for providing and fixing four different types of windows with rawl plugs in cut-stone works in a building. The Supreme Court put the question : What did the respondent agree to do when it offered its tender ? Did the respondent agree to sell the window-leaves as described in the tender or did it, as part of a works contract, agree to "fix" the windows of certain specifications in the building ? On a consideration of all the circumstances it was held that the object was to enter into a works contract. The fixing of windows was found to be an essential term of the contract which was not incidental or subsidiary to the sale. There the windows on being fixed became part of the building as an accretion to it. The property passed on accretion. That was held to be the main object.
31. To the same effect is the decision of the Supreme Court in State of Rajasthan v. Nenu Ram [1970] 26 S.T.C. 268 (S.C.), which was also a case of supplying and fixing windows to buildings.
32. In our opinion, decided cases are not of much help because the vital point to be seen is the main object or intent of the parties, as evidenced by the terms of the contract and the circumstances of each case. Here the subject-matter of the transaction was the crane, complete in all respects and in working condition. Erection and installation of the unit was incidental or subsidiary to the main object of supplying the crane, because it was undertaken in order to fulfil the contract of supplying the cranes in good working condition. The fact that the contracts provided for payment of sales tax coupled with the fact that the assessee charged and the purchasers paid sales tax corroborates the inference that the intention of the parties was to buy and sell cranes for a price and not to enter into a works contract.
33. The contract was one and indivisible. It was either a contract of work or a contract of sale. It was not splittable into two contracts one for work and the other for sale. Since we have found that the contract was for sale, the entire price would constitute the turnover liable to tax.
34. Our answer to the two questions referred to us is that the turnovers in question amounted to contract of sale of goods in their entirety. The Commissioner, Sales Tax, will be entitled to costs, which are assessed at Rs. 200.