JUDGMENT Rajes Kumar, J.
1. This is a revision filed by the applicant under Section 11 of the U.P. Sales Tax Act, 1948 against the order of Tribunal dated March 8, 1991 relating to assessment year 1984-85.
2. The applicant was a manufacturer of electrode, welding-rods and was also a trader of scrap, iron and steel rods. During the year under consideration, the applicant had entered into a contract on February 28, 1984 with M/s. Gunkar Electrodes Pvt. Ltd., Rampur, for design, manufacture, fabricate and installation of complete machinery and equipment of electrodes plant for Rs. 5,15,000. The claim of the applicant was that the nature of works was works contract and not sale and therefore, the amount received for execution of such contract was not liable to tax. Assessing authority had not accepted the claim of the applicant and treated the agreement as contract for sale and not works contract and accordingly levied tax on the amount of Rs. 5,15,000. Aggrieved by the order of assessing authority, applicant filed appeal before the Assistant Commissioner (Judicial), Sales Tax, Moradabad, which was rejected. Claim of the dealer of works contract was also rejected by Tribunal. Being aggrieved by the order of Tribunal, the present revision has been filed.
3. The only question for consideration in the present revision is that whether the agreement dated February 28, 1984 between the applicant and M/s. Gunkar Electrodes Private Limited, Rampur, was in the nature of works contract or contract for sale. A copy of the agreement is annexure 2 to the present revision. It has also been referred in the order of Tribunal. The agreement reads as follows :
AGREEMENT This agreement is made at Rampur on this 28th day of February, 1984. M/s. Heera Electrodes, Rampur, having its office near Kosi River Bridge, Rampur, represented by Sri Pradeep Kumar Jain, its partner, hereinafter referred to as the first party.
AND M/s. Gunkar Electrodes Private Ltd., Rampur, having its registered office at Jwalanagar, Rampur, and being represented by Shri R.B. Jain, managing director of the company, hereinafter referred to as the second party.
Whereas the second party is desirous of getting supplied an electrode plant from the first party, both the parties have entered into the following agreement in this connection :
1. That the first party will design, manufacture, fabricate and install the complete machinery and equipments of electrodes plant as per quotations furnished by the first party to the second party, which is annexure I to this agreement.
2. That the costs of electrodes plant so fabricated, supplied, erected and installed by the first party at the site of the second party will be Rs. 5,15,000 (rupees five lakhs fifteen thousand only), which will include the costs of plant, installation charges, providing of technical know-how and giving of training to staff.
3. That the second party will pay amount to the first party as running payments as per requirement of the first party, but maximum to the extent of 80 per cent of the costs of work done/costs of material at site.
4. That till the supply and installation of electrode plant and machinery by the first party to the second party, the second party will be bound to pay 90 per cent of the costs of the electrode plant and remaining 10 per cent may be paid by the second party to the first party after watching performance of the supplied electrode plant and machinery for a period of one year.
5. That the first party also agrees to take back plant if it fails to give full performance during the period of one year from the date of installation of plant and in that case the total cost of the plant will be refunded by the first party to the second party.
6. That the first party hereby confirms that it will provide operational staff for the electrode plant under this agreement. The said operational staff will remain in the direct employment of the second party on terms and conditions to be negotiated in-between them. The first party also confirms to train personnel for operating the plant if the second party so desires and provide them to it.
7. That the second party shall be responsible for all civil works such as godowns, buildings, foundations, flooring, plastering, etc. The civil work shall be carried on and completed by the second party at its costs as per requirement indicated by the first party.
8. That the first party is at liberty to modify the design in consultation with the second party for technical improvement without affecting the guaranteed performance of the plant.
9. That the first party hereby guarantees that the designs are its own and that the plant and machinery to be designed and supplied by it does not infringe any existing patent or trade mark and agrees to indemnify against the latter for any such infringement.
10. That in case any dispute or difference arises at any time between the parties to this agreement during the period of fabrication and supply of the plant or during the performance guarantee period thereof, or on account of any misinterpretation of this agreement, such dispute or difference shall be referred to an arbitration. Each of the two parties will appoint one arbitrator under the provisions of Indian Arbitration Act, 1940 or any statutory modification or reenactment thereof, for the time being in force. All proceedings in such arbitration will be held at a place or places as may be determined by the arbitrators. In case of any dispute in-between arbitrators, one independent umpire will be appointed, whose decision will be final.
In witnessth we have put our signatures on this 28th day of February, one thousand nine hundred eighty four.
Relating to aforesaid contract, applicant had prepared a Bill No. 1 dated February 1, 1985 which is annexure 3 to the present revision, reads as follows :
HEERA ELECTRODES Works & Office : Kosi River Bridge, Rampur (U.P.) Manufacturers of all types of steel wire and plant and machinery Gram : Heera Phone Off : 4462 Res : 4640 Customer : M/s. Gunkar Electrodes (Pvt) Limited, Rampur Mode of Despatch P-Bill No. 1 Dated 1-2-1985 Consignee : Customer's Order No. & 38-A/GEPL/84-85 Date or other reference.
4. The claim of the applicant was that the contract was for supply, fabrication and installation of complete machinery and equipment of electrodes plant installation for composite price at Rs. 5,15,000 and the contract being a composite indivisible contract for design, manufacture, fabrication and installation, it was in the nature of works contract. The assessing authority had rejected the claim merely on the ground that the job-work was only incidental and the agreement was mainly for supply. For rejection of claim of works contract, Tribunal had given the following reasons :
From the reading of this agreement as a whole, it transpires that the assessee shall design, manufacture, fabricate and install complete machinery and equipments of electrodes plant, as per quotations furnished by it ; that during the supply and installation of the electrodes plant and machinery, by the first party (assessee) to the second party, the second party will be bound to pay 90 per cent of the cost of the electrodes plant and remaining 10 per cent must be paid by the second party to the opposite party by watching the performance of the supplied electrodes plant and machinery for a period of one year ; that the assessee also agreed to take back plant, if it fails to give full performance during that period of one year from the date of installation of plant ; that the assessee would provide operational staff for the electrodes plant under this agreement and that staff will remain in direct employment of the second party ; that the assessee also takes the responsibility to train the personnel for operating the plant if the second party so desire and provides them ; that the second party will be responsible for all civil works such as godown, buildings, to modify, design in consultation of the second party for technical improvement.
From these terms specially terms Nos. 4 and 5, it is clear that the property in plant and machinery remained with the assessee till the time of its installation and it passed only to the payee after installation and are tested to be functional effectively and properly without any defect and during the time of such test the property in machinery and plant remained with the assessee, as is clear from the condition that if any machinery or equipment was found defective, the assessee was liable to take back of the same.
Therefore, the contract is one of the primary contract for supply of materials at a price agreed to between the parties for the materials so supplied and the work or service rendered in installation incidental to the execution of the contract, as the cost of work and labour is very nominal in comparison to the cost of the material so supplied and hence the contract is one for sale of material and the sale proceeds would be exigible to sales tax.
5. To decide the present issue on the facts stated in the Tribunal order, it is necessary to consider various decisions of apex Court, in which the differences between the contract for work and a contract for sale of goods has been considered. In the case of Commissioner of Sales Tax, Madhya Pradesh v. Purshottam Premji , it has been held :
The primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in the person performing work or rendering service no property in the thing produced as a whole .... 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, at some time before delivery, and the property therein passes only under the contract relating thereto to the other party for price.
6. This was the test applied by apex Court in State of Rajasthan v. Man Industrial Corporation Ltd. [1969] 24 STC 349 (SC) for holding that a contract for providing and fixing four different types of windows of certain sizes according to "specifications, designs, drawings and instructions" set out in the contract was a contract for work and labour and not a contract for sale. Shah, J., speaking on behalf of the court, analysed the nature of the contract and pointed out that "the window-leaves did not pass to the Union of India under the terms of the contract as window-leaves. Only on the fixing of the windows as stipulated, the contract could be fully executed and the property in the windows passed on the completion of the work and not before". The contract was not for the transfer of property in the window-leaves as window-leaves. It was a contract for providing and fixing windows and windows could come into existence only when the window-leaves were fixed to the building by bestowing labour and skill, and it was for this reason that it was held to be a works contract.
7. The same test was applied by the honourable Supreme Court in Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax reported in [1978] 42 STC 409 : 1979 UPTC 872. There the question was whether a contract for fabrication, supply and erection of certain types of rolling shutters was a contract of sale or a contract for work and labour. The apex Court analysed the nature of the contract and pointed out that "not only are the rolling shutters to be manufactured according to the specif