Work contract vs sale of materials: embroidery service using incidental jari was not a taxable composite sale.

A contract for embroidery was treated as a contract of work and labour, not as a composite sale of jari materials, because the true substance of the bargain showed that the customer engaged the assessee to perform embroidery on supplied sari pieces. The inclusion of jari cost in a consolidated charge, and the passing of property in materials with the finished sari, did not by itself establish a sale unless there was an express or implied agreement to sell the materials as such. The use of jari was only incidental to the service undertaken, so the arrangement did not amount to a taxable sale of materials.

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Issues: Whether the embroidery arrangement was a works contract or a composite contract comprising a sale of jari materials and a contract for work.

Analysis: The decisive test was the true nature and substance of the bargain, namely whether the parties intended a sale of materials as such or whether the dominant object was execution of embroidery work. Mere inclusion of the cost of jari in the consolidated charge, or the fact that property in the materials passed with the finished sari, was not enough unless there was an express or implied agreement to sell the materials. On the facts, the customer engaged the applicants to do embroidery work on supplied sari pieces, and the use of jari was only incidental to the service undertaken. The consolidated bill and surrounding circumstances did not show a separable agreement for sale of jari materials.

Conclusion: The agreement was a contract of work and labour and not a composite contract involving a sale of jari materials; the answer was in favour of the assessee.

Ratio Decidendi: A contract is taxable as a sale of materials only where, on a true construction, there is an express or implied agreement to sell the materials as such; mere passing of property in materials used in performing a service contract does not constitute a sale if the materials are merely ancillary to the work.

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