Works contract classification depends on the contract's true substance, not invoices, when materials and labour are inseparable.

Whether electrification and supply-cum-installation contracts were works contracts or sales turned on the true character of the agreement, ascertained from the contract as a whole and the parties' intention. A composite and indivisible contract, in which materials are supplied together with specialised labour, skill, design, erection and completion of the work, is not a sale merely because property in materials passes by affixture or invoices describe the transaction as supply. The Madras High Court noted that indicia such as technical execution, defect liability, delay penalties and payment linked to work done supported works-contract treatment, and rejected reliance on billing nomenclature as conclusive.

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Issues: Whether the two contracts for electrification and supply-cum-installation of cables were works contracts or contracts of sale of materials exigible to sales tax under the Madras General Sales Tax Act.

Analysis: The decisive test was the true character of the contract gathered from its terms and the intention of the parties, not the form of billing or the fact that materials were supplied and fixed in the course of execution. Where the contract is composite and indivisible, and the supply of materials is knitted together with specialised labour, skill, design, erection and completion of the work, the transaction does not become a sale merely because property in the materials passes by affixture. The contracts in question contained numerous indicia of works contracts, including technical execution, price variation, defect liability, penalties for delay, and payment linked to work done. The Tribunal had wrongly treated the invoices and nomenclature as conclusive and had failed to apply the governing tests laid down for distinguishing a works contract from a sale.

Conclusion: The contracts were works contracts and not sales of materials; the turnover relating to them was not taxable as sale turnover.

Final Conclusion: The assessment made by treating the receipts under the two contracts as taxable sales was set aside, and the petitioners succeeded.

Ratio Decidendi: In determining whether a contract is a works contract or a sale, the contract must be read as a whole to ascertain the parties' intention; if the supply of materials is inseparable from the execution of the work and title passes only by affixture in a composite and indivisible contract, the transaction is not a sale of goods.

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