1970 (12) TMI 83 - HC - VAT and Sales Tax

Court rules manufacture and supply of bricks contract as works contract, not sale.

The court determined that the contract for the manufacture and supply of kiln-burnt bricks between the assessee and the Public Works Department was a ... - Issues Involved:1. Whether the contract in question is a works contract or a contract of sale of bricks or a composite contract.Detailed Analysis:Issue 1: Nature of the ContractThe primary issue was whether the contract between the assessee and the Public Works Department of Gujarat for the manufacture and supply of kiln-burnt bricks was a works contract, a contract of sale, or a composite contract. The court analyzed this by examining the real intention of the parties, the terms of the contract, and the surrounding circumstances.Analysis of Contract Terms:1. Lump Sum Payment: The contract stipulated a lump sum payment for a unit of 1,000 bricks without separate rates for work done or materials supplied.2. Land Use: The contract was to be executed on land provided by the Government at a nominal rent, and the Government also provided land for excavating soil free of rent.3. Material Procurement: The assessee had to arrange for other raw materials, equipment, water, coal, and labor, with some assistance from the Government.4. Control and Supervision: The Government retained control over the manufacturing process, including the type of kilns used and the method of soil excavation.5. Security Deposit and Time-Limit: The assessee had to make a security deposit and adhere to a specified time-limit for contract execution, with penalties for delays.6. Prohibition on Sale: The assessee was prohibited from selling the manufactured bricks or any portion thereof to any private party.7. Purchase Obligation: The Government agreed to purchase all bricks, including inferior quality ones, at specified rates.8. Fixed Rates: The assessee could not claim increased rates due to market fluctuations.9. Government's Right to Modify Work: The Government could modify the extent of work required without compensating the assessee for potential profits lost.10. Sub-letting Restrictions: The assessee could not sub-let the contract without written permission.11. Employment Conditions: The contract included provisions for fair wages and prohibited the employment of minors or unhealthy animals, with the Government having the authority to enforce these conditions.Court's Conclusion:The court concluded that these terms are inconsistent with a pure contract of sale. The contract was found to be a works contract because:- The emphasis was on the employment of skill and labor to produce the desired result (bricks of specific design and quality).- The materials used (such as clay) were supplied by the Government, indicating that the property in the materials did not pass to the assessee.- The Government retained control over the manufacturing process, and the bricks bore the stamp of Government ownership at all stages of production.Distinguishing from Previous Cases:The court distinguished this case from the Supreme Court decision in Chandra Bhan Gosain v. State of Orissa, where the contract was found to be a sale. The distinguishing factors included:- The property in the earth (clay) did not pass to the assessee in the present case.- The assessee had no right to sell the bricks to any other party.- The Government provided land and materials free of charge, retaining ownership throughout the process.Final Judgment:The court held that the contract was a works contract and not a contract of sale of bricks. The real intention of the parties was for the assessee to provide labor and skill to produce bricks for the Government, with the property in the materials and the finished product remaining with the Government.Conclusion:The transaction envisaged by the contract was a works contract, and not a contract of sale of bricks. The court answered the reference accordingly and awarded costs to the assessee.