Divisible composite contract for supply and commissioning treated as sale of goods, not a pure works contract.

A contract for design, manufacture, supply, erection and commissioning of a product handling system was treated as a divisible composite contract rather than a pure works contract. Separate pricing and distinct terms for supply and for transportation, erection, testing and commissioning showed severable obligations, while the purchaser's right to reject the unit until successful commissioning indicated that property was intended to pass only after completion. Applying the dominant object test and the distinction between sale and work-and-labour contracts, the HC held that the supply element amounted to a sale of goods and the service element was incidental. The transaction was therefore taxable as a sale of goods, and the reference was answered against the assessee.

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Issues: Whether the contract for design, manufacture, supply, erection and commissioning of the product handling system was a contract of sale of goods or a works contract, and whether it was divisible into separate contracts for supply and for services.

Analysis: The contract and purchase order showed separate pricing and separate terms for supply of equipment and for transportation, erection, testing and commissioning. The system was to be manufactured to specifications, supplied in components, and installed at the purchaser's site, but no civil work or foundation work necessary to make the system part of the immovable property was to be done by the supplier. The purchaser's right to reject the unit until successful commissioning, together with the contractual structure and payment terms, indicated that property in the system was intended to pass only after commissioning. Applying the dominant object test and the settled distinction between a contract for sale and a contract for work and labour, the Court held that the contract was a composite but divisible contract, with one part amounting to sale of goods and the other part relating to incidental services.

Conclusion: The transaction was not a pure works contract; it was a divisible composite contract involving a sale of goods. The reference was answered against the assessee and in favour of the department.

Final Conclusion: The Tribunal's view was reversed, and the question referred was answered in the negative by treating the transaction as a taxable sale of goods rather than a non-sale works contract.

Ratio Decidendi: Where a contract for manufacture, supply, erection and commissioning shows separable consideration for goods and services, and the goods do not become part of immovable property before completion and acceptance, the contract may be treated as a divisible contract of sale of goods rather than as a works contract.

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