Composite contract for compressors treated as a sale where supply of equipment was the dominant obligation and labour was incidental.

A composite agreement for designing, manufacturing, supplying, transporting, erecting and commissioning compressors was treated as a sale transaction because the contract, read as a whole, showed that the purchaser provided the site, foundation, civil works, electricity and crane facilities, while the contractor's principal obligation was supply of equipment. The consideration was structured mainly for compressors and allied equipment, with only an incidental component for transport, handling, erection, testing and pre-commissioning. Applying the principles on composite contracts and the tests reiterated in Kone Elevator, the labour and erection elements were held to be incidental, so the supplies were liable to tax as a sale under the Bombay Sales Tax Act, 1959.

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Issues: Whether the contract for designing, manufacturing, supplying, transporting, erecting and commissioning compressors constituted a works contract or a sale transaction liable to tax under the Bombay Sales Tax Act, 1959.

Analysis: The contract was construed as a whole and its clauses showed that the purchaser was to provide the site, foundation, civil works, electricity and crane facilities, while the contractor's principal obligation was supply of equipment. The price structure treated the bulk of the consideration as cost of compressors and allied equipment, with only a small part attributable to transportation, handling, erection, testing and pre-commissioning. The invoices also reflected supply of compressors against the work order. Applying the principles governing composite contracts and the tests reiterated in Kone Elevator, the contractual setting showed that the labour and erection elements were only incidental and the dominant character of the transaction was supply of equipment.

Conclusion: The contract was not a works contract; it was a contract for sale of equipment, and the supplies were liable to tax under the Bombay Sales Tax Act, 1959.

Ratio Decidendi: Where the terms of a composite agreement show that the purchaser undertakes the preparatory civil work and the contractor's principal obligation is supply of goods, with only an incidental labour component, the transaction is to be treated as a sale and not as a works contract.

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