Case Note & Summary
The case involves a reference under Section 61 of the Bombay Sales Tax Act, 1959, made by the Maharashtra Sales Tax Tribunal at the instance of M/s. Bharat Heavy Electricals Ltd. (BHEL), a Government of India undertaking. BHEL was engaged by Rashtriya Chemicals & Fertilizers Ltd. (RCF) for designing, engineering, supplying, erection, installation and commissioning of the Trombay-V Expansion Project under a work order dated 20th October 1978 for a total price of about Rs. 22 crores. During the period from 1st April 1979 to 31st March 1980, the contract was performed. The Assistant Commissioner of Sales Tax treated the transaction as a sale, and the Deputy Commissioner upheld that view, holding it not to be a works contract. The Sales Tax Officer levied penalty under Section 36(3) of the Act without giving an opportunity of being heard. BHEL contended that the contract was a divisible contract for supply of labour and materials, and that the property in goods was not transferred as goods but as part of the erected and installed structure. Appeals were filed against assessment orders dated 16th March 1984 and 20th May 1984, which were partly allowed. Second appeals were filed before the Tribunal, which were decided on 6th February 1993, upholding the view that the transactions were sales. The question referred to the High Court was whether the Tribunal was justified in holding that the supplies of materials made by BHEL's Mumbai unit to RCF were sales liable to tax under the Bombay Sales Tax Act, 1959. The High Court analyzed the terms of the work order and the nature of the contract, and held that the contract was a composite works contract for the execution of a project, and not a sale of goods. The court emphasized that the intention of the parties was to transfer the property in the goods as part of the erected structure, and not as chattels. Therefore, the supplies were not liable to tax as sales under the Act. The court also noted that the penalty under Section 36(3) was imposed without proper hearing and was unsustainable. The reference was answered in the negative, in favor of the applicant.
Headnote
A) Sales Tax - Works Contract vs. Sale - Interpretation of Contract Terms - Bombay Sales Tax Act, 1959, Section 61 - The question was whether the transaction between the applicant and RCF for designing, engineering, supplying, erection, installation and commissioning of a project was a works contract or a sale of goods. The court examined the terms of the work order and held that the contract was a composite works contract and not a sale of materials, as the property in goods was not intended to pass as goods but as part of the erected structure. (Paras 1-6) B) Sales Tax - Penalty - Section 36(3) of Bombay Sales Tax Act, 1959 - The penalty levied under Section 36(3) without giving an opportunity of being heard was challenged. The court noted that the penalty was imposed without proper hearing and was therefore unsustainable. (Para 5)
Issue of Consideration
Whether the supplies of materials made by the applicant's Mumbai unit to RCF under a work order dated 20th October 1978 constituted sales liable to tax under the Bombay Sales Tax Act, 1959, or were part of a works contract.
Final Decision
The reference is answered in the negative, i.e., the Tribunal was not justified in holding that the supplies were sales liable to tax under the Bombay Sales Tax Act, 1959. The court held that the contract was a works contract and not a sale.
Law Points
- Works contract
- Sale of goods
- Divisible contract
- Bombay Sales Tax Act
- 1959
- Section 61
- Section 36(3)
