Contract of Sale vis-à-vis Works Contract

In CST v. Sabarmati Reti Udyog Sahakari Mandali Ltd., (1976) 3 SCC 592, it was held as under:
“It is well settled that whether a particular transaction is a contract of sale or a works contract depends upon the true construction of all the terms and conditions of the document, when there is one. The question will depend upon the intention of the parties executing the contract. As observed in State of Gujarat v. Variety Body Builders, (1976) 3 SCC 500, there is no standard formula by which one can distinguish a contract of sale from a contract for work and labour. The question is not always easy and has for all time vexed jurists all over. The distinction between a contract of sale of goods and a contract for work and labour is often a fine one. A contract of sale is a contract whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. (Halsbury’s Laws of England, 3rd Edition, Vol. 34, Page 6).
The above paragraph in CST v. Sabarmati Reti Udyog Sahakari Mandali Ltd., (1976) 3 SCC 592, sufficiently demonstrates that the question will depend upon the intention of the parties executing the contract and that there can be no standard formula by which one can distinguish a contract of sale from a contract of work and labour. The said principle stated in the abovesaid paragraph can be applied under all situations and since after the Forty-Sixth Amendment as held in Larsen and Toubro Limited v. State of Karnataka, (2014) 1 SCC 708, the first condition to be found out is as to whether a contract is a “works contract”. It has to be necessarily examined based on the terms agreed between the parties as to what is the intention of the parties. Therefore, applying the above tests, since it is found that the present contract is a contract for sale, it cannot be held to be a “works contract.”
In State of A.P. v. Guntur Tobaccos Limted, AIR 1965 SC 1396, it was held:
“The fact that in the execution of a contract for work some materials are used and property in the goods so used passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that account to sell the materials. A contract for work in the execution of which goods are used may take one of three forms. The contract may be for work to be done for remuneration and for supply of materials used in the execution of the works for a price, it may be a contract for work in which the use of materials is accessory or incidental to the execution of the work: or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances: if it is of the first; it is a composite contract for work and sale of goods: where it is of the second category, it is a contract for execution of work not involving sale of goods.” Kone Elevator India Private Ltd. V. State of Tamil Nadu, (2014) 7 SCC 1.

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