CONTRACT OF SALE AND CONTRACT TO WORK:

DISTINCTION

CONTRACTS LAW II

SUBMITED BY:

DEBARGHYA CHAKRABORTY 2016/BA, LLB/29

DEBARSHI CHAKRABORTY 2016/BA, LLB/30

of

NATIONAL LAW UNIVERSITY ODISHA

Under the guidance
of

MR RAJAT SOLANKI MR KAPIL SHARMA

ASST. PROF RESEARCH ASSOC. & TEACHING ASSOC.
NLU, ODISHA NLU, ODISHA
PAGE I | CONTRACT OF SALE AND CONTRACT TO WORK: DISTINCTION

TABLE OF CONTENTS

TABLE OF CONTENTS ____________________________________________________ I

TABLE OF CASES________________________________________________________ II

TABLE OF STATUTES __________________________________________________ IV

INTRODUCTION_________________________________________________________ V

RESEARCH METHODOLOGY __________________________________________ VIII

A. OBJECTIVES _____________________________________________________ VIII

B. HYPOTHESIS _____________________________________________________ VIII

C. RESEARCH QUESTIONS ___________________________________________ VIII

D. SCOPE & LIMITATIONS ___________________________________________ VIII

E. CHAPTERISATION __________________________________________________IX

PROJECT BODY __________________________________________________________ 1

I. MEANING AND DISTINCTION BETWEEN CONTRACT OF SALE AND

CONTRACT TO WORK ________________________________________________ 1

A. DISTINCTION: CLARIFIED IN CASE LAWS _____________________________ 2

II. DISTINCTION BETWEEN CONTRACT TO WORK AND CONTRACT OF

SALE UNDER SALES TAX LAWS ____________________________________ 4

III. CONTRACT FOR WORK: METHODS TO DETERMINE A WORKS

CONTRACT ________________________________________________________ 7

A. OTHER TESTS FOR DETERMINING CONTRACT TO WORK ______________ 10

B. CONTRACT TO WORK, WHETHER ALWAYS INCLUDES SALE ___________ 11

C. POSITION OF SUPPLY OF MEALS IN RESTAURANTS AND HOTELS ______ 11

CONCLUSION __________________________________________________________ IX

BIBLIOGRAPHY _________________________________________________________ X

A. BOOKS ____________________________________________________________ X

B. ONLINE SOURCES __________________________________________________ X

CONTRACT LAW II TABLE OF CONTENTS

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TABLE OF CASES

1. Associated Cement Cos Ltd v Commissioner of Customs AIR 2001 SC 1485. ............. 4
2. Associated Hotels of India Ltd. Stmla v Excise Taxation Officer Shimla AIR 1966
Punj 449. ...................................................................................................................... 11
3. Banarasi Das Bhanot v State of Madbya Pradesh AIR 1958 SC 909. ........................ 11
4. Builders Association of India v Union of India AIR 1989 SC 1371............................. 2
5. Collins Trading Co Pty Ltd v. Maker [1969] VR 20 at 234. ......................................... 2
6. Commissioner of Sales Tax Madhya Pradesh v. Purshottam Premj [1970] 12 STC
237.................................................................................................................................. 3
7. Ghosh v State of Bihar (1961) Pat 272. ......................................................................... 9
8. Government of Andhra Pradesh v Guntur Tobaccos Ltd AIR 1965 SC 1396. .......... 10
9. Government of Andhra Pradesh v Guntur Tobaccos Ltd AIR 1965 SC 1396............. 11
10. Grafion v Armitage (1845) 2 CB 336. ........................................................................... 6
11. Hindustan Aeronautics Ltd v State of Kamataka AIR 1984 SC 744. .......................... 11
12. Hindustan Aeronautics Ltd v State of Karnata AIR 1984 SC 744. ............................... 1
13. Hindustan Aeronautics Ltd v State of Karnatalea AIR 1984 SC 744. ........................ 10
14. Hindustan Aeronautics Ltd v State of Orissa (1984) 2 SCC 16. ................................... 1
15. Hindustan Shipyard Ltd v State of Andhra Pradesh (2000) 6 SCC 579. ..................... 10
16. Hyundai Heavry Industries Co. Ltd. V Papadopoulos [1980] 2 All ER 29................... 6
17. Lee v Griffin (1861) 1 B & S 272 at 277........................................................................ 2
18. Lee v. Griffen, (1861) 1 B & S 272. .............................................................................. 2
19. Marcel Furriers Ltd v Tapper [1953] 1 All ER 15. ....................................................... 9
20. P T Varglaese v State Of Kerala (1976) 37 STC 171 (Ker). .................................... 2
21. Rainbow Colour Lab v State of Madhya Pradesh (2000) 2 SCC 385. .................... 4, 10
22. Raj Steel v State of Andhra Pradesh (1989) 3 SCC 262. ............................................. 10
23. Robinson v Graves [1935] 1 KB 579. ........................................................................... 9
24. State of A.P. v. Kone Elevators (India) Ltd (2005) 3 SCC 389. ................................... V
25. State of Andhra Pradesh v Kone Elevator (India) Ltd (2005) 3 SCC 38. ......... 2, 5, 7, 8
26. State of Andhra Pradesh V. Guntur Tobaccos Limited AIR 1965 SC 1396. ...............IV
27. State of Gujarat v Variety Body Builders (1976) 3 SCC 500. ..................................... 10
28. State of Orissa v. Titagbur Paper Mills Co Ltd AIR 1985 SC 1293. ............................ 1

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29. State of Punjab and Haryana v. Associated Hotels of India Limited AIR 1972 SC
1131..............................................................................................................................IV
30. State of Punjab v Associated Hotels of lndia Ltd AIR 1972 SC 1131. ........................ 11
31. State of Tamil Nadu v Anandam Viswanathan AIR 1989 SC 962................................ 1
32. State of Tamil Nadu v. Anandam Viswanathan AIR 1989 SC 962............................... V
33. Steel Authority of India Ltd v State of Orissa (2000) 3 SCC 200. ................................. 5
34. Vanguard Rolling Shutters & Steel Work v The Commr of Sales Tax AIR 1977 SC
1505................................................................................................................................ 5

CONTRACT LAW II TABLE OF CASES

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TABLE OF STATUTES

SALE OF GOODS ACT 1930 .............................................................................................. VIII

___________________________________________________________________________

CONTRACT LAW II TABLE OF STATUTES

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INTRODUCTION

The Supreme Court in State of Andhra Pradesh v. Guntur Tobaccos1 noted that a contract for
a work in the execution of which goods are used may take one of the three following forms:

* The contract may be used 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 second
category, it is a contract for execution of work not involving sale of goods.

The question as to whether a contract is a contract of work or a contract of sale is the subject
matter of precedents on the subject. The principles, as decided cases would show, are well
defined but the application of those principles to individual cases often poses a difficulty. In
determining as to whether a contract constitutes one for work or is a contract of sale, it is the
dominant interest and object of the parties in entering into the contract, as evinced by the
terms of the contract, the circumstances of the contract and the customs of the trade that
provide a guiding indicator. The object of the parties is of necessity to be deduced from the
terms of the contract.

In State of Punjab and Haryana v. Associated Hotels of India Limited2 the Supreme Court
held that a contract for sale is one whose main object is the transfer of property in, and the
delivery of the possession of a chattel as a chattel to the buyer. Where the principal object of
the work undertaken by the payee of the price is not the transfer of a chattel, the contract is

1
State of Andhra Pradesh V. Guntur Tobaccos Limited AIR 1965 SC 1396.
2
State of Punjab and Haryana v. Associated Hotels of India Limited AIR 1972 SC 1131.

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one of work and labour. The test is whether or not the work and labour bestowed end in
anything that can properly become the subject of sale; neither the ownership of material, nor
the value of the skill and labour as compared with the value of the material, is conclusive,
though these circumstances may be taken into consideration in deciding whether a subsisting
contract is a contract of work and labour or contract for a sale of a chattel.

In State of Tamil Nadu v. Anandam Viswanathan3 the contract in question involved supply
and printing of question papers to universities. The assessee entered into those contracts for
printing and the question involved was whether the taxable turnover for the purpose of Tamil
Nadu General Sales Tax Act, 1959 would include the printing and block making charges. The
Supreme Court held that the contract in question was a contract of work, having regard to the
nature of the job to be done and the confidence reposed in the contractor for work to be
rendered. The supply of paper was merely incidental.

In State of A.P. v. Kone Elevators (India) Ltd4 the distinction between a contract of sale and a
works contract found elaboration - "If the intention to transfer for a price a chattel in which
the transferee had no previous property, then the contract is a contract for sale. Ultimately,
the true effect of an accretion made pursuance to a contract has to be judged not by artificial
rules but from the intention of the parties to the contract. In a 'contract of sale', the main
object is the transfer of property and delivery of possession of the property, whereas the main
object in a 'contract for work' is not the transfer of the property but it is one for work and
labour. Another test often to be applied is - when and how the property of the dealer in such a
transaction passes to the customer- is it by transfer at the time of delivery of the finished
articles as a chattel or by accession during the procession of work on fusion to the moveable
property of the customer? If it is the former, it is a 'sale'; if it is latter it is a 'works contract'.
Therefore, in judging whether the contract is for 'sale' or for 'work and labour' the essence of
the contract or the reality of the transaction as a whole has to be taken into consideration. The
predominant object of the contract, the circumstances of the case and the custom of the trade
provide a guide in deciding whether transaction is a 'sale' or a 'works contract'. Essentially,
the question is of interpretation of the 'contract'. It is settled law that the substance and not the

3
State of Tamil Nadu v. Anandam Viswanathan AIR 1989 SC 962.
4
State of A.P. v. Kone Elevators (India) Ltd (2005) 3 SCC 389.

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form of the contract is material in determining the nature of transaction. This may also be
derived from section 4 of the Sale of Goods Act 1920.5

In Hindustan Shipyard Ltd., v. State of Andhra Pradesh, the Supreme Court held that the
court may form an opinion that the contract is one whose main object is transfer of property
in a chattel as a chattel to the buyer, though some work may be required to be done under the
contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the
contract is the carrying out of work by bestowal of labor and services and materials are
incidentally used in execution of such work then the contract is one for work and labour.

Therefore, with reference to the case laws a contract for sale has hence to be distinguished
from a contract of work. Whether a particular agreement falls within one or the other
category depends upon the object and intent of the parties, as evidenced by the terms of the
contract, the circumstances in which it was entered into and the custom of the trade. The
substance of the matter and not the form is what is of importance. If a contract involves the
sale of moveable property as moveable property, it would constitute a contract for sale. On
the other hand if the contract primarily involves carrying on of work involving labour and
service and the use of materials is incidental to the execution of the work, the contract would
constitute a contract of work and labour. One of the circumstances which is of relevance is
whether the article which has to be delivered has an identifiable existence prior to its delivery
to the purchaser upon the payment of a price. If the article has an identifiable existence prior
to its delivery to the purchaser, and when the title to the property vests with the purchaser
only upon delivery, that is an important indicator to suggest that the contract is a contract for
sale and not a contract for work.

5
Sale of Goods Act 1930, s 4.

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RESEARCH METHODOLOGY

A. OBJECTIVES
To examine the meaning and distinguish between contract of sale and contract to
work.
To examine various tests for determining works contracts
To examine whether works contract always incluse sale.

B. HYPOTHESIS
There lies a thin line of difference between contract of sale and contract to work.
Although it depends upon the object and intent of the parties, as evidenced by the terms of the
contract, the circumstances in which it was entered into and the custom of the trade. If a
contract involves the sale of moveable property as moveable property, it would constitute a
contract for sale. While if it involves carrying on of work involving labour and service and
use of materials is it would constitute a contract to work.

C. RESEARCH QUESTIONS
1. What is the meaning and where lies the difference between contract of sale and
contract to work?
2. What are the various tests devised to determine a contract as contract to work?
3. Whether contract to work always include contract of sale?
4. Whether contract to work and supply of goods are necessarily connected to the
execution of the contract?

D. SCOPE & LIMITATIONS

Whether a particular agreement falls within one or the other category depends upon the
object and intent of the parties, as evidenced by the terms of the contract, the
circumstances in which it was entered into and the custom of the trade. The substance of
the matter and not the form is what is of importance and within which the distinction to
contract of sale and contract to work lies.

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E. CHAPTERISATION
1. Introduction.
2. Meaning and Distinction between contract of sale and contract to work.
3. Distinction between contract to work and contract of sale under sales tax laws.
4. Contract for work: Methods to determine a works contract.
5. Conclusion.

CONTRACT LAW II RESEARCH METHODOLOGY

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PROJECT BODY

I. MEANING AND DISTINCTION BETWEEN CONTRACT OF

SALE AND CONTRACT TO WORK

Historically speaking, many difficulties have arisen in England and other Common Law
countries jurisdictions pertaining to the effect of a contract to make a chattel and deliver it
when made. Although it has been fairly acknowledged that such difficulties were partially
due to the old system of pleading prevailing, under which the plaintiff might lose his cause if
he sued on the wrong action, and partially out of the requirements of section 4 of the English
Sale of Goods Act, which now stands repealed, wherein, one of certain special kinds of proof
was necessary in order to establish a right of action on the contract for the sale of goods
above a certain value. However, such views cannot arise in India in a similar manner, but the
decisions are still informative on the principles involved.

Contract to work may be suitably described as a contract for the performance of work or
rendering service where the supply of materials or some other goods is incidental.6 A contract
of sale (A contract of sale of goods) therefore, must be distinguished from a contract to work
and labour7. The distinction between contract of work and contract to sale rests on a
clear-cut principle, as observed in the preceeding lines. The principal distinction between a
contract to work or service and a contract of sale is that in case of the former, the person
performing or rendering service has no property involved in what is being produced as a hole,
notwithstanding the fact that a part or even the whole of the material used by him may have
been his property.8 In order for it to constitute a sale, the thing Produced as a whole must
have individual existence as the sole property of the party who produced it sometime before
delivery and the property therein passes to the other party for a price.9 A transaction that
transpires into transfer of property in finished goods to another person must not be described
as a contract to work. In a contract to work, there exists no passing of property in goods,
which are used in the mechanism for executing a contract to work and are expended in the

6
State of Orissa v. Titagbur Paper Mills Co Ltd AIR 1985 SC 1293.
7
Hindustan Aeronautics Ltd v State of Karnata AIR 1984 SC 744.
8
State of Tamil Nadu v Anandam Viswanathan AIR 1989 SC 962.
9
Hindustan Aeronautics Ltd v State of Orissa (1984) 2 SCC 16.

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process, since the goods themselves cease to exist.10 Only with respect to those goods to
which title has passed as due to the contract, can it be understood that the goods have been
sold.11

Therefore, the actual test is to determine whether the contract is the one in which the main
object is to transfer property which is a chattel, as a chattel, to the buyer.12 If work is to be
done is necessary under the contract as ancillary13 or incidental to the sale or work is to be
carried out by way of bestowal of labour and service and materials are used in the
performance of such work, it might still be considered as a contract of sale. Where the
transfer of a chattel as a chattel is not the main object of the contract and is merely ancillary
to it, the contract is a contract to work and of labour.14 From a mere passing of title to goods,
whether as an integral part of or independent of goods, it must not be inferred that the goods
were agreed to be sold. It must be realised whether or not the work and labour that has been
bestowed, end in anything that may the property become the subject of sale.15 Where the
finished product supplied to a particular customer is not a commercial commodity in the
sense that it manor be sold in the market to any other person, the transaction would constitute
only to be a contract to work.

A. DISTINCTION: CLARIFIED IN CASE LAWS

The fundamental distinction between a contract to work or of service and a contract of

sale of goods is that in the former there is in the person performing work or rendering
service no property, in the thing produced as a whole notwithstanding that a part or even the
whole of the materials used by him may have been his property. In a given case of a contract
of sale, the thing produced as a whole has individual existence as the sole property, and of the
party who produced it, at some time before delivery and as a result of which the property
would thereby pass only under the contract relating thereto in goods used in the performance
of the contract is not sufficient; to constitute a sale there must be an express or implied
agreement in connection with the sale of goods and completion of the agreement by passing

10
Builders Association of India v Union of India AIR 1989 SC 1371.
11
P T Varglaese v State Of Kerala (1976) 37 STC 171 (Ker).
12
Lee v. Griffen, (1861) 1 B & S 272.
13
Collins Trading Co Pty Ltd v. Maker [1969] VR 20 at 234.
14
State of Andhra Pradesh v Kone Elevator (India) Ltd (2005) 3 SCC 38.
15
Lee v Griffin (1861) 1 B & S 272 at 277.

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of title in the very goods that have been contracted to be sold. Ultimately, the true effect of an
accretion made pursuing a contract must be ascertained, not by an artificial rule that the
accretion may be supposed to have become by virtue of affixing to a chattel, part of that
chattel, but shall be arrived at from the intention of the parties to the contract. The
aforementioned distinction sought between a contract to work or of service and a contract
of sale has been noted by the Honble Supreme Court, in Commissioner of Sales Tax
Madhya Pradesh v Purshottam Premj.16

16
Commissioner of Sales Tax Madhya Pradesh v. Purshottam Premj [1970] 12 STC 237.

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II. DISTINCTION BETWEEN CONTRACT TO WORK AND

CONTRACT OF SALE UNDER SALES TAX LAWS

One of the important tests is to infer whether the contract is mainly a contract for supply of
materials at a price agreed to between the parties for the materials so supplied, and the work
or service rendered is incidental to the execution of the contract. If so, it would constitute a
contract of sale for materials and the sale proceeds would be eligible or rather be subject to
sales tax. However, where the contract is primarily a contract to work and the labour and
materials are supplied in execution of the contract there arises no contract of sale for
materials, but it would transpire to be a contract of work.

For the purposes of tax, any transfer, delivery or supply of property in any goods, otherwise
than in pursuance of a contract, for cash, deferred payment or other valuable consideration,
must be deemed to be a sale of those goods by: the person making the transfer, delivery or
supply and a purchase of those goods by the person to whom such transfer, delivery or supply
is made.

A transfer of property in goods, whether as goods or in some other form, involved in the
execution of a contract to work must also be deemed to be a sales. Such transaction must be
subject to a sales tax.

By a legal fiction, the State is now empowered to bifurcate a contract into two separate
contracts: (1) contract for sale of goods involved in the gaid contract to work; and (2) contract
for supply of labour and service and thus, levy sales tax on the value of the material involved
in the execution of the contract to work.17 However, the said amendment has not empowcred
the State to indulge in a microscopic division of contract involving me value of materials
used incidentally in such contracts.18 The value of goods involved in the execution of a
contract to work has to be deter' mined after making the following exclusions from the value
of a contract to work:
(a) exclusions for transfer of property in goods consequent upon an inter-state sale;
(b) exclusions in respect of an outside sale; or

17
Associated Cement Cos Ltd v Commissioner of Customs AIR 2001 SC 1485.
18
Rainbow Colour Lab v State of Madhya Pradesh (2000) 2 SCC 385.

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(c) exclusions for a sale in the course of import.19

In order to determine the value of the goods which are involved in the execution of the
contract to work for the purpose of levying tax, it is per missible to take the value of the
contract to work as the basis and the value of the goods involved in the execution of the
contract to work may be arrived at by deducting the expenses incurred by the contractor for
providing labour and other services from the value of the contract to work.

To attain clarity, the question pertaining to whether a contract is a contract of sale or

contract to work often yields the proceedings in connection with the assessment under the
sales tax laws in order to decide whether the transaction is eligible to tax. The courts have
taken assistance in construction from the provisions of the statute, the terms of the contract
and devised some tests.

In State of Andhra Prades v Kone Elevators (India) Ltd,20 the Supreme Court observed that
the assesse carries on business of selling lifts and elevators and the major component of the
end product is the material consumed in producing the lift to be delivered, and the skill and
labour employed in order to convert the main components into the end product were only
incidentally used and, therefore, the delivery of the end product by the assessee to the
customer constituted a 'sale' and not a 'contract to work' and, therefore, the assessee was
liable to pay sales tax.

The circumstance that it is only on the basis of bestowing work and labour on the materials
that they acquire commercial identity would prima facie indicate a contract to work. Thus,
where under the terms of a contract the assessee was obliged to engineer the rolling shutters,
to bring them to the site and to erect the same at the premise, it was held that the transaction
was an inseparable composite contract encompassing labour and service performed for a
lump sum and the materials were not merely supplied so as to pass as a chattel simpliciter,
but actually fixed permanently to an immovable property, resulting in an accretion to the
immovable property and therefore, the contract was a contract to work.21 In the
undermentioned case, the contract entered into by the company was for manufacture and

19
Steel Authority of India Ltd v State of Orissa (2000) 3 SCC 200.
20
State of Andhra Pradesh v Kone Elevator (India) Ltd (2005) 3 SCC 38.
21
Vanguard Rolling Shutters & Steel Work v The Commr of Sales Tax AIR 1977 SC 1505.

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supply of railway wagons to the railway board and the question arose whether it was a
contract of sale or a contract to work. The company was assessed to sales tax on sale of
wagons to the railway board. The raw material thus used in the manufacture of the wagons
was partly supplied by the railways free of cost and against some part advance could be
drawn. Relying on a clause in the contract which provided that on payment of ninety percent
of the value of the vehicle, the vehicle in question will become the property of the purchaser,
the court held that there could be no clearer expression of the intention of the contracting
parties than this clause; that the contract was, in substance, one for the sale of manufactured
wagons by the company for a stipulated price. The court distinguished its earlier decision
where the material used in construction of coaches was the property of the railways and there
was no possibility of any other material being used and there was no term corresponding to
the clause specifying the transfer of property in the wagon on payment of ninety percent of its
value. The court further distinguished on facts its another earlier decision upon the point that
the bulk of the materials needed in the construction of coaches and even labour was supplied
by the railways and the contractor mainly contributed his labour and skill to manufacture the
end product. It has been held that a contract to build a shift though a contract of sale of goods,
has also some of the characteristics of a building contract.22 In a few illustrative cases,
contracts have been held to be of sale or for works contingent to the Facts of each case.

It has also been held that where the supposed vendors labour and skill are really the principal
object of the contract, as where he was employed not only to make but to invent the machine
for a specific purpose, he can at all events recuperate the value of his work and materials
independently of the question whether there was a contract of sale or not.23 But this is of little
importance in jurisdictions where the old forms of action are abolished or have never existed
and no enactment similar to the Statute of Frauds is in force.

22
Hyundai Heavry Industries Co. Ltd. V Papadopoulos [1980] 2 All ER 29.
23
Grafion v Armitage (1845) 2 CB 336.

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III. CONTRACT FOR WORK: METHODS TO DETERMINE A WORKS

CONTRACT

In State of Andhra Pradesh v Kone Elevator (India) Ltd,24 the Supreme Court, while dealing
with a sales tax matter, laid down the principles to distinguish between a 'sale' and a 'contract
to work'. It can be treated as well settled that there is no standard formula by which one can
distinguish a contract for sale from a workscontract. The question is largely one of fact
depending upon the terms of the contract including the nature of the obligations to be
discharged there under and the surrounding circumstances. If the intention is to transfer for a
price a chattel in which the transferee had no previous property, then the contract is a contract
for sale. Ultimately, the true Effect of an accretion made pursuant to a contract has to be
judged not by artificial rules but from the intention of the parties to the contract. In a contract
of sale, the main object is the transfer of property and delivery of possession of the property,
whereas the main object in a contract for work is not the transfer of the property but it is one
for work and labour. Another test often to be applied to is: when and how the property of the
dealer in such a transaction passes to the customer; is it by transfer at the time of delivery of
the finished article as a chattel or by accession during the procession of work on fusion to the
movable property of the customer? If it is the former, it is a sale, if it is the latter, it is a
workscontract. Therefore, in judging whether the contract is for a sale or for work and labour,
the essence of the contract or the reality of the transaction as a whole has to be taken into
consideration. The predominant object of the contract, the circumstances of the case and the
custom of the trade provides a guide in deciding whether transaction is a sale or a
workscontract. Essentially, the question is of interpretation of the contract. It is settled law
that the substance and not the form of the contract is material in determining the nature of
transaction. No definite rule can be formulated to determine the question as to whether a
particular given contract is a contract for sale of goods or is a works-contract. Ultimately, the
terms of a given contract would be determinative of the nature of the transaction, whether it is
a sale or a works-contract. Therefore, this question has to be ascertained on facts of each
case, on proper construction of terms and conditions of the contract between the parties.

24
State of Andhra Pradesh v Kone Elevator (India) Ltd (2005) 3 SCC 38.

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It is not the bulk of the material alone but the relative importance of the material qua the
work, skill and labour of the payee which also has to be seen. If the major component of the
end-product is the material consumed in producing the chattel to be delivered and skill and
labour are employed for converting the main components into the endproducts, the skill and
labour are only incidentally used, the delivery of the end-product by the seller to the buyer
would constitute a sale. On the other hand, if the main object of the contract is to avail the
skill and labour of the seller though some material or components may be incidentally used
during the process of the endproduct being brought into existence by the investment of skill
and labour of the supplier, the transaction would be a contract for work and labour.25

It cannot be said as a general proposition that in every case of contract to work, there is
necessarily implied sale of the component parts which go to make up the repair. That
questionwould naturally depend uponthe facts and circumstances of each case. Mere passing
of propertyin an article or commodity during the course of performance of the transaction in
question does not render the transactionto be transactionof sale. Even in a contract purely of
worksor service, it is possible that articles may have to be used by the person executing the
work, and property in such articles or material may pass to the other party. That would not
necessarily convert the contract into one of sale of those materials. In every case, the court
will have to find out what was the primary object of the transaction and the intention of the
parties while entering into it. It may, in some cases, be that even while entering into the
contract of work or even of service, parties might enter into separate agreements, one of work
and service and the ether of sale and purchase of material to be used in the course of
executing the work or performing the service. In that event, however, the transaction would
not be one and indivisible, but would comprise of two separate agreements, one of work or
service and the other of sale. Thus, where the property in the materials which were used in
the execution of the job entrusted to the contractor became the property of the government
before it was used and there was no possibility of any other material to be used in the process
of repairing, servicing and overhauling of the aircrafts, their instruments and accessories, it
was held that there was no sale of material in execution of the work.

Generally, a contract to make a chattel and deliver it, when made, is a contract of sale, but not
always. The test would seem to be whether the thing to be delivered has any individual

25
State of Andhra Pradesh v Kone Elevator (India) Ltd (2005) 3 SCC 38.

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existence before delivery as the sole property of the party who is to deliver it. Examples are
perhaps best given in the form of illustrations:

(1) A promises to make a set of false teeth for B with materials wholly found by A, and B
promises to pay for them when made. This is a contract for the sale of goods.
(2) A orders a mink jacket from B. After inspecung several skins, she chooses a colour and
selects a style for the jacket. The price is agreed. This is a contract for the sale of goods.26
(3) A promised to paint a picture for B, A finding the paint and canvas which are of small
value, and B promised to pay for the picture as a work of art. This was a contract for work
and labour and not for the sale of goods.27 The substance of the contract was that skill and
labour should be exercised upon the production of the portrait and that it was only ancillary to
the contracr that the paint and the canvas would pass from the artist to his customer.
(4) A promises to carve a block of marble belonging to B into a statue. This is not a contract
of sale, however much the value of the marble may be increased by As work.
(5) A promises to print and deliver to 8 Five hundred copies of a manuscript which B
entrusted to him for that purpose, on paper and with ink furnished by A. This is a contract for
work and not for the sale of goods. it is, more obviously, where a tailor makes up a customers
cloth and adds trimmings, buttons and the like from his own stock.
(6) A is employed by B to draw a conveyance on paper and with ink furnished by A. This is a
contract for work and not for the sale of goods.
(7) A carries on business as a photographer, and sells the photographs to his customers. This
is a sale of goods.28

It will be observed that in the cases where there is no sale, there is never a moment when the
thing produced is as a whole the makers absolute property, notwithstanding that part, or even
that all of the materials may have been his property, whereas to the orher case he might, if he
found it possible and profitable, and if not resrrained by patent, copyright or any other similar
branch of laws, make in duplicate or in greater numbers chattels of the kind ordered,
appropriate one at his will to Fulfil the special contract, and sell the Others to Other persons.
But although the contract may be a contract to do work and not an order for a specific article,
yet the property in the article produced may pass to the party giving the order. When an

26
Marcel Furriers Ltd v Tapper [1953] 1 All ER 15.
27
Robinson v Graves [1935] 1 KB 579.
28
Ghosh v State of Bihar (1961) Pat 272.

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PAGE 10 | CONTRACT OF SALE AND CONTRACT TO WORK: DISTINCTION

architect is employed to carry out alterations in a building and prepares plans for that
purpose, he property in the plans passes to the employer on payment of the remuneration
provided under the contract.

A. OTHER TESTS FOR DETERMINING CONTRACT TO WORK

Whether a given contract is a contract to work, pure and simple or it involves sale of goods is
a mixed question of law and facts29 and no straight-jacket formula can be laid down.30

Different tests may be applied in answering the question Whether a contract is for works or
for sale. All the tests converge towards finding out the intention of the parties by viewing the
transaction as a whole.31 The intention of the parties has to be ascertained by culling out the
same from the circumstances of the transaction32 and the custom of the trade. True agreement
between the parties about the obligations to be discharged under the contract have to be
determined without placing reliance on any particular aspect or feature or the ostensible
language Used in any one term of the contract. The problem, almost always requires a factual
investigation into the nature of ingredients of the transactions.33 Despite many common
features in both types of contract, certain clinching terms in a given case may fortify a
conclusion one way or the other.34

Ownership of materials, value of skill and labour as compared with the value of
materials,mode of payment and separate pricing at cost plus some profit, is not conclusive,
though such matters may be taken into consideration in determining the nature of the
contract. Even an advance payment towards the price of goods to be used in the execution of
the contract does not reflect that the contract is one of sale.

29
Hindustan Aeronautics Ltd v State of Karnatalea AIR 1984 SC 744.
30
Hindustan Shipyard Ltd v State of Andhra Pradesh (2000) 6 SCC 579.
31
Rainbow Colour Lab v State of Madhya Pradesh (2000) 2 SCC 385.
32
Government of Andhra Pradesh v Guntur Tobaccos Ltd AIR 1965 SC 1396.
33
Raj Steel v State of Andhra Pradesh (1989) 3 SCC 262.
34
State of Gujarat v Variety Body Builders (1976) 3 SCC 500.

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B. CONTRACT TO WORK, WHETHER ALWAYS INCLUDES SALE

In every case of contract to work, there is not necessarily an implied sale of the component
parts used.35 In order that there be a sale of goods as part of a contract for work, there must be
a contract in which there is not merely a transfer of title to goods as an incident of contract,
but there is a contract, express or implied, for sale of the very goods which the par, ties
intended to sell for money considerations.36

Where the contract is indivisible, it cannot be sale. However, there might be contracts that
consist of two distinct agreements one for the sale of materials and other for work and
labour.37

C. POSITION OF SUPPLY OF MEALS IN RESTAURANTS AND HOTELS

Where food is supplied in an eating house or a restaurant and it is established, upon the facts
that the substance of the transaction evidenced by its dominant object, is a sale of food and
the rendering of services are merely incidental, the transaction would undoubtedly be a sale.
However, there is no sale when food and drinks are supplied to guests residing in the hotel.
The transaction between a hotelier and a visitor to his hotel is one essentially of service in the
performance of which and as part of the amenities incidental to which, the hotelier serves
meals at stated hours.38 Where in a restaurant operated in a hotel, meals are served to casual
visitors who are not entitled to remove or carry any uneaten food and the services rendered
include furniture and furnishing, linen, crockery and cutlery, music, dancing and a floor
show, the transaction would not be one of sale of food. Similarly,a supply of eatables effected
in a canteen for the benetit of employees is not a sale. However, supply of meals or other
eatables to casual or non-resident visitors in a restaurant amounts to sales.39

35
Hindustan Aeronautics Ltd v State of Kamataka AIR 1984 SC 744.
36
Government of Andhra Pradesh v Guntur Tobaccos Ltd AIR 1965 SC 1396.
37
Banarasi Das Bhanot v State of Madbya Pradesh AIR 1958 SC 909.
38
State of Punjab v Associated Hotels of lndia Ltd AIR 1972 SC 1131.
39
Associated Hotels of India Ltd. Stmla v Excise Taxation Officer Shimla AIR 1966 Punj 449.

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CONCLUSION

With reference to the case laws a contract for sale has hence to be distinguished from a
contract of work. Whether a particular agreement falls within one or the other category
depends upon the object and intent of the parties, as evidenced by the terms of the contract,
the circumstances in which it was entered into and the custom of the trade. The substance of
the matter and not the form is what is of importance. If a contract involves the sale of
moveable property as moveable property, it would constitute a contract for sale. On the other
hand if the contract primarily involves carrying on of work involving labor and service and
the use of materials is incidental to the execution of the work, the contract would constitute a
contract of work and labor. One of the circumstances which is of relevance is whether the
article which has to be delivered has an identifiable existence prior to its delivery to the
purchaser upon the payment of a price. If the article has an identifiable existence prior to its
delivery to the purchaser, and when the title to the property vests with the purchaser only
upon delivery, that is an important indicator to suggest that the contract is a contract for sale
and not a contract for work.

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BIBLIOGRAPHY

A. BOOKS
1. Pollock and Mulla, Sale of Goods Act (10th ed, LexisNexis 2017).
2. Halsburys, Laws of India, Vol 9 (2nd ed, LexisNexis 2015).

B. ONLINE SOURCES
1. Randall A., The Law Quarterly Review (Heinonline)
<http://www.heinonline.org/HOL/Page?handle=hein.journals/lqr38&id=1&collection=jo
urnals&index> accessed on 1 August 2017.

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CONTRACT LAW II BIBLIOGRAPHY