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State of Madras v. Gannon Dunkerley

State of Madras v. Gannon Dunkerley

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Published by Mayank Jain
Case Comment on The Nature of Composite Works Contract and Dominant Nature Test
Case Comment on The Nature of Composite Works Contract and Dominant Nature Test

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Published by: Mayank Jain on Nov 22, 2008
Copyright:Attribution Non-commercial

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11/27/2011

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 S 
TATE 
 
OF 
 ADRAS 
 
V
.
 M/ 
 S 
 ANNON 
D
UNKERLEY 
& C 
O
 ., (M 
 ADRAS 
 ) L
TD
 .
1
F
ACTS
:The assessees, Messrs. Gannon Dunkerley and Co. (Madras) Ltd., are a private limitedcompany incorporated under the Indian Companies Act and they carry on business asEngineers and Contractors. Their business consists mainly of execution of contracts for construction of buildings, bridges, dams, roads and structural contracts of all kinds.The controversy started because “works contracts” were included within the ambit of theMadras General Sales Tax Act and the Company was made subject to the levy of sales-taxwithin the limitations provided in the said Act. Thus the amounts with respect to the materialstransferred, used in the execution of the contract, between the Government (the contracting party) and the Company (the builder) were included in the annual turnover of the companyand thus was taxed under the Act aforementioned.The amending Act added an inclusive definition of sale in the Madras General Sales Tax Actunder sec 2(h):
“Includes also a transfer of property in goods involved in the execution of awork contract.”
I
SSUE
:Whether a building contract, as in the present case, constitutes within itself a contract of saleof goods and contain any element of the nature of the sale of goods to justify the impositionof the tax upon them?To answer this question, the Court looked into what constitutes a “sale of goods”, andwhether a building contract includes a “sale of goods” to come under the tax net.C
OURT
S
V
IEW
:
What is “sale of goods”?
The term “sale of goods” has been used in Entry 48 of the Government of India Act, 1935(now in entry 54 in the Constitution of India, 1950). Hence the argument put forth was thatthis term has to be interpreted in a wider sense and thus include transfer of materials in aworks contract. But the Court was of the view that
“the draftsmen and the Parliament must have been well aware that the expression “sale of goods” had acquired a legal import bythat time, and it is legitimate therefore to presume that the expression was used in the sensein which it was understood by English lawyers and also in India. The draftsmen must have
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AIR 1958 SC 560
1
 
intended to define the power of the Legislature to tax only the transaction of sale of foods,which was understood in law as meaning and as constituting those composite series of actsbeginning with an agreement of sale and ending with transfer of property for a price, whichconstitute sale of goods.”
In order to constitute a sale as defined in the English Sale of Goods Act, followed in theIndian Sale of Goods Act, two things are necessary: (1) An agreement to sell, i.e, anagreement to transfer the property in goods to the buyer for a price and (2) An actual sale bywhich the property in the goods passes from the seller to the buyer.Sale of goods, therefore, means a contract whereby the property in the goods is actuallytransferred by the seller to the buyer. It is not an executory contract but an executed contract,and the transfer of the property in the goods is for a price, i.e., for money consideration. Inthis regard, the Court relied on various authorities like
 Benjamin on Sale
and
 Halsbury’s Laws of England 
.For sale of goods, the Court held that there cannot be an agreement to one kind of property or work and a sale regards another. For the true interpretation of the term “sale of goods” theremust be an agreement for the sale of the very goods in which eventually property passes.Thus even the appellant’s contention that an express agreement is not necessary with respectto the goods is also nullified. In a contract to construct buildings according to specifications,there is no contract to sell materials used in construction. Thus such a contract for sale of materials cannot be inferred from a building contract.Thus the Court observed that the expression “sale of goods” has a well-defined meaningunder law even before the Government of India Act, 1935 had come into force and thus themeaning in the Constitutional Act also has to be the same as understood by lawyers andCourts,
viz.
, as defined under the Sale of Goods Act. Under the Sale of Goods Act, “goods”means every kind of moveable property other than actionable claims and money; andIncludes stock and shares, growing crops, grass and things attached to or forming part of theland, which are agreed to be severed before sale or under the contract of sale. According tothe definition in the English Act “goods” include all chattels personal, other than things inaction and money.Thus the Court held that the power of the legislature could not extend to anything other than atransaction of sale as understood in law. It does not mean that the Legislature has no power toenact provisions which are intended and are necessary for the enjoyment and exercise of 
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 power, but the Legislature can tax only on what constitutes a “sale of goods”. Under the guiseof enacting a law in respect of a field open to the Legislature, it is not entitled to transgressthe limits and widen the field by enacting an inclusive definition of sale of goods, to includewhat in law is not a transaction of sale. If really the Legislature has no power to levy a taxupon transactions, which do not constitute in law sales of goods, it purports to do something,which is forbidden.Thus it has become clear that the Legislature has a power to determine taxable events, but hasno power to widen the field and change the definition of “sale of goods” as understood inlaw.
Whether building contracts include “sale of goods”?
In this regard the Court observed that when the material is fixed to the corpus by the builder,the property passes when the property in the larger corpus itself passes to the other party. Thisrule, of course, is subject to any special stipulations in the contract to build. If the partiesintended that property in materials should pass at an earlier stage that of course governs therights between the parties.
 If the material is supplied by the other party to the contract, or if on his account the builder purchases the materials, the contract in either event will be a merecontract for labour and work and not for sale of the material.
The Court then relied on an English decision [1904 AC 223 (L)], wherein before the ship wascompleted, the builders became bankrupt. At that time, there were iron and steel plates of alarge quantity lying in the railway station which were ordered by the ship-builders. Now, boththe builders and the ship owners claimed these materials. The House of Lords held that therewas no sale with respect to materials in this case and the contract of sale was with regards tothe purchase of the ship. The materials in question should not be regarded as appropriated tothe contract or sold under the Sale of Goods Act.The Court thus held that building contracts are always considered in law as entire andindivisible contracts in the sense, that the complete fulfillment of the promise by one party isa condition precedent to the right of the other to call for the fulfillment of any part of the promise by the other.Here, the Court used an analogy, taking cue from another English case. It observed that thematerials which were used by the builder into the property of the other contracting party became part of that property. Bricks built into a wall become part of the house; thread stichedinto a coat which is under repair or planks and nails and pitch worked into a ship under repair 
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