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.

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.

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

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

Halsburys 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 appellants
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, goodsmeans 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

2 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 Halsburys 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 appellants
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, goodsmeans 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 to the 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 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 become part of the coat or the ship; and therefore, generally, and
in the absence of somethingto show a contrary intention, the bricklayer, or tailor, or shipwright, is to be
paid for the work and materials he has done and provided.There is, therefore, no element of sale of the
materials in such a contract, as the contract insubstance is not a contract to sell materials as goods for a
price stipulated between the partiesas explained under the Sale of Goods Act. The contract therefore
does not become a contractrelating to sale of goods but is only a contract to build. There is no element
of sale of goodseither and the contract is one and indivisible. Unless the work is completed, the builder
is notentitled to the price fixed under the contract or ascertainable under the terms of the contract.It
does not imply or involve a contract of the sale of the materials for a price stipulated.

he property in the materials passes to the owner of the land because they are fixed in pursuanceof the
contract to build, and along with the corpus, the materials also pass to the owner of theland.In the
present case, cement and other materials were provided by the Government. It is onlythe non-
controlled materials (meaning labour and workforce etc.) that the company had tofind for the purpose
of the work. The company does not purport to sell the materials under the contract, and it is not a
contract for the sale of the materials. On the face of the contract,therefore, it is difficult to come to the
conclusion, that the contract involves any element of sale of goods to justify the imposition of a tax
upon the assesses.

It therefore, follows that the building contracts, which the assessees entered into during theassessment
year, on which the turnover was calculated, do not involve any element of sale of the materials and are
not in any sense contracts for the sale of goods as understood in law.Having regard to the terms of
particular contracts, there may be an intention to pass theownership in the materials for a price agreed
upon between the parties, in which case suchcontracts might contain an element of sale of goods, but
that is not the case here. The Courtheld that if the Legislature intends to bring under the tax net
contracts such as these, then theamendment is ultra vires of the legislature to that extent as they had
no power to taxtransactions which are not sale of goods. Thus the levy of tax in this case is not
justified inlaw.
Conclusion

Sale of Goods in Entry 48 of the Government of India Act, 1935 (now in Entry 54of the Constitution of
India, 1950) is a

nomen juris

(or a legal term or expression) andis to be understood in the context of the law prevailing.

Essential ingredients of sale are agreement to sell movables for a price and property passing between
the two competent parties therein pursuant to that agreement.

A building contract is one and indivisible. There is no sale of goods and thus no taxcan be imposed as it
amounts to treating a building contract as including sale of goods.

It is possible for parties to enter into two agreements, one for transfer of materials for money
consideration and other for payment of consideration for services and work done. But here there are
two separate agreements.In the other case, there might also arise a situation wherein the parties agree
totransfer materials for a particular price in the building contract, but here also, there isan express
agreement.But a works contract, without any of the express clauses or agreements, is only
oneagreement and that is for the works and execution of contract and there is noagreement for sale of
goods. Thus it is one and indivisible.

View of the Court in

BSNL

v.

Union of India

(2006)

The Court in this case held that the

Gannon Dunkerley
case followed the classical thoughtwhich says that there were three essentials of sale, namely, (i) an
agreement to transfer title of goods (ii) supported by consideration, and (iii) an actual transfer of title in
the goods. In theabsence of any of these elements, there is no sale. Therefore a contract with a builder
to setup a building or dam etc does not include a contract of sale of goods.But the

BSNL

case held that the 46

th

Constitutional Amendment in Article 366 inserting adefinition of tax on the sale or purchase of goods
in clause 29A(b) overcomes the

Gannon Dunkerley

case. Clause (b) covers cases relating to works contracts. The effect in law of atransfer of property in
goods involved in the execution of the works contract was by thisamendment deemed to be a sale. To
that extent the decision in Gannon Dunkerley wasdirectly overcome.This case held that

Gannon Dunkerley

case survived the 46

th

Amendment in two respects:

AIR2006SC1383

First with regard to the definition of sale for the purposes of the Constitution in general andfor the
purposes of Entry 54 of List II in particular except to the extent that the clauses
inArticle366(29A)operate

By introducing separate categories of deemed sales, the meaningof the word goods was not
altered.The second respect in which it survived was with respect to, what the Court in

BSNL
casetermed as dominant nature test to be applied to a composite transaction. Article
366(29A)covered only three types of composite transactions,

viz.

, works contract, hire purchasecontract, and catering contract. Apart from these, where splitting of
contract into service andsale of goods is not possible, as in the case of hospital services or lawyer
services, then in thatcase the Court will check what the parties intended to do. If there was no intention
of the parties for sale of goods and materials, there is no sale, even if the contract could
bedisintegrated. The test for deciding whether a contract falls into one category or the other is toas
what is the substance of the contract. This test for determining whether a compositecontract will be
taxable or not was termed as dominant nature test.Thus even in the case of

State of Andhra Pradesh

v.

Kone Elevators

(2005), the agreementwas clear in that the customer was asked to make all the arrangements for the
liftmanufacturer to come and place the elevator. Hence, the Court held that the works part wasgiven
to the customer and the supply part was given to the manufacturer which includesinstallation after
taking help of the work done by the customer. Thus it was a contract of sale of lift than a service
provided by the manufacturer.Finally, even in the case of

Oriental Bank of Commerce

v.

State of U.P

(2008), the Courtheld that the

Gannon Dunkerley

case was holding field with respect to works contracts, andin general composite contracts, before the 46

th

Amendment. But after the amendment, asstated in the

BSNL
case, this aspect has been overcome and only the case survived in onlytwo respects as laid down in the
judgment.Thus with respect to works contracts, hire purchase contracts, and catering contracts and
allsuch transfers as specified in Article 366(29A), the transfer of materials will be considered assale. But
as given by the

BSNL

case, the definition of sale and other things such as delivery,intention of parties, goods etc shall stand as
long as it includes the changes in the amendment.

(2005)3SCC389

MANU/UP/0291/2008

Also the dominant nature test shall also stand, whose logic originated in the

Gannon