ivil Appeal No 340 of 1988
From the Judgment and Order dated 8121986 in the High Court of Madhya Pradesh in MP No 1670 of 1984
RK Virmani for the Appellant
TC Sharma for the Respondents
The Judgment of the Court was delivered by SABYASACHI MUKHARJI J
This appeal by special leave is from the judgment and order of the Full Bench to the Madhya Pradesh High Court dated 8th December 1986
The Writ Petition in question out of which this Judgment arose had been referred to the Full Bench by the Division Bench on the question whether the petitioner appellant could be said to have effected entry of the goods in the local area and thereby made it liable for payment of entry tax under Section 3 of the MP Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam 1976 hereinafter called the Act 
I here was conflict between the Division Benches of the Madhya Pradesh High Court and as a result the matter was referred to the Full Bench
In order to appreciate the controversy and the question it is necessary to state a few facts
The appellant company is a building contractor at Rajnandgaon in Madhya Pradesh and is registered as a dealer under the Madhya Pradesh General Sales Tax Act
The appellant s tender for construction of foodgrains godown and ancillary buildings at Rajnandgaon was accepted by the Central Public Works Department
It was an item rate tender
In the tender so submitted by the appellant the prices of the materials to be used for the construction including cost of iron steel and cement were included
The PWD however had agreed to supply from its stores the said iron steel and cement for the construction work and to deduct the prices of materials so supplied and consumed the construction from the final bill of the appellant Clause 10 of the Contract is relevant and was as follows PG NO 661 Clause 10
If the specification or Schedule of terms provides for the use of any special description of materials to be supplied from Engineer in charge s Stores or if it is required that the Contractor shall use certain stores to be provided by the Engineer in charge as shown in the Schedule of materials hereto annexed the contractor shall be bound to procure and shall be supplied such material and stores as are from time to time required to be used by him for the purposes of the contract only and the value of the full quantity of materials and stores to supply at the rates specified in the said Schedule of materials may be set off or deducted from any sums then due or thereafter to become due to the contractor under the contract or otherwise or against or from the Security deposit or the proceeds or sale thereof if the same is held in Government securities the same or a sufficient portion thereof being in this case sold for the purpose
All materials so supplied to the contractor shall remain the absolute property of Government and shall not be removed on any account from the site of the work and shall be at all times open to inspection by the Engineer in charge
Any such materials remaining unused and in perfectly good condition at the time of the completion or determination of the contract shall be returned to the Engineer in charge at a place directed by him if by a notice in writing under his hand he shall so require but the contractor shall not be entitled to return any such materials unless with such consent and shall have no claim for compensation on account of any such materials so supplied to him as aforesaid not being used by him or for any wastage in or damage to any such materials
Provided that the contractor shall in no case be entitled to any compensation or damage on account of any delay in supply or non supply thereof all or any such materials and stores
Provided further that the contractor shall be bound to execute the entire work it the materials are supplied by the Government within the scheduled time for completion of the work plus 50 per cent thereof scheduled time plus 6 months if the time of completion of the work exceeds 12 months but it a part only of the materials has been supplied within the aforesaid period then the contractor shall be bound to do so much of the work as may be possible with the materials and stores supplied in the aforesaid period
For the completion of the rest of the work the contractor shall be PG NO 662 entitled to such extension of time as may be determined by the Engineer in charge whose decision in this regard shall be final
As mentioned hereinbefore under the said clause all materials supplied to the contractor remained the absolute property of the Government and could not be removed on any account from the site of the work and were at all times open to inspection by the Engineer in charge
Any such materials remaining unused and in perfectly good condition at the time of completion or determination of the contract were to be returned to the Engineer in charge at a place directed by him by a notice in writing in his hand if he so required but the contractor was not entitled to return any such material unless he was required to do so
There was no dispute that for the construction the appellant was supplied iron steel and cement by the PWD and it had purchased other materials from the market
The prices of iron steel and cement supplied to the appellant for the work were deducted from its final bill
On 22nd September 1982 the appellant was assessed by the respondent for entry tax for the period 7th June
1979 to 31st March 1980 to a tax of Rs11292 including penalty of Rs 2000 and by an order dated 5th October 1982 the appellant was assessed for the period from 1st April 1980 to 31st March 1981 for the entry tax of Rs 23393 including penalty of Rs 4500
The appellant was a registered dealer under the Madhya Pradesh General Sales Tax Act and had been assessed to purchase tax under Section 71 of the Act and was as such liable for payment of entry tax for iron steel and cement the entry for the same having been effected at the instance of the appellant because it had ultimately used the material for the construction work
The appellant filed revisions before the Deputy Commissioner of Sales Tax who affirmed the assessment orders
The appellant then filed a writ petition challenging the assessment of purchase tax under Section 71 of the Madhya Pradesh General Tax Act and assessment of entry tax under Section 31 of the Act saying that the entry of the materials so supplied by the PWD was effected by it and not by the appellant and it further contended that as there was no sale of these materials and that as these materials were used for construction of the building there was no sale as such and so no entry tax could be levied
It was contended that since the appellant had purchased the iron steel and cement from the PWD and not from the market as per the PG NO 663 contract the prices of which had been deducted from its final bill the entry of material could be presumed to have been made at the instance of the appellant who had ultimately used the materials for the construction work and since these materials were purchased from the unregistered dealer ie the PWD the appellant was held liable for payment of purchase tax and entry tax
Section 3 of the Act is the charging section
Under this entry tax is levied on the entry in the course of business of a dealer of goods in local area specified in Schedule II for consumption use and sale therein and on the entry of the goods specified in Schedule III for consumption use of such goods as raw materials or as packing materials or in the execution of work contracts but not for sale therein
Iron and steel are in Schedule II and cement is in Schedule III and these are assessable to entry tax at the rate of 15 per cent and 1 per cent respectively
Under Section 6c of the Act where a dealer purchases goods specified in Schedule II and Schedule III in a local area from a person or a dealer who is not a registered dealer it is presumed unless the contrary is proved by him that the entry of such goods had been effected by him into such local area before they were purchased by such dealer
It was in those circumstances presumed that the appellant had effected the entry of iron steel and cement which were supplied by the PWD for the construction of work in the local area for consumption use and sale therein
This position was conceded on behalf of the appellant before the Full Bench of the High Court
The PWD is not a registered dealer and therefore Section 6c of the Act applied to the appellant
Under Section 13 of the Act certain provisions of the MP General Sales Tax Act applied mutatis mutandis to a dealer in respect of entry tax payable under the Act
The question therefore was whether there was sale of iron steel and cement by the PWD while supplying those materials for the construction work undertaken by the appellant
If supply of these materials is sale within the meaning of Section 2n of the MP General Sales Tax Act then the appellant would be liable for payment of entry tax as it has been assessed
The question therefore is whether there was sale and whether the property in the goods in question passed to the appellant or continued to remain with the PWD although the PWD had in the final bill debited the prices of the goods so supplied to the appellant under clause 10 of the contract
The Full Bench found that there was sale and as a result of that the duty was leviable
The question therefore is whether there was sale of goods in view of the contract between the parties whereunder the custody and control of the goods remained with the PWD PG NO 664 and goods were only used in the construction under the contract
This question has been considered by this Court in The Government of Andhra Pradesh vs Guntur Tobaccos Ltd 16 STC 240
There the majority of the judges in a Bench of three learned Judges viz Justice Shah and Justice Sikri held that although in the execution of a contract for work some materials were used and property in the goods so used passed to the other person the contractor undertaking the work would not necessarily be deemed on that account to sell the materials
This Court observed that a contract for work in the execution of which goods were used might take one of the three forms
It was indicated that the contract might be for the work to be done for remuneration and for supply of materials used in the execution of the works for a price it might be a contract for work in which the use of the materials was necessary and incidental to the execution of the work or it might be a contract for work and use and supply of materials though not accessory to the execution of the contract was voluntary or gratuitous
In the last class there was no sale because though the property passed it did not pass for a price
Whether a contract was of the first or the second class must depend upon the circumstances if it was of the first class it was composite contract for work and sale of goods where it was of the second category it was a contract for execution of work not involving sale of goods
The majority of the learned Judges was of the view that in order that there should be a sale of goods which was liable to sales tax as part of a contract for work under a statute enacted by the Provincial or State Legislature there must be a contract in which there was not merely transfer of title to goods as an incident of the contract but there must be a contract express or implied for sale of the very goods which the parties intended should be sold for a money consideration ie there must have been in the contract for work an independent term for sale of goods by one party to the other for a money consideration
The question in each case was one about the true agreement between the parties and the terms of the agreement must be deduced from a review of all the attendant circumstances
But from the mere passing of title to goods either as integral part of or independent of goods it could not be inferred that the goods were agreed to be sold and the prices were liable to sales tax
Whether a contract for service or for execution of work involved a taxable sale of goods must be decided on the facts and circumstances of each case
The burden in such a case lay upon the taxing authorities to show that there was a taxable sale and that burden was not discharged by merely showing that property in the goods which belonged to the party performing service or executing the contract stood transferred to the other party
In that case the assessee PG NO 665 company was a dealer carrying on the business of redrying in its factory raw tobacco entrusted to it by its customers
The assessee redried the tobacco packed it in packing materials purchased from the market and delivered it to the customers
For redrying each bale of tobacco the assessee had charged the customers a certain sum but there was no separate charge for the value of the packing materials used
The assessee was assessed to sales tax under the Madras General Sales Tax Act 1939 on the value of the packing materials on the ground that there was a sale of the packing materials
The High Court found that the packing of the redried tobacco and its storage for the requisite period was an integral part of the redrying process and held that there was no sale of packing materials
On appeal in that case this Court by majority held that the finding recorded by the High Court that it was intended by the parties that the packing material should form an integral part of the process of redrying the without the use of the packing material redrying process could not be completed and that there was no independent contract for sale of packing material
It was only as an incident of redrying process and as a part thereof that the assessee had to seal up the package of tobacco after it had emerged from the reconditioning chamber with a view to protect it from atmospheric action
In the absence of any evidence from which contract to sell packing material for a price might be inferred the use of the packing material by the assessee must be regarded as all execution of the works contract and the fact that the tobacco delivered by the constituent was taken away with the packing material would not justify an inference that there was an intention to sell the packing material
Mr Justice Subba Rao as the Chief Justice then was held however that all the ingredients of the charging Section read with the definition of sale were satisfied
He observed that unless it could be said that the material used for packing was transformed into some other commodity not covered by the definition of goods it could not be held that there was no sale of the material
The packing material remained distinct from the dried tobacco
Property in it passed to the customer who had paid for it
On the basis of the practice prevailing in the factory of the assessee contracts for sale arose easily by implication and therefore the Sales Tax Authorities had rightly assessed the turnover in regard to the packing materials
In Hindustan Steel Ltd vs The State of Orissa 25 STC 211 this Court was concerned with Section 91 read with Section 251e of the Orissa Sales Tax Act 1947
Penalty was imposed therein for failure to register as a dealer
But the liability to pay penalty did not arise merely upon proof PG NO 666 of default in registering as a dealer
An order imposing penalty for failure to carry out a statutory obligation was the result of a quasi criminal proceeding and penalty would not ordinarily be imposed
Between 1954 and 1959 the appellant company was erecting factory buildings for its steel plant residential buildings for its employees and ancillary work such as roads water supply and drainage
Some construction work was done departmentally and the rest through contractors
The company supplied to the contractors for use in construction bricks coal cement steel etc
for a consideration which in addition to the cost price of the appellant company included some additional amounts which were charged by the appellant
The question was whether the supply of building materials amounted to sale and the appellant company was a dealer for the purpose of sales tax under the Orissa Sales Tax Act 1947
It was held that the supply constituted sale
It was further held that however the company had charged a fixed percentage above its cost price only for storage insurance and rental or other incidental charges it could not be said that the company was carrying on business of supplying materials and it would not be a dealer
In other words it is clearly held by this Court in the Hindustan Steel Ltd case Supra that where company supplies to the contractor for use in its construction coal steel and cement etc
for a consideration it amounts to a sale and the company becomes a dealer for the purpose of sales tax
The provisions were similar to that of the present Act
In Brij Bhushan Lal Parduman Kumar etc
vs Commissioner of Income Tax Haryana Himachal Pradesh and New Delhi III  the question arose in the context of income tax
The appellant therein a registered firm was a Military Engineering Services contractor carrying on the business of executing contracts and works on behalf of the Government
For the execution of the works undertaken by the appellant certain materials such as cement coal steel etc were supplied by the Government at the fixed rates specified in the respective contract
Such materials though in the custody of the appellant remained the property of the Government and any surplus had to be returned to the Government and the Government was to give credit therefor at fixed rates at which they were supplied by the Government
After rejecting the book results the Income Tax Officer sought to estimate the profits of the appellant at a percentage of the net cash payments received by the appellants against the contracts as well as the cost of the materials supplied by the Government
The Appellate Tribunal however held that the cost of the materials supplied by the Government could not be added to the figure of cash payments received by the appellant as no profits could have arisen therefrom
On a reference the High Court held that the cost of materials was liable to be included PG NO 667 before applying a flat rate to the appellant s receipts
On appeal this Court reversing the decision of the High Court held that since in substance and in reality the materials supplied by the Government always remained the property of the Government and the appellant merely had custody and fixed or incorporated them into the works there was not even a theoretical possibility of any element of profit being involved in the turnover represented by the cost of such materials
Though ordinarily when a works contract was put through or completed by a contractor profit from the contract was determined on the value of the contract as a whole and not by considering the several items that would go to form such value of the contract where as in that case materials were supplied at fixed rates by the Government to the contractor solely for being used fixed or incorporated in the works on the terms that they would remain the property of the Government and any surplus should be returned to the Government and the real total value of the entire contract would be the value minus the cost of such materials so supplied
Since no element of profit was involved in the turnover represented by the cost of the materials supplied by the Government to the appellant the income or profits derived by the appellant from such contracts had to be determined on the basis of the value of the contracts represented by the cash payments received by the appellant from the Government exclusive of the cost of the materials received for being used fixed or incorporated in the works
There the question was whether there was profit taxable to income tax on the sale of the materials
There was none and it was so held
This Court again examined the question in the context of a sale of meals and amenities by a hotelier in the case of The State of Himachal Pradesh  Ors
vs Associated Hotels of India Ltd 29 STC 474 where this Court reiterated that mere passing of property in an article or commodity during the course of the performance of a transaction did not render it a transaction of sale
For even in a contract purely of work or service it is possible that articles may have to be used by the person executing the work and property in such articles or materials 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 has to find out 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 a contract of work or even service parties might enter into separate agreements one of work and service and the other of sale and purchase of materials to be used in the course of executing the work or performing the service
In such cases the transaction would not be one and indivisible but would form two separate agreements one of work or service and the other of sale
PG NO 668 Therefore from the above decisions it follows that in order to be sale taxable to duty not only the property in the goods should pass from the contractor to the Government or the appellant in this case but there should be an independent contract separate and distinct apart from mere passing of the property where a party purchases or procures goods from the Government
Mere passing of property from the contractor to the Government would not suffice
There must be sale of good
The primary object of the bargain judged in its entirely must be viewed
In the instant case clause 10 is significant as we have set out hereinbefore
For the purpose of performance the contractor was bound to procure materials
But in order to ensure that quality materials are procured the PWD undertook to supply such materials and stores as from time to time required by the contractor to be used for the purpose of performing the contract only
The value of such quantity of materials and stores so supplied was specified at a rate and got set off or deducted from any sum due or to become due thereafter to the contractor
Mr Virmani appearing for the appellant submitted before us that in the instant case there was no such independent and separate sale
But we are unable to accept
Though in a transaction of this type there is no inherent sale a sale inheres from the transaction
Clause 10 read in the proper light indicates that position
Our attention was drawn to a Bench decision of the Kerala High Court in Construction Company Changanacherry  Anr
vs State of Kerala 36 STC 320 wherein on a consideration of the contract the Court came to the conclusion that the consideration stipulated to be paid to the petitioner in that case was for the work which the petitioner had undertaken to perform and not by way of sale price of the poles to be produced and delivered by the petitioner
Therefore it was held that the petitioner was not liable to sales Tax
Mr Virmani also drew our attention to a Division Bench decision of the Calcutta High Court in Cementation Patel Durgapur vs Commissioner of Commercial Taxes West Bengal Calcutta 47 STC 385
There on a consideration of the transaction entered into between the parties the Court came to the conclusion that the property in the materials all along remained with the Government of India and whatever was the nature of the transaction involved between the assessee on the one hand and the other members of the consortium or the sub contractors on the other the same did not and could not amount to sale as the assessee could not in the facts of that case transfer the PG NO 669 property therein
In the instant case by use or consumption of materials in the work of construction there was passing of the property in the goods to the assessee from the PWD
By appropriation and by the agreement there was a sale as envisaged in terms of clause 10 set out hereinbefore
Therefore in our opinion there was a sale which was liable to tax
The Full Bench was right in its conclusion
The appeal therefore fails and is accordingly dismissed
There will be no order as to costs
RPD Appeal dismissed


Summary:
The respondent had taken a loan of Rs15000 from the Ministry of Defence for construction of a house on a plot allotted to him
As the amount of loan was insufficient to complete the construction he took a loan of Rs5000 from Appellant No 1 and on 6th September 1973 he entered into an agreement to sell the house and the plot to Appellant No 1
The aforesaid amount of Rs5000 was shown as advance of sale price
Clause 2b of the Agreement provided that the appellant purchaser shall pay to the sellerrespondent a sum of Rs105 every month against the sanctioned loan of Rs 15000 till the full amount is recovered from the respondent
I he payment of Rs 105 per month was made by the appellant only up to January 1976 and this payment covered upto 23 instalments and more than l00 instalments remained unpaid
On January 29 1974 another agreement for construction was entered into between Appellant No 1 and the respondent
Under this agreement Appellant No 1 was to complete construction of the house and alter the completion of the house the respondent was to return the cost of construction amounting to Ks115000 including appellant s profit of Rs20000 and security amount of Rs 15000 deposited by the Appellant No 1 with the respondent within three years in a lump sum and on payment the Appellant No
I was to hand over the possession of the building and the plot to the respondent
Till that amount was paid
Appellant No 1 was entitled to possess and occupy and enjoy the building PG NO 513 PG NO 514 The house was not completed but the appellants who are husband and wife were occupying the same
According to the respondent this transaction was sham and bogus and he repudiated the same
Disputes arose between the parties
The respondent filed a suit claiming for the return of possession of the said plot of land and house
The application ot  the appellant under section 34 of the Arbitration Act was dismissed
In the appeals preferred by the appellant the Additional District Judge appointed a sole arbitrator with the consent of the parties
The arbitrator made and published his award which went against the appellants
The High Court dismissed the appeal filed by the appellants against the order of the District Judge dismissing their application challenging The Award
This Court
in appeal set aside the award of the Arbitrator and also the judgment of the High Court and appointed Shri AC Gupta a former Judge of this Court as the sole arbitrator
It was contended before the said Arbitrator that the agreement for sale was not registered and might not convey any interest to appellant No 1 in the property but the appellants who had been put in possession of the said land and construction
were entitled to retain possession under th4  protection affOrded by section 53A of the 
The arbitrator made and published his award which went against the appellants
The arbitrator held from the receipts filed that the respondent paid only rent up to than 100 instalments remained to be paid and that there was no valid reason why the respondent should have failed to carry out his obligation under The contract
The arbitrator further held that the respondent could not therefore claim that his possession was protected under section 53A of the and was therefore
not entitled to retain possession of the disputed property beyond January 1976
In the objection filed by the appellants challenging the award before this Court it was contended that the award is bad in law and liable to be set aside as there is an error of law disclosed on the face of the award as the statements contained in the award ran counter to the settled position in law that wrongful repudiation by the respondent of the contract by his letter dated 16 January 1976 before mutual obligation under the contract were carried out amounted to PG NO 515 an anticipatory breach of contract by him and therefore the Appellant No 1 is absolved from carrying out his remaining obligation under the contract and could claim specific performance of the same even though he failed to carry out his remaining obligations under the contract
Dismissing the objections and upholding the award the Court HELD l
It is settled in law that where a party to a contract commits an anticipatory breach of the contract the other party to the contract may treat the breach as putting an end to the contract and sue for damages but in that event he cannot ask for specific performance
The other option open to the other party namely the aggrieved party is that he may choose to keep the contract alive till the time for performance and claim specific performance but in that event he cannot claim specific performance of the contract unless he shows his readiness and willingness to perform the contract
521B C International Contractors Ltd vs Prasanta Kumar Sur 19613 SCR 579 distinguished
It is an error of law and not a mistake of fact committed by the Arbitrator which is justiciable in the application before the Court
521A If there is no legal proposition either in the award or in any document annexed to the award which is erroneous and constitutes the basis of the award and the alleged mistakes or alleged errors are only mistakes of fact the award is not amenable to correction by the Court
522A B Coimbatore District Podu Thozillar Sangam vs Balasubramania Faundary and Others   Champsey Bhara and Co vs Jivraj Balloo Spinning Weaving Co Ltd 1922 23 LR 50 IA 324  Kanpur Nagar Mahapalika vs Ms Narain Das Haribansh  and State of Orissa  Orsv
Ms Lall Brothers 1988 Judgment Today SC 552 referred to
In this case what the arbitrator has done is to set out in his award the relevant portion of section 53A of the  in terms of the said section
There can be no dispute that these provisions have been correctly set out
There is thus no error in the proposition of law set out by the learned Arbitrator in the award
It may be that there is an error although that is by no means certain in PG NO 516 the application of these principles in coming to the conclusion that notwithstanding the repudiation of the said contract by the respondent Appellant No 1 was not absolved in the facts and circumstances of the case from his obligation to pay the remaining instalments of Rs105 per month as provided under the contract
521F G