D.P Madon, J.:— The applicants carry on the business of manufacturing and supplying tiles as also of supplying and fixing tiles. The work of fixing tiles carried out by the applicants consists of setting the tiles and polishing them. A contract for supplying, setting and polishing tiles was entered into between the applicants and Kothari Auto Parts Manufacturers (Private) Ltd. at the rates and upon the terms and conditions embodied in a contract dated 18th April, 1960.

2. After the work under the said contract was carried out, the applicants by their letter dated 23rd July, 1963, applied to the Deputy Commissioner of Sales Tax to determine under section 52 of the Bombay Sales Tax Act, 1959, the questions whether the transaction between the applicants and their said customer was a transaction of sale and whether any tax was payable in respect thereof. In the said application the applicants contended that the aforesaid contract was an entire and indivisible contract for work and labour and that there was no sale of materials involved in it. By his order dated 10th September, 1963, the Deputy Commissioner negatived the contention of the applicants and held that the said contract was a composite contract consisting of two parts, namely, one for the sale of goods, namely, tiles, and the other for the services involved in the setting and polishing of tiles, and held that the sale part of the said contract was subject to the levy of sales tax at four naye paise in the rupee and general sales tax at 2 naye paise in the rupee under section 10 of the said Act. In appeal the Tribunal confirmed the view taken by the Deputy Commissioner of Sales Tax and dismissed the said appeal. From the said judgment of the Tribunal this reference has been made to us at the instance of the applicants, the question referred to us being, “whether, on the facts and in the circumstances of the case and on a proper construction of the various conditions of the contract, the Tribunal was justified in holding that the transaction in dispute was in respect of a divisible contract, a part of the consideration for which was liable to tax under the Bombay Sales Tax Act, 1959?”

3. The position in law is now well-settled by a number of decisions of the Supreme Court. There can be a contract simpliciter for the sale of goods. There can also be a contract simplicittr for work and labour in which all that is rendered by the party contracting to do work or provide labour is either the doing of the work contracted for or the providing of the labour stipulated. Neither of these two types of cases can, from the nature of things, give rise to any difficulty. A difficulty, however, arises when in a contract not only work is to be done but the execution of such contract requires the providing if materials by the contractor, namely, by the person undertaking the work and labour part of the contract. In such a case there are three distinct types of contract which the parties can enter into: the first, a contract for the sale of goods in the supply of which or for bringing such goods into being, some work and labour will have to be done by the seller; the second, a contract in which work and labour will have to be done and any supply of materials which will be involved in the execution of the contract is merely incidental thereto; and the third, a contract which is a composite contract, one part of it being for the supply of goods, and the other part for work and labour. In the last type of contract, the two contracts, one for the sale of goods and the other for the rendering of work and labour, may either be in separate documents or, as is more often the case, embodied in the same document. The test for determining in which category a particular contract will fall depends upon the intention of the parties. The intention of the parties is to be gathered primarily from the terms of the agreement and, where a case so requires, from the surrounding circumstances. If the parties had intended to contract for the delivery of a chattel, irrespective of the work and labour that may go in bringing into being such chattel, the contract is one for the sale of goods. If the parties have contracted for the rendering of service or work and labour, the contract is a works contract even though the execution of the contract may involve the supply of materials. In such a case, the contract is an indivisible contract for work and labour and any supply of materials involved in the execution thereof is merely incidental thereto. Where the intention of the parties is that goods should be sold and delivered and, in addition thereto, work and labour should also be done or carried out, the intention of the parties is to enter into two contracts, one for the sale of goods and the other for work and labour, even though these two contracts are embodied in one document. In such a case the contract is divisible and severable and the taxing authorities are entitled to treat it as such and to tax the sale part of the said transaction. Bearing these principles in mind we will now examine the contract before us. The contract between the parties which is contained in a letter dated 18th April, 1960, is on the printed form of the applicants containing the acceptance by the customer of the terms and conditions quoted by the applicants. The customer has signed the said letter on 18th April, 1960. So the contract was really entered into on the said date, though the judgment of the Deputy Commissioner and of the Tribunal both refer to the said contract as being dated 16th April, 1960, that date being the date put on the order form by the applicants when they sent the said letter in duplicate to their customer for them to sign at the foot of one of them and return it in token of their acceptance. The said contract provided for “supplying, setting and polishing” of Hindustan marble mosaic flooring tiles of size 10″ × 10″ as per approved samples and the rates which are quoted against the different types of tiles are given as:

“Yellow No. 4 @ Rs. 110 per 100 sq. ft. Green No. 17 @ Rs. 130 „ „ „ „

Cream No. 180C @ Rs. 125 per 100 sq. ft. Grey No. 1 @ Rs. 115 „ „ „ „”

4. The total work to be carried out is stated in the said contract as being “Approx. 100 Brass” and the cost of work as being approximately “About Rs. 13,000”. The terms of payment set out in the said contract are as follows:

“25% advance with the order, 60% against delivery, 10% against setting and 5% during polishing.”

5. The terms and conditions of the said contract, which are relevant for our purposes, are those contained in clauses 3, 8 and sub-clauses (a), (b) and (c) of clause 9. These clauses provide as follows:

“3. Unless otherwise stipulated,

(a) An advance of 25 per cent shall have to be paid by the purchaser with the order and the balance shall be recovered either by cash against delivery or by documents being sent through bank or V.P.P;

(b) And in case of fixing contracts, where the contract is made for lump sum for tiles, setting charges and/or polishing charges, the purchaser shall have to pay the 25 per cent of the contract value in advance as above and shall have to pay 60 per cent of the contract value on delivery or despatch of the goods. And the remaining 15 per cent shall have to be paid during the running work of setting and/or polishing, as the case may be, at instalments in proportion of the work done;

(c) And in case of fixing contracts, when the contract value is fixed separately for tiles and setting and/or polishing, the purchaser shall have to pay for tiles as stated in clause (a) and 75 per cent of the setting and/or polishing charges for work done shall have to be paid every week and the balance shall have to be paid when the tiles are fixed and/or polished.

8. In every case (including contracts for tiles for fixing) the purchaser if he so chooses has a right by previous appointment in writing to demand examination of the goods before they leave the godown; because thereafter the goods shall be deemed to have been examined and approved at the time of the delivery. Our responsibility ceases after the goods leave our premises or are delivered at Jamnagar, Bombay or Indore, as the case may be, either at the railway station or the bunder. Even in case of fixing contracts outside Jamnagar, Bombay or Indore, as the case may be, once the goods are delivered to the carriers either at the railway station or bunder, we hold no more responsible for any loss, destruction or damage caused in transit. All the goods are despatched at the purchaser's risk and uninsured.

9.(a) We undertake fixing contracts only for the sake of convenience of our customers and so reserve a right unto ourselves to terminate the contract for the fixing of the tiles and to limit our liability for the supply of tiles only. In such cases costs of the supply of the tiles shall be ascertained by deducting the usual charges for fixing and polishing labour from the contract rate.

(b) In fixing contracts sufficient space on the ground floor, say, a room with lock and key, must be given to us with facilities to stock tiles and other materials on site. These tiles, etc., shall remain there till the completion of the work at the risk and responsibility of the purchaser, including the risks of damage or destruction caused by fire or any other accident.

(c) Moreover it often happens that unauthorised persons negligently handle the tiles and cause loss or damage to the edges and corners to our tiles; if so done the purchaser shall be held responsible for any loss that may unjustly accrue to us. They should only be removed through our own men.”

6. Relying upon clause 3 of the said contract Mr. Patil on behalf of the applicants has submitted that the applicants enter into three distinct types of contract: first, for the sale of goods simpliciter envisaged by sub-clause (a) of clause 3; second, for work and labour envisaged by sub-clause (b) of the said clause 3; and, third, a contract which consists of two separable and divisible parts, namely, the sale of tiles and the setting and polishing of tiles envisaged by sub-clause (c) of the said clause 3, and that the contract in the present case was one falling under the said sub-clause (b) and was, therefore, an entire and indivisible contract for work and labour. We accept Mr. Patil's Submission that the contract in the present case is one which falls under subclause (b) of the said clause 3. We are, however, unable to accept the further part of his submission that the contracts of the type envisaged by the said sub-clause (b) are contracts which are entire and indivisible contracts for work and labour. Clause 8 of the said contract, quoted above, makes it clear that the applicants treat the sale of tiles by them on a separate footing from the setting and polishing part thereof, irrespective of whether the contract was of the type envisaged by sub-clause (b) or sub-clause (c) of the said clause 3. By the said clause 8 they have expressly provided that in the case of every contract entered into by them, including “contracts for tiles for fixing”, the purchaser has a right to examine the goods till the time the goods leave the applicants' godown and that after the goods leave the applicants' godown, the goods would be deemed to have been examined and approved at the time of delivery, the responsibility of the applicants ceasing after the goods leave their premises or are delivered at Jamnagar, Bombay or Indore, as the case may be, either at the railway station or at the port. The said clause further expressly provides that even in the case of fixing contracts outside Jamnagar, Bombay or Indore, as the case may be, once the goods are delivered to the carriers either at the railway station or port, the applicants are no more responsible for any loss, destruction or damage caused in the transit, all the goods being despatched uninsured at the risk of their customer. A more important term of the contract for showing what the real intention of the parties was is the condition contained in sub-clause (a) of the said clause 9 in which it is expressly stated that the applicants undertook fixing contracts only for the convenience of their customer and for the said reason reserved to themselves the right to terminate the contract for the fixing of tiles and to limit their liability to the supply of tiles by them only and that in the case of their terminating the said contract for the fixing of tiles and limiting their liability only for the supply of tiles, the cost for the supply of tiles would be ascertained by deducting the usual charges for fixing and polishing labour from the contractors. This sub-clause clearly shows that the contract was from its very nature severable and that an option was given fo the applicants to sever it if they so desired and to carry out only the sale part of it, receive the price for the tiles sold and delivered by them and incur no liability for non-performance by them for work and labour part of the said contract.

7. In support of his submission that this contract was an entire and indivisible contract for work and labour in which the supply of materials was incidental, Mr. Patil, the learned Advocate for the applicants, has relied upon a decision of the Supreme Court in Carl Still G.m.b.H v. State of Bihar [1961] 12 S.T.C 449 S.C.. In that case the appellants had contracted to set up a complete coke oven battery ready for production as well as by-products plants at Sindri in the State of Bihar and to erect and construct buildings, plants and machineries and deliver and supply accessories and articles and render services described in the schedule to the contract for an all-inclusive price. Clause 15 of the said contract provided that all materials brought to the site by the appellants would become the company's property, but if they were destroyed by fire, tempest or otherwise, the loss would fall not on the company but on the appellants. The sales tax authorities sought to impose sales tax on the appellants on the materials supplied in the execution of the said contract on the ground that such supply was a sale. The matter ultimately went to the Supreme Court and the Supreme Court held that this was an entire and indivisible contract for work and labour and that supply of materials was incidental thereto. Referring to the said clause 15 of the contract the Supreme Court stated that the said clause clearly showed that no sale of materials as such was intended, because the said clause expressly provided that if the materials were destroyed by fire, tempest or otherwise, the loss would fall not on the company but on the contractor and that had the intention of the parties been that there should be a sale of these materials, the loss would have fallen on the company and not on the appellants, because it would have been taken that the property in the said materials had been absolutely transferred to the company. Clauses 8 and 9(b) of the contract before us are in material respects exactly the opposite of the said clause 15 in the case before the Supreme Court. Here the goods are entirely at the risk of the applicants' customer once they are delivered at Bombay either at the railway station or the port, and even when the goods are kept in a room with a lock and key provided by the applicants' customer to enable the applicants' workmen to carry out the work of setting and polishing the tiles, the tiles would remain in the said room and on the premises where the work of setting and polishing is being carried out at the risk and responsibility of the applicants' customer even in cases where the damage or destruction to the tiles was caused by fire or any other accident.

8. Relying upon the terms of payment set out in the said contract the Tribunal has held that 85 per cent of the amount payable under the said contract was the price of the tiles sold and delivered by the applicants to their customer because under the said terms 25 per cent of the amount was to be paid as advance while placing the order with the applicants and 60 per cent against delivery, the remaining 15 per cent being split up by the said terms into 10 per cent against setting and 6 per cent during polishing. Since the sale part of the said contract was worked out when the goods were delivered to the applicants' customer at Bombay either at the railway station or the port and at the time of delivery 60 per cent was to be paid in addition to the 25 per cent paid as advance, it would be consistent and logical to take the aggregate percentage of 85 per cent as the price of tiles sold by the applicants to their customer.

9. In the result, we answer the question submitted to us in the affirmative. The applicants will pay to the respondent the costs of this reference.

10. Reference answered in the affirmative.