Composite Contract of Service and Sale

Case History:

Prior to the 46th Amendment of the Indian Constitution, composite contracts such as works contracts, hire-purchase contacts and catering contracts were not assessable as contracts for sale of goods. The locus classicus holding the field was State of Madras v. Gannon Dunkerley & Co. 9 STC 353 (SC). The classic concept of sale was held to apply to the entry in the legislative list in that there had to be three essential components to constitute a transaction of sale, namely-

  1. an agreement to transfer title
  2. supported by consideration, and
  3. an actual transfer of title in the goods.

In the absence of any one of these elements it was held that there was no sale. Relying on the ratio in Gannon Dunkerley, that “sale” in Entry 48 must be construed as having the same meaning which it has in the Sale of Goods Act, 1930, the Supreme Court as well as the several High Courts held that composite transactions in which there was an element of sale were not liable to sales tax. However, after the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying.


Bharat Sanchar Nigam Ltd. and Anr. vs. Union of India (UOI) and Ors., AIR 2006 SC 1383

The nature of transaction involved in providing telephone connection may be a composite contract of service and sale and therefore State can tax sale element provided there is discernible sale and only to the extent relatable to such sale.

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