Contract of Sale under GST – Object and Conditions

Contract of Sale under GST refers to a legally enforceable agreement where ownership of goods is transferred from the seller to the buyer for a monetary consideration, and such transfer qualifies as a "supply" under Section 7 of the Central Goods and Services Tax (CGST) Act, 2017.

Table of Contents

1. Relevance to GST
2. Object of Sale
3. Conclusion of Sale

Check out Taxmann's GST & Allied Laws which provides a comprehensive commentary on how GST intersects with key allied laws—from the Contract Act and Sale of Goods Act to RERA and beyond—offering updated legislative references and judicial insights. It clarifies how these statutory definitions and principles shape GST liabilities, classifications, and dispute outcomes, with illustrative examples and practice notes. Each chapter systematically integrates core concepts, addresses interpretational challenges, and guides readers on applying them in practical scenarios. Its organised structure and cross-references make it indispensable for practitioners, businesses, and students seeking an in-depth understanding of GST's legal underpinnings. It is a user-friendly and authoritative guide to navigating GST's multifaceted legal landscape.

1. Relevance to GST

Contract of sale is also formed and interpreted in every way as a contract that is not for sale. Law on sale of goods cannot be applied to ‘services’. But the eight (8) forms of supply listed in section 7(1)(a) of Central GST Act, are expressed in a manner that it applies to ‘goods’. For purposes of understanding these forms of supply qua services, it is sufficient to supplant ‘object of contract’ from goods with services to examine the treatment applicable. Sale, Benjamin defined to be, a transfer of the absolute or general property in a thing for a price in money. And such a sale is just one of the eight forms that supply takes. Without knowing sale incisively, the understanding about the other forms of supply, can hardly be satisfactory.

Example (198) – Supply of service of repairing an equipment being supply of skill of the Supplier that is non-reusable by Recipient, it is not a lease but a license.

Example (199) – Supply of service of training in repair of equipment being supply of skill of the Supplier that is reusable by Recipient, it is not lease.

Uniformity of tariff classification applicable to supply of goods and services undermines deep study into their differences. But when it comes to disputes about valuation of supply of services, then these differences greatly assist the cause of defence to challenge instances put forward by Revenue as comparable. No such deep study will be complete without considering works by Pollock and Benjamin on this subject.

It may be of interest to mention that Sale of Goods Act was located in sections 76 to 123 of Indian Contract Act until it came to be relocated. For this reason, entire body of earlier deliberations on Contract law are relied upon extensively here and expected to be considered subconsciously while considering ensuring deliberations on Sale of Goods Act.

2. Object of Sale

2.1 Goods

Law contained in Sale of Goods Act does not relate to immovable property or services. And to come within the scope and operation of this law requires that the ‘object of contract’ be goods and the transaction a sale.

Section 2(7) “goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

Note that the definition is exhaustive as well as illustrative. And actionable claims are excluded, and stocks and shares are included in the definition, contrary to section 2(52) of Central GST Act.

Exclusion of actionable claims renders the statute and deliberations about its interpretation inapplicable. But for limited purposes of GST, actionable claims must be extended the full force of the prevailing jurisprudence.

Standing crop is not the same as growing crop. While both are attached to the earth and hence, immovable, standing crop is that which has ceased its dependence on land on which it stands and derives its nourishment unlike growing crop. Standing crop has completed growing and ready to be severed and made movable property, that is, goods. Growing crop is still dependent and continues growing until its dependence on land is not to grow any further but to remain on it. Understanding this aspect is of great importance for purposes of this and GST law.

Due to the presence of ‘comma’ before “and things….”, growing crop and grass have been excluded from qualification by the words that follow, that is, “which are agreed to be severed before sale or under the contract of sale”. Contrast this with the definition in section 2(52) of Central GST Act and the difference jumps out – ‘comma’ before “and things….”, is deleted by Legislature.

Section 2(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

Words of qualification – which are agreed to be severed before sale or under the contract of sale – do not touch classes that are before the comma because comma separates the classes to which the words of qualification is meant to affect. Therefore, all things that are attached but agreed to be detached will also be goods for purpose of GST and the others – actionable claims, growing crop and grass – are goods even when there is no agreement to severe them from the land. This is correct application of words of qualification and can be more completely appreciated along with deliberation about immovable property.

2.2 Future Goods

Existing goods that are yet to be appropriated to the contract of sale are not future goods. Goods that are not yet in existence but taken up for negotiations in anticipation of their production for appropriation are future goods.

“Section 2(6) “future goods” means goods to be manufactured or produced or acquired by the seller after the making of the contract of sale;”

Contracts can be entered into in respect of future goods provided acknowledgement of their non-existence is not made. If it is acknowledged that the object of this contract is future goods, then the contract is non est. Parties cannot be said to agree about a thing that does not exist. Parties, without referring to its non-existence, may enter into a contract on the assertion by Seller that they exist and will be ready before the date due for their delivery. Contracts may be entered into in respect of existing goods but by the due date of delivery new stock of identical goods may be produced and ready for appropriation.

Contracts of sale, especially, of custom-built articles cannot be negotiated in vacuuo and customs of trade expose their non-existence and defeat the contract. For this reason, it is necessary to grasp the implications of future goods forming object of negotiations as being goods not in existence than merely being in existence pending appropriation. As such, these will be contract for works.

Example (200) – Contract to sell a cruise ship cannot be a contract of sale because the specifications are so unique that once it is built, it is to be one-of-a-kind and hence, cannot already exist to be a sale simplicitor and this contract is something
more.

Example (201) – Contract for sale of laptop could well be contract of sale even if inventory with the OEM is NIL.

Forward contracts with intent to deliver goods are mere promises in praesenti since the object of contract (goods) are not yet in existence. But forward contracts without intent to deliver, will be valid as they are contract involving ‘securities’ being derivatives.

2.3 Ascertained Goods

Goods set apart for delivery to a Customer cannot be diverted to another Customer with earlier delivery date. Setting apart is not linking Customers to available inventory in an irreversible manner. Ascertainment is such ‘setting apart’ but this does pre-empt ‘passing of title’.

Offer whose acceptance brings about a binding contract of sale will be of existing goods even if unascertained. Ascertainment does not pass risks to Acceptor (Promisee) unless appropriated as per terms of sale. Sale in praesenti can be entered into of goods in existence even if not ascertained from common stock. Unascertained goods does not mean future goods.

2.4 Merchantability

Fit-for-purpose refers to the purpose for which the goods are designed and produced. Goods meeting the purpose of their design and declared end-use are goods of merchantable quality. Whether the goods are fit-for-purpose is decided by the trade and the stated purpose in that trade. Where goods are custom-built, then the purpose must be defined in such arrangement.

Goods that are unfit-for-purpose cannot be identified as those goods but some other goods such as scrap or something else but not the identity with which those that are fit-for-purpose.

Example (202) – Expired medicines being returned to manufacturer are not medicines. Identity flows from implied merchantable quality or fit-for-purpose attribute of those goods.

Contract of sale using certain description for the object of sale bears an implied warranty that goods, if they are asserted by Seller to meet their description, will be fit-for-purpose. Sale is complete on delivery and goods delivered are fit-for-purpose is implicit in delivery. And on inspection if they are found unfit-for-purpose, the sale is void ab initio. Declarations cannot be collected every time delivery is attempted. Delivery proceeds on an
understanding or expectation that Seller will ensure that only fit-for-purpose stocks are delivered subject to risk of failure during inspection and voiding contract. Assumption about completion of sale stands impeached by discovery of failure of fit-for-purpose warranty. Any tax treatment extended due to this assumption is liable to be reversed on discovery of failure.

Fit-for-purpose is evidence of consensus ad idem test of valid contract. And this consensus is necessary to locate the ‘object of contract’ and that which enjoys consensus must be the object.

Example (203) – Contract for healthcare services cannot be for sale of prosthetics although price-longevity-benefits aspects may be discussed and approved by Patient, yet object is not for sale of goods.

Example (204) – Contract for supply of items of food preserved in sugar syrup or in vacuum sealed container bearing MRP label and presented as if fit-for-redistribution is contract of sale of goods.

Example (205) – Contract for supply of items of food bearing declaration

(i) no preservatives added

(ii) best to consume within three (3) days

(iii) contains milk, will curdle

(iv) MRP label not applicable

(v) quantity when packed…….grams and non-standard quantities suited for consumption in one occasion

(vi) handle unsealed package with care, fit for reuse and may be recycled, contraindicates identity as goods.

Example (206) – Old newspaper is NOT newspaper since it is not current and hence, not fit-for-purpose as newspaper.

Example (207) – Old motor vehicle is still motor vehicle since it is fit-for-purpose as such.

Where merchantability is in doubt, HSN code of merchantable quality of goods cannot be applied. And when the object of contract of sale is not goods, then it will be a contract for supply of services in GST.

2.5 Condition

Sale may be absolute or conditional. Condition cannot be tendering of consideration by Promisee (Buyer). Conditions are not conforming to description or sample. Condition are those which furnish occasion to constitute a sale. Conditions may be –

1. conditions precedent where sale does not arise unless conditions are fulfilled;
2. conditions concurrent which are to be shown to be fulfilled at time of passing title; or
3. conditions subsequent where sale is concluded by Seller in anticipation that conditions will be subsequently fulfilled.

Example (208) – Perfecting title by Seller before conferring title to Buyer is condition precedent.

Example (209) – Sale of equipment subject to installation and testing is conditional sale where the condition is subsequent to sale.

Example (210) – Works contractor’s bills being ‘subject to’ approval of works completed by Project Engineer is NOT a conditional sale. Approval of works is determination of completion.

Conditional sales are necessary because this law is ‘law of merchants’ that is codified and necessities of trade demand that in certain instances, conclusion of sale be delayed until conditions precedent are fulfilled and in other instances, conclusion of sale NOT be delayed pending fulfilment of conditions subsequent. Reference may be had to sections 51 to 58 of Contract law on the contours of these conditions.

Failure of conditions denies the sale, even if concluded already. Failure is not rejection because rejection implies subjective examination with description or sample. Failure goes to the root of the transaction and leaves the transactions non est. Condition is central and substantive to the sale itself.

2.6 Warranty

Continuation of assertions made at the time of sale that are essential to satisfaction of sale during the agreed tenure such as fit-for-purpose, title, time as essence (or not) for performance, measure of performance, payment, credit period and interest, liquidated damages, non-fatal breach and waiver, etc. are warranties by seller.

“Section 14. Implied undertaking as to title, etc.-In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is –

(a) an implied condition on the part of the seller that, in the case of a sale, he has a right to sell the goods and that, in the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass;

(b) an implied warranty that the buyer shall have and enjoy quiet possession of the goods;

(c) an implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made.”

Terms of contract containing warranty is a good indicator of the object of contract. It can be seen in Kone Elevators India (P.) Ltd. v. State of TN [2014] 45 taxmann.com 150 (SC), that whether the object of contract was sale simplicitor or works contract was not categorically decided by Apex Court but left be determined based on the terms of each contract and its stipulations. This decision appears to be indecisive but shows great discernment in leaving room for play based on stipulations in each contract to guide the object of said contract and procure the tax treatment.

2.7 Condition as Warranty

Non-fatal breach or fatal breach waived by Promisee can result in saving the contract and the Parties from re-tendering and to accept the variation caused by these events. It is provided in section 13 to treat a condition as a warranty not to dilute the rigours of performance in future but avoid repudiation of contract and save executed portion of the contract.

Waiver may be express or implied. Waiver is like acquiescence. Waiver does not alter the contract in the areas where it is still executory. It is does not create any estoppel against breach in future by Promisor. Effect on price to the extent of waiver must be allowed to avoid unfairness in dealings with each other.

Non-payment of consideration does not come within this legal fiction. Waiver applies only to Promisor who is to perform and not to Promisee who is to pay consideration. Refer separate discussion about non-payment of lease rental due to Covid and legal effects on variation to contract. Waiver is not the same as severability of contract due to impossibility of performance to that extent. Waiver by Promisee denies right of repudiation but allows claim for damages under section 54. These provisions do not save fatal breach and waiver of fatal breach results in substitution of contract.

3. Conclusion of Sale

3.1 Preliminary Aspects

Sale is ‘transfer of property’. But sale is NOT ‘transfer’ simplicitor. Sale is transfer of property ‘for cash’ consideration. If consideration is other than cash, then Sale of Goods Act has no applicable. Logical extension is unreliable and ill-advised to apply even if it seems to produce the same result in some instances.

Awareness that a sale has been concluded is also not necessary as long as in the eyes of law there is a consensual transfer of property for money consideration. And where there is non-monetary consideration, it is not a sale but not if there are two sales going in opposite directions and settle money consideration due to each other.

“Section 4. Sale and agreement to sell.—

(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.

(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

(4) An agreement to, sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.”

Clarity about the ‘object’ of sale is essential to bring a contract of sale into existence. Object of contract of sale and objective of Parties to contract are not the same. Contract for construction of building with key material (cement and steel) being made available by Customer is not a sale of cement and steel by Customer to Contractor, provided the scope of contract (and hence the price for work to be done) did not include supply of these key material and Customer was always obliged to make them available.

Example (211) – Contract for installation of air-conditioner is a contract for services and Customer is obliged to make the air-conditioner available in order for the installation contractor perform the obligation (of installation). There is no implying that an air-conditioner is sold by Customer to Contactor and purchased back from Contractor via the contract for work of installation. If the air-conditioner is not made available, Contractor cannot complete obligations agreed.

In the same contract for construction of building (with key material excluded from scope and price) if the Contractor is debited for cost of key material wasted during the course of their use in construction, the amount debited will be –

• A sale of those key material (to the extent wasted) if there is a provision in the contract that “wastage to Contractor’s account” which means that quantity of material wasted is first transferred to Contractor which is then wasted on own account by Contractor; or
• Not a sale of those key material (to the extent wasted) if the contract provides that ‘Contractor liable to bear the cost of Customer’s material used beyond maximum allowance for wastage’ which implies that the amount debited is liquidated damages to impose a monetary charge on Contractor as a disincentive against improper use of key material.

This is not an easy debate because this issue came up as early as 1954 in Gannon Dunkerley & Co. (Madras) Ltd. AIR 1954 Mad. 1130 but there were other challenges to levy sales tax that after a Constitutional amendment and extensive judicial examination came to be addressed in NM Goel and Co. v. STO 1990 taxmann.com 1352 (SC). where it was held that amounts debited to Contractor’s accounts must be treated as a sale by Customer to Contactor which appears to be support by the fact that the contract scope and price was not sans these key material and Contractor was free to otherwise procure said key material of acceptable quality and decline to use material made available by Customer.

Interestingly, in order for a transaction to be considered to be ‘a sale’, it is well known that there must be transfer of property. But more important is that the transfer of property must result in the title and the goods exist in the hands of Contractor to be used as pleased. Debiting cost of material that is admittedly wasted and no longer exists, to impute a sale (of wasted material) would be artificial and to assume that the sale was momentary which was instantaneously misused and wasted would be in the realm of imagination. In GST, where consideration is NOT towards supply of goods, it is readily accommodated as being towards supply of services.

Example (212) – Glassware store with display sign “if you break it, you bought it” is not an affirmation of passing of title as glassware knocked over was falling until it landed on the floor and broke into pieces. Sign merely cautions browsing visitors of the liquidated damages that applies in case of any breakage caused.

In Rashtriya Ispat Nigam Ltd. v. CTO 1990 (77) STC 182 (AP) (affirmed by Apex Court in State of AP v. Rashtriya Ispat Nigam Ltd. 2002 (126) STC 114) held that amount debited towards use of construction equipment belonging to Customer made available for use by Contactor in the construction works for Customer, was not a lease (under the earlier tax regime) because ‘right to use’ cannot be inhibited by place or purpose of use. If amount debited were to be consideration for transfer of right to use, Contractor should have bene free to take the said construction equipment and use it in Customer’s project or any other project. Since restriction on ‘place and purpose of further use’ was applicable, amount debited could not satisfy ‘test of transfer’ of right – whether limited only to use or unlimited and absolute – to be liable to tax. Transfer proper requires existence which is complete and unqualified for further application by Transferee. Transfer cannot exist in consumption of material. For this reason, passenger transport service is the object of contract in a stage carriage where diesel is consumed by Operator in the course of providing said service and not a contract for sale of diesel to Passenger.

Food supplied in a restaurant is a service and not sale simplicitor of goods being items of food because these items are presented for consumption and not in a manner that it is suited for redistribution. Northern India Caterers (India) Ltd. v. LG Delhi AIR 1978 SC 1591 explains why supply of items of food in the context of consumption does not meet the exacting standards of Sale of Goods Act to be a sale simplicitor. And if consumption is extended to the convenience of one’s home, then items of food presented for consumption but packed suitably as ‘take away’ but not ‘storage and redistribution’.

How it looks and what it is – can be very confusing and for this reason, search for ‘object’ of contract cannot be based on common parlance but based on strict application of the provisions of Sale of Goods Act.

3.2 Formation of Sale Contract

Sale is complete on delivery and not consumption. But for the formation of a contract of sale, the object of contract – the goods – must be in existence. Those goods must be present and ascertained and not future or unascertained. If those goods do not exist (yet to be manufactured or grown) at the time of contract, acceptance does not create a contract due to non-existence of object.

“Section 5. Contract of sale how made.—

(1) A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by instalments, or that the delivery or payment or both shall be postponed.

(2) Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties.”

Goods not in existence may be in the contemplation of Parties to a negotiation and in anticipation of their acquisition may be Offered for Sale and even agreed upon on other essential matters such as date and place of delivery, price, insurance and so on. Goods are not in existence perhaps because they are not mixed in a common stock and after negotiations will be identified, isolated and set apart to be appropriated against the impending delivery. But goods that are yet to be come into existence and need to be manufactured or grown and harvested, they cannot be the subject of a contract of sale.

“Section 6. Existing or future goods. –

(1) The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or future goods.

(2) There may be a contract for the sale of goods the acquisition of which by the seller depends upon a contingency which may or may not happen.

(3) Where by a contract of sale the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods.

Contract for non-existent goods is only a promise in praesenti to enter into a contract in futuro when those goods come into existence and get appropriated against this contract and the terms negotiated as merely bargain of a promise in praesenti.

Example (213) – Sale of door is a contract for sale of wooden door if the door exists and is offered for sale to buyer who is able to inspect and accept terms offered.

Example (214) – Sale of door after production is a promise to contract (if and) when production is complete and door (as described) comes into existence.

Mandatory requirement for goods to be in existence is because of the mandatory requirement of Offer to be made worthy of Acceptance. Description of goods not in existence cannot satisfy the exacting standards needed to establish consensus ad idem. But if a contract has, in fact, come into existence but the object of contract appears to be non-existent (or future goods), then the contract needs to be read by adjusting the expected object with actual object.

Example (215) – Contract for sale of wooden door yet to be produced but type of wood identified and confirmed from stock of manufacturer will be –

(i) contract for sale of wood and

(ii) work order to produce door as per specification, contained in two separate or single composite document.