Commissioner of Commercial Taxes,
Mysore Bangalore Vs. Hindustan Aeronautics Ltd.  INSC 351 (17 December
SIKRI, S.M. (CJ) SIKRI, S.M. (CJ) BHARGAVA,
VISHISHTHA DUA, I.D.
KHANNA, HANS RAJ MITTER, G.K.
CITATION: 1972 AIR 744 1972 SCR (2) 927
D 1974 SC2309 (16) R 1976 SC2108 (48) D 1977
SC1537 (23,24,25,35) E 1984 SC 744 (24)
Sales Tax-Contract for manufacture and supply
of railway coaches-if sale or Works-contract.
The correspondence between the Railway Board
and the respondent (assessec regarding the terms and conditions for the
manufacture and supply of railway coaches, and the indemnity bond in respect of
the contract, disclosed that,.
(i) The Railway booked capacity of the
assessee for the purpose of construction of railway coaches;
(ii) an advance, on account, was made to the
extent of 90% of the value of the material on the production of a certificate
by the inspecting authority.
(iii) the material used for the construction
of coaches before its use was the property of the railway;
(iv) there was no possibility of any other
material being used for the construction, and (v) the words used in the
contract were, 'manufacture and supply of the following coaches.' On the
question whether there was a sale of railway coaches liable to sales tax. or
only a works-contract,
HELD : The answer to the question whether a
contract is a works contract or a contract of sale depends upon the
construction of the terms of the contract in the light of surrounding
circumstances. [935 A-B] (1) In the present case. when all the material used in
the construction of a coach belonged to the Railways there cannot be any sale
of the coach itself. It was a pure works-contract, the difference between the
price of a coach and the cost of material being only the cost of service
rendered by the assessee. [935 G-H] (2) Whether the wheels-sets and under
frames were supplied free of cost or not makes no essential difference, [936
A-B] (3) The material and wage escalator and adjustments regarding final price
mentioned in the contract are neutral factors. [935G] State of Gujarat v.
Kailash Engineering Co., 19 S.T.C. 13 (S.C.) followed.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 710 of 1968.
Appeal from the judgment and order dated
March 1, 1967 of the Mysore High Court in Sales Tax Appeal No. 8 of 1966.
928 Somanatha Iyer, R. B. Datar and M. S.
Narasimhan, for the appellant.
S. T. Desai, Mrs. A. K. Verma, J. B.
Dadachanji, O. C. Mathur and Ravinder Narain, for the respondent.
B. Sen, Santosh Chatterjee, G. S. Chatterjee
and P. K. Chakravarti, for intervener No, 1.
D. Goburdhun, for intervener No. 2.
The Judgment of the Court was delivered by
Sikri, C.J. In this appeal by certificate granted by the High Court of Mysore
the only question involved is whether the deliveryby the respondent-Hindustan
Aeronautics Ltd.-hereinafter referred to as the assessee-to the Railway Board
of railway coaches model 407, 408 and 411 is liable to sales tax under the
Central Sales Tax etc.
The Commercial Tax Officer, by assessment
order dated March 28, 1964, in respect of the assessment year 1958-59, included
the turnover in respect of the supply of these coaches. The Sales Tax Officer
rejected the contention of the assessee that therewas no sale involved in the
execution of the works-contract inview of certain decisions of the High Courts;
e.g., McKenzievLimited v. The State of Bombay(1) and Jiwan Singh v. State of
In appeal, the Deputy Commissioner of
Commercial Taxes confirmed the order. In revision the Commissioner of
Commercial Taxes also came to the same conclusion. He observed:
"The contracts specifically mentioned
that the under-frame shall always remain the property of the Railway Board. On
the other hand, the order placed with the assessee company here was for the
'manufacture and supply' of railway coaches. The payment to the assessee
company is specifically referred to as 'price'. The conditions normally
included in contracts for works are absent in this order." He further
". . . I would like to reiterate here
that even the actual contract is for manufacture and supply of rail coaches.
There is no mention that the rail coaches are to be constructed on the
underframes of the indentor ........ If it was really a works contract the
under(1) 13 S.T.C. 602. (2) 14 S.T.C. 957.
929 frames would have been made available for
construction instead of being 'supplied free of cost' and the indentor's lien
on them would have been made clear. The plain meaning of the contract is that
the underframes were transferred to the assessee company free of cost by the
Railway Board and that after construction of rail coaches on them, the rail
coaches were sold to the Railway Board at the agreed price. The agreement does
not also contemplate any inspection in the course of execution as would
normally be provided for in a works contract. The only inspection is after
completion and at Perembur." He thought that case of the assessee in
respect of model 411 railway, coaches was Worse. Regarding the financial
arrangement between the Railway Board and the assessee, he observed "The
Railway Board made only advance payments for purchase of materials and did not
itself procure the material and supply them to the assessee company. The
condition that the materials become property of the Railway Board as and when
purchased is only for purposes of providing adequate security for the advances.
In the circumstances, the materials can be
deemed to be hypothecated to the Railway Board and the advance payments are
really part payment of the final price. The transaction relating to Rail
coaches of model 411 is clearly a sale." He, therefore, confirmed the
appellate order of the Deputy Commissioner.
The assessee then took an appeal to the High
Court of Mysore under s. 24(1) of the Mysore Sales Tax Act read with s. 9(3) of
the Central Sales-tax Act. The High Court was not satisfied with the material
on record and directed that a report be sent on three points, viz :
"(i) Whether and if so to what extent
the assessee has drawn advance payment from the Railway Board in respect of the
material utilised for completing the contracts in question;
(ii) Whether any material, in respect of
which no advance have been drawn, has been utilised by the assesseefor
completing the contracts; and (iii) Whether the assessee has used for
completing the contracts any material not specifically procured for the,
purposes of completing the contracts." 930 The Commercial Tax Officer
submitted his report, and certain extracts may be reproduced below :
"My findings revealed that as and when
they purchased materials, they sent to the Railway Board 'an invoice'
accompanied by a list of the details regarding the materials purchased.
90 per 'cent of the value of these materials
was then paid to the company after inspection of the materials by the board's
representative. Invoice No. 31009 of 15-10-1956 is obtained as a sample. This
invoice shows that materials for the value of Rs. 2,60,374-12-0 were purchased
by the company for 407 model coaches. The details of the materials are given in
list attached to the invoice. The invoice and the list were sent to the board
with a covering letter dated 15-10-1956 asking payment of Rs. 2,34,517-4-0
being 90 per cent of the invoice amount. The amount of this invoice is included
in the Board's remittance note No. 1290 of 30-10-1956 and a cheque was issued
to the company for the total of several such invoices. The amount of the cheque
received on 30-10-1956 was Rs. 22,90,719-0-O." He concluded :
" (1) It is not possible to specify the
exact amount received from the board as advance payments. It is said that the
construction was spread out more than one year and a running, account was
maintained showing the debits and credits for this coaches.
(2) It is said that no materials, for which
advance was not drawn, was utilised for building the coaches.
(3) It is not possible to find out whether
any materials not specifically procured for the construction of coaches were
used. But it is said that there is no possibility of any other materials being
used for this construction. The constructions are said to be done at particular
shed which is separately located. No other work is undertaken in this section.
All the materials procured for constructions of coaches are said to be kept
separately in this section alone. Materials not connected with this work are
not mixed up with the materials in this section. Separate stock registers are
maintained for this section. Receipts and issues of materials for the
constructions of coaches are being accounted for in this register under code
numbers." 931 The High Court allowed the appeal and set aside the order
including the turnover relating to the construction of railway coaches, models
407, 408 and 411. Facts found by the High Court and as they appear to us are as
follows On February 3, 1955, the Ministry of Railways wrote to the Hindustan
Aircraft Ltd. regarding the coaching programme 1955-56. The letter reads :
"In order to book your capacity,
construction of the following is planned on your works against the 1955-56
1. Third Class Coaches B.G. model 407 120
2. Military Coaches 'M' type model 408 60
Total :180 The intention of this intimation is to facilitate such arrangements
as you may find necessary for provising for materials and for planning capacity
for the question. You should therefore treat this as a firm booking of your
capacity." After discussions and settlement of terms between officers of
,the Government of India and of the assessee, the Railway Board placed orders
with the assessee. The terms agreed between the parties are found stated in a
letter of the Government of India, Ministry of Railways (Railway Board) No.
57/147/RE(163) dated May 4, 1957. This relates (to the first of the models 407.
We may extract some portions of the letter. It is stated thus In continuation
of their letter No.
56/142/'3/Re dated 8-1-57 the Railway Board
are pleased to place an order on your work for the manufacture and supply of
the following coaching stock on terms and conditions stated under para 2 below
:Item No. Description of stock Particular Nos. Price per coach of Rly
specification Required (without wheels Board's and Drawing and axles and
Rolling No. under-frames) Stock Programme 1957-58 384 Broad Gauge 55-B-14 180
Rs. 94,731/Class III (Provisional) Coaches fully CSC 1119 furnished to model
'407' 932 Following terms and conditions are relevant:
(i) Price (a) The price mentioned above is
for stock without wheels and axels and under frames, and is provisional. Final
price will be settled by negotiations after you have submitted your claim for
the coaches ordered on you up to 1954-55 Rolling Stock Programme on the basis
of the wages and material escalator approved by the Board.
(b) The final price when settled shall be
subject only to the Standard Wages and material escalator clauses given
(c) The final payment on completion of this
order shall be subject to examination and check of your books by the Chief
Administrative Officer, Integral Coach Factory, Perambur, Madras.
(ii) Wheelsets and Underframes The Wheel sets
and Under frames for the stock will be supplied to you free of cost for
your work siding.
(iv) Delivery The delivery of the above stock
for your works siding is required to commence after the completion of the stock
ordered on your works against 1956-57 R.S.P. and required to be completed by
January 1957, or earlier.
(v) Inspection Authority The inspection of
this stock shall be carried out by a representative (C.M.E. Southern Railway)
before the coaches are dispatched.
(vi) Terms of payment (a) Advance 'on
account' payment to the extent of 90% of the value of the materials shall be
made to you on receipt of materials and on production of a certificate from the
(b) Payment of full contract price, less 'on
account' payment already will be made on delivery of coaches in complete
condition and good working order, duly certified by the Inspecting 933
Authority on the lines of procedure laid down vide Board's letter No.
57/142/6/M dated 4-21952 (Copy enclosed).
(vii) Other terms of Contract.
(ii) If and when sales tax on this order
becomes payable under law, such payments, when made, will not be on your
account. The Railway will not, however, be responsible for payment of the sales
tax paid by you under misapprehension of law.
There is an indemnity bond in respect of this
contract and we may set it out fully.
"1. Standing Indemnity for advance
payment against contract relating to Railway Board's order for construction and
delivery of all metal III class B.G. coaches now pending under orders Nos.
52-142/4/M dated 16th February, 1952 and 53/142/4/M dated 3rd March, 1953 and
against contracts in respect of future orders that may be given by the Railway
Board from time to time, by the Hindustan Aircraft Ltd., Bangalore represented
by General Manager hereinafter called the Company in favour of the President of
Union of India. lie Hindustan Aircraft Ltd., hereby undertake to hold at their
works at Bangalore for and on behalf of the President of the Union of India,
and as his property in trust for him the Stores and articles in respect of
which advances are made to them under Railway Board's letters, No . 52,/142/4/M
dated 16th February, 1952 and 53/142/4/M dated 3rd March, 1953 and hereafter to
be made to the Company under future orders from the Railway Board from time to
2. The said stores and articles shall be such
as are required of the purpose of the pending and future contracts and the
advances made and to be made are without prejudice to the provisions of the
contract as to rejection and inspection and any advance made against stores and
articles rejected or found unsatisfactory on inspection shall be, refunded
immediately to the President of the Union of India.
3. The Company shall be entirely responsible
for the safe custody and protection of the said articles and stores against all
risks till they are duly delivered to the 12-L736Sup-CI/72 934 .lm15 President
of the Union of India or as he may direct and shall indemnify the President of
the Union of India against any loss, damage or deterioration whatsoever in
respect of the said stores and articles while in our possession. The said
articles and material shall at all times to be open to inspection of any
officer authorised by Government.
4. Should any loss of damage occur or a
refund become due, the President of the Union of India shall be entitled to
recover from the Company compensation for such loss or damage or the amount to
be refunded without prejudice to any other remedies available to him by deduction
from any sum due or any sum which at any time hereafter may become due to the
Company under this or any other contract." We have set out the terms of
the Indemnity Bond in great detail because the learned counsel for the
appellant has strongly relied on the terms thereof.
The text of the invoice sent by the assessee
for the purpose of receiving 90% advance may be seen from the covering letter
dated October 15, 1956 relating to one of the invoices. The letter reads :
"On account payment of 90% on material
procured for rail coaches-407 and 408 model VI order. Further to our letter No.
Al/Inv/1 169 dated 8-10-56 enclosing our invoice for Rs. 42,892-15-0 we enclose
herewith our invoice No. 31009 dated 15-10-1956 in duplicate for Rs.
2,34,517-4-0 being 90% of materials procured in October 1956. Kindly arrange
payment of the invoice alongwith the invoice already sent. Please instruct your
resident representative to check the stock of materials as per lists attached
to our invoices and send them to the Deputy Financial Adviser and Chef Accounts
Officer, Integral Coach Factory, Perambur, so that he may send his representative
to check the value of the materials." On these facts we have to decide
whether there has been any sale of the coaches within the meaning of the
Central Sales Tax Act. We were referred to a number of cases* of this Court and
the High Courts, but it seems to us that ultimately the answer must-depend upon
the terms of the contract. The answer to the (1) 16S.T.C.518-McKenziesv.State
(2)  2S.C.R.782-Patnaik & Co. v.
State of Orissa.
935 question whether it is a works contract
or it is a contract of sale depends upon the construction of the terms of the
contract in the light of the surrounding circumstances. In this case the
salient features of the contract are as follows :
(1) The Railway books capacity of the
assessee for the purpose of construction of railway coaches.
(2) Advance on account is made to the extent
of 90% of the value of the material on the production of a certificate by the
(3) The material used for the construction of
coaches before its use is the property of the Railway. This is quite clear from
para I of the Indemnity Bond set out above.
No other meaning can be given to the words in
the bond to the effect that "the Hindustan Aircraft Ltd. hereby undertake
to hold at their works at Bangalore for and on behalf of the President of the
Union of India and as his property in trust for him the Stores and articles in
respect of which advances are made to them." It seems to us clear that the
property in the materials which are used for the construction of the coaches
becomes the property of the President before it is used.
(4) It seems that there is no possibility of
any other material being used for the construction as is borne out from the
report written by the Commercial Tax Officer.
(5) As far as the coaches of models 407 and
408 are concerned, the wheel sets and under frames are supplied free of cost.
(6) In the order the words used are
"manufacture and supply of the following coaches." (7) The material
and wage escalator and adjustments which are mentioned in the contract are
On these facts it seems to us that it is a
pure works contract. We are unable to agree that when all the material used in
the construction of a coach belongs to the Railways there can be any sale of
the coach itself. The difference between the price of a coach and the cost of
material can only be the cost of services rendered by the assessee.
If it is necessary to refer to a case which
is close to the facts of this case, then this case is more in line with the
decision of 936 this Court in State of Gujarat v. Kailash Engineering Co.(1)
than any other case.
The only difference as far as coach model No.
41 1 is concerned is that in that case the wheel sets and under frames are not
supplied free of cost but otherwise there is no essential difference in the
terms. This does not make any difference to the result.
In the result the appeal fails and is dismissed
V.P.S. Appeal dismissed.
(1) 19 S.T.C. 13.