M/S. Damodar Valley Corporation Vs.
The State of Bihar [1960] INSC 210 (21 November 1960)
SINHA, BHUVNESHWAR P.(CJ) IMAM, SYED JAFFER
SARKAR, A.K.
SUBBARAO, K.
SHAH, J.C.
CITATION: 1961 AIR 440 1961 SCR (2) 522
ACT:
Sales Tax-Liability-Agreement to supply
equipment and machinery to contractor--If a sale or hire-Test-Bihar Sales Tax
Act, 1947 (19 of 1947) S. 2(g), 13(5), 25.
HEADNOTE:
The appellant Corporation was assessed to
sales tax under S. 13(5) of the Bihar Sales Tax Act, 1947, on the price of
machinery and equipment, amounting approximately to Rs. 42,63,305, supplied to
two contractor firms on the basis of an agreement which it entered into with
them for the construction of a dam. The agreement provided, inter alia, that
the price of the machinery and equipment supplied was to be paid by the
contractors and until that was done they were to remain the property of the
Corporation. It was further agreed that the Corporation would take them over
after the completion of the work at their residual value, to be calculated in
the manner set out in the agreement, provided that they were properly looked
after during the period of operation; and if the contractors so chose earlier,
if they were declared surplus and certified as such by the consulting Engineer.
The price was to be paid in 18 equal installments, two-thirds of which was
realisable in any case, and thereafter the Corporation was to consider the date
or dates of taking them over after assessment of the depreciation in order to
arrive at the residual value. The Corporation was not bound to take over if the
residual life of the equipment fell below one-third of the standard life as
fixed by the parties.
523 The contractors were to replenish the
stock of spare parts supplied to them at their own cost. The appellant's case
was that the transaction represented by the agreement was not a sale within the
meaning of the Act. The Sales Tax authorities held against it and the only
question that was ultimately referred to the High Court by the Board of Revenue
under S. 25 of the Act was whether the property in the equipment and machinery
passed to the contractors and the transaction amounted to a sale. The High
Court answered the question in the affirmative, holding that the transaction
was a sale within the meaning of s. 2(g) of the Act. The High Court having
refused the necessary certificate, the appellant appealed by special leave
granted by this court.
Held, that the appeal must be confined to the
question debated in the High Court. It is well settled that, while functioning
in its advisory capacity under a taxing statute, the High Court cannot go
beyond the question referred to it or on a reference called by it. That the
appeal was by special leave could make no difference and the scope of the
controversy could not be extended beyond what could be legally raised before
the High Court.
The two fold test to determine whether a
particular agreement is a contract of mere hiring or of purchase on deferred
payments is (1) whether the hirer is under an obligation to purchase the goods
and (2) whether he has the right to return the goods at any time during the
subsistence of the contract. What has to be considered in each case is the
substance of the agreement and not the words describing its category.
Helby v. Matthews and others, (1895) A.C.
471, referred to.
So judged, there could be no doubt that on
the terms of the agreement between the parties the transaction in the instant
case was clearly a sale on deferred payments with an option to repurchase and
not a mere contract of hiring.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 285 of 1959.
Appeal by Special Leave from the Judgment and
Decree dated the 13th July, 1956, of the Patna High Court in M. J. C. No. 404
of 1954.
M. C. Setalvad, Attorney-General for India
and S. P. Varma, for the Appellants.
A. V. Viswanatha Sastri, Suresh Aggarwala and
D. P. Singh, for the Respondent.
1960. November 21. The Judgment of the Court
was delivered by 524 SINHA, C.J.-This appeal, by special leave, is directed
against the judgment and order of the High Court of Patna dated July 13, 1956
disposing of a reference under s. 25(1) of the Bihar Sales Tax Act, 1947, which
hereinafter will be referred to as the Act, made by the Board of Revenue,
Bihar.
The facts of this case have never been in
dispute and may shortly be stated as follows. The appellant is a Corporation
incorporated under the Damodar Valley Corporation Act (XIV of 1948) and will
hereinafter be referred to as the Corporation. It is a multipurpose
Corporation, one of its objects being the construction of a number of dams in
Bihar and Bengal with a view to controlling floods and utilising the stored
water for purposes of generation of electricity. One of such dams is the Konar
Dam in the district of Hazaribagh in Bihar. For the construction of the
aforesaid Dam the Corporation entered into an agreement with Messrs Hind
Construction Ltd. and Messrs Patel Engineering Co. Ltd. on May 24, 1950, and
appointed them contractors for the aforesaid purpose. They will hereinafter be
referred to as the Contractors. As a result of a change in the design of the
Dam, it became necessary to enter into a supplementary agreement and on March
10, 1951, cl. 8 of Part II of the original agreement was amended and a fresh
cl. 8 was substituted. Under the new cl. 8 of the agreement, as amended, the
Corporation agreed to make available to the contractors such equipment as was
necessary and suitable for the construction aforesaid. The Contractors are charged
the actual price paid by the Corporation for the equipment and machinery thus
made available, inclusive of freight and customs duty, if any, as also the cost
of transport, but excluding sales tax.
The equipment thus supplied by the
Corporation to the Contractors was classified into two groups, Group A and
Group B, as detailed in Schedule No. 2. The machinery in Group A was to be
taken over from the Contractors by the Corporation, after the completion of the
work at their "residual value" which was to be calculated in the
manner set out in the agreement. The machinery in Group B was to become the 525
property of the Contractors after its full price had been paid by them. No more
need be said about the machinery in Group B, because there is no dispute about
that group, the Contractors having accepted the position that Group B machinery
had been sold to them. The controversy now remaining between the parties
relates to the machinery in Group A.
On August 12, 1952, the Superintendent of
Sales Tax, Hazaribagh, assessed the Corporation under s. 13(5) of the Act for
the period April, 1950 to March, 1952. It is not necessary to set out the
details of the tax demand, because the amount is not in controversy. What was
contended before the authorities below and in this Court was that the
transaction in question did not amount to a "sale" within the meaning
of the Act. The Superintendent rejected the contention raised on behalf of the
Corporation that it was not liable to pay the tax in respect of the machinery
supplied to the Contractors. The Corporation went up in appeal to the Deputy
Commissioner of Sales Tax against the said order of assessment. By his order
dated May 5, 1953, the Deputy Commissioner rejected the contention of the
appellant as to its liability under the Act, but made certain amendments in the
assessment which are not material to the points in controversy before us. The
Deputy Commissioner repelling the Corporation's contentions based on the Act,
held inter-alia that the supply of equipment in Group A of the agreement
aforesaid amounted to a sale and was not a hire ; that the condition in the
agreement for the "taking over" of the equipment on conditions laid
down in the agreement was in its essence a condition of repurchase and that the
Corporation was a "dealer" within the meaning of the Act. The
Corporation moved the Board of Revenue, Bihar, in its revisional jurisdiction
under s. 24 of the Act. The Board of Revenue by its resolution dated October 1,
1953, rejected the revisional application and upheld the order of the
authorities below. Thereafter, the Corporation made an application to the Board
of Revenue under s. 25 of the Act for a reference to refer the following 67 526
questions to the High Court at Patna, namely, (a) whether the assessment under
s. 13(5) of the Act is maintainable, (b) whether, in the facts and
circumstances of the case, it can be held that the property in the goods
included in Schedule A did pass to the Contractors and the transaction amounted
to a sale, and (c) whether the terms of the agreement amount to sale
transactions with the Contractors and taking over by the Corporation amounts to
repurchase.
This application was made on December 22,
1953, but when the application for making a reference to the High Court came up
for hearing before the Board of Revenue on May 20, 1954, and after the parties
had been heard, counsel for the Corporation sought leave of the Board to
withdraw questions (a) and (c) from the proposed reference and the Board passed
the following order:"Leave is sought by the learned advocate for the
petitioner to drop questions (a) and (c) from the reference. The leave is
granted. There remains only question (b) for reference to the High
Court........" Thus only question (b) set out above was referred to the
High Court for its decision. After hearing the parties, a Division Bench of the
High Court, Ramaswami, C. J. and Raj Kishore Prasad, J., heard the reference
and come to the conclusion by its judgment dated July 13, 1956, that the
reference should be answered in the affirmative, namely, that the transaction
in question amounted to a sale within the meaning of s. 2(g) of the Act.
Thereupon the Corporation made an application
headed as under Art. 132(1) of the Constitution and prayed that the High Court
"be pleased to grant leave to appeal to the Supreme Court of India and
grant the necessary certificate that this case is otherwise a fit case for
appeal to the Supreme Court..... " Apart from raising the ground of attack
dealt with by the High Court on the reference as aforesaid, the Corporation at
the time of the hearing of the application appears to have raised other
questions as would appear from the following extract from the judgment and
order of the High Court dated January 31, 1957 :527 "It was conceded by
learned counsel for the petitioner that the case does not fulfill the
requirements of Article 133(1) of the Constitution; but the argument is that
leave may be granted under Article 132 of the Constitution as there is a
substantial question of law with regard to the interpretation of the
Constitution involved in this case.
We are unable to accept this argument as
correct. It is not possible for us to hold that there is any substantial
question of law as to the interpretation of the Constitution involved in this
case. The question at issue was purely a matter of construction of section 2(g)
of the Bihar Sales Tax Act and that question was decided by this Court in
favour of the State of Bihar and against the petitioner. It is argued now on
behalf of the petitioner that the provisions of section 2(g) of the Bihar Sales
Tax Act are ultra vires of the Constitution, but no such question was dealt
with or decided by the High Court in the reference.
We do not, therefore, consider that this case
satisfies the requirements of Art. 132(1) of the Constitution and the
petitioner is not entitled to grant of a certificate for leave to appeal to the
Supreme Court under this Article.
The application is accordingly
dismissed." Having failed to obtain the necessary certificate from the
High Court, the Corporation moved this Court and obtained special leave to
appeal under Art. 136 of the Constitution.
The leave was granted on March 31, 1958.
Though the scope of the decision of the High
Court under s. 25 of the Act on a reference made to it is limited, the
Corporation has raised certain additional points of controversy, which did not
form part of the decision of the High Court. Apart from the question whether
the transaction in question amounted to a sale within the meaning of the Act,
the statement of the case on behalf of the appellant raises the following
additional grounds of attack, namely, (1) that the Corporation is not a dealer
within the meaning of the Act, (2) that the proviso to s. 2(g) of the Act is ultra
vires the Bihar Legislature and (3) that the Act itself is ultra vires the
Bihar Legislature by reason of the 528 legislation being beyond the scope of
entry 48 in List II of Schedule 7 of the Government of India Act, 1935. Hence,
a preliminary objection was raised on behalf of the respondent that the
additional grounds of attack were not open to the Corporation in this Court. It
is, therefore, necessary first to determine whether the additional grounds of
attack set out above are open to the Corporation. In our opinion, those
additional grounds are not open. They were never raised at any stage of the
proceedings before the authorities below, or in the High Court. This Court is
sitting in appeal over the decision of the High Court under s. 25 of the Act. The
High Court in coming to its conclusion was acting only in an advisory capacity.
It is well settled that the High Court acting in its advisory capacity under
the taxing statute cannot go beyond the questions referred to it, or on a
reference called by it.
The scope of the appeal to this Court, even
by special leave, cannot be extended beyond the scope of the controversy that
could have been legally raised before the High Court. It is manifest that the
High Court could not have expressed its opinion on any matter other than the
question actually before it as a result of the reference made by the Board of
Revenue. The preliminary objection must, therefore, be allowed and the appeal
limited to the question whether the transaction in question in this case amounted
to a sale within the meaning of the Act.
It is manifest that this controversy between
the parties has to be resolved with reference to the terms of the contract
itself. Clause 8 of the agreement as amended is a very complex one as will
presently appear from the following extracts, being the relevant portions of
that clause :"The Corporation may hire or make available such of its
equipment as is suitable for construction for the use of the Contractor. The
actual prices paid by the Corporation for the equipment thus made available,
inclusive of freight, insurance and custom duties, if any, and the cost of its
transport to site but excluding such tax as sales tax whether local, municipal,
State or Central, shall be charged to the 529 Contractor and the equipment
shall remain the property of the Corporation until the full prices thereof have
been realised from the Contractor. Equipment lent for the Contractor's use, if
any, shall be charged to him on terms of hiring to be mutually agreed upon;
such terms will cover interest on capital cost and the depreciation of the
equipment.
The Corporation will supply to the Contractor
the machinery mentioned in Schedule No. 2, Group A and Group B below."
Then follows a description seriatim of the many items of machinery in Group A
with the number of such machinery and the approximate cost thereof. In this
Group A, there are fourteen items of which it is only necessary to mention the
first one, that is to say, four excavators with accessories approximately
valued at Rs. 12,46,390; and no. 14, two excavators of another model,
approximately costing Rs. 3,35,000. The total approximate cost of the machinery
in Group A is estimated to be Rs. 42,63,305. Then follow the descriptions of
machinery in Group B, the approximate cost of which is Rs. 21,84,148. Then
follow certain conditions in respect of equipments included in Group A, in
these words:"The Corporation will take over from the Contractor item 1 and
14 on the completion of the work at a residual value calculated on the basis of
the actual number of hours worked assuming the total life to be 30,000 hours
and assuming that the machinery will be properly looked after during the period
of its operation. The remaining items of this group will be taken over by the
Corporation at their residual value taking into account the actual number of
hours worked and the standard life of such machinery for which Schedule F. as
last relished, ? of the U. S. Bureau of Industrial Revenue, on the probable
useful life and depreciation rates allowable for Income Tax purpose (vide
Engineering News Record dated March 17, 1949) will serve as a basis, provided
that the machinery shall be properly looked after by the Contractor during the
period of its operation. Provided further that such residual value of the
machinery shall be assessed 530 jointly by representatives of the Corporation
and of the Contractor and that in case of difference of opinion between the two
parties the matter shall be settled through arbitration by a third party to be
agreed to both by the Corporation and the Contractor.
The items included in this group will be
taken over by the Corporation from the Contractor either on the completion of
the work or at an earlier date if the Contractor so wishes, provided that in
the latter case the equipments will be taken over by the Corporation only when
they are declared surplus at Konar and such declaration is duly certified by
the Consulting Engineer, within a period of 15 days of such declaration being
received by the Corporation.
In respect of the machinery which shall have
been delivered to the Contractor on or before the 31st of December 1950, their
cost shall be recovered from the Contractor in eighteen equal installments
beginning with January 1951 and in respect of the remaining items included in
this group of machinery, their cost will be recovered from the Contractor in
eighteen equal instalments beginning with July 1951, provided that these
remaining items shall have been delivered to the Contractor prior to the last
specified date.
Provided(a) that the total actual price for
these equipments which has been provisionally estimated at Rs. 42,63,305 will
be chargeable to the Contractor as per first para of clause 1 above.
(b) that after approximately two thirds of
total cost or an amount of Rs. 28,43,000 (Rupees twenty eight lakhs forty three
thousand) approximately has been recovered from the Contractor on account of
these equipments the Corporation will consider the date or dates when it could
take over the equipments still under use by the Contractor, assess the, extent
to which they have already been depreciated and thereby arrive at, their
residual value; and (c) that the recovery or refund of the amount payable by or
to the Contractor on account of these equipments will be decided only if the
Corporation is fully satisfied that their residual life at the time of 531
their being finally handed over to the Corporation shall under no circumstances
fall below one third of their respective standard life as agreed upon by the Corporation
and the Contractor." Then follow terms and conditions in respect of Group
'B' which are not relevant to our purpose. Thereafter, the following conditions
appear:"In respect of equipments whether in Group A or B made available by
the Corporation to the Contractor.
The following conditions shall apply to all
equipments, i.e., those included in Group A and B above and others, if any(a)
The Contractor shall continuously maintain proper machine cards separately in
respect of each item of equipment, clearly showing therein, day by day, the
number of actual hours the machine has worked together with the dates and other
relevant particulars.
(b) The Contractor shall maintain all such
equipments in good running condition and shall regularly and efficiently give
service to all plant and machinery, as may be required by the Corporation's
Chief Engineer who shall have the right to inspect, either personally or
through his authorised representatives all such plant and equipment and the
machine cards maintained in respect thereof at mutually convenient hours.
(c) No item of equipment made available by
the Corporation on loan or hire shall at any time be removed from the work site
under any circumstances until the full cost thereof has been recovered from the
Contractor by the Corporation and thereafter only if in the opinion of the
Consulting Engineer the removal of such item or items is not likely to impede
the satisfactory prosecution of the work.
Similarly no item of equipment or material
belonging to the Contractor but towards the cost of which money has been
advanced by the Corporation shall at any time be removed from the work site
under any circumstances until the amount of money so advanced has been
recovered from the Contractor by 532 the Corporation and thereafter if in the
opinion of the Consulting Engineer the removal of such item or items is not
likely to impede the satisfactory prosecution of the work.
(d) The Corporation shall supply to the
Contractor whatever spares have been procured or ordered for the equipment
already supplied or to be supplied by the Corporation to the Contractor under
the terms of this Agreement and that thereafter the replenishment of the stock
of spares shall be entirely the responsibility of the Contractor who shall therefore
take active steps in time to procure fresh spares so as to maintain a
sufficient reserve.
The spares to be supplied by the Corporation
will be issued to the Contractor by the Executive Engineer, Konar as and when
required by the Contractor against indent accompanied by a certificate that the
spares previously issued to him have been actually used up on the machines for
which they were intended.
(e) Whenever spares are issued to the
Contractor in accordance with this provision, their actual prices inclusive of
freight, insurance and customs but excluding storage and handling charges shall
be debited against him and recovered from his next fortnightly bill.
(f) In order to enable the Contractor to take
active steps for planning the procurement of additional spares in advance, the
Corporation shall forthwith furnish to him a complete list of all the spares
which it has procured or ordered for the equipment to be supplied to the
Contractor." The portions quoted above contain the relevant terms and conditions
in respect of the transaction in question, so far as it is necessary to know
them for the purpose of this case. It will be noticed that the Corporation made
available to the Contractors different kinds of machinery and equipment
detailed in Group A of the approximate value of Rs. 42,63,000 odd, for which
the price paid by the Corporation inclusive of freight, insurance, customs duty
etc. has to be charged to them. But the machinery and the equipment so 533 made
available to the Contractors were to remain the property of the Corporation
until the, full price thereof had been realised from the Contractors. It is
also noteworthy that the agreement makes a distinction between the aforesaid
part of the agreement and the equipment lent to the contractors in respect of
which the contractors had to be charged in terms of hiring, including interest
on capital cost and the depreciation of equipment. Thus clearly the agreement
between the parties contemplated two kinds of dealings between them, namely (1)
the supply of machinery and equipments by the Corporation to the Contractors
and (2) loan on hire of other equipment on terms to be mutually agreed between
them in respect of the machinery and equipment supplied by the Corporation to
the Contractors. There is a further condition that the Corporation will take
over from the contractors items 1 and 14, specifically referred to above, and
the other items in Group A at their "residual value" calculated on
the basis indicated in the paragraph following the description of the machinery
and the equipments. But there is a condition added that the "taking
over" is dependent upon the condition that the machinery will be properly
looked after during the period of its operation. There is an additional
condition to the taking over by the Corporation, namely, the work for which
they were meant had been completed, or earlier, at the choice of the
Contractors, provided that they are declared surplus for the purposes of the
construction of the Konar Dam and so certified by the Consulting Engineer.
Hence, it is not an unconditional agreement to take over the machinery and
equipment as in Group B. The total approximate price of Rs. 42,63,305 is
payable by the Contractors in 18 equal installments. Out of the total cost thus
made realisable from the Contractors two-thirds, namely, Rs. 28,42,000
approximately, has to be realised in any case. After the two-thirds amount
aforesaid has been realised from the contractors on account of supply of the
equipments by the Corporation, the Corporation had to consider the date or
dates of the "taking over" of the equipment after assessing the
extent to which it 534 had depreciated as a result of the working on the
project in order to arrive at the "residual value" of the same. The
refund of the one third of the price or such other sum as may be determined as
the "residual value" would depend upon the further condition that the
Corporation was fully satisfied that their "residual life" shall,
under no circumstances, fall below one-third of their respective standard life
as agreed upon by the parties. It would, thus, appear that the "taking
over" of such of the equipments as were available to be returned was not
an unconditional term. The Corporation was bound to take them over only if it
was satisfied that their "residual life" was not less than one-third
of the standard life fixed by the parties. It is clear from the terms and
conditions quoted above that there was no right in the contractors to return
any of the machinery and equipments at any time they liked, or found it
convenient to do so. The conditions which apply to all equipments, whether in
Group A or in Group B, are also relevant to determine the nature of the
transaction.
The contractors are required to
"continuously maintain proper machine cards showing certain relevant
particulars".
It is their duty to maintain the equipments
in good running condition and to regularly and effectively service them. No
item of machinery and equipment could be removed by the contractors under any
circumstances until the full cost thereof had been recovered from them and even
then only if the removal of those items of machinery or equipment was not
likely to impede the satisfactory progress of the work.
Then follows the most important condition
that the Contractors themselves shall have to replenish their stock of spare
parts of the machinery made available to them by the Corporation. When spare
parts are supplied to the Contractors by the Corporation, they shall be liable
for the actual price of those parts inclusive of freight, insurance and customs
duty.
Those substantially are the terms of the
contract between the parties and the sole question for determination in this
appeal is whether, in respect of the machinery and equipments admittedly
supplied by the Corporation to the Contractors, it was a mere 535 contract of
hiring, as contended on behalf of the appellant Corporation, or a sale or a
hire purchase, as contended on behalf of the respondent State. The law on the
subject is not in doubt, but the difficulty arises in applying that law to the
facts and circumstances of a particular case on a proper construction of the
document evidencing the transaction between the parties. It is well settled
that a mere contract of hiring, without more, is a species of the contract of
bailment, which does not create a title in the bailee, but the law of hire
purchase has undergone considerable development during the last half a century
or more and has introduced a number of variations, thus leading to categories,
and it becomes a question of some nicety as to which category a particular
contract between the parties comes under. Ordinarily, a contract of hire
purchase confers no title on the hirer, but a mere option to purchase on
fulfillment of certain conditions. But a contract of hire purchase may also
provide for the agreement to purchase the thing hired by deferred payments
subject to the condition that title to the thing shall not pass until all the installments
have been paid. There may be other variations of a contract of hire purchase
depending upon the terms agreed between the parties. When rights in third
parties have been created by acts of parties or by operation of law, the
question, which does not arise here, may arise as to what exactly were the
rights and obligations of the parties to the original contract. It is equally
well settled that for the purpose of determining as to which category a
particular contract comes under, the court will look at the substance of the
agreement and not at the mere words describing the category. One of the tests
to determine the question whether a particular agreement is a contract of mere
hiring or whether it is a contract of purchase on a system of deferred payments
'of the purchase price is whether there is any binding obligation on the hirer
to purchase the goods. Another useful test to determine such a controversy is
whether there is a right reserved to the hirer to return the goods at any time
during the subsistence of the contract. If there is such a right reserved, then
536 clearly there is no contract of sale, vide Helby v. Matthews and others
(1). Applying these two tests to the transaction in the present case, it
becomes clear that it was a case of sale of goods with a condition of
repurchase on certain conditions depending upon the satisfaction of the
Corporation as to whether the "residual life" of the machinery or the
equipment was not less than one-third of the standard life in accordance with
the terms agreed between the parties. It is clear on those terms that there is
no right reserved to the contractors to return the goods at any time that they
found it convenient or necessary. On the other hand, they were bound to pay
two-thirds of the total approximate price fixed by the parties in equal installments.
The Contractors were not bound under the terms to return any of the machinery
or the equipments, nor was the Corporation bound to take them back
unconditionally.
The term in the agreement regarding the
"taking over" of the machinery or equipments by the Corporation on payment
of the "residual value" is wholly inconsistent with a contract of
mere hiring and is more consistent with the property in the goods having passed
to the Contractors, subject to the payment of all the installments of the
purchase pride.
Furthermore, the stipulation that the
Contractors themselves will have to supply the spare parts, as and when needed,
for replacements of the worn out parts is also consistent with the case of the
respondent that title had passed to the contractors and that they were responsible
for the upkeep of the machinery and equipments and for depreciation. If it were
a mere contract of hiring, the owner of the goods would have continued to be
liable for replacements of worn out parts and for depreciation. Applying those
tests to the terms of the agreement between the parties, it is clear that the
transaction was a sale on deferred payments with an option to repurchase and
not a mere contract of hiring, as contended on behalf of the appellant.
It must, therefore, be held that the judgment
of the High Court is entirely correct and the appeal must be dismissed with
costs.
Appeal dismissed.
(1) (1895) A.C. 471.
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