State of Gujarat Vs. M/S. Kailash
Engineering Co  INSC 187 (26 September 1966)
26/09/1966 BHARGAVA, VISHISHTHA BHARGAVA,
VISHISHTHA SHAH, J.C.
CITATION: 1967 AIR 547 1967 SCR (1) 543
CITATOR INFO :
RF 1972 SC 744 (13) D 1974 SC2309 (13) RF
1976 SC2108 (48) RF 1977 SC1537 (23)
Bombay Sales-tax Act, 1953, s. 27-Contract
for the construction of Railway coach bodies-Provisions in contract showing
property in construction material vesting in Railway on arrival at site and in
coach bodies on completionTransaction whether sale or works contract.
The respondent company, which was an
engineering concern with a workshop at Morvi, obtained a contract from the
Western Railway Administration for construction of third class coaches. Under
the contract the respondent constructed three coaches and submitted a bill
which was properly certified on October 4, 1958, in accordance with the
agreement as to the work done by the respondent. After the bill had been paid,
the respondent wrote to the Additional Collector of Sales-tax requesting him
under Section 27 of the Bombay Sales-tax Act, 1953 to hold that the transaction
was a works contract and not a sale, so that no sales-tax was payable under the
The Additional Collector held however that
the transaction was a sale on which tax was payable. Dismissing an appeal from
this decision, the Sales-tax Tribunal took the view that the general conditions
of the contract showed the ownership of the coach bodies only passed to the
Rail when they were completed and handed over to the Railway, so that way
contract was for supply of coach bodies. Sales-tax was therefore payable on the
price of these coach bodies. Upon a reference made to it, the High Court held
however that the contract clearly mentioned that the contract was for
performance of work of building, erecting and furnishing coach bodies on Broad
Gauge under frames which already belonged to the Railway. The terms of the
contract further showed that as soon as the materials were taken by the
respondent to the site of the construction of coaches, the ownership in those
materials vested in the Railway and all that the respondent had to do was to
carry out the work of erecting and furnishing the coach bodies. When the coach
bodies .were ready, the property in them vested in the Railway automatically
without any further transfer of rights in it to the Railway. The ownership in
the ready coach bodies never vested in the respondent company at all and
although materials for their construction had to be obtained by it and brought
to the site, in purchasing those materials it was acting more or less in the
capacity of an agent !or the Railway. Accordingly the High Court came to thefinding
that the contract between the parties was one entire and indivisible contract
for carrying out the works specified in the agreement and that it did not
envisage either the sale of the materials by the respondent to the Railway, or
of the coach bodies as such; no sales-tax was therefore held leviable on the transaction.
On appeal to this Court.
HELD : The terms of the contract led to the
only inference that the respondent was not to be the owner of the ready coach
bodies and that the property in those bodies vested in the Railway even during
the process of construction. The transaction was therefore clearly a works
contract which did not involve any sale. [547 G] 544 Patnaik & Company v.
State of Orissa,  2 S.C.R. 782:
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 945 of 1965.
Appeal by special leave from the judgment and
order dated December 14, 1962 of the Gujarat High Court in Sales Tax Reference
No. 16 of 1961.
N. S. Bindra and R. H. Dhebar, for the
M. V. Goswami, for the respondent.
The Judgment of the Court was delivered by
Bhargava, J. This appeal under special leave granted by this Court arises out
of proceedings for assessment of sales-tax under the Bombay Sales Tax Act III
of 1953. Messrs.
Kailash Engineering Co. (hereinafter referred
to as "the respondent") was an engineering concern having their
workshop at Morvi on the meter gauge section of the Western Railway. They
obtained a contract from the Western Railway Administration for construction of
III class passenger coaches on certain conditions described as the conditions
of tender. Under that contract which was reduced to writing and was described
as an agreement, the respondent constructed three coaches and submitted a bill
which was properly certified in accordance with the agreement by the Railway
Administration on October 4, 1958. The net value of the work done by the
respondent was certified at Rs. 1,22,035/-. After receipt of this money, the
respondent wrote to the Additional Collector of Sales Tax requesting him under
S. 27 of the Bombay Sales Tax Act, 1953, to hold that this was a works
contract, and that the transaction, in respect of which the respondent received
the money, did not amount to a sale, so that no sales-tax was payable under
that Act. The Additional Collector held that two questions fell for
determination before him:
(1) Whether the transaction covered by the
bill dated 4th October, 1958, is a sale; and (2) if it is a sale, whether any
tax is payable in respect of the same.
The Additional Collector answered both the
questions in the affirmative against the respondent. The appeal before the
Gujarat Sales Tax Tribunal failed; and thereupon, the respondent sought a
reference to the High Court of Gujarat.
The Tribunal referred the following question
for the opinion of the High Court:"Whether on a proper construction of the
agreement as a whole and its general conditions and specification, the work
done and covered by Contract Certificates No.
M/60(1)/B-PRTN, dated 4th October, 1958, for
the performance of the works of building, erecting and furnishing 3 B. G.
Coaches over the chassis supplied by the Railway is a works contract not
amounting to sale, or whether it is a transaction of sale." The High Court
answered the question in favour of the respondent, holding that the transaction
was a works contract carried out by the respondent and did not amount to a
sale. Consequently, this appeal has been brought up by the State of Gujarat
challenging the correctness of the decision of the High Court.
The Tribunal, when dealing with the case,
mentioned a few of the terms of the contract entered into between the
respondent and the Western Railway Administration, and, though there was a
provision in one of the clauses of the agreement that as soon as the plant and
materials were brought on the site where the coaches were to be constructed,
the ownership in them would vest in the Railway, the Tribunal held that the
ownership in those materials never passed to the Railway because of the
indication given by another clause which provided that on removal of contractor
or on rescission of contract, the Railway Authorities would be entitled to take
possession and retain all materials, tools, implements, machinery and
buildings. On this basis, the Tribunal held that, from the general conditions
of the contract, it appeared that the ownership of the coach bodies only passed
to the Railway when completed and handed over to the Railway, so that the
contract was for supply of coach bodies. It was on supply of these coach bodies
that the respondent received the price of those bodies, and thus received the
amount subjected to sales-tax as sale consideration for those bodies.
The High Court, however, in its judgment,
reproduced the preamble of the contract as well as a large number of clauses of
it to show that in the contract, at every stage, it was clearly mentioned that
the contract was for performance of work of building, erecting and furnishing
coach bodies on Broad Gauge under frames which already belonged to the Railway.
The terms of the contract showed that as soon as the materials were taken by
the respondent to the site of construction of the coaches, the ownership in
those materials vested in the Railway and all that the respondent had to do was
to carry out the work of erecting and furnishing the coach bodies. When the
coach bodies were ready, the property in them vested in the Railway
automatically without any further transfer of rights in it to the Railway. In
fact, the ownership in the ready coach bodies did not vest in the respondent at
all. No doubt, the materials for building the' coach bodies had to be obtained
by the respondent and brought to the site of construction, but the provision
that the ownership in those materials would vest in the Railway as soon as
those materials were brought to the site clearly indicated that the respondent,
in purchasing those materials, was 546 acting more or less in the capacity of
an agent for the Railway. While the materials were at site, the effect of
vesting of their ownership in the Railway was that if they were destroyed or
damaged, the risk had to be borne by the Railway, even though the Railway might
have been entitled to reimburse itself, because those materials -and goods were
in the custody of the respondent on behalf of the Railway. In fact, under clause
29, there was a specific provision for the contingency that the materials or
plant may be lost, stolen, injured or destroyed by fire, tempest or otherwise.
This special provision was to the effect that
the liability of the contractor was not to be diminished in any way, nor was
the Railway to be in any way answerable for loss or damage on the happening of
such contingency. This special provision had to be made, because the ownership
in the materials vested in the Railway, though the contractor was in actual
physical possession of the materials and plant in order to carry out the works
contract. It was for this reason that a specific provision had to be made that
the contractor would be liable to the Railway if any such loss occurred.
Taking into account all the terms of the
contract as a whole, the High Court came to the finding that the contract
between the parties was one entire and indivisible contract for carrying out
the works specified in full details in the agreement, and that it did not
envisage either the sale of materials by the respondent to the Railway, or of
the coach bodies as such.
In this connection, learned counsel for the
appellant relied on the decision of this Court in Patnaik & Company v.
State of Orissa.(1) In that particular case, the contract in question was for
the supply of bus bodies, and it was held that when the bus bodies were
supplied by the contractor and money received by him, it amounted to a sale.
It, however, appears that the facts and circumstances, on the basis of which the
Court gave that opinion, do not find place in the case, Three main
circumstances were relied upon in that case for holding that the transaction
amounted to a sale and not to a works contract. The first circumstance was that
the bus bodies were, throughout the contract, spoken of as a unit or as a
composite thing to be put on the chassis, and this composite body consisted not
only of things actually fixed on the chassis but movable things like seat
cushions, and other things which could be very easily detached. In the
contract, with which we are concerned, the coach bodies are not separately
described as units or components to be supplied by the respondent to the
Railway. The language used in the contract everywhere describes the duty of the
respondent to be that of constructing, erecting and furnishing coach bodies on
the under frames supplied. At no stage does the contract mention that ready
coach (1)  2 S.C.R. 782.
547 bodies were to be delivered by the
respondent to the Railway. In fact, even during the process of construction of
the coach bodies, the unfinished bodies in process of erection were treated,
under the terms of the contract, as the property of the Railway.
The second circumstance found in that case
was that if some work was not satisfactorily done and the body builder, on
receipt of a written order, did not dismantle or replace the defective work or
material at his own cost within seven days, the Controller was entitled to get
the balance of the work done by another agency and recover the difference in
cost from the body builder; and for this, purpose, the Controller was entitled
to take delivery of the unfinished body. In the contract before us, as we have
already mentioned in the preceding paragraph, the unfinished bodies of the coaches
were from the earliest stage treated as the property of the Railway, and there
was no question of ownership of the unfinished body passing to the Railway only
after its seizure by it as was the case in the other contract in which the
property in the unfinished body did.
not pass to the Government till the
unfinished body was seized.
The third circumstance taken into account in
that case was the liability for the loss, if a fire took place and the bus
bodies were destroyed or spoiled. In that case, there was a provision for
insurance of the chassis, but there was no such provision regarding. insurance
of bus bodies, and the Court inferred that till delivery was made, the bus
bodies remained the property of the appellant on whom the loss would fall. On the
other hand, in the contract with which we are concerned, the terms envisaged
the property in the unfinished bodies vesting in the Railway, and since those
unfinished bodies were to be in charge of the respondent during construction, a
special provision had to be made making the respondent responsible for the loss
and throwing upon the respondent the liability to reimburse the Railway for
loss by fire, etc. Thus, the terms of the contract in this case are markedly
different from those which came up for consideration in that case. Here, we
find that all the terms of the contract lead to the only inference that the
respondent was not to be the owner of the ready coach bodies and that the
property in those bodies vested in the Railway even during the process of
construction. This was, therefore, clearly a works contract which did not
involve any sale. The decision given by the High Court was correct.
The appeal fails and is dismissed with costs.
R.K.P.S. Appeal dismissed.