Union of India Vs. Central India
Machinery Manufacturing Co. Ltd. & Ors [1977] INSC 105 (6 April 1977)
SARKARIA, RANJIT SINGH SARKARIA, RANJIT SINGH
KRISHNAIYER, V.R.
SINGH, JASWANT
CITATION: 1977 AIR 1537 1977 SCR (3) 437 1977
SCC (2) 847
ACT:
Rajasthan Sales Tax Act, 1954--Section
2(o)--Definition of sale--Sale of Goods Act, s. 64(a)--Distinction between
contract of sale and work contract-Manufacturing and supplying wagons to
Railways--Whether sale or work contract-Tests to be applied--Interpretation of
contract--When external aid permissible.
HEADNOTE:
The appellant and respondent No. 1company
entered into a contract for the manufacture and supply of wagons. By the
correspondence exchanged, the number of wagons to be supplied and the price of
wagon of each type were indicated.
It was provided that the contract would be
governed by the Standard Conditions in so far as they are not inconsistent with
the' correspondence exchanged between the parties.
Under the Standard conditions, 90 per cent of
the payment had to be made against the Company submitting the bill to the
purchaser together with the completion certificate and on payment of such 90
per cent price the vehicle in question would become the property of the
purchaser. The balance of 10 per cent was to be treated as security for the due
fulfillment of the contract. The balance was to be received on the receipt of
certificate from the purchaser to the effect that the actual delivery of the
vehicle was taken and that the delivery was made in due time. One of the
clauses provided that where any raw materials for the execution of the contract
are procured with the assistance of the appellant the company would hold the
said materials as trustee for Government and use such materials economically
and solely for the purpose .of the contract against which they are issued and
not dispose them of without the permission of the Government and return, if
required by the purchaser. all surplus or unserviceable materials that might be
left after the completion of the contract or its termination for any reason
whatsoever on his being paid such price as Government might fix with due regard
to the condition of the material. Clause 10 further provided that if and when
the State and inter-State Sales Tax on the stock on order becomes payable under
law such payments would be reimbursed by the Railway Board. The Railway Board,
however, is not to be made. liable for the payment of Sates Tax paid under
misapprehension of law. No sales tax on materials including steel and
components would be reimbursed by the Railway Board. That the stores and
articles shall be such as arc required for the execution of the contract and
the advance made by the Railways is without prejudice to, the provisions of the
contract and is subject to inspection and rejection of the stores. That the
said articles and materials shall at all times be open to inspection of any
officer authorised by the Railways. There are 3 categories of materials, the
first category admittedly was the property of the Railways; the second category
is the material procured by the Company against 90 per cent advance; and the
third category was at all times material of the Company. Paragraph 3 of the
letter exchanged between the parties fixed the period of delivery. Pars 4
provided for doing the packing of axle boxes by the Railway for which no
packing charges were to be recovered from the Company. Section 2(0) of the
Rajasthan Sales Tax Act, 1954 defines sale as any transfer of property in goods
for cash or for deferred payment or for any other valuable consideration.
The appellant relied on the following
circumstances:
Under the Special Conditions read with the
indemnity bond the property in the raw materials purchased by the Company for
the construction of the 438 wagons passed to the Railway Board as soon as the
latter advanced 90 per cent of the value of such material; which thereafter is
held by the Company merely as an agent or trustee for the Board. Condition No.
5 obligates the contractor to hold "as trustee for Government" and
raw materials for the execution of the contract procured with the assistance of
Government and further requires the contractor to use such materials
economically and solely for the purpose of the contract against which they are
issued and not to dispose them of without the permission of the Government.
The Railway wagon at the time of its delivery
had no individual existence as the sole property of the Company.
The respondents contended that there was
nothing in the Special Conditions which militates or is inconsistent with the
Standard Condition No. 15.
The Special Conditions, read as a whole show
that the raw materials purchased by the Company against 90 per cent of advance
payment do not become the property of the Railway Board or the Union of India
because under the express terms of the contract such advance payment is made
towards the contract price of the wagons' and not towards price of the
materials.
Dismissing the appeal,
HELD: (1) Transfer of property in goods for a
price is the linch-pin of the definition of 'sale'. The difficulties in
distinguishing between the contract of sale and work contract is an age-old
one. It was much debated even by the Roman Jurists. According to Pollock &
Mulla, the test would be whether the thing to be delivered has any individual
existence before delivery as the sole property of the party who is to deliver
it. If the answer is in the affirmative it is sale of the thing otherwise not.
Another rule is that if the main object of the contract is the transfer from A
to B for a price of the property in a thing in which B had no previous property
then the contract is a contract of sale.
According to Lord Halsbury, the distinction
is often a fine one. A contract of sale is a contract whose main object is the
transfer of the property in and the delivery of the possession of a chattel as
a chattel to the buyer. Where the main object of work undertaken by the payee
of the price is not the transfer of a chattel qua chattel the contract is one
for work and labour. The test is whether or not the work and labour bestowed
and in anything that can properly become the work and labour bestowed and in
anything that can properly become the subject of sale, neither the ownership of
materials nor the value of the skill and labour as compared with the value of
the materials is conclusive, although such matters may be taken into
consideration in determining in the circumstances of a particular case whether
the contract is in substance one for work and labour or one for the sale of a
chattel. [446 F-H, 447 A-D] (2) The question, whether a contract is one for
sale of goods or for executing work or rendering services is largely one of
fact depending upon the terms of the contract including the nature of the obligations
to be discharged there under and the surrounding circumstances. In the present
case the contract is expressly one for the manufacture and supply of wagons for
a price. Price has been fixed taking the wagon as a unit. Payment of the price
is made for each vehicle on its completion and delivery by the contractor to
the purchaser who is described as the Union of India acting through the Railway
Board. The payment is made in two installments; 90 per. cent of the value of
the vehicle on completion against an On Account Bill together with the
completion certificate and 10 per cent after delivery.
The real intention of the contracting parties
is primarily to be sought within the four-corners of the documents containing
Standard and Special Condition of the contract. If such intention is deafly
discernible from these documents it would not be proper to seek external aid
from the stereo-typed indemnity bond. The terms and conditions of the contract
read as a whole undoubtedly lead to the conclusion that the property in the
material procured or purchased by the Company against the 90 per cent value of
which 439 advance is taken from the Railways, does not before their use in the
construction of the wagons, pass to the Railways, for the following reasons:
(a) On account payment up to 90 per cent is a
part of the full contract price for each completed wagon;
(b) Condition No. 5 while imposing restriction
as to the use and disposal of material against which advance is taken further
gives a pre-emptive right to the Government to purchase all surplus or
unserviceable materials from the company on its "being paid such price as
Government may fix with due regard to the condition of material". If the
material belonged to the Government or the Railways, no question of purchasing
the same from the Company could arise. No one can be seller and purchaser of
the same property at the same time.
(c) Condition No. 10 which provides that no
sales tax on materials including steel and components will be reimbursed by the
Railway Board clearly postulates that the Company becomes the owner of the
materials by purchase and, therefore, becomes liable to pay the sales tax.
There is no condition or term in the contract that the material purchased by
the Company after drawing on Account payment to the extent of 90 per cent of
the value of the material became the property of the Railways. The conditions
embodied in the contract read as a whole clearly show that the property in the
material purchased by the company with the assistance of the Railway, does not
pass to the Railway. Thus, most of the raw materials required for the construction
of the wagons belong to the Company and not to the Railway Board. With the
exception of a relatively small proportion of the components, the entire wagon
including the material, at the time of its completion for delivery, is the
property of the Company.
Clause 15 stipulates in unmistakable terms
that as soon as a vehicle has been completed the Company will get it examined
by the Inspecting officer and submit to .the purchaser an On Account Bill for
90 per cent of the value of the vehicle. This clearly shows that the contract
was in substance one for the sale of manufactured wagons by the Company for the
stipulated prices. [441 G, 447 E-F, 451 B-H & 455 B-C] M/s. Hindustan
Aeronautics Ltd. Bangalore Division v.
The Commissioner of Commercial Taxes, Mysore
[1972] 2 SCR 927 and State of Gujarat (Commissioner of Sales Tax, Ahmedabad) v.
M/s. Variety Body Builders AIR 1976 SC 2108, distinguished.
Patnaik & Company v. State of Orissa
[19651 16 STC 369 (SC), followed.
CIVIL APPELLATE JURISDICTION: Appeal No. 1812
of 1969.
(From the Judgment and Order dated 31-1-1969
of the Rajasthan High Court in Civil Misc. Writ No. 733 of 1968).
S.K. Mehta and Girish Chandra, for the
appellant.
S.T. Desai, G. A. Shah and S.K. Dholakia, for
respondent No. 1.
L.M. Singhvi, S.M. Jain and Indra Mapwana,
for respondents 2--3 Leila Seth and G.S. Chatterjee for the Intervener.
The Judgment of the Court was delivered by:
SARKARIA, J.--Whether on the facts of this
case, the contract dated 15-6-1968 between the Union of India and the Central
India 440 Machinery Manufacturing Company Ltd. (Wagon & Structural
Division) Bharatpur (hereinatter called tile Company) for tile manufacture and
supply of wagonS, was a contract of sale or work contract, is the principal
question mat falls to be determined in this appeal by certificate, field by the
Union of India against a judgment dated January 31, 1969 of the High Court of
Rajasthan. It arises out of these facts:
The Company, Respondent No. 1 herein entered
into a Contract (No. 67/Rs(1)/954/15/396, dated 15-6-1968 with the Union of
India through the Railway Board for the manufacture and Supply of 258 BG Bogie
covered BCX type wagons and 812 MG covered wagons of MBC type to the Railways.
The sales tax authorities of the State (Respondent 3 herein) under the Rajastan
Sales Tax Act, levied the sales tax treating the contract as one of sale and
delivery of wagons. Under a similar past contract, the appellant reimbursed the
Company the amount of sales-tax for the wagons supplied by it to the appellant
in the months of March and April, 1967. In March 1967, the High Court of Mysore
in the case of Hindustan Aeronautics Ltd., Bangalore Division v. The
Commissioner of commercial Taxes, Mysore, C) held that the contract for the
supply of wagons to the Railway Board by HAL was in the nature of works
contract and therefore sales-tax was not payable on such supplies. In view of
this decision, the Railway Board by its letter dated June 7, 1968 informed the
Company that the money paid by it to the Company which was not deposited with
the Sales-tax Department should be refunded because the real nature of the
transaction was that of a works contract and not a sale or purchase and
therefore the Railway Board was not liable-to reimburse the Company for the
amount of sales-tax if any, paid by the Company to the State of Rajasthan.
While in reply to the Railway Board at Company contended that the contract was
for sale of wagons and not a contract for works, it took a contrary position in
its representation to the Commissioner of Sales-tax, Rajasthan. Instead of
giving any relief, the Sales-tax Department informed the Company that it should
stop purchasing material on the strength of Form 'C' under the Central
Sales-tax Act. Such stoppage would have saddled the Company with a further
liability to pay tax at the enhanced rate on the purchase of material used for
the manufacture of wagons.
The Commercial Tax Officer provisionally
assessed the Company under s. 7(D) of the Rajasthan Sales-tax Act on the Sale
of wagons to the Railway Board for the month of May 1968, and served a demand
notice for payment of Rs. 1,91,827/79p. including Rs. 1,899.29p/ as penalty.
Since the Company was registered as a dealer under the Sales-tax Act, it had to
bear, in the first instance, the charge of the tax although its incidence
normally passes on to the purchaser, in the absence of a contract to the contrary
under the provisions of s. 64(a) of Sales of Goods Act.
By its letter of August 14, 1968, the Railway
Board finally informed the Company that, in future it would not reimburse the
Company' for the sales-tax if paid by it in connection with the supply of
wagons (1) [1972] 2 S.C.R. 927.
441 The Company thereupon invoked the writ
jurisdiction of the High Court by a petition under Article 226 of the Constitution.
In the writ petition, the Commercial Taxes Officer Special Circle Jaipur, the
Union of India through the Railway Board and the State of Rajasthan were
impleaded as Respondents.
The relief prayed in the petition was:
"(1) That an appropriate Order be made
determining whether the contract in question is in the nature of a contract for
sale of goods, or works contract.
(2) That in the event of a finding that the
contract is in reality a contract for sale the respondent Union of India be
prohibited from claiming refund from the petitioner of the sum of Rs.
1,56,703.20 lying in its hands for payment of Sales Tax.
(3) ........
(4) That an appropriate writ, Directive or
order be made directing the respondent Union of India through the Railway Board
to reimburse the Petitioners in respect of Sales Tax for the purchases from May
1968 onwards from month to month." The writ petition was contested by the
Union of India, inter alia, on the ground that the contract in question was
contract for works and not a contract of sale. The State of Rajasthan and the
Commercial Taxes Officer in their joint reply contended that the contract was
one for sale of wagons.
At the final hearing before the High Court
all the parties requested the Court to resolve the dispute in the exercise of
its extraordinary jurisdiction under Article 226 of the Constitution, notwithstanding
the availability of an alternative remedy. The Court, in consequence, proceeded
to decide the dispute on merits. After examining in detail the terms and
conditions of the contract as disclosed by the relevant documents on the
record, the High Court took the view that the contract in question was a
contract for the manufacture and Sale of wagons to the Union of India by the
Company and as such sales-tax was payable on these transactions. It thus
decided the main issue against the Union of India and allowed the writ
petition.
Hence this appeal by the Union of India.
The question, whether a contract is one for
sale of goods or for executing works or rendering services, is largely one of
fact, depending upon the terms of the Contract, including the nature of the
obligations to be discharged there under and the surrounding circumstances. It
is therefore, necessary to examine the terms and conditions of contract in
question.
There is no consolidated contract deed
formally executed by the parties, on record. There are however, several
documents, including 442 the correspondence between the parties, which embody
the terms and conditions of the contract.
By its letters No. 67/RS(1)/954/15 dated
December 23, 1967, and letter dated June 15, 1968, the Railway Board
communicated to the Company, the former's acceptance of the offer made by the
Company in its earlier letters, including the letter, dated 12-12-1967, to
manufacture and supply, B.G. Bogie covered wagons BCX Type and M.G. Covered
wagon MBC Type. The numbers of the wagons to be supplied and the price per
wagon of each type were indicated in these letters. Paragraph 2 of the letter,
dated December 23, 1967, stated:
"2. Terms and Conditions: The contract
shall be governed by the General Conditions of Contract A5-51 (Revised) in so
far as these are not inconsistent with the Special Conditions of contract
attached as per Annexure 'A' and these given in Paras 3 and 7 below."
Paragraphs 3 to 6 of the letter provide as under:
"3. Delivery: The delivery of the stock
F.O.R, your works siding is required to be completed by 30-6-69.
"4. Packing 01 axle boxes: Packing of
axle boxes (Wherever necessary) will be done by Western Railway. No packing
charges on account of the same will be received from you." "5.
Inspecting Authority: Joint Director (R.I.), R.D.S.D., Calcutta or his representative
shall constitute the Inspecting Authority for the inspection of stock built by
you against this order.
6. Accounting and payments: F.A. &
C.A.O., Northern Railway, New Delhi will maintain accounts and arrange all
payments." Para 7 dealt with "Material Escalations", while in
para 8 it was expressed that the order was being issued in the name of the
President of India. .
Now the salient Standard Conditions referred
to in paragraph 2 of this letter may be seen, Conditions 1 and 2 are as
follows:
"1. The "Purchaser" means the
President of India in the case of carriage under frames and goods wagons
(hereinafter called vehicles) ordered for Indian Railways."
2. "The work" includes materials of
every kind" ....
Standard Condition 15 is crucial and may be
extracted in full.
"SYSTEM OF PAYMENT
15. Payments for completed vehicles delivered
by the Contractor shall be made in two installments, viz. 90 per 443 cent on
completion and 10 per cent as provided in paragraph (2) of this clause. The
procedure for such payment will be as follows:
(1 ) The Contractor on receipt of a Certificate
signed by the Inspecting Officer (whose decision shall be final) to the effect
that one or more vehicles have been completed will submit to the Purchaser on
account bill for 90 per cent of the value of vehicles in question, together
with the completion certificate, the Purchaser will pay the 90 per cent bill,
and on payment of this bill the vehicles in question will become the property
of the Purchaser.
(underlining ours) (2) The balance of 10
percent-shall be treated as security for the due fulfillment of the contract
and the Contractor .shall be entitled to receive payment of the balance of 10
per cent on vehicles as completed on his receiving a certificate from the
Purchaser to the effect that the actual delivery of the vehicles in question
has been taken, that the delivery was made in the due time, and that the
Contract has been duly fulfilled in every respect in so far as it relates to
the completed vehicles.
Condition 16 lays down that if the
"defect arises from inferiority of material or workmanship, or from
imperfect protection or other default on the Contractor's part, the Railway
shall be at liberty to ask the Contractor to remedy the defect and deduct from
any money due to the Contractor.
The Special Conditions of Contract contains
in Annexure 'A' to the letter dated 23-12-1967, are as under:
SPECIAL CONDITIONS
1.3 Material Escalations: Adjustments due to
variations in the cost of material will be confined to the variations in the
prices of steel at Col. 1 rate through Governmental action for controlled
categories and those fixed by J.P.C. for de-controlled categories of steel. The
escalation would be allowed in respect of such of the quantities of the
material which were purchased and paid for the manufacture of wagons on order
after the variation in price over the base date and subject to examination of
the actual amounts paid for the supply of such tonnage of steel which is
considered reasonable for the manufacture of the wagons on order and for which
prices have varied over the base date whether supplied to the Contractor or sub
contractor ....
4. Specifications and Drawings:
The stock shall be built conforming to
specifications and drawings indicated in the order which axe obtainable on 444
payment from the Research Design and Standards Organisation, Lucknow, with such
modifications as may be required or approved by the Railway Board, from time to
time during the execution of this contract.
The basic price shall have reference to the
specification shown in the order. Any modification to specification or design
shall be subject to price adjustment over and above the basic price
............ ,, Special Condition 4 is important. A good deal of .argument was
made as to whether 90% advance made under this Condition should be taken as
payment towards the price of the material or towards the price of the wagons.
This condition reads:
"4-. Terms of Payments:
(a) 'On Account' payment up to 90% of the
value of steel and other raw materials procured by the firm for this order will
be ,made against such materials, on its receipt in the firms' works, on
production of a certificate to that effect from the concerned officer of the
Inspection and Liaison Organisation and on the firm furnishing necessary
indemnity bond to the paying Authority.
Note:'On Account' payment will be permissible
on steel procured according to Joint Director (Iron & Steel), Calcutta's
planning after taking into consideration any steel offers from the floating
stock held by the Railways. If such offers are refused and steel of similar
quality is obtained from other sources such quantities will be excluded from
'On Account' payment. The claim for 'On Account' payment will be accompanied by
a further certificate that similar steel has not been offered from the floating
stock held by the Railways and refused by the Wagon Builders.
(b) Payment of 90% of the full contract price
less 'On Account' payment already .made vide (a) above will be made on
production of inspection certificate for each completed wagon.
(c) Payment of the balance 10% of the
contract price will be made on the certification by the consignee Railways that
wagons have been received in complete condition and in good working order,
provided that the payment so made shall be provisional and subject to
adjustment and finalisation by deduction of rebate in accordance with provision
of clause 1.4" (underlining ours) 445 The other material Special
Conditions are:
"5. USE OF RAW MATERIALS SECURED WITH THE
GOVERNMENT ASSISTANCE:
Where any raw materials for the execution of
the contract are procured with the assistance of Government either by issue
from Government stock or purchase under arrangements made or permit(s) or
licence(s) issued by Government, the Contractor shall hold the said materials
as trustee for Government and use such materials economically and solely for
the purpose of the contract against which they are issued and not dispose of
them, without the permission of the Government and return, if required by the
purchaser, all surplus or unserviceable materials that may be left with after'
the completion of the contract or at its termination for any reason whatsoever,
on his being paid such price as Government may fix with due regard to the
condition of the material. The freight charges for the return of the materials
according to the directions of the purchaser shah be borne by the Contractor,
in the event of the contract being cancelled for any default on his part. The
decision of Government shall be final and conclusive.
(underlining ours) "10. Sales Tax: If
and .when State and Inter-State Sales Tax on the stock on order becomes payable
under Law such payments will be reimbursed by the Railway Board. The Railway
Board will, not, however, be responsible for the payments of sales tax paid
under misapprehension of Law. No sales tax on materials including steel or
components will be reimbursed by the Railway Board.
(underlining ours) The material part of the
Indemnity Bond which was subsequently executed by the Company in connection
with the Contract, provide:
"Whereas under Railway Board's order No.
67/ RS(1)/954/15 dated 23-12-1967, the said Contractor has been given the
contract for manufacture of 258 Nos. B.G. covered wagons BCX type with
Transition type Centre Buffer couplers at both ends and 812 numbers MG covered
wagons MBC type (1968-69 R.S.P.) at Bharatpur. And whereas advance payment are
to be made by the Railways to the Contractor against Railway Board's said order
....
That the Contractor shall hold at his works
at Bharat put and/or at the works of his sub-contractors the Stores and
articles of the Railways in respect of which advance may be made to him against
the said order.
2--502SCI/77 446 That the said Stores and
articles shall be such as are required for the execution of the above contract
and the advance made to him by the Railways is without prejudice to the
provision of the contract and is subject to inspection and rejection of the
Stores and any advance .made against stores and articles rejected or found
unsatisfactory on inspection shall be refunded immediately to the Railways.
That the Contractor shah be solely
responsible for the safe custody and protection of the said stores and articles
against all risks till they are duly delivered to the Railways or as they may
direct. The said articles and materials shall at all times be open to
inspection of any officer authorised by the Railways.
(underlining ours) Now these presents
witnesseth that the Contractor .... hereby undertakes to indemnify the
Railways, should any loss or damage or deterioration occur in respect of the
said stores and articles while in his possession or in the possession of his
sub-contractors or if any refund becomes due to the Railways without prejudice
to any other remedies available, the Railways may also deduct such amount from
any sums due, or any sum which at any time hereinafter may become due to the
Contractor .......... " Clause (0) of S. 2 of the Rajasthan Sales Tax Act,
1954, defines "sale". It says:
"'Sale' with all its grammatical variations
and cognate explanations, means any transfer of property in goods for cash or
for deferred payment or for any other valuable consideration, and includes a
transfer of goods on the hire purchase or other system of payment by installments
.... " Thus, transfer of property in goods for a price is the linchpin of
the definition. Under Section 4 the Sale of Goods Act, 1930, also, in the
definition of the term "sale" stress is laid on the element of
transfer of property in the goods. According to the Roman jurists, also, the
purport of a contract of sale is that the seller divests himself of all
proprietory right in the thing sold in favour of the buyer.
It is this requisite which often distinguishes
a contract of sale of goods from a contract for work and services. Even so, the
difficulty of distinguishing between these two types of contracts is an age-old
one. It was much debated even by the Roman jurists (see Inst. III, 24,4, and De
Zuluete, The Roman, Law of Sale, pp. 15, 16). Difficulty has also been felt in
England and other Common law jurisdictions to the effect of a contract to make
a chattel and deliver it when made. Generally, such a contract is one of sale
of Chattel, but not always. Jurists have differed much and striven much about
the test for distinguishing between these two types of contracts. Since each
contract presents its own features, and imponderables it has not been possible
to devise an infallible test of universal application. According to Pollock
& Mulla, "the test would seem to be whether the thing 447 to be
delivered has any individual existence before delivery as the sole property of
the party who is to deliver it". H the answer is in the affirmative, it is
a 'sale' of the thing, otherwise not. Another learned author enunciates that
"the general rule deducible from the cases seems to be that if the main
object of the contract is the transfer from A to B, for a price, of the
property in a thing in which B had no previous property, then the contract is a
contract of sale," (See Chalmers Sale of Goods, 16th Edn, page 52).
The broad criteria for distinguishing between
these two types of contracts have been neatly summed up in Halsbury's Laws of
England, (3rd Edn., Vol. 34, page 6) thus:
"A contract of sale of goods must be
distinguished from a contract for work and labour. The distinction is often a
fine one.
A contract of sale is a contract whose main
object is the transfer of the property in and the delivery of the possession
of, a chattel as a chattel to the buyer. Where the main object of work
undertaken by the payee of the price is not the transfer of a chattel qua
chattel, the contract is one. for work and labour. The test is whether or not
the work and labour bestowed end in anything that can properly become the
subject of sale; neither the ownership materials, nor the value of the skill
and labour as compared with the value of the materials is conclusive, although
such matters may be taken into consideration in determining in the
circumstances of a particular case, whether the contract is in substance one
for work and labour or one for the sale of a chattel." Let us now apply
the above criteria to the contract in question. The contract is expressly one
for the manufacture and supply of wagons for a price. Price has been fixed
taking the wagon as a unit. Payment of the price is made for each vehicle on
its completion and delivery by the contractor to the Purchaser, who is
described as the Union of India acting through the Railway Board. Such payment
is made in two installments, viz., 90 per cent of the value of the vehicle on
completion against an 'On account' bill, together with the Completion
Certificate from the Inspecting Officer appointed by the Railway Board, and the
balance of 10 per cent after delivery. If clause (1) of the Standard Condition
15 is not inconsistent with anything in the Special Conditions, and as we shall
presently notice it is not so--it clinches the issue in as much as it declares
in unequivocal terms the invention of the contracting parties that on. payment
of the 90 per cent of the value, 'the vehicles in question will become the
property of the purchaser." Prima facie, the contract in question has all
the essential attributes of' a contract of sale of moveable.
That is to say, hare is an agreement to sell
finished goods manufactured by the Sellers (Company) for a price, the property
in the goods passing to the Purchaser, on completion and delivery pursuant to
the agreement.
Mr. Mehta, learned counsel for the appellant,
contended that what clause (1) of Standard Condition 15 appears to convey
about.
448 the transfer of the property in the
completed vehicle stands inferentially negated and superseded by the terms of
the Special Conditions and the Indemnity Bond to which the Standard Conditions,
are subject. It is urged that under Special Conditions read with the Indemnity
Bond the property in the raw material purchased by the Company for the construction
of the wagons, passed to the Railway Board as soon as the latter advance 90 per
cent of the value of such material, which thereafter is held by the Company
merely as an agent or trustee for the Board. Our attention has been invited to
Special Condition 4 under which 'On Account' payment upto 90% of the value of
'steel and other materials" procured by the Company for this Order"
will be made against such materials, on production of a certificate from the
officer of the Inspection and Liaison Organisation and on furnishing necessary
indemnity Bond to the Paying Authority.
We are also adverted to the Note under clause
('a) of that Condition, according to which "On Account" payment will
not be permissible against steel procured by the Company from a source other
than the floating stock held by the Railways, except when an offer to procure
it from that source is refused. Counsel has also referred to Special Conditions
5 which obligates the contractor to hold "as trustee for Government"
any raw materials for the execution of the contract" procured with the
assistance of Government either by issue from Government stock or purchase
under arrangement made or permit(s) or licence(s) and to "use such
materials economically and solely for the purpose of the contract against which
they are issued and' not dispose of them, without the permission of the
Government." Mr. Mehta further pointed out that under Special Condition 6,
other essential components, viz., wheelsets for all the stock (and roller
bearing axle boxes and C.F. couplers Wherever applicable) are supplied to the
contractor free of cost F.O.R.
against a proper undertaking for their safe
custody.
Counsel further took us through the contents
of the Indemnity Bond and placed special emphasis on its clause:
"That the contractor shall hold at his
works at Bharatpur and/or at the works of his Sub-contractors the Stores and
articles of the Railways in respect of which advance may, be made to him
against the said order." From a conjoint reading of the Special Conditions
4, 5, 7 and the Indemnity Bond it is sought to be spelt out that all the raw
materials and components used in the manufacture of the wagons, belonged to the
Railway Board; such materials were either procured under Special Condition 4
against 90% 'On Account' payment which should be taken as a payment towards the
price of the material purchased and held by the Company on behalf of the
Railway Board, or procured under Special Condition 6 free of cost. It is
maintained that since purchases of raw material against 90% 'On Account' payment
were made by the Company on behalf of and/or the Railway Board, that was why in
the Indemnity Bond, the "stores and articles" in respect of which the
advance has been made by the Railway Board, are described as 'of the
Railways". It is further submitted that in view of the facility available
to the contractor, there was little or no possibility of any materials other
than those procured against 90% 449 'on account' payment, or supplied free of
cost by the Railway under Special Condition 6, being used in the manufacture of
the wagons by the Company. In sum, the proposition propounded is that since the
raw materials and components used in the manufacture of a wagon under the terms
of the contract belonged to the Railway Board, the wagon produced had, at the
time of its completion and delivery, no individual existence as the sole
property of the Company.
Although counsel has not specifically cited
from Pollock and Mulla's commentary on the Sale of Goods Act, the test sought
to be invoked is the same which has been suggested by the learned authors.
Judged by this test, proceeds the argument, the contract in question is not a
contract of sale of wagons, but one for work and labour.
In support of his contentions, Mr. Mehta
relies on three decisions of this Court:
M/s. Hindustan Aeronautics Ltd., Bangalore
Division v.
The Commissioner of Commercial Taxes,
Mysore(1) State of Gujarat v. Kailash Engineering Co.(2) and the other in State
of Gujarat (Commissioner of Sales Tax, Ahmedabad), v. M/s. Variety Body
Builders(3). According to counsel, the terms and conditions of the contract
which came up for consideration in M/s. Hindustan Aeronautics were
substantially the same, and there it was held that the contract was one for
work and not of sale of vehicles. On the other hand, Dr.
L.M. Singhvi, Learned Advocate-General
appearing for the State of Rajasthan, and Shri S. T. Desai, learned counsel
appearing for the Company have pointed out that there is nothing in the Special
Conditions which militates against or is inconsistent with the Standard
Condition 15; that the Special Conditions, read as a whole, show beyond all
doubt that the raw materials purchased by the Company against 90% advance
payment do not become the property of the.
Railway Board or the Union of India, because
under the express terms of the contract, such advance payment is made towards
the "contract price" of the wagons and not towards the price of the
materials purchased by the Company, although to safeguard the interests of the
Railway Board some restrictions have been placed with regard to the use and
disposal of those materials on the Company who had become aware thereof by
purchase for a price. In refutation of the stand taken by the appellant, it is
asserted that under the terms and conditions of the contract, it is not
obligatory for the Company to purchase all the materials required for the
construction of the wagons, from the Government Stores or with the assistance
of the Government against 90% advance payment. It is submitted that in accord
with the terms of the contract, lot of raw material against which no such
advance was taken, was purchased by the Company and used in the construction of
the wagon. With our permission, an affidavit has been filed before us on behalf
of' the Company to support this assertion of fact.
(1) [1972] 2 S.C.R. 927.
(2) [1967] 195 S.T. (1360).
(3) A.I.R. 1976 S.C. 2108.
450 Dr. Singhvi has further submitted that
the terms of the contract in question are materially different from those which
were in question in Hindustan Aeronautics case and in M/s. Variety Body
Builders (supra) and consequently those decisions cannot govern the instant
case. According to the Counsel, the instant case is more in line with the
decisions of this Court in Patnaik and Company v. State of Orissa(1) and T.V.
Sundram lyengar & Sons v. State of Madras.(2) The first question for
consideration is: whether all the raw materials used in the construction of the
wagons are those against the 90% value of which advance is drawn by the Company
from the Railway under Special Condition 4 ? In this connection, it may be
noted that there is nothing in the terms and conditions of the contract which
expressly or by necessary implication binds the Company to procure and use only
this raw material for which advance has been drawn by it from the Railway.
There is positive evidence (i.e. unrebutted affidavit of Shri C.P. Gupta,
Senior Accounts and Finance Officer of the Company) that m execution of the
contract in question, the Company has used such raw material also against which
no advance was drawn from the Railway.
The raw material used in the manufacture of
the wagons may be split up into three categories:
1. Wheelsets, axle boxes supplied by the
Railway free of cost (vide Special Condition 6).
2. Raw materials such as steel against which
advance was drawn.
3. Raw materials against which no such
advance wag drawn.
The first category was admittedly the
property of the Railway There can be no dispute that the third category was, at
all times material, the property of the Company. Controversy converges on
category (2). Does such material procured by the Company, against 90% advance,
become the property of the Railway before its use in the manufacture of the wagons?
Should the "on account" payment received from the Railway by the
Company under Special Condition 4, on 90% of the value of the materials, be
taken as payment towards the price of the materials? Or, should it be taken as
payment towards the price of the wagons? Answers to these questions turn on a
construction of the terms and conditions of the contract. A correct construction,
in turn, depends on a reading of the Standard and Special conditions as a whole..
It would not be proper to cull out a sentence here or a sub-clause there and
read the same in isolation. Again what is required is not a (1) [1965] 16,
S.T.C. 369 (S.C.).
(2) [1975] 35, S.T.C. 24 (S.C.).
451 fragmentary examination in parts but an
overall view and understanding of the whole. Again, it is the substance of the
documents constituting the contract, and not merely the Form which has to be
looked into.
The real intention of the contracting parties
is primarily to be sought within the four corners of the documents containing
Standard and Special Conditions of the Contract. If such intention is clearly
discernible from these documents, it will not be proper to seek external aid
from the stereotyped Indemnity Bond which is not only collateral but also
posterior in point of time to the contract. It will bear repetition that there
is no conflict or inconsistency between Standard Condition 15 and the Special
Conditions. The terms and conditions of the contract, read as a whole,
indubitably lead to the conclusion that the property in the materials procured
or purchased by the Company, against the 90% value of which advance is taken
from the Railway, does not before their use. in the construction of the wagons,
pass to the Railway. Reasons for arriving at this conclusion are as under:
(i) Clause (a) of Special Condition 4 which
provides for "On Account" payment up to, 90% of the' value of steel
and other raw materials procured by the firm (Company) is to be read with
Clause (b) which makes it clear that such 'On Account' payment is a part of the
"full contract price" "for each completed wagon".
(ii) Condition 5 while imposing restrictions
as to. the use and disposal of materials against which advance is taken,
further gives a pre-emptive right to the Government to purchase all surplus or
unserviceable materials from the Company on its "being paid such price as
Government may fix with due regard to the condition of 'the material". If
the materials belonged to the Government or the Railway, no question of
purchasing the same from the Company could arise. No one can be a seller and
purchaser of the same property at the same time.
(iii) Special Condition to provides in
unequivocal terms that no Sales Tax on materials including steel or components
will be reimbursed by the Railway. Board".
This condition postulates two things: First,
that the Company becomes the owner of the materials by purchase and therefore,
in that capacity becomes liable to the charge of Sales Tax which it cannot,
because of this covenant to the contrary, pass on to the President/Railway
Board. Second, such steel and components are not the property of the Railway.
They were not supplied by the President/Railway free of charge under Special
Condition 6.
(iv) There is no condition or term in the
contract that the material purchased, by the Company after drawing 'on account'
payment to the extent of 90% of the value of the material shall become the
property of the Railway.
452 (v) Standard Condition 16 provides that
if within twelve months after delivery, any "defect arises from
inferiority of material or workmanship" the Company shall be liable to
remedy the deffect, and to deduction of money due to it.
This Condition also presupposes that the
inferior material used was not the property of the Railway but of the Company.
(vi) The stipulation in the Indemnity Bond
making the Company responsible for safe custody and protection of the
"Stores and articles" against all risks till they are duly delivered
to the Railway, or as they may direct, nor the use of the words "of the
Railway", therein, in our opinion, in the face of clear Conditions of the
contract, is a ground to hold that the materials purchased by the Company
construction of the wagons would become the property of the Railway immediately
on advance of an amount equal to 90% of their value under Special Condition 4.
As rightly pointed out by the High Court the
word 'of' in the expression "Of the Railway" used in the Indemnity
Bond in the context of "stores and articles" appears to have been
loosely used. Moreover these "stores and articles" might include the
wheel sets and articles supplied by the Railway free of charge from its stores
under Special Condition 6. The expression Of the Railways' might have been possibly
used in the context of such components belonging to the Railway. Furthermore,
under Condition 5, in respect of all surplus material, the Railway had been
given a right of preemption. Even so much capital cannot be made out of the use
of this loose expression in the Indemnity Bond, when the Conditions embodied in
the contract documents read as a whole, clearly show that the property in the
materials purchased by the Company with the assistance of the'
Railway/Government does not pass to the Railway.
The upshot of the above discussion is that
with the exception of wheel sets (with axle boxes and coupleS), substantially
all the raw materials required for the construction of the wagons before their
use belong to the Company and not to the President/Railway Board. In other
words with the exception of a relatively small proportion of the components
supplied under Special Condition 6, the entire wagons including the material at
the time of its completion for delivery is the property of the Company. This
means that the general test suggested by Pollock and Chalmers has been
substantially albeit not absolutely satisfied so as to indicate that the
contract in question was one for the sale of wagons for a price, the Company
being the seller and the President/Railway Board being the buyer. It is true
that technically the entire wagon including all the material and components
used in its construction cannot be said to be the sole property of the Company
before its delivery to the Purchaser. But as pointed out by Lord Halsbury in
the above quoted passage from his renowned work neither the ownership of the
materials nor the value of the skill and labour as compared with the value of
the materials used in the manufacture is conclusive. Nevertheless, if the bulk
of the material used in the construction belongs to the manufacturer 453 who
sells the end product for a price that will be a strong pointer to the
conclusion that the contract is in substance one for the sale of goods and not
one for work and labour.
Be that as it may Clause (1) of Standard
Condition 15 dispels all doubt with regard to the nature of the contract.
This clause stipulates in unmistakable terms
that as soon as a vehicle has been completed, the Company will get it examined
by the Inspecting Officer and submit to the Purchaser an 'On Account' Bill for
90% of the value of the vehicle and within 14 days of the receipt of such bill
together with a certificate of the Inspecting Officer, the Purchaser will pay
90% bill and on such payment, the vehicle in question will become the property
of the Purchaser.
There could be no clearer expression of the
intention of the contracting parties than this clause that the contract was, in
substance, one for the sale of manufactured wagons by the Company for a
stipulated price.
We would therefore affirm the finding of the
High Court on this point.
The ratio of Hindustan Aeronautics (supra) is
not applicable. The present case has some special features which did not figure
in Hindustan Aeronautics. In that case from the terms and conditions the
contract then under consideration and the report of the Commercial Tax Officer,
these facts appeared to be well established:
(i) the material used in the construction of
coaches before its use was the property of the Railway.
(ii) There was no possibility of any other
material being used excepting which belonged to the President/Railway before
its use in the construction of-coaches-purch. This fact was borne out from the
report of the Commercial Tax Officer.
(iii) Further in the contract in question in
that case, there was no term corresponding to Clause (1) of Standard Condition
15. This Court therefore found that the difference between the price of a coach
and the cost of material could only be the cost of services rendered by the
assessee. Such is not the case here. The bulk of the material used in the
construction of the wagons, as already discussed above, in the instant case
belongs to the Company before its use.
State of Gujarat (Commissioner of Sales, Tax,
Ahmedabad) v. M/s. Variety Body Builders (supra) cited by Shri Mehta, also is
clearly distinguishable from the facts of the instant case. There the bulk of
the materials used in the construction of coaches was supplied by the Railway.
Even labour was supplied by the Railway. The contractor mainly contributed his
labour and skill to manufacture the end product, being the Railway Coaches,
under the constant supervision and control of the Railway. From the totality of
the material terms and conditions in the agreement, in that case, it was 454
not possible to hold that the parties intended that the Contractor transferred
the property in the coach to the Railway after its completion. Reality of the
transaction as a whole indicated that the contract was one for work and labour
while in the instant case the converse is true.
The case before us is more in line with the
decision of this Court in Patnaik and Company v. state of Orissa (supra). The
appellants therein had entered into an agreement with the State of Orissa for
the construction of bus-bodies on the chassis supplied by the Governor. The
agreement provided inter alia that the appellants were responsible for the safe
custody of the chassis from the date of their receipt from the Governor till
their delivery and they had to insure their premises against fire, theft etc.
at their own cost. The appellants had to construct the bus-bodies in the most
substantial and workmanlike manner, both as regards materials and otherwise in
every respect in strict accordance with the specifications. They had to
guarantee the durability of the body for two years from the date of delivery.
It was also provided that all works under the contract should be open to
inspection by the Controller or Officers authorised by him and such officers
had the right to stop any work which had been executed badly or with materials
of inferior quality and on receipt of a written order the appellants had to
dismantle or replace such defective work or material at their own cost. The
Builders were entitled to 50% of the cost of the body-building at the time of
delivery and the rest one month thereafter. The question before the
Constitution Bench of this Court was whether on these facts, the contract was
one for work or a contract for sale of goods. This Court held (by majority)
that the contract as a whole was a contract for sale of goods and therefore the
appellants were liable to sales-tax on the amounts received from the State of
Orissa for the construction of the bus bodies. In reaching at this conclusion
the Court paid due regard to the fact that under that contract the property in
the bus-body did not pass to the Government till the chassis with the busbody
was delivered at the destination to be named by the Controller.. Till the
delivery was made the busbody remained the property of the builder. This
clinching circumstance also prominently figures in Standard Condition 15 in the
instant case, also.
For the foregoing reasons, the appeal fails
and is dismissed with costs.
P.H.P. Appeal dismissed.
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