Hindustan Shipyard Ltd. Vs. State of Andhra Pradesh  INSC 365 (20 July
Babu, J. & R.C. Lahoti, J.
question arising for decision in these appeals is whether the transactions
involved in manufacture and supply of ships by the appellant to its customers
are a sale as defined in clause (n) of Section 2 of the Andhra Pradesh General
Sales Tax Act, 1957 (hereinafter the Act, for short) as held by the High Court
or a works contract as defined in clause (t) of Section 2 of the Act and hence
not exigible to sales-tax as contended by the assessee-appellant.
Hindustan Shipyard Limited, the appellant before us, is a public sector
undertaking. It is engaged in the activity of building ships for different ship
owners under the orders placed by them and as evidenced by the contracts
entered into between them.
facts in brief. Between the assessment years 1974-75 and 1983-84 (both years
inclusive) there were 18 ships involved and formed subject matter of different
assessments. The Assessing Authority and the Commissioner (Appeals) held all
the transactions in question as transactions of sale liable to payment of
sales-tax by the appellant. Several tax appeals preferred by the appellant were
disposed of by the Sales Tax Appellate Tribunal, Andhra Pradesh, Hyderabad by a common order dated 19th July, 1989. It appears that earlier also
transactions regarding building of ships by this very assessee have been a
subject of controversy travelling upto the High Court of Andhra Pradesh and
disposed of by a Division Bench by its order dated 27th January, 1969 reported
as Hindustan Shipyard Limited, 1970 (1) Andhra Weekly Reporter 197. The High
Court having examined several clauses of the contract dated 12.4.1965 entered
into between the appellant and its customers concluded that the building of the
ships under the contract under scrutiny was works contract and not sale. This
decision was heavily relied on by the appellant before the Tribunal. The
Tribunal has analysed the terms and conditions of all the contracts forming
subject matter of appeals before it and thereafter divided the contracts into
two groups. The Tribunal noticed that the contracts relating to 10 ships before
it incorporated recitals identical or similar to the contract dated 12.4.1965
involved before the High Court in 1970 (1) Andhra Weekly Reporter 197. As to
such contracts the Tribunal held that it was bound to follow the Division Bench
decision of the High Court more so when the Department had not pursued its challenge
to the correctness of the findings of fact and the principles laid down therein
by approaching the Supreme Court. Such contracts were held to be works contract
following the abovesaid decision. This time also the Department has not pursued
the matter further. Therefore as to the transactions involving 10 ships the
order of the Tribunal has become final.
Tribunal has then noted in its impugned order that after the decision of the
High Court dated 27th
January, 1969 there
was a decision of a three-Judges Bench of the Supreme Court delivered India
Machinery Manufacturing Co. Ltd. (CIMMCO) & Ors. 1977 (40) STC 246, wherein
the relevant law was dealt with and the tests for determining the distinction
between a contract of sale and a works contract were laid down. The decision in
CIMMCOs case was followed by the High Court of Andhra Pradesh in P.S. &
with exigibility to sales-tax of a transaction involved in construction and
supply of harbour ferry. Having followed the law laid down by the Supreme Court
in the case of CIMMCO and several other decisions and having also considered
the earlier Division Bench decision of the High Court of Andhra Pradesh in the
case of this assessee, the Division Bench held in PS & Co.s case the
transaction before it to be a sale and not merely a contract for work and labour.
This being the latest decision of the jurisdiction High Court placed before the
Tribunal, for the transactions relating to remaining 8 ships before it, the
Tribunal applied the ratio of P.S. & Co.s case and held the transactions to
be those of sales liable to sales-tax and dismissed appeals filed by the
appellant. The appellant feeling aggrieved by the decision of the Tribunal to
the extent to which the transactions were held to be sales, filed tax revision
cases before the High Court. The decision in 1970 (1) Andhra Weedly Reporter
197 was once again heavily relied on by the appellant before the High Court.
The High Court examined the contention of the appellant, scrutinised the terms
and conditions of the contracts entered into by the appellant with the several
ship owners and then held that the relevant terms and clauses led to an
irresistible inference of sales having taken place and such a situation was
governed by the Division Bench decision in P.S. & Co.s case (supra).
Accordingly, the revisions filed by the appellant have been dismissed. The
aggrieved appellant has come up to this Court by filing these petitions for
special leave to appeal.
(n) and (t) of Section 2 of the Act respectively define sale and works contract
as under :- Sale with all its grammatical variations and cognate expressions
means every transfer of the property in goods (Whether as such goods or in any
other form in pursuance of a contract or otherwise) by one person to another in
the course of trade or business, for cash or for deferred payment or for any
other valuable consideration or in the supply or distribution of goods by a
society (including a co-operative society), club, firm or association to its
members, but does not include a mortgage, hypothecation or pledge of, or a
charge on goods.
xxx xxx xxx Works Contract includes any agreement for carrying out for cash or
for deferred payment or for any other valuable consideration, the building
construction, manufacture, processing, fabrication, erection, installation,
fitting out, improvement, modification, repair or commissioning of any movable
or immovable property.
distinction between a contract of sale and a works contract is not free from
difficulty and has been subject matter of several judicial decisions. No
straight-jacket formula can be made available nor can such quick-witted tests
devised as would be infallible. It is all a question of determining the
intention of the parties by culling out the same on an overall reading of the
several terms and conditions of a contract. In State of observed that there is
no standard formula by which one can distinguish a contract of sale from a
contract for work and labour. There may be many common features in both the contracts,
some neutral in a particular contract, and yet certain clinching terms in a
given case may fortify a conclusion one way or the other. It will depend upon
the facts and circumstances of each case. The question is not always easy and
has for all times vexed jurists all over.
would straightaway proceed to notice the relevant recitals of the contracts in
question. During the course of hearing Shri T.L.V. Iyer, the learned senior
counsel for the appellant submitted that in the case at hand there are
different contracts relating to 8 ships. The terms and conditions of these
several contracts are more or less similar to each other though not the same
and it will suffice if the terms and conditions of one contract, viz. the one
entered into between the appellant and the Great Eastern Shipping Co. Ltd.
dated 3rd February,
1971 are taken into
consideration. This contract relates to construction of four motor vessels of
Jag Darshan type. The relevant recitals and terms and conditions of the
contract are summarised and wherever necessary reproduced, as under:-
appellant is called the Builder and the customer the Great Eastern Shipping Co.
Ltd. - is called the Owner.
Preamble to the contract speaks of the Builder having agreed to build, launch,
fit, equip, test and complete in all respects four vessels at its Shipyard and
after completion and successful trials in all respects deliver them alongside
safe berth at Visakhapatnam from which supplies could be conveniently loaded
and the crew embarked and the owner having agreed to accept delivery from the
Builder of the said four vessels upon the terms and conditions hereinafter set
The vessels shall have Builders hull numbers 171002-3- 4-7 respectively and
shall be constructed, fitted and completed in strict accordance with the plans
and specifications forming part of the contract.
The Builders shall arrange for assignment of a representative/s called the
Classification Surveyor to the vessel from Lloyds Register of Shipping
throughout the construction.
plans and drawings, materials and workmanship shall be subject to instructions
and tests by the Classification Surveyor for which the facilities shall be
furnished by the Builder without any charge to the owner.
The Builder shall furnish all labour, machinery, materials, equipments,
appurtenances, spare parts and outfits required for the construction of the
vessel to make it completely ready.
The total price of the vessel is fixed at Rs.5,50,00,000/- per vessel which
shall be called the contract price to be paid in the following manner :- (a) 5%
of the Contract Price upon signing this Contract.
10% of the Contract Price upon Builder producing adequate documentary evidence
to the Owner confirming that the Builder has placed order for main engine and
10% of the Contract Price upon keel laying of the vessel.
15% of the Contract Price upon Builder submitting its certificate to the Owner
that 50% by weight of the steel structure of the vessels hull has been erected.
(Panels placed on berth).
15% of the Contract Price upon launching of the vessel.
10% of the Contract Price upon Builder submitting its certificate to the Owner
that the main engine has been lowered in position on board the vessel.
15% of the Contract Price upon satisfactory completion of the dock trials.
20% of the Contract Price upon delivery of the vessels.
The contract, vide Article 3, makes provision for payment of liquidated damages
at the prescribed scale by reference to the period of delay for delayed
delivery and also makes a similar provision for payment of bonus by the owner
to the Builder for advanced delivery.
The owner has the right to appoint at its expense one or more superintendents
who will be allowed to inspect regularly the building of the vessel and also
the machinery and all accessories and workmanship during the work in progress.
owner may suggest any changes and alteration in the plans and drawings the same
shall be carried out by the Builder subject to mutual agreement arrived at in
writing between the owner and the Builder regarding additional debits and
Before the vessel being delivered there shall be trial runs intimation whereof
shall be given by thirty working days advance notice in writing and all
expenses in connection with the trial runs of the vessel are to be borne by the
Builder. Prior to the trial runs the vessel shall be dry-docked and the bottom
shall be painted as per the specifications. Dry-dockeing and painting shall be
at the expenses of the Builder. The required quantity of the fuel oil,
lubricating oils and greases shall be provided by the owner but paid for by the
Clause 5 of Article 6 provides method of acceptance or rejection as under:- If
after successfully completed technical trial test procedures according to the
Specifications no legitimate complaints are made concerning the completion or
correct functioning of the vessel according to this Contract, the Drawings and
Specifications, the Owner shall accept the vessel and confirm the acceptance in
If any defects become evident they shall be made good by the Builder at his own
expense. The owner may demand a new set of trial which shall be conducted by
the Builder on the same terms and conditions as applicable to the first trial
and paid for by the Builder. After the first or second trial runs, as the case
may be, the owner may accept or reject the vessel by serving notice in writing
within seven days and stating the reasons for rejection.
Vide Article 7, there are the different dates appointed for the four vessels by
which the Builder agrees to deliver the respective vessels. Simultaneously with
the delivery the owner has to fulfil its obligation for payment as stipulated.
protocol of delivery shall be signed. All the documents relating to the vessel
have to be delivered by the Builder to the owner upon the acceptance of the
vessel by the owner.
Clause 5 of Article 7, dealing with title and risk, reads as under:- Title and
risk of the Vessel shall pass to the Owner upon acceptance when delivery of the
Vessel is effected, as stated above, it being expressly understood that, until
such delivery is effected, the Vessel and equipment thereof, is at the entire risk
of the Builder, including, but not limited to, risks of war, insurrection and
seizure by Government or Authorities, whether Indian or foreign, and whether at
war or at peace.
There is warranty of quality to remain valid for a period of 12 calendar months
from the date of actual delivery of the vessel.
Vide Article 11, for a certain period of delay and default on the part of the
owner the same is liable to the compensated by payment of interest. Delay and
default beyond a certain time entitles the Builder to rescind the contract
whereupon the Builder shall refund to the owner all the instalments already
paid by the owner to the Builder without any interest thereon.
this Article nothing is said about the vessel which implies that the vessel continues
to remain with the Builder.
Article 15 entitled property in the vessel reads as under:- Article 15 Property
in the vessel : Without prejudice to Article 17 hereof, the vessel as
constructed and her engines, boilers and machinery and all materials from time
to time intended for her or appropriated to the Contract whether in the
building berth, fitting out basin, workshop or elsewhere shall immediately
after payment of the first instalment on account of vessel as the work
proceeds, become the property of the Owner and such property shall be
conspicuously marked with the hull number or with other appropriate markings
for identification, as belonging to vessel/Owner as its property and shall not
be within the ownership or disposition of the Builder. Until the vessel is
completed and delivered the Builder, shall not use or permit to be used any
such part/s, material/s, equipment and machinery so allocated to the vessel for
any other vessel. The Owner to the extent of payment made by him will have a right
to mortgage his interest in materials mentioned above to Indian Government,
Lender and/or Shipping Development Fund Committee for loans taken by Owner and
formalities as required by Lender/Owner shall be completed by the Builder. But
the Builder at all times shall have a lien on the above-mentioned property fcr
any unpaid portion of the price. All materials and other things appropriated
but not used for the purpose of this Contract shall after completion of the
vessel become the property of Builder.
Vide Article 16, in the event of the Builder defaulting in the construction of
the vessel, the owner may at his option and after due notice :- take possession
of the vessel in her then state and of all engines, boilers and machinery and
all materials intended for her as before mentioned and to complete the vessel,
engines, boilers and machinery. For this purpose the Owner shall have power to
enter into any contract with other Builders or manufacturers, and to use the
Yard or Yards; Workshops, Machinery and tools of the Builders or such other
Builders or manufacturers with whom the Builders may have entered
Sub-contracts, and costs directly incurred by the Owners by the exercise of any
of the powers vested under this clause shall be deducted from the contracted
price then remaining unpaid is sufficient, and if not sufficient, shall be made
good by the Builders.
Article 17 provides that the vessel shall be at the risk and expense of the
Builder until handed over and accepted by the owner and until then so far the
interest of the owner is concerned the Builder shall keep her insured at its
own cost for all Builders risks under a policy or policies taken out in the
joint names of the Builder and the owner. The same clause further provides :-
If, before delivery to the Owner, the Vessel (including the engines, boilers,
appurtenances or materials intended for her) hull sustain damage not amounting
to total or constructive or compromised total loss, this Contract shall not be
invalidated in any way. But such damage shall be made good by the Builder as
speedily as may be reasonably expected having regard to all the circumstances
to the satisfaction of the Classification Society and the reasonable
satisfaction of the Owners authorised representative or representatives. The
Insurance moneys recoverable in respect of such damage shall be applied by the
Builder to such reinstatement of the Vessel. The Owner shall not on account of
the said damage or repair be entitled to object to the Vessel, engines,
boilers, material or equipment or to make any claim for any alleged
consequential loss or depreciation.
to any cause the Vessel before delivery to the Owner shall be destroyed or lost
or so damaged as to become or to be deemed to become at any time a total or
constructive, arranged or compromised total loss the Builder shall refund to
the Owner the instalments of the Contract Price if any; plus interest at the
rate of 5 per cent per annum from the date of payment of monies by the Owner to
the Builder out of monies payable by the Underwriters under the insurance
effected with them in terms of this Contract. Every amount of the instalment,
shall be endorsed on the policy/policies and such endorsement shall be
sufficient authority to the Underwriters, to pay to the Owner the amount of
such instalments plus interest. On payment of such instalments by the
Underwriters to the Owner, the Owner shall have no further right or claim on
the Builder in respect of this Contract and the Contract in respect of the
particular Vessel or Vessels shall be deemed to have ended in all respects. The
remaining amounts received from the Underwriters shall be retained by the
decision of the Underwriters as to whether the Vessel is a total or
constructive, arranged or compromised total loss shall be binding upon the
parties to this Agreement.
if the recovery of the claim for loss, damage or destruction of the ship cannot
be made from the insurers in terms of insurance policies either because the
risks are not insured or for any reason whatsoever the Builder shall refund to
the Owner the amounts of instalments paid by the Owner together with interest
at the rate of 5 per cent per annum form the dates of payments of monies by the
Owner to the Builder.
will shortly revert back to analysing the above-said terms and conditions of
the contract and in between try to find out the tests which would enable
determination of the nature of the transactions covered by such contracts. The
distinction between contract of sale and contract for work and labour has been
so stated in Halsburys Laws of England (Fourth Edition, Vol.41, para 603) :-
Contract of sale distinguished from contract for work and labour.
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 the main
object of which is the transfer of the property in, and the delivery of the
possession of, a chattel as such to the buyer. Where the main object of work
undertaken by the payee of the price is not the transfer of a chattel as such,
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 of the 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.
Sale of Goods (Fourth Edition) it is stated that it is sometimes extremely
difficult to decide whether a particular agreement is more popularly described
as a contract of sale of goods, or a contract for the performance of work or
services to which the supply of materials or some other goods is incidental.
learned author sums up the test for distinction in the following words (vide para
1.042) :- Where the parties have not settled the question by the form of their
contract, the decision whether the bargain is one for the performance of work
or the sale of a chattel must be made by the court. It is now well established
that the court does so by having regard to the substance of the contract - a test
which assumes that every contract must be in substance one or the other. This
is a legitimate inquiry where the supply of the goods and the performance of
the work are, to some extent at least, separate elements in the bargain; but it
breaks down in the case where all the work goes into the making of the goods to
be supplied, so that the two are inseparable. This point has unfortunately not
been appreciated. In the former type of contract, the determination of the
substance is a matter of degree, involving an assessment of the relative
importance of the two elements; but in the latter type the designation of the
contract as one of work or sale must depend upon either an arbitrary formula or
a superficial impression.
same learned author discusses the following types of contracts :-
Chattel to be affixed to land or another chattel. Where work is to be done on
the land of the employer or on a chattel belonging to him, which involves the
use or affixing of materials belonging to the person employed, the contract
will ordinarily be one for work and materials, the property in the latter
passing to the employer by accession and not under any contract of sale.
Materials supplied wholly or principally by employer. Where an article is to be
manufactured, and all the materials are supplied by the person for whom the
work is to be done, it is obvious that there can be no sale unless there is a
specific transfer of the materials followed by a repurchase of the product.
Where each party provides some of the materials or components, the task of the
court is to determine which of them has supplied the principal materials; it
then follows that the materials supplied by the other vest by accession in the
owner of the principal materials.
Services independent of creation or furnishing of product.
work or skill is involved over and above what goes into the making of the goods
delivered, it is possible and often correct to view the contract as
substantially one for work or services.
doctor or veterinary surgeon who supplies medicines does so as an incident to a
contract for professional services, which include diagnosis and advice over and
above any work in the making up of the medicine. In contrast, a chemist who
makes up a prescription sells it, since his work and skill goes entirely into
the product- it is simply a component reflected in the price of the goods.
Work wholly a component of article produced. The most difficult type of
contract remains to be discussed. In this case the whole of the work or skill
involved goes into the creation of the product which is ultimately delivered in
performance of the contract: for example, a contract to make a suit of clothing
or to build a ship. The work or skill is here a component - perhaps the most
important - of the thing produced, but is a component and nothing more. It is
not logical to ask whether in such a case the parties contracted primarily or
substantially for the performance of work or for the transfer of a chattel:
they contracted for both. In Clay v. Yates Pollock C.B. suggested that the
court should ask whether it was the work or the materials supplied that was of
the essence of the contract, a question to be determined by comparing the
importance, though not perhaps necessarily the value, of the two items.
& Mulla on Sale of Goods Act (1990, Fifth Edition, at page 53) lay down the
test for distinction as under:- Generally a contract to make a chattel and
deliver it, when made, is a contract of sale, but not always. The test would
seem to 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.
learned authors have thereafter noted by way of illustrations several decided
cases to notice how the principle has played with several courts in its actual
application and then drawn the following deduction from the decided cases:- It
will be observed that in the cases where there is no sale there is never a
moment when the thing produced is as a whole the makers absolute property,
notwithstanding that part, or even the whole, of the materials may have been
his property, whereas in the other case he might, if he found it possible and
profitable, and if not restrained by patent, copyright or any other similar
branch of laws, make in duplicate or in greater numbers chattels of the kind
ordered, appropriate one at his will to fulfil the special contract, and sell
the others to other persons (s).
number of authorities were cited at the Bar during the course of hearing. It
would suffice for our purpose to notice only a Engineering Co. (Pvt.) Ltd. -
1967 (19) STC 13, State of India Machinery Manufacturing Co.Ltd. and Ors. - 1977 (40) STC 246, Sentinel Rolling
Shutters & Engineering Company Pvt. Ltd.
principles deducible from the several decided cases may be summed up as under:-
is difficult to lay down any rule or inflexible rule applicable alike to all
transactions so as to distinguish between a contract for sale and a contract
for work and labour.
Transfer of property of goods for a price is the linchpin of the definition of
sale. Whether a particular contract is one of sale of goods or for work and labour
depends upon the main object of the parties found out from an overview of the
terms of the contract, the circumstances of the transactions and the custom of
the trade. It is the substance of the contract document/s, and not merely the
form, which has to be looked into. The Court may form an opinion that the
contract is one whose main object is transfer of property in a chattel as a
chattel to the buyer, though some work may be required to be done under the
contract as ancillary or incidental to the sale, then it is a sale. If the
primary object of the contract is the carrying out of work by bestowal of labour
and services and materials are incidentally used in execution of such work then
the contract is one for work and labour.
the thing to be delivered has any individual existence before the delivery as
the sole property of the party who is to deliver it, then it is a sale. If A
may transfer property for a price in a thing in which B had no previous
property then the contract is a contract for sale. On the other hand 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 bulk of material used in construction belongs to the manufacturer who sells
the end product for a price, then it is a strong pointer to a conclusion that
the contract is in substance one for the sale of goods and not one for work and
the test is not decisive. It is not the bulk of the material alone but the
relative importance of the material qua the work, skill and labour of the payee
which have to be weighed.
major component of the end product is the material consumed in producing the
chattel to be delivered and the skill and labour are employed for converting
the main components into the end products, the skill and labour are only
incidentally used and hence the delivery of the end product by the seller to
the buyer would constitute a sale. On the other hand if the main object of the
contract is to avail the skill and labour of the seller though some material or
components may be incidentally used during the process of the end product being
brought into existence by the investment of skill and labour of the supplier,
the transaction would be a contract for work and labour.
may be three categories of contracts: (i) The contract may be for work to be
done for remuneration and for supply of materials used in the execution of the
work for a price; (ii) It may be a contract for work in which the use of the
materials is accessory or incidental to the execution of the work; and (iii) It
may be a contract for supply of goods where some work is required to be done as
incidental to the sale. The first contract is a composite contract consisting
of two contracts one of which is for the sale of goods and the other is for
work and labour. The second is clearly a contract for work and labour not
involving sale of goods. The third is a contract for sale where the goods are
sold as chattels and the work done is merely incidental to the sale.
simple illustrations may be given to demonstrate applicability of the
above-said principles. A customer goes to a tailoring shop accompanied by a
suit length in his hands and entrusts the same to the tailor for stitching a
suit for him as per his measurements. The tailor by devoting his skill and labour
stitches the suit and delivers the same to the customer.
this process the tailor utilises lining, buttons and threads of his own. The
transaction would remain a contract for work and labour. The stitched suit
delivered by the tailor to the customer is not a sale. It would not make any
difference if the customer would have selected a piece of cloth of his own
choice for a price to be paid or paid and having purchased the suit length left
it with the tailor for being stitched into a suit.
property in the suit length had passed to the customer and physical possession
over the suit length by the tailor thereafter was merely that of a bailee
entrusted with the suit length.
if the tailor promises to stitch and deliver the suit for a price agreed upon,
investing his own cloth and stitching materials such as lining, buttons and
threads, and utilising his own skill and labour then though the customer might
have chosen the piece of cloth as per his own liking as to the texture, colour
and qualilty and given his own instructions in the matter of style, the
transaction would remain a contract for sale of goods, that is, a stitched suit
piece in as much as the object of the contract was to transfer property in the
stitched suit piece alongwith delivery of the suit by the tailor to the
customer, all investments, whether of material or of skill and labour having
been made by the tailor incidental to the fulfillment of the contract. Yet
another illustration is provided by Benjamin (ibid, para 1.046). A doctor or
veterinary surgeon who supplies medicines does so as an incident to a contract
for professional services, which include diagnosis and advice over and above
any work in the making up of the medicine. In contrast, a chemist who makes up
a prescription sells it, since his work and skill goes entirely into the
product - it is simply a component reflected in the price of the goods.
Benjamin concludes - Where work or skill is involved over and above what goes
into the making of the goods delivered, it is possible and often correct to
view the contract as substantially one for work or services. In our opinion a
reverse case would be one of sale.
gives yet another illustration. A meal supplied to a customer in a restaurant
is a sale of goods, the element of service being subsidiary; but a meal
supplied to a lodger or a resident hotel guest is part of a contract for
& Co.s case (supra) is a Constitution Bench decision.
appellant entered into a contract with the State of Orissa for the construction of bus bodies
on the chassis supplied by the State. On an interpretation of the terms of the
contract this Court by a majority of 4:1 concluded that the bus body built by
the appellant passed to the Government as moveable. It did not make any
difference that the process of manufacture was supervised by purchaser. The
contract was held to be a contract for sale of goods.
Sentinel Rolling Shutters & Engineering Companys case (supra), the assessee
carried on business as engineers, contractors, manufacturers and fabricators.
It entered into a contract for fabrication, supply, erection and installation
of two rolling shutters in two sheds belonging to the customer for a price
which was inclusive of charges for erection at site.
the goods were delivered, rejection claim were not to be entertained. All
masonry works required before and/or after erection was to be carried out by
the assessee. Payments were to be made on overall measurements to be checked by
the customer after installation. This Court held that the erection and installation
of rolling shutters was as much the fundamental part of the contract as the
fabrication and supply. The contract was held to be a contract for work and labour
and not a contract for sale.
case (supra) this Court emphasised the need of looking into the substance and
not merely the format of the contract. Reading the terms and conditions of the
contract before it as a whole this Court concluded that the property in the
materials procured or purchased by the company against 90% bill of which advance
was taken from the railways did not, before their use in the construction of
the wagons, pass to the railways. With an exception of a relatively small
portion of the components supplied by the railways, the entire wagon including
the material at the time of its completion and delivery was the property of the
company. It was held that the wagons were sold for a price and the contract was
a contract for the sale of wagons and not a work contract.
Engineering Co. (Pvt.) Ltd.s case (supra) and Variety Body Builders case
(supra), bodies were built for the railways on the underframes supplied by the
railways. Upon analysing the terms and conditions of the contract this Court
concluded that the assessee was not the owner of the ready coaches and the
property in the bodies vested in the railways even during the process of
construction and therefore the transaction was a works contract not involving
Hindustan Aeronautics Ltd.s case, the assessee HAL was to manufacture MIG
engines on behalf of the Government of India for which the latter had obtained
a licence from the U.S.S.R.. For the imports made from U.S.S.R., all payments
under the agreement were made by HAL on behalf of the Government of India. The
materials imported by HAL, stocks and stores, work-in-progress etc., were the
property of the Air Force. The bills drawn by HAL against the Government of
India indicated a break-up of the material cost, labour cost and sundry direct
charges and further profit at a percentage. This Court held that at no point of
time before the delivery of MIG engines HAL was the owner of the property,
either in the equipment or in the spares or in the aircrafts and as such there
could not have been any transfer of property from HAL to the Government of India.
The transaction was held to be a works contract.
back to the facts of the contract under consideration before us, a few
prominent features of the transaction are clearly deducible from the several
terms and conditions and recitals of the contract. The contract is for sale of
a completely manufactured ship to be delivered after successful trials in all
respects and to the satisfaction of the buyer. It is a contract for sale of
made to order goods, that is, ship for an ascertained price. Although the plans
and specifications for the ship are to be provided by the customer and the work
has to progress under the supervision of the classification surveyor and
representative of the buyer, but the components used in building ship, all
belong to the appellant The price fixed is of the vessel completely built up
although the payment is in a phased manner or, in other words, at certain
percentages commensurate with the progress of the work. The payment of 15% of
the price is to be made on satisfactory completion of the dock trials, that is
when the vessel is ready to be delivered and strictly speaking excepting the
delivery nothing substantial remains to be done. 20% of the price is to be paid
upon delivery of the vessel. Thus 65% of the price paid before the trials is
intended to finance the builder and to share a part of the burden involved in
the investments made by the builder towards building the ship. It is a sort of
an advance payment of price. The title and risk clause quoted as sub-para 14
above is to be found in 6 out of 8 contracts in question. So far as these 6
contracts are concerned they leave no manner of doubt that property in goods
passes from seller to the buyer only on the ship having been built fully and
delivered to the buyer. In all the contracts the ultimate conclusion would
remain the same. The ship at the time of delivery has to be a completely built
up ship and also seaworthy whereupon only the owner may accept the delivery. A
full reading of the contract shows that the chattel comes into existence as a
chattel in a deliverable state by investment of components and labour by the
seller and property in chattel passes to the buyer on delivery of chattel being
accepted by the buyer. Article 15 apparently speaks of property in vessel passing
to the buyer with the payment of first instalment of price but we are not to be
guided by the face value of the language employed; we have to ascertain
intention of the parties. The property in machines, equipments, engine etc.
by the seller is not agreed upon to pass to the buyer.
delivery of the ship must be preceded by trial run or runs to the satisfaction
of the owner. All the machinery, materials, equipment, appurtenances,
spare-parts and outfit required for the construction of the vessel are to be
purchased by the builder out of its own funds. Neither any of the said things
nor the hull is provided by the owner and in none of these the property vests
in the owner. It is not a case where the builder is utilising in building the
ship, the machinery, equipment, spares and material etc. belonging to the
owner, whosoever might have paid for the same. The builder has thereafter to
exert and invest its own skill and labour to build the ship. Not only the owner
does not supply or make available any of the said things or the hull of the
ship the owner does not also pay for any of the said things or the hull
separately. All the things so made available by the builder are fastened to the
hull belonging to the builder and become part of it so as to make a vessel.
What the owner pays to the builder in instalments and in a phased manner are
all payments at the specified percentage which go towards the payment of the
contract price i.e. the price appointed for the vessel as a whole. 65 per cent
payment of the price is up to the stage of the main engine having been lowered
in position on board the vessel i.e. the stage by which the building of the
vessel is complete. 15 per cent payment is to be done on satisfactory
completion of the trial and 20 per cent upon delivery of the vessel. Giving
maximum benefit in the matter of construction and interpretation of this clause
in favour of the appellant it can be said that it is the property in vessel
which starts passing gradually to the buyer proportionately with the percentage
of payments made and passes fully with the payment of last instalment on
delivery of vessel having been accepted.
Reid v. Macbeth  A.C. 223 where a contract for the construction of a ship
provided that the vessel, as she is constructed and all materials from time to
time intended for her [wherever situated] shall immediately as the same
proceeds become the property of the purchasers, the House of Lords held as a
matter of construction that various iron and steel plates lying in railway
stations, which had been passed by the Lloyds surveryor and which had been
marked with their proposed position in the ship, were still the property of the
seller as they had not yet become part of the ships structure. (see Benjamin,
ibid, para 5.093).
marking of hull number on machines, equipments etc. achieves the object of the
same being kept available for use in the ship concerned so as not to hamper the
progress of work for want of material or the available material having been utilised
for construction of some other ship. Such of the things as are left unused
automatically revert back to the seller. In fact, except on paper, they were
not at all appropriated by the buyer. The payments made by buyer are not
towards any components but towards the vessel which is yet to come in
existence. The built up vessel, if the contract may fail, is available to be
sold to some one else by the seller. The comparative importance is more of the
hull, machine, equipments, engine, etc. then that of the labour. Present one is
not a case where the materials used are insignificant or secondary or have been
used just incidental to the skill and labour bestowed.
event of the owner committing a default in honouring the schedule of payment
and the belated payment accompanied by payment of interest not wiping out the
default of the owner, the vessel continues with the builder and the builder may
rescind the contract. All that the builder is required to do is to refund the instalments
already paid by the owner to the builder without any interest thereon.
15, 16 and 17 of the contract confuse the issue to some extent because of the
phraseology employed in drafting these clauses. Article 15 provides the
property in the vessel vesting in the owner simultaneously with the payment of
the first instalment and the ownership or disposition of the builder ceasing
therewith. The owner also becomes entitled to mortgage his interest in the
vessel to the extent of the payments made by him. However, the same clause goes
on to say that such passing of the property is subject to Article 17 of the
contract and also subject to the lien of the builder for the unpaid portion of
the price. If the builder may commit a default in fulfilling his obligations
under the contract the owner may take possession of the vessel in the State in
which she is and have the remaining building of the vessel completed elsewhere
out of the price remaining unpaid and the deficiency, if any, shall be made
good by the builder. Vide Article 17, the insurance cover is to be obtained by
the builder, the policy or policies being taken out in the joint names of the
builder and the owner. What is pertinent to note is that the loss or damage, if
any, occasioned to the vessel before delivery to the owner is to be suffered by
the builder which would not have been so if the property in the vessel had
already stood passed to the owner. It is the obligation of the builder to make
the loss or destruction good for which purpose the builder may reimburse itself
by claim under the policy. In the event of destruction of the vessel the loss
though responsibility of the builder may be partly or fully satisfied to the
owner by refunding the amount of the instalments of the contract price plus
interest at the rate of 5 per cent per annum for which purpose the builder has
to make necessary endorsements on the policy and the owner may directly receive
payments from the insurer. This clause also shows that interest of the owner is
only to the extent of the percentage of the contract price paid by the owner to
the builder. Else the loss has to be borne by the builder. The High Court has
observed, and in our opinion rightly, that Article 15 is a piece of artistic
drafting. Though it is said that the things mentioned therein become the property
of the owner simultaneously with the first payment of the instalment, other
clauses of the contract generally, and Articles 16 and 17 immediately, go to
show that for all practical purposes the property in the vessel, continues to
remain with the builder and passes to the owner only (i) on satisfactory
completion of the work, (ii) the vessel coming into existence in a deliverable
state, and (iii) satisfaction of the owner as to the vessel being seaworthy
also having been built up to the satisfaction of the owner in accordance with
the terms and conditions of the contract. It is not the meaning of an
individual recital or the inference flowing from any term or condition of the
contract read in isolation but an overview of the contract wherefrom the nature
of the transaction covered thereby has to be determined.
recitals of the contract may also be read in the light of the few provisions of
Chapter III of The Sale of Goods Act. In a contract for the sale of specific or
ascertained goods the property in them is transferred to the buyer at such time
as the parties to the contract intend it to be transferred. Sections 20 to 24
contain rules for ascertaining the intention of the parties in this regard.
When something remains to be done on the date of the contract to bring the
specific goods in a deliverable state the property does not pass until such
thing is done and brought to the notice of the buyer. The risk in such case
remains with the seller so long as the property therein is not transferred to
the buyer though the delivery may be delayed.
all the foregoing reasons we are of the opinion that the High Court and the
Tribunal have not erred in taking the view which they have done. The contracts
in question involve sale of the respective vessels within the meaning of clause
(n) of the Andhra Pradesh General Sales Tax Act, 1957 and are not merely works
contract as defined in clause (t) thereof. The transactions have rightly been
held exigible to sales tax.
appeals are devoid of merit. They are held liable to be dismissed and are
dismissed accordingly. In view of purely legal controversy arising for decision
it is directed that the costs shall be borne as incurred.