PETITIONER:
COMMISSIONER OF COMMERCIAL TAXES, MYSOREBANGALORE
Vs.
RESPONDENT:
HINDUSTAN AERONAUTICS LTD.
DATE OF JUDGMENT17/12/1971
BENCH:
SIKRI, S.M. (CJ)
BHARGAVA, VISHISHTHA
DUA, I.D.
KHANNA, HANS RAJ
MITTER, G.K.
CITATION:
1972 AIR 744 1972 SCR (2) 927
ACT
Sales Tax-Contract for manufacture and supply of railway coaches-if sale or Works-contract.
HEADNOTE
The correspondence between the Railway Board and the respondent (assessec regarding the terms and conditions for the manufacture and supply of railway coaches, and the indemnity bond in respect of the contract, disclosed that,. (i) The Railway booked capacity of the assessee for the purpose of construction of railway coaches; (ii) an advance, on account, was made to the extent of 90% of the value of the material on the production of a certificate by the inspecting authority. (iii) the material used for the construction of coaches before its use was the property of the railway; (iv) there was no possibility of any other material being used for the construction, and (v) the words used in the contract were, ’manufacture and supply of the following coaches.’ On the question whether there was a sale of railway coaches liable to sales tax. or only a works-contract, HELD : The answer to the question whether a contract is a works contract or a contract of sale depends upon the construction of the terms of the contract in the light of surrounding circumstances. [935 A-B] (1) In the present case. when all the material used in the construction of a coach belonged to the Railways there cannot be any sale of the coach itself. It was a pure works-contract, the difference between the price of a coach and the cost of material being only the cost of service rendered by the assessee. [935 G-H] (2) Whether the wheels-sets and under frames were supplied free of cost or not makes no essential difference, [936 A-B] (3) The material and wage escalator and adjustments regarding final price mentioned in the contract are neutral factors. [935G] State of Gujarat v. Kailash Engineering Co., 19 S.T.C. 13 (S.C.) followed.
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 710 of 1968. Appeal from the judgment and order dated March 1, 1967 of the Mysore High Court in Sales Tax Appeal No. 8 of 1966. 928 Somanatha Iyer, R. B. Datar and M. S. Narasimhan, for the appellant. S. T. Desai, Mrs. A. K. Verma, J. B. Dadachanji, O. C. Mathur and Ravinder Narain, for the respondent. B. Sen, Santosh Chatterjee, G. S. Chatterjee and P. K. Chakravarti, for intervener No, 1. D. Goburdhun, for intervener No. 2. The Judgment of the Court was delivered by Sikri, C.J. In this appeal by certificate granted by the High Court of Mysore the only question involved is whether the deliveryby the respondent-Hindustan Aeronautics Ltd.-hereinafter referred to as the assessee-to the Railway Board of railway coaches model 407, 408 and 411 is liable to sales tax under the Central Sales Tax etc. The Commercial Tax Officer, by assessment order dated March 28, 1964, in respect of the assessment year 1958-59, included the turnover in respect of the supply of these coaches. The Sales Tax Officer rejected the contention of the assessee that therewas no sale involved in the execution of the works-contract inview of certain decisions of the High Courts; e.g., McKenzievLimited v. The State of Bombay(1) and Jiwan Singh v. State of Punjab (2). In appeal, the Deputy Commissioner of Commercial Taxes confirmed the order. In revision the Commissioner of Commercial Taxes also came to the same conclusion. He observed:
"The contracts specifically mentioned that the
under-frame shall always remain the property
of the Railway Board. On the other hand, the
order placed with the assessee company here
was for the ’manufacture and supply’ of
railway coaches. The payment to the assessee
company is specifically referred to as
’price’. The conditions normally included in
contracts for works are absent in this order."
He further observed :
". . . I would like to reiterate here that
even the actual contract is for manufacture
and supply of rail coaches. There is no
mention that the rail coaches are to be
constructed on the underframes of the
indentor ........ If it was really a works
contract the under- (1) 13 S.T.C. 602. (2) 14 S.T.C. 957. 929
frames would have been made available for
construction instead of being ’supplied free
of cost’ and the indentor’s lien on them would
have been made clear. The plain meaning of
the contract is that the underframes were
transferred to the assessee company free of
cost by the Railway Board and that after
construction of rail coaches on them, the rail
coaches were sold to the Railway Board at the
agreed price. The agreement does not also
contemplate any inspection in the course of
execution as would normally be provided for in
a works contract. The only inspection is
after completion and at Perembur." He thought that case of the assessee in respect of model 411 railway, coaches was Worse. Regarding the financial arrangement between the Railway Board and the assessee, he observed
"The Railway Board made only advance payments
for purchase of materials and did not itself
procure the material and supply them to the
assessee company. The condition that the
materials become property of the Railway Board
as and when purchased is only for purposes of
providing adequate security for the advances.
In the circumstances, the materials can be
deemed to be hypothecated to the Railway Board
and the advance payments are really part
payment of the final price. The transaction
relating to Rail coaches of model 411 is
clearly a sale." He, therefore, confirmed the appellate order of the Deputy Commissioner. The assessee then took an appeal to the High Court of Mysore under s. 24(1) of the Mysore Sales Tax Act read with s. 9(3) of the Central Sales-tax Act. The High Court was not satisfied with the material on record and directed that a report be sent on three points, viz :
"(i) Whether and if so to what extent the
assessee has drawn advance payment from the
Railway Board in respect of the material
utilised for completing the contracts in
question;
(ii) Whether any material, in respect of
which no advance have been drawn, has been
utilised by the assesseefor completing the
contracts; and
(iii) Whether the assessee has used for
completing the contracts any material not
specifically procured for the, purposes of
completing the contracts." 930 The Commercial Tax Officer submitted his report, and certain extracts may be reproduced below :
"My findings revealed that as and when they
purchased materials, they sent to the Railway
Board ’an invoice’ accompanied by a list of
the details regarding the materials purchased.
90 per ’cent of the value of these materials
was then paid to the company after inspection
of the materials by the board’s representa-
tive. Invoice No. 31009 of 15-10-1956 is
obtained as a sample. This invoice shows that
materials for the value of Rs. 2,60,374-12-0
were purchased by the company for 407 model
coaches. The details of the materials are
given in list attached to the invoice. The
invoice and the list were sent to the board
with a covering letter dated 15-10-1956 asking
payment of Rs. 2,34,517-4-0 being 90 per cent
of the invoice amount. The amount of this
invoice is included in the Board’s remittance
note No. 1290 of 30-10-1956 and a cheque was
issued to the company for the total of several
such invoices. The amount of the cheque
received on 30-10-1956 was Rs. 22,90,719-0-O."
He concluded :
" (1) It is not possible to specify the exact
amount received from the board as advance
payments. It is said that the
construction was spread out more than one year
and a running, account was maintained showing
the debits and credits for this coaches.
(2) It is said that no materials, for which
advance was not drawn, was utilised for
building the coaches.
(3) It is not possible to find out whether
any materials not specifically procured for
the construction of coaches were used. But it
is said that there is no possibility of any
other materials being used for this
construction. The constructions are said to
be done at particular shed which is separately
located. No other work is undertaken in this
section. All the materials procured for
constructions of coaches are said to be kept
separately in this section alone. Materials
not connected with this work are not mixed up
with the materials in this section. Separate
stock registers are maintained for this
section. Receipts and issues of materials for
the constructions of coaches are being
accounted for in this register under code
numbers." 931 The High Court allowed the appeal and set aside the order including the turnover relating to the construction of railway coaches, models 407, 408 and 411. Facts found by the High Court and as they appear to us are as follows On February 3, 1955, the Ministry of Railways wrote to the Hindustan Aircraft Ltd. regarding the coaching programme 1955-56. The letter reads :
"In order to book your capacity, construction
of the following is planned on your works
against the 1955-56 R.S.P. 1. Third Class Coaches B.G. model 407
120 2. Military Coaches ’M’ type model 408
60
Total :180
The intention of this intimation is to
facilitate such arrangements as you may find
necessary for provising for materials and for
planning capacity for the question. You
should therefore treat this as a firm booking
of your capacity." After discussions and settlement of terms between officers of ,the Government of India and of the assessee, the Railway Board placed orders with the assessee. The terms agreed between the parties are found stated in a letter of the Government of India, Ministry of Railways (Railway Board) No. 57/147/RE(163) dated May 4, 1957. This relates (to the first of the models 407. We may extract some portions of the letter. It is stated thus
In continuation of their letter No.
56/142/’3/Re dated 8-1-57 the Railway Board
are pleased to place an order on your work for
the manufacture and supply of the following
coaching stock on terms and conditions stated
under para 2 below :- Item No. Description of stock Particular Nos. Price per
coach of Rly specification Required (without wheels Board’s and Drawing and axlesand Rolling No. under-frames) Stock Programme 1957-58 384 Broad Gauge 55-B-14 180 Rs. 94,731/-
Class III (Provisional)
Coaches fully CSC 1119
furnished to
model ’407’ 932 Following terms and conditions are relevant: (i) Price
(a) The price mentioned above is for stock
without wheels and axels and underframes, and
is provisional. Final price will be settled
by negotiations after you have submitted your
claim for the coaches ordered on you up to
1954-55 Rolling Stock Programme on the basis
of the wages and material escalator approved
by the Board.
(b) The final price when settled shall be
subject only to the Standard Wages and
material escalator clauses given below........
(c) The final payment on completion of this
order shall be subject to examination and
check of your books by the Chief
Administrative Officer, Integral Coach
Factory, Perambur, Madras.
(ii) Wheelsets and Underframes
The Wheelsets and Underframes for the stock
will be supplied to you free of cost f.o.r.
your work siding.
(iv) Delivery
The delivery of the above stock f.o.r. your
works siding is required to commence after the
completion of the stock ordered on your works
against 1956-57 R.S.P. and required to be
completed by January 1957, or earlier.
(v) Inspection Authority
The inspection of this stock shall be carried
out by a representative (C.M.E. Southern
Railway) before the coaches are despatched.
(vi) Terms of payment
(a) Advance ’on account’ payment to the
extent of 90% of the value of the materials
shall be made to you on receipt of materials
and on production of a certificate from the
Inspecting Authority.
(b) Payment of full contract price, less ’on
account’ payment already will be made on deli-
very of coaches in complete condition and good
working order, duly certified by the
Inspecting
933
Authority on the lines of procedure laid down
vide Board’s letter No. 57/142/6/M dated 4-2-
1952 (Copy enclosed).
(vii) Other terms of Contract.
(i)..................
(ii) If and when sales tax on this order
becomes payable under law, such payments, when
made, will not be on your account. The
Railway will not, however, be responsible for
payment of the sales tax paid by you under
misapprehension of law. There is an indemnity bond in respect of this contract and we may set it out fully.
"1. Standing Indemnity for advance payment
against contract relating to Railway Board’s
order for construction and delivery of all
metal III class B.G. coaches now pending under
orders Nos. 52-142/4/M dated 16th February,
1952 and 53/142/4/M dated 3rd March, 1953 and
against contracts in respect of future orders
that may be given by the Railway Board from
time to time, by the Hindustan Aircraft Ltd.,
Bangalore represented by General Manager
hereinafter called the Company in favour of
the President of Union of India. lie Hindustan
Aircraft Ltd., hereby undertake to hold at
their works at Bangalore for and on behalf of
the President of the Union of India, and as
his property in trust for him the Stores and
articles in respect of which advances are made
to them under Railway Board’s letters, No .
52,/142/4/M dated 16th February, 1952 and
53/142/4/M dated 3rd March, 1953 and hereafter
to be made to the Company under future orders
from the Railway Board from time to time.
2. The said stores and articles shall be
such as are required of the purpose of the
pending and future contracts and the advances
made and to be made are without prejudice to
the provisions of the contract as to rejection
and inspection and any advance made against
stores and articles rejected or found
unsatisfactory on inspection shall be,
refunded immediately to the President of the
Union of India.
3. The Company shall be entirely
responsible for the safe custody and
protection of the said articles and stores
against all risks till they are duly delivered
to the 12-L736Sup-CI/72 934 .lm15 President of the Union of India or as he may direct and shall indemnify the President of the Union of India against any loss, damage or deterioration whatsoever in respect of the said stores and articles while in our possession. The said articles and material shall at all times to be open to inspection of any officer authorised by Government. 4. Should any loss of damage occur or a refund become due, the President of the Union of India shall be entitled to recover from the Company compensation for such loss or damage or the amount to be refunded without prejudice to any other remedies available to him by deduction from any sum due or any sum which at any time hereafter may become due to the Company under this or any other contract." We have set out the terms of the Indemnity Bond in great detail because the learned counsel for the appellant has strongly relied on the terms thereof. The text of the invoice sent by the assessee for the purpose of receiving 90% advance may be seen from the covering letter dated October 15, 1956 relating to one of the invoices. The letter reads :
"On account payment of 90% on material pro-
cured for rail coaches-407 and 408 model VI
order. Further to our letter No. Al/Inv/1 169
dated 8-10-56 enclosing our invoice for Rs.
42,892-15-0 we enclose herewith our invoice
No. 31009 dated 15-10-1956 in duplicate for
Rs. 2,34,517-4-0 being 90% of materials
procured in October 1956. Kindly arrange
payment of the invoice alongwith the invoice
already sent. Please instruct your resident
representative to check the stock of materials
as per lists attached to our invoices and send
them to the Deputy Financial Adviser and Chef
Accounts Officer, Integral Coach Factory,
Perambur, so that he may send his represen-
tative to check the value of the materials." On these facts we have to decide whether there has been any sale of the coaches within the meaning of the Central Sales Tax Act. We were referred to a number of cases* of this Court and the High Courts, but it seems to us that ultimately the answer must-depend upon the terms of the contract. The answer to the (1) 16S.T.C.518-McKenziesv.State of Maharashtra. (2) [1965] 2S.C.R.782-Patnaik & Co. v. State of Orissa. 935 question whether it is a works contract or it is a contract of sale depends upon the construction of the terms of the contract in the light of the surrounding circumstances. In this case the salient features of the contract are as follows : (1) The Railway books capacity of the assessee for the purpose of construction of railway coaches. (2) Advance on account is made to the extent of 90% of the value of the material on the production of a certificate by the inspecting authority. (3) The material used for the construction of coaches before its use is the property of the Railway. This is quite clear from para I of the Indemnity Bond set out above. No other meaning can be given to the words in the bond to the effect that "the Hindustan Aircraft Ltd. hereby undertake to hold at their works at Bangalore for and on behalf of the President of the Union of India and as his property in trust for him the Stores and articles in respect of which advances are made to them." It seems to us clear that the property in the materials which are used for the construction of the coaches becomes the property of the President before it is used. (4) It seems that there is no possibility of any other material being used for the construction as is borne out from the report written by the Commercial Tax Officer. (5) As far as the coaches of models 407 and 408 are concerned, the wheelsets and underframes are supplied free of cost. (6) In the order the words used are "manufacture and supply of the following coaches." (7) The material and wage escalator and adjustments which are mentioned in the contract are neutral factors. On these facts it seems to us that it is a pure works contract. We are unable to agree that when all the material used in the construction of a coach belongs to the Railways there can be any sale of the coach itself. The difference between the price of a coach and the cost of material can only be the cost of services rendered by the assessee. If it is necessary to refer to a case which is close to the facts of this case, then this case is more in line with the decision of 936 this Court in State of Gujarat v. Kailash Engineering Co.(1) than any other case. The only difference as far as coach model No. 41 1 is concerned is that in that case the wheelsets and underframes are not supplied free of cost but otherwise there is no essential difference in the terms. This does not make any difference to the result. In the result the appeal fails and is dismissed with costs. V.P.S. Appeal dismissed. (1) 19 S.T.C. 13. 937