PETITIONER:
UNION OF INDIA
Vs.
RESPONDENT:
CENTRAL INDIA MACHINERY MANUFACTURING CO. LTD. & OTHERS
DATE OF JUDGMENT06/04/1977
BENCH:
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 supply-
ing 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. 1- company 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 was ,indicated.
It was provided that the contract would be governed by
the Standard Conditions in so far as they are not inconsist-
ent 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 ful-
filment 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 appel-
lant 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 purchas-
er. 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. Para-
graph 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 con-
tractor to hold "as trustee for Government" and raw materi-
als 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 pur-
pose 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 indi-
vidual 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 com-
pared with the value of the materials is conclusive, al-
though such matters may be taken into consideration in
determining in the circumstances of a particular case wheth-
er 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 includ-
ing the nature of the obligations to be discharged thereun-
der 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 contrac-
tor to the purchaser who is described as the Union of India
acting through the Railway Board. The payment is made in
two instalments; 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 pri-
marily to be sought within the four-corners of the docu-
ments 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 condi-
tions 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 upto 90 per cent is
a part of the full contract price for each
completed wagon;
(b) Condition No. 5 while imposing restric-
tion as to the use and disposal of material
against which advance is taken further gives a
pre-emptive right to the Government to pur-
chase 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 materi-
al belonged to the Government or the Rail-
ways, 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 pur-
chase 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 pay-
ment 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 construc-
tion of the wagons belong to the Company and
not to the Railway Board. With the exception
of a relatively small proportion of the compo-
nents, the entire wagon including the materi-
al, at the time of its completion for deliv-
ery, 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, Ahmeda-
bad) v. M/s. Variety Body Builders AIR 1976 SC 2108, distin-
guished.
Patnaik & Company v. State of Orissa [19651 16 STC 369 (SC),
followed.
JUDGMENT
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 respond-
ent No. 1.
L.M. Singhvi, S.M. Jain and Indra Mapwana, for respond-
ents 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 re-
funded 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 Constitu-
tion. In the writ petition, the Commercial Taxes Officer
Special Circle Jaipur, the Union of India through the Rail-
way 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 reim-
burse 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 wag-
ons.
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 transac-
tions. 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 Con-
tract, including the nature of the obligations to be dis-
charged thereunder 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 let-
ters. 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 Condi-
tions 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 Direc-
tor (R.I.), R.D.S.D., Calcutta or his repre-
sentative 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 underframes
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 instalments, viz. 90 per
443
cent on completion and 10 per cent as provided
in paragraph (2) of this clause. The proce-
dure for such payment will be as follows:
(1 ) The Contractor on receipt of a Certifi-
cate 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 ques-
tion will become the property of the Purchas-
er.
(underlining ours)
(2) The balance of 10 percent-shall be
treated as security for the due fulfilment 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 com-
pleted 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 manu-
facture 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 upto 90% of the
value of steel and other raw materials pro-
cured by the firm for this order will be
,made against such materials, on its receipt
in the firms’ works, on production of a cer-
tificate to that effect from the concerned
officer of the Inspection and Liaison Organi-
sation and on the firm furnishing necessary
indemnity bond to the paying Authority.
Note:’On Account’ payment will be per-
missible 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 Build-
ers.
(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 certifica-
tion 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 acordance with provi-
sion 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 execu-
tion of the contract are procured with the
assistance of Government either by issue from
Government stock or purchase under arrange-
ments 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 con-
tract 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 de-
fault 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 Rail-
way Board will, not, however, be responsible
for the payments of sales tax paid under mis-
apprehension of Law. No sales tax on materi-
als including steel or components will be
reimbursed by the Railway Board.
(underlining ours)
The material part of the Indemnity Bond which was subse-
quently 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 Bharatput 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 protec-
tion 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 indemni-
fy 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 herein-
after 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 varia-
tions 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 hirepurchase or other system of
payment by instalments .... "
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. Accord-
ing 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 particu-
lar 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 contrac-
tor to the Purchaser, who is described as the Union of India
acting through the Railway Board. Such payment is made in
two instalments, 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 Condi-
tion 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 pur-
chaser." 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 comple-
tion 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 con-
struction 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 fur-
ther 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 ap-
plicable) 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 Indemni-
ty 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 Rail-
way 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 individ-
ual 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 considera-
tion 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, al-
though 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 noth-
ing in the terms and conditions of the contract which ex-
pressly 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 evi-
dence (i.e. unrebutted affidavit of Shri C.P. Gupta, Senior
Accounts and Finance Officer of the Company) that m execu-
tion 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. Contro-
versy 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 construc-
tion, 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 con-
tract. 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 con-
struction of the wagons, pass to the Railway. Reasons for
arriving at this conclusion are as under:
(i) Clause (a) of Special Condition 4 which pro-
vides for "On Account" payment upto, 90% of the’ value of
steel and other raw materials procured by the firm (Compa-
ny) 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 Govern-
ment 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 unequivo-
cal 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 Rail-
way. 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 construc-
tion 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 Condi-
tion 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 docu-
ments 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 wheelsets (with axle boxes and coupleS), sub-
stantially all the raw materials required for the construc-
tion 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 compo-
nents 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 manu-
facture is conclusive. Nevertheless, if the bulk of the
material used in the construction belongs to the manufactur-
er
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 Pur-
chaser 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 ap-
plicable. 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 considera-
tion 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, Ahmeda-
bad) 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 agree-
ment 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-build-
ing at the time of delivery and the rest one month thereaf-
ter. 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 reach-
ing 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 bus-
body was delivered at the destination to be named by the
Controller.. Till the delivery was made the busbody re-
mained the property of the builder. This clinching circum-
stance 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.
455