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PETITIONER: COMMISSIONER OF COMMERCIAL TAXES, MYSOREBANGALORE

       Vs.

RESPONDENT: HINDUSTAN AERONAUTICS LTD.

DATE OF JUDGMENT17/12/1971

BENCH: SIKRI, S.M. (CJ) BENCH: SIKRI, S.M. (CJ) BHARGAVA, VISHISHTHA DUA, I.D. KHANNA, HANS RAJ MITTER, G.K.

CITATION:  1972 AIR  744            1972 SCR  (2) 927  CITATOR INFO :  D          1974 SC2309  (16)  R          1976 SC2108  (48)  D          1977 SC1537  (23,24,25,35)  E          1984 SC 744  (24)

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

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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

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             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 assessee- for 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

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             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

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             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)..................

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             (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.

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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 pur- pose 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

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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  con- cerned  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