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PETITIONER: M/S. HINDUSTAN SHIPYARD LTD.

       Vs.

RESPONDENT: STATE OF  ANDHRA PRADESH

DATE OF JUDGMENT:       20/07/2000

BENCH: S. Rajendra Babu, J. & R.C. Lahoti, J.

JUDGMENT:

R.C. Lahoti, J. The question arising for decision in these appeals is whether the transactions  involved in manufacture and supply of ships by  the appellant  to its customers are a sale as defined in clause (n) of  Section  2 of the Andhra Pradesh General Sales Tax Act,  1957 (hereinafter the Act, for short) as held by the High Court or a works contract as defined in clause (t) of Section 2 of the Act and  hence  not  exigible  to   sales-tax  as  contended  by  the assessee-appellant.

M/s.   Hindustan Shipyard Limited, the appellant before us, is  a public  sector  undertaking.   It is engaged in the  activity  of building  ships for different ship owners under the orders placed by  them  and as evidenced by the contracts entered into  between them.

The  facts  in brief.  Between the assessment years  1974-75  and 1983-84  (both years inclusive) there were 18 ships involved  and formed  subject  matter of different assessments.  The  Assessing Authority   and   the  Commissioner   (Appeals)  held   all   the transactions  in  question  as  transactions of  sale  liable  to payment  of  sales-tax  by the appellant.   Several  tax  appeals preferred  by  the  appellant were disposed of by the  Sales  Tax Appellate  Tribunal, Andhra Pradesh, Hyderabad by a common  order dated 19th July, 1989.  It appears that earlier also transactions regarding  building  of ships by this very assessee have  been  a subject  of controversy travelling upto the High Court of  Andhra Pradesh  and  disposed of by a Division Bench by its order  dated 27th  January,  1969  reported  as  Hindustan  Shipyard  Limited, Visakhapatnam  Vs.   The Commercial Tax Officer, Visakhapatnam 1970  (1)  Andhra  Weekly Reporter 197.  The  High  Court  having examined  several clauses of the contract dated 12.4.1965 entered into  between the appellant and its customers concluded that  the building of the ships under the contract under scrutiny was works contract  and  not sale.  This decision was heavily relied on  by the appellant before the Tribunal.  The Tribunal has analysed the terms  and conditions of all the contracts forming subject matter of  appeals  before it and thereafter divided the contracts  into two  groups.  The Tribunal noticed that the contracts relating to 10  ships before it incorporated recitals identical or similar to the  contract  dated 12.4.1965 involved before the High Court  in 1970  (1)  Andhra Weekly Reporter 197.  As to such contracts  the Tribunal  held  that  it was bound to follow the  Division  Bench decision  of  the High Court more so when the Department had  not pursued  its challenge to the correctness of the findings of fact and  the principles laid down therein by approaching the  Supreme

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Court.   Such contracts were held to be works contract  following the  abovesaid  decision.  This time also the Department has  not pursued  the  matter further.  Therefore as to  the  transactions involving  10  ships the order of the Tribunal has become  final. The  Tribunal has then noted in its impugned order that after the decision  of the High Court dated 27th January, 1969 there was  a decision  of a three-Judges Bench of the Supreme Court  delivered on  6th  April 1977 reported as Union of India Vs.   The  Central India  Machinery Manufacturing Co.  Ltd.  (CIMMCO) & Ors.   1977 (40)  STC  246, wherein the relevant law was dealt with  and  the tests  for determining the distinction between a contract of sale and  a  works contract were laid down.  The decision in  CIMMCOs case  was followed by the High Court of Andhra Pradesh in P.S.  & Co.   Vs.   State of Andhra Pradesh  1984 (56) STC  283  dealing with  exigibility  to  sales-tax  of a  transaction  involved  in construction  and  supply of harbour ferry.  Having followed  the law  laid  down  by the Supreme Court in the case of  CIMMCO  and several  other  decisions and having also considered the  earlier Division  Bench  decision of the High Court of Andhra Pradesh  in the  case of this assessee, the Division Bench held in PS & Co.s case  the  transaction  before it to be a sale and not  merely  a contract  for work and labour.  This being the latest decision of the  jurisdiction High Court placed before the Tribunal, for  the transactions  relating  to  remaining  8  ships  before  it,  the Tribunal  applied  the ratio of P.S.  & Co.s case and  held  the transactions  to  be  those  of sales  liable  to  sales-tax  and dismissed  appeals filed by the appellant.  The appellant feeling aggrieved  by the decision of the Tribunal to the extent to which the  transactions were held to be sales, filed tax revision cases before  the  High Court.  The decision in 1970 (1) Andhra  Weedly Reporter  197  was once again heavily relied on by the  appellant before the High Court.  The High Court examined the contention of the  appellant,  scrutinised  the  terms and  conditions  of  the contracts  entered  into by the appellant with the  several  ship owners  and then held that the relevant terms and clauses led  to an  irresistible inference of sales having taken place and such a situation  was governed by the Division Bench decision in P.S.  & Co.s  case  (supra).   Accordingly, the revisions filed  by  the appellant  have been dismissed.  The aggrieved appellant has come up  to this Court by filing these petitions for special leave  to appeal.

Clauses  (n) and (t) of Section 2 of the Act respectively  define sale and works contract as under :-

Sale with all its grammatical variations and cognate expressions means  every  transfer of the property in goods (Whether as  such goods  or  in  any  other  form in pursuance  of  a  contract  or otherwise)  by  one person to another in the course of  trade  or business,  for  cash  or for deferred payment or  for  any  other valuable  consideration or in the supply or distribution of goods by  a  society (including a co-operative society), club, firm  or association  to  its  members, but does not include  a  mortgage, hypothecation or pledge of, or a charge on goods.

xxx                xxx                xxx                xxx xxx

Works  Contract  includes any agreement for carrying  out  for cash   or  for  deferred  payment  or  for  any  other   valuable consideration,    the    building    construction,   manufacture, processing,  fabrication,  erection, installation,  fitting  out, improvement, modification, repair or commissioning of any movable or immovable property.

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The  distinction between a contract of sale and a works  contract is  not  free  from  difficulty and has been  subject  matter  of several  judicial  decisions.  No straight-jacket formula can  be made  available nor can such quick-witted tests devised as  would be infallible.  It is all a question of determining the intention of  the parties by culling out the same on an overall reading  of the  several  terms  and conditions of a contract.  In  State  of Gujarat Vs.  Variety Body Builders  (1976) 38 STC 176 this Court observed  that  there  is no standard formula by  which  one  can distinguish  a  contract  of sale from a contract  for  work  and labour.  There may be many common features in both the contracts, some  neutral in a particular contract, and yet certain clinching terms  in  a given case may fortify a conclusion one way  or  the other.   It will depend upon the facts and circumstances of  each case.   The  question  is not always easy and has for  all  times vexed jurists all over.

We  would straightaway proceed to notice the relevant recitals of the  contracts  in question.  During the course of  hearing  Shri T.L.V.   Iyer,  the  learned  senior counsel  for  the  appellant submitted  that in the case at hand there are different contracts relating  to 8 ships.  The terms and conditions of these  several contracts  are more or less similar to each other though not  the same  and  it  will suffice if the terms and  conditions  of  one contract,  viz.   the one entered into between the appellant  and the  Great  Eastern Shipping Co.  Ltd.  dated 3rd February,  1971 are   taken  into  consideration.    This  contract  relates   to construction  of  four motor vessels of Jag Darshan type.   The relevant  recitals  and terms and conditions of the contract  are summarised and wherever necessary reproduced, as under:-

1.   The appellant is called the Builder and the customer  the Great Eastern Shipping Co.  Ltd.  - is called the Owner.

2.   The  Preamble to the contract speaks of the  Builder  having agreed  to  build, launch, fit, equip, test and complete  in  all respects  four  vessels at its Shipyard and after completion  and successful  trials  in all respects deliver them  alongside  safe berth  at Visakhapatnam from which supplies could be conveniently loaded  and  the  crew embarked and the owner  having  agreed  to accept  delivery  from the Builder of the said four vessels  upon the terms and conditions hereinafter set forth.

(3)  The vessels shall have Builders hull numbers 171002-3-  4-7 respectively  and  shall be constructed, fitted and completed  in strict  accordance with the plans and specifications forming part of the contract.

(4)   The   Builders   shall  arrange   for   assignment   of   a representative/s called the Classification Surveyor to the vessel from  Lloyds  Register of Shipping throughout  the  construction. The  plans  and  drawings,  materials and  workmanship  shall  be subject  to instructions and tests by the Classification Surveyor for  which  the  facilities  shall be furnished  by  the  Builder without any charge to the owner.

(5)  The Builder shall furnish all labour, machinery,  materials, equipments,  appurtenances, spare parts and outfits required  for the construction of the vessel to make it completely ready.

(6)  The  total price of the vessel is fixed at  Rs.5,50,00,000/- per vessel which shall be called the contract price to be paid in the following manner :-

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(a) 5% of the Contract Price upon signing this Contract.

(b)  10%  of the Contract Price upon Builder  producing  adequate documentary evidence to the Owner confirming that the Builder has placed order for main engine and steel requirement.

(c) 10% of the Contract Price upon keel laying of the vessel.

(d)  15%  of  the  Contract Price  upon  Builder  submitting  its certificate  to  the  Owner  that  50% by  weight  of  the  steel structure  of the vessels hull has been erected.  (Panels placed on berth).

(e) 15% of the Contract Price upon launching of the vessel.

(f)  10%  of  the  Contract Price  upon  Builder  submitting  its certificate to the Owner that the main engine has been lowered in position on board the vessel.

(g) 15% of the Contract Price upon satisfactory completion of the dock trials.

(h) 20% of the Contract Price upon delivery of the vessels.

(7)  The contract, vide Article 3, makes provision for payment of liquidated  damages  at the prescribed scale by reference to  the period  of  delay for delayed delivery and also makes  a  similar provision  for  payment of bonus by the owner to the Builder  for advanced delivery.

(8) The owner has the right to appoint at its expense one or more superintendents  who  will  be allowed to inspect  regularly  the building of the vessel and also the machinery and all accessories and workmanship during the work in progress.

(9)  If owner may suggest any changes and alteration in the plans and drawings the same shall be carried out by the Builder subject to  mutual agreement arrived at in writing between the owner  and the Builder regarding additional debits and credits involved.

(10)  Before the vessel being delivered there shall be trial runs intimation  whereof shall be given by thirty working days advance notice  in writing and all expenses in connection with the  trial runs  of the vessel are to be borne by the Builder.  Prior to the trial runs the vessel shall be dry-docked and the bottom shall be painted  as  per the specifications.  Dry-dockeing  and  painting shall  be at the expenses of the Builder.  The required  quantity of  the fuel oil, lubricating oils and greases shall be  provided by the owner but paid for by the Builder.

(11)  Clause  5  of Article 6 provides method  of  acceptance  or rejection as under:-

If  after successfully completed technical trial test  procedures according to the Specifications no legitimate complaints are made concerning  the  completion or correct functioning of the  vessel according  to this Contract, the Drawings and Specifications, the Owner  shall  accept  the vessel and confirm  the  acceptance  in writing.

(12) If any defects become evident they shall be made good by the Builder  at  his own expense.  The owner may demand a new set  of trial  which shall be conducted by the Builder on the same  terms

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and  conditions as applicable to the first trial and paid for  by the  Builder.  After the first or second trial runs, as the  case may  be,  the  owner may accept or reject the vessel  by  serving notice  in writing within seven days and stating the reasons  for rejection.

(13)  Vide Article 7, there are the different dates appointed for the  four  vessels  by which the Builder agrees  to  deliver  the respective  vessels.  Simultaneously with the delivery the  owner has  to  fulfil  its  obligation   for  payment  as   stipulated. Thereupon  protocol  of  delivery  shall   be  signed.   All  the documents  relating  to  the vessel have to be delivered  by  the Builder  to  the owner upon the acceptance of the vessel  by  the owner.

(14)  Clause 5 of Article 7, dealing with title and risk, reads as under:-

Title  and  risk  of  the Vessel shall pass  to  the  Owner  upon acceptance  when  delivery of the Vessel is effected,  as  stated above, it being expressly understood that, until such delivery is effected, the Vessel and equipment thereof, is at the entire risk of  the  Builder,  including, but not limited to, risks  of  war, insurrection  and  seizure by Government or Authorities,  whether Indian or foreign, and whether at war or at peace.

(15) There is warranty of quality to remain valid for a period of 12  calendar  months  from  the date of actual  delivery  of  the vessel.

(16)  Vide Article 11, for a certain period of delay and  default on the part of the owner the same is liable to the compensated by payment  of  interest.  Delay and default beyond a  certain  time entitles  the  Builder  to  rescind the  contract  whereupon  the Builder  shall  refund to the owner all the  instalments  already paid  by  the owner to the Builder without any interest  thereon. In  this  Article nothing is said about the vessel which  implies that the vessel continues to remain with the Builder.

(17)        Article 15 entitled property in the vessel reads as under:-

Article 15 Property in the vessel :  Without prejudice to Article 17 hereof, the vessel as constructed and her engines, boilers and machinery and all materials from time to time intended for her or appropriated  to  the  Contract whether in  the  building  berth, fitting  out basin, workshop or elsewhere shall immediately after payment  of the first instalment on account of vessel as the work proceeds,  become  the  property of the Owner and  such  property shall  be conspicuously marked with the hull number or with other appropriate   markings  for  identification,   as  belonging   to vessel/Owner  as  its  property  and  shall  not  be  within  the ownership  or  disposition of the Builder.  Until the  vessel  is completed  and delivered the Builder, shall not use or permit  to be  used any such part/s, material/s, equipment and machinery  so allocated  to the vessel for any other vessel.  The Owner to  the extent  of payment made by him will have a right to mortgage  his interest  in  materials  mentioned above  to  Indian  Government, Lender and/or Shipping Development Fund Committee for loans taken by  Owner  and formalities as required by Lender/Owner  shall  be completed  by  the Builder.  But the Builder at all  times  shall have  a  lien  on  the above-mentioned property  fcr  any  unpaid portion   of  the  price.   All   materials  and   other   things appropriated  but not used for the purpose of this Contract shall

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after completion of the vessel become the property of Builder.

(18)        Vide Article 16, in the event of the Builder defaulting in the  construction of the vessel, the owner may at his option and after due notice :-

      take possession of the vessel in her then state and of all engines, boilers and machinery and all materials intended for her as  before mentioned and to complete the vessel, engines, boilers and  machinery.   For this purpose the Owner shall have power  to enter into any contract with other Builders or manufacturers, and to  use the Yard or Yards;  Workshops, Machinery and tools of the Builders  or  such other Builders or manufacturers with whom  the Builders  may  have  entered Sub-contracts,  and  costs  directly incurred  by  the  Owners by the exercise of any  of  the  powers vested  under  this clause shall be deducted from the  contracted price then remaining unpaid is sufficient, and if not sufficient, shall be made good by the Builders.

(19) Article 17 provides that the vessel shall be at the risk and expense  of  the  Builder until handed over and accepted  by  the owner  and  until  then  so  far the interest  of  the  owner  is concerned  the Builder shall keep her insured at its own cost for all  Builders risks under a policy or policies taken out in  the joint  names  of  the  Builder and the owner.   The  same  clause further provides :-

If,  before  delivery  to the Owner, the Vessel  (including  the engines,  boilers,  appurtenances or materials intended for  her) hull  sustain  damage not amounting to total or  constructive  or compromised total loss, this Contract shall not be invalidated in any  way.   But such damage shall be made good by the Builder  as speedily  as may be reasonably expected having regard to all  the circumstances  to the satisfaction of the Classification  Society and  the  reasonable  satisfaction  of  the  Owners   authorised representative   or   representatives.    The  Insurance   moneys recoverable  in  respect of such damage shall be applied  by  the Builder to such reinstatement of the Vessel.  The Owner shall not on  account of the said damage or repair be entitled to object to the  Vessel,  engines, boilers, material or equipment or to  make any claim for any alleged consequential loss or depreciation.

If due to any cause the Vessel before delivery to the Owner shall be  destroyed or lost or so damaged as to become or to be  deemed to  become  at  any  time a total or  constructive,  arranged  or compromised  total loss the Builder shall refund to the Owner the instalments  of the Contract Price if any;  plus interest at  the rate  of 5 per cent per annum from the date of payment of  monies by  the  Owner  to  the  Builder out of  monies  payable  by  the Underwriters  under the insurance effected with them in terms  of this Contract.  Every amount of the instalment, shall be endorsed on  the policy/policies and such endorsement shall be  sufficient authority  to the Underwriters, to pay to the Owner the amount of such  instalments plus interest.  On payment of such  instalments by the Underwriters to the Owner, the Owner shall have no further right or claim on the Builder in respect of this Contract and the Contract  in respect of the particular Vessel or Vessels shall be deemed  to  have  ended in all respects.  The  remaining  amounts received from the Underwriters shall be retained by the Builder.

The  decision  of the Underwriters as to whether the Vessel is  a total  or constructive, arranged or compromised total loss  shall be binding upon the parties to this Agreement.

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Even if the recovery of the claim for loss, damage or destruction of  the  ship  cannot  be  made from the  insurers  in  terms  of insurance  policies  either because the risks are not insured  or for  any reason whatsoever the Builder shall refund to the  Owner the  amounts  of  instalments  paid by the  Owner  together  with interest  at  the rate of 5 per cent per annum form the dates  of payments of monies by the Owner to the Builder.

We will shortly revert back to analysing the above-said terms and conditions  of  the contract and in between try to find  out  the tests  which  would  enable determination of the  nature  of  the transactions  covered by such contracts.  The distinction between contract  of  sale and contract for work and labour has  been  so stated  in  Halsburys Laws of England (Fourth  Edition,  Vol.41, para 603) :-

Contract of sale distinguished from contract for work and labour. 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 the main object of which is  the transfer  of the property in, and the delivery of the  possession of,  a  chattel as such to the buyer.  Where the main  object  of work  undertaken by the payee of the price is not the transfer of a  chattel as such, the contract is one for work and labour.  The test  is  whether  or  not the work and labour  bestowed  end  in anything  that can properly become the subject of sale.   Neither the  ownership  of the materials, nor the value of the skill  and labour   as  compared  with  the   value  of  the  materials,  is conclusive, although such matters may be taken into consideration in  determining in the circumstances of a particular case whether the  contract is in substance one for work and labour or one  for the sale of a chattel.

In  Benjamins Sale of Goods (Fourth Edition) it is stated that it is  sometimes extremely difficult to decide whether a  particular agreement  is  more popularly described as a contract of sale  of goods,  or a contract for the performance of work or services  to which  the supply of materials or some other goods is incidental. The  learned  author  sums  up the test for  distinction  in  the following words (vide para 1.042) :-

Where  the  parties have not settled the question by the form  of their  contract, the decision whether the bargain is one for  the performance  of work or the sale of a chattel must be made by the court.   It  is  now well established that the court does  so  by having  regard to the substance of the contract - a test  which assumes  that  every  contract must be in substance  one  or  the other.   This  is  a legitimate inquiry where the supply  of  the goods  and  the  performance of the work are, to some  extent  at least,  separate elements in the bargain;  but it breaks down  in the  case where all the work goes into the making of the goods to be  supplied,  so that the two are inseparable.  This  point  has unfortunately  not  been  appreciated.   In the  former  type  of contract,  the  determination of the substance is a  matter  of degree, involving an assessment of the relative importance of the two  elements;   but  in the latter type the designation  of  the contract  as  one  of  work or sale must depend  upon  either  an arbitrary formula or a superficial impression.

The  same  learned  author  discusses   the  following  types  of contracts :-

1.  Chattel to be affixed to land or another chattel.  Where work is  to  be  done  on the land of the employer  or  on  a  chattel belonging to him, which involves the use or affixing of materials

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belonging to the person employed, the contract will ordinarily be one for work and materials, the property in the latter passing to the employer by accession and not under any contract of sale.

2.   Materials supplied wholly or principally by employer.  Where an  article  is  to be manufactured, and all  the  materials  are supplied  by  the person for whom the work is to be done,  it  is obvious  that  there  can be no sale unless there is  a  specific transfer  of  the  materials  followed by  a  repurchase  of  the product.   Where  each  party provides some of the  materials  or components,  the task of the court is to determine which of  them has supplied the principal materials;  it then follows that the materials supplied by the other vest by accession in the owner of the principal materials.

3.   Services  independent of creation or furnishing of  product. Where work or skill is involved over and above what goes into the making  of the goods delivered, it is possible and often  correct to view the contract as substantially one for work or services. A  doctor or veterinary surgeon who supplies medicines does so as an  incident  to  a  contract for  professional  services,  which include  diagnosis  and  advice over and above any  work  in  the making up of the medicine.  In contrast, a chemist who makes up a prescription  sells  it, since his work and skill  goes  entirely into the product- it is simply a component reflected in the price of the goods.

4.   Work  wholly  a  component of article  produced.   The  most difficult type of contract remains to be discussed.  In this case the whole of the work or skill involved goes into the creation of the  product which is ultimately delivered in performance of  the contract:   for example, a contract to make a suit of clothing or to build a ship.  The work or skill is here a component - perhaps the  most  important - of the thing produced, but is a  component and  nothing  more.  It is not logical to ask whether in  such  a case  the  parties contracted primarily or substantially for  the performance  of  work  or for the transfer of  a  chattel:   they contracted  for both.  In Clay v.  Yates Pollock C.B.   suggested that  the  court  should  ask  whether it was  the  work  or  the materials  supplied  that was of the essence of the  contract,  a question to be determined by comparing the importance, though not perhaps necessarily the value, of the two items.

Pollock  &  Mulla on Sale of Goods Act (1990, Fifth  Edition,  at page 53) lay down the test for distinction as under:-

Generally a contract to make a chattel and deliver it, when made, is a contract of sale, but not always.  The test would seem to be whether  the  thing to be delivered has any individual  existence before  delivery  as  the sole property of the party  who  is  to deliver it.

The learned authors have thereafter noted by way of illustrations several decided cases to notice how the principle has played with several  courts  in  its actual application and  then  drawn  the following deduction from the decided cases:-

It  will  be observed that in the cases where there is  no  sale there is never a moment when the thing produced is as a whole the makers absolute property, notwithstanding that part, or even the whole,  of  the materials may have been his property, whereas  in the  other case he might, if he found it possible and profitable, and  if not restrained by patent, copyright or any other  similar branch  of laws, make in duplicate or in greater numbers chattels

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of  the  kind ordered, appropriate one at his will to fulfil  the special contract, and sell the others to other persons (s).

A  number of authorities were cited at the Bar during the  course of  hearing.   It would suffice for our purpose to notice only  a few of them, namely, Patnaik and Company Vs.  The State of Orissa -  1965  (16)  STC  364,  The   State  of  Gujarat  Vs.   Kailash Engineering  Co.   (Pvt.)  Ltd.   - 1967 (19) STC  13,  State  of Gujarat  (Commissioner of Sales Tax, Ahmedabad) Vs.  Variety Body Builders  -  1976 (38) STC 176, Union of India Vs.   The  Central India  Machinery Manufacturing Co.Ltd.  and Ors.  - 1977 (40) STC 246,  Sentinel Rolling Shutters & Engineering Company Pvt.   Ltd. Vs.  The Commissioner of Sales Tax - 1978 (42) STC 409, Hindustan

Aeronautics Limited Vs.  The State of Orissa - 1984 (55) STC 327. The principles deducible from the several decided cases may be summed up as under:-

1.   It  is  difficult to lay down any rule  or  inflexible  rule applicable alike to all transactions so as to distinguish between a contract for sale and a contract for work and labour.

2.   Transfer of property of goods for a price is the linchpin of the  definition of sale.  Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of  the  parties found out from an overview of the terms  of  the contract, the circumstances of the transactions and the custom of the  trade.  It is the substance of the contract document/s,  and not  merely the form, which has to be looked into.  The Court may form  an  opinion that the contract is one whose main  object  is transfer  of  property  in a chattel as a chattel to  the  buyer, though some work may be required to be done under the contract as ancillary  or incidental to the sale, then it is a sale.  If  the primary  object  of the contract is the carrying out of  work  by bestowal  of  labour and services and materials are  incidentally used  in execution of such work then the contract is one for work and labour.

3.   If  the thing to be delivered has any  individual  existence before  the delivery as the sole property of the party who is  to deliver  it, then it is a sale.  If A may transfer property for a price  in  a thing in which B had no previous property  then  the contract  is  a contract for sale.  On the other hand  where  the main  object of work undertaken by the payee of the price is  not the  transfer  of a chattel qua chattel, the contract is one  for work and labour.

(4)  The  bulk  of material used in construction belongs  to  the manufacturer  who sells the end product for a price, then it is a strong  pointer to a conclusion that the contract is in substance one  for  the  sale  of goods and not one for  work  and  labour. However,  the  test is not decisive.  It is not the bulk  of  the material  alone  but the relative importance of the material  qua the work, skill and labour of the payee which have to be weighed. If  the  major  component  of the end  product  is  the  material consumed  in producing the chattel to be delivered and the  skill and  labour are employed for converting the main components  into the end products, the skill and labour are only incidentally used and  hence  the delivery of the end product by the seller to  the buyer  would  constitute a sale.  On the other hand if  the  main object  of  the contract is to avail the skill and labour of  the seller  though  some material or components may  be  incidentally used  during  the process of the end product being  brought  into

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existence  by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour.

There may be three categories of contracts:  (i) The contract may be  for  work  to  be done for remuneration  and  for  supply  of materials used in the execution of the work for a price;  (ii) It may  be a contract for work in which the use of the materials  is accessory  or incidental to the execution of the work;  and (iii) It  may  be  a contract for supply of goods where  some  work  is required  to  be  done  as incidental to  the  sale.   The  first contract  is a composite contract consisting of two contracts one of  which is for the sale of goods and the other is for work  and labour.  The second is clearly a contract for work and labour not involving  sale of goods.  The third is a contract for sale where the  goods  are  sold  as chattels and the work  done  is  merely incidental to the sale.

Two   simple   illustrations   may  be   given   to   demonstrate applicability of the above-said principles.  A customer goes to a tailoring  shop  accompanied  by a suit length in his  hands  and entrusts  the same to the tailor for stitching a suit for him  as per  his  measurements.   The tailor by devoting  his  skill  and labour  stitches the suit and delivers the same to the  customer. In  this process the tailor utilises lining, buttons and  threads of his own.  The transaction would remain a contract for work and labour.   The  stitched  suit  delivered by  the  tailor  to  the customer  is not a sale.  It would not make any difference if the customer  would have selected a piece of cloth of his own  choice for  a  price  to be paid or paid and having purchased  the  suit length  left  it with the tailor for being stitched into a  suit. The  property  in the suit length had passed to the customer  and physical possession over the suit length by the tailor thereafter was  merely  that  of a bailee entrusted with  the  suit  length. However,  if  the tailor promises to stitch and deliver the  suit for  a  price agreed upon, investing his own cloth and  stitching materials  such as lining, buttons and threads, and utilising his own  skill and labour then though the customer might have  chosen the  piece  of  cloth as per his own liking as  to  the  texture, colour  and qualilty and given his own instructions in the matter of  style,  the transaction would remain a contract for  sale  of goods, that is, a stitched suit piece in as much as the object of the  contract was to transfer property in the stitched suit piece alongwith delivery of the suit by the tailor to the customer, all investments,  whether  of material or of skill and labour  having been  made  by  the tailor incidental to the fulfillment  of  the contract.   Yet  another  illustration is  provided  by  Benjamin (ibid,  para 1.046).  A doctor or veterinary surgeon who supplies medicines  does so as an incident to a contract for  professional services,  which include diagnosis and advice over and above  any work  in  the making up of the medicine.  In contrast, a  chemist who  makes  up a prescription sells it, since his work and  skill goes  entirely  into  the  product - it  is  simply  a  component reflected in the price of the goods.  Benjamin concludes - Where work  or  skill  is involved over and above what  goes  into  the making  of the goods delivered, it is possible and often  correct to  view  the  contract  as   substantially  one  for  work  or services.  In  our opinion a reverse case would be one of  sale. Benjamin  gives  yet another illustration.  A meal supplied to  a customer  in  a  restaurant is a sale of goods,  the  element  of service  being subsidiary;  but a meal supplied to a lodger or  a resident hotel guest is part of a contract for services.

Patnaik  &  Co.s case (supra) is a Constitution Bench  decision. The  appellant  entered into a contract with the State of  Orissa for the construction of bus bodies on the chassis supplied by the

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State.   On  an interpretation of the terms of the contract  this Court  by a majority of 4:1 concluded that the bus body built  by the  appellant passed to the Government as moveable.  It did  not make  any  difference  that  the   process  of  manufacture   was supervised  by purchaser.  The contract was held to be a contract for sale of goods.

In  Sentinel  Rolling  Shutters  &  Engineering  Companys   case (supra),   the  assessee  carried  on  business   as   engineers, contractors,  manufacturers  and fabricators.  It entered into  a contract  for  fabrication, supply, erection and installation  of two rolling shutters in two sheds belonging to the customer for a price  which  was  inclusive of charges for erection  at  site. Once  the  goods were delivered, rejection claim were not  to  be entertained.   All  masonry  works required before  and/or  after erection was to be carried out by the assessee.  Payments were to be  made  on overall measurements to be checked by  the  customer after  installation.   This  Court  held that  the  erection  and installation of rolling shutters was as much the fundamental part of  the contract as the fabrication and supply.  The contract was held  to be a contract for work and labour and not a contract for sale.

In  CIMMCOs  case  (supra)  this Court emphasised  the  need  of looking  into  the  substance and not merely the  format  of  the contract.   Reading  the  terms and conditions  of  the  contract before  it  as a whole this Court concluded that the property  in the  materials  procured or purchased by the company against  90% bill of which advance was taken from the railways did not, before their  use  in  the  construction  of the  wagons,  pass  to  the railways.  With an exception of a relatively small portion of the components  supplied by the railways, the entire wagon  including the  material at the time of its completion and delivery was  the property  of the company.  It was held that the wagons were  sold for  a  price  and the contract was a contract for  the  sale  of wagons and not a work contract.

In  Kailash  Engineering  Co.   (Pvt.) Ltd.s  case  (supra)  and Variety  Body  Builders case (supra), bodies were built for  the railways  on  the  underframes supplied by  the  railways.   Upon analysing  the  terms and conditions of the contract  this  Court concluded  that  the  assessee  was not the owner  of  the  ready coaches  and  the property in the bodies vested in  the  railways even  during  the  process  of  construction  and  therefore  the transaction was a works contract not involving any sale.

In  Hindustan  Aeronautics Ltd.s case, the assessee HAL  was  to manufacture  MIG engines on behalf of the Government of India for which  the latter had obtained a licence from the U.S.S.R..   For the  imports made from U.S.S.R., all payments under the agreement were  made  by  HAL on behalf of the Government  of  India.   The materials  imported  by HAL, stocks and stores,  work-in-progress etc., were the property of the Air Force.  The bills drawn by HAL against  the  Government  of India indicated a  break-up  of  the material  cost, labour cost and sundry direct charges and further profit at a percentage.  This Court held that at no point of time before  the  delivery  of MIG engines HAL was the  owner  of  the property,  either  in  the equipment or in the spares or  in  the aircrafts  and as such there could not have been any transfer  of property  from  HAL to the Government of India.  The  transaction was held to be a works contract.

Reverting  back to the facts of the contract under  consideration before  us,  a  few  prominent features of  the  transaction  are clearly  deducible  from  the several terms  and  conditions  and

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recitals  of  the  contract.   The  contract is  for  sale  of  a completely  manufactured  ship to be delivered  after  successful trials  in all respects and to the satisfaction of the buyer.  It is  a  contract for sale of made to order goods, that is,  ship for  an ascertained price.  Although the plans and specifications for  the ship are to be provided by the customer and the work has to  progress under the supervision of the classification surveyor and  representative  of  the buyer, but the  components  used  in building  ship, all belong to the appellant The price fixed is of the  vessel  completely  built up although the payment  is  in  a phased  manner  or,  in  other   words,  at  certain  percentages commensurate  with the progress of the work.  The payment of  15% of the price is to be made on satisfactory completion of the dock trials,  that  is  when the vessel is ready to be  delivered  and strictly  speaking  excepting  the delivery  nothing  substantial remains to be done.  20% of the price is to be paid upon delivery of  the vessel.  Thus 65% of the price paid before the trials  is intended to finance the builder and to share a part of the burden involved  in the investments made by the builder towards building the  ship.   It  is a sort of an advance payment of  price.   The title  and  risk  clause quoted as sub-para 14 above is  to  be found  in  6 out of 8 contracts in question.  So far as  these  6 contracts  are  concerned  they  leave no manner  of  doubt  that property  in  goods passes from seller to the buyer only  on  the ship  having been built fully and delivered to the buyer.  In all the contracts the ultimate conclusion would remain the same.  The ship at the time of delivery has to be a completely built up ship and  also  seaworthy  whereupon  only the owner  may  accept  the delivery.   A full reading of the contract shows that the chattel comes  into  existence  as a chattel in a  deliverable  state  by investment of components and labour by the seller and property in chattel passes to the buyer on delivery of chattel being accepted by the buyer.  Article 15 apparently speaks of property in vessel passing  to  the  buyer with the payment of first  instalment  of price  but  we  are  not to be guided by the face  value  of  the language  employed;   we  have  to  ascertain  intention  of  the parties.   The  property  in machines,  equipments,  engine  etc. purchased  by the seller is not agreed upon to pass to the buyer. The delivery of the ship must be preceded by trial run or runs to the  satisfaction  of the owner.  All the  machinery,  materials, equipment, appurtenances, spare-parts and outfit required for the construction of the vessel are to be purchased by the builder out of its own funds.  Neither any of the said things nor the hull is provided  by the owner and in none of these the property vests in the  owner.   It is not a case where the builder is utilising  in building  the ship, the machinery, equipment, spares and material etc.   belonging to the owner, whosoever might have paid for  the same.   The  builder has thereafter to exert and invest  its  own skill  and labour to build the ship.  Not only the owner does not supply  or  make available any of the said things or the hull  of the  ship the owner does not also pay for any of the said  things or  the hull separately.  All the things so made available by the builder  are  fastened to the hull belonging to the  builder  and become part of it so as to make a vessel.  What the owner pays to the  builder  in  instalments  and in a  phased  manner  are  all payments at the specified percentage which go towards the payment of the contract price i.e.  the price appointed for the vessel as a  whole.  65 per cent payment of the price is up to the stage of the  main  engine  having been lowered in position on  board  the vessel  i.e.   the stage by which the building of the  vessel  is complete.   15  per  cent payment is to be done  on  satisfactory completion  of  the  trial and 20 per cent upon delivery  of  the vessel.  Giving maximum benefit in the matter of construction and interpretation  of this clause in favour of the appellant it  can be  said  that it is the property in vessel which starts  passing

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gradually  to  the buyer proportionately with the  percentage  of payments  made  and  passes  fully   with  the  payment  of  last instalment on delivery of vessel having been accepted.

In  Reid  v.  Macbeth [1904] A.C.  223 where a contract  for  the construction  of  a  ship provided that the vessel,  as  she  is constructed  and all materials from time to time intended for her [wherever situated] shall immediately as the same proceeds become the  property  of the purchasers, the House of Lords held  as  a matter  of construction that various iron and steel plates  lying in  railway  stations,  which  had been  passed  by  the  Lloyds surveryor  and which had been marked with their proposed position in  the  ship, were still the property of the seller as they  had not  yet  become  part of the ships structure.   (see  Benjamin, ibid, para 5.093).

The marking of hull number on machines, equipments etc.  achieves the  object of the same being kept available for use in the  ship concerned  so  as not to hamper the progress of work for want  of

material  or  the  available material having  been  utilised  for construction  of some other ship.  Such of the things as are left unused  automatically revert back to the seller.  In fact, except on  paper,  they were not at all appropriated by the buyer.   The payments made by buyer are not towards any components but towards the  vessel  which  is yet to come in existence.   The  built  up vessel, if the contract may fail, is available to be sold to some one  else  by the seller.  The comparative importance is more  of the  hull,  machine, equipments, engine, etc.  then that  of  the labour.   Present one is not a case where the materials used  are insignificant  or secondary or have been used just incidental  to the skill and labour bestowed.

In  the event of the owner committing a default in honouring  the schedule  of  payment  and  the belated  payment  accompanied  by payment  of interest not wiping out the default of the owner, the vessel continues with the builder and the builder may rescind the contract.   All  that the builder is required to do is to  refund the  instalments already paid by the owner to the builder without any interest thereon.

Clauses  15, 16 and 17 of the contract confuse the issue to  some extent  because  of  the phraseology employed in  drafting  these clauses.   Article 15 provides the property in the vessel vesting in  the  owner  simultaneously  with the  payment  of  the  first instalment  and  the  ownership  or disposition  of  the  builder ceasing  therewith.  The owner also becomes entitled to  mortgage his  interest in the vessel to the extent of the payments made by him.   However, the same clause goes on to say that such  passing of the property is subject to Article 17 of the contract and also subject  to the lien of the builder for the unpaid portion of the price.   If  the builder may commit a default in  fulfilling  his obligations  under the contract the owner may take possession  of the  vessel  in the State in which she is and have the  remaining building  of  the  vessel completed elsewhere out  of  the  price remaining  unpaid and the deficiency, if any, shall be made  good by  the  builder.  Vide Article 17, the insurance cover is to  be obtained  by the builder, the policy or policies being taken  out in  the  joint  names  of the builder and  the  owner.   What  is pertinent  to note is that the loss or damage, if any, occasioned to  the vessel before delivery to the owner is to be suffered  by the  builder which would not have been so if the property in  the vessel  had  already  stood  passed  to the  owner.   It  is  the obligation  of  the builder to make the loss or destruction  good for which purpose the builder may reimburse itself by claim under

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the  policy.  In the event of destruction of the vessel the  loss though  responsibility  of  the builder may be  partly  or  fully satisfied to the owner by refunding the amount of the instalments of the contract price plus interest at the rate of 5 per cent per annum  for  which  purpose  the builder  has  to  make  necessary endorsements  on  the policy and the owner may  directly  receive payments  from the insurer.  This clause also shows that interest of  the  owner  is only to the extent of the  percentage  of  the contract  price paid by the owner to the builder.  Else the  loss has to be borne by the builder.  The High Court has observed, and in  our  opinion rightly, that Article 15 is a piece of  artistic drafting.   Though  it is said that the things mentioned  therein become  the  property of the owner simultaneously with the  first payment  of  the  instalment,  other   clauses  of  the  contract generally,  and  Articles 16 and 17 immediately, go to show  that for  all practical purposes the property in the vessel, continues to  remain  with the builder and passes to the owner only (i)  on satisfactory  completion of the work, (ii) the vessel coming into existence  in a deliverable state, and (iii) satisfaction of  the owner  as to the vessel being seaworthy also having been built up to the satisfaction of the owner in accordance with the terms and conditions  of  the  contract.   It  is not  the  meaning  of  an individual  recital  or  the inference flowing from any  term  or condition  of  the contract read in isolation but an overview  of the  contract  wherefrom  the nature of the  transaction  covered thereby has to be determined.

The recitals of the contract may also be read in the light of the few  provisions  of Chapter III of The Sale of Goods Act.   In  a contract  for  the  sale  of specific or  ascertained  goods  the property  in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.  Sections 20 to 24 contain rules for ascertaining the intention of the parties in this regard.  When something remains to be done on the date of the  contract to bring the specific goods in a deliverable  state the  property does not pass until such thing is done and  brought to  the notice of the buyer.  The risk in such case remains  with the  seller so long as the property therein is not transferred to the buyer though the delivery may be delayed.

For all the foregoing reasons we are of the opinion that the High Court  and  the Tribunal have not erred in taking the view  which they  have  done.  The contracts in question involve sale of  the respective vessels within the meaning of clause (n) of the Andhra Pradesh  General  Sales  Tax Act, 1957 and are not  merely  works contract as defined in clause (t) thereof.  The transactions have rightly been held exigible to sales tax.

The  appeals  are  devoid of merit.  They are held liable  to  be dismissed and are dismissed accordingly.  In view of purely legal controversy  arising  for decision it is directed that the  costs shall be borne as incurred.