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PETITIONER: PATNAIK & COMPANY

       Vs.

RESPONDENT: STATE OF ORISSA

DATE OF JUDGMENT: 19/01/1965

BENCH: SHAH, J.C. BENCH: SHAH, J.C. GAJENDRAGADKAR, P.B. (CJ) HIDAYATULLAH, M. SIKRI, S.M. BACHAWAT, R.S.

CITATION:  1965 AIR 1655            1965 SCR  (2) 782  CITATOR INFO :  D          1967 SC 547  (6)  RF         1969 SC1245  (11)  RF         1972 SC 744  (11)  RF         1972 SC1131  (10)  F          1974 SC2309  (9,10,11,12,13,17)  RF         1976 SC2108  (45)  R          1977 SC1537  (37)  RF         1989 SC 962  (24)

ACT: Orissa  Sales Tax Act, (14 of 1947)--Contract to  build  bus bodies  on chassis supplied by purchaser-If a  contract  for sale or for work.

HEADNOTE: The  appellant  claimed to deduct from its  gross  turnover, amounts received from the State Government for building  bus bodies,  on the chassis supplied by the Government  under  a contract. Under  the  contract, the bus bodies were to be put  on  the chassis  and the body consisted not only of things  actually fixed  on the chassis but movable things like seat  cushions and  other  things  which  though  fixed  could  be   easily detached,  like  roof-lamps etc.  The chassis with  the  bus body was to be delivered at the destination named within the stipulated  time.  If some work was not satisfactorily  done the Government was entitled to seize the unfinished vehicle, get  the  work  done  by  another  agency  and  recover  the difference in cost from the appellant.  While the  appellant was required to protect the chassis by insurance, there  was no  provision  regarding  insurance  of  bus  bodies.    The contract  also provided that the process of manufacture  was to  be supervised on behalf of the Government, and that  the work  should be done with due deligence.  There was  also  a provision for payment of damages until the defects  detected on inspection were rectified. The  Sales Tax Officer refused to allow the  deduction.   On appeal, the claim was allowed by the Collector, whose  order was  affirmed  by the Sales Tax Tribunal, on appeal  by  the

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Department.  On a reference to the High Court, the question, as to whether the amounts were not chargeable to sales  tax, was answered against the appellant. In  the appeal to the Supreme Court, on the question  as  to whether  the contract was one for execution of work  or  for performance  of  service, or whether it was a  contract  for sale of goods. HELD  :  (Per Gajendragadkar C.J., Hidayatullah,  Sikri  and Bachawat,  JJ) : The contract as a whole was a contract  for the sale of goods and the amounts were therefore  chargeable to sales tax. [792 G] The  answer to the question depended on the construction  of the agreement regarding the building of bus bodies.  On  the terms  of the contract the property in the bus body did  not pass  on its being placed or constructed on the chassis  but when the whole vehicle including the bus body was delivered. The provision regarding insurance showed that till  delivery was made, the bus bodies remained the property of the appel- lant  and  unlike  the  case of a  contract  a  construct  a building, where the property does not pass in the  materials as movable the bus body never lost its character as  movable property  and  the property in it passed  to  Government  as movable  Property.   It  is not the  law,  that  whenever  a contract  provides  for the fixing of a chattel  to  another chattel  there is no sale of goods; and, a contract for  the sale  of  goods to be manufactured does not cease  to  be  a contract  for sale of goods, merely because the  process  of manufacture is supervised by the purchaser. [785 C-D; 788 F; 790 A-B; 791 A, D; 792 A] 783 Gannon  Dunkerley’s Case, [1959] S. C.R. 379 and Carl  Still v. State of Bihar, [1962] 2 S.C.R. 81, distinguished. Anglo-Egyptian Navigation Co. v. Rennie, (1875) L.R. 10 C.P. 271, explained. Per  Shah, J. (dissenting) : The contract was one  for  work and  not a contract for sale, because, the contract was  not that  the parties agreed that the "bus body" constructed  by the  appellants should be sold to the State.   The  contract was  one  in which the appellants agreed to  construct  "bus bodies" on the chassis supplied to them as bailers, and such a  contract being one for work, the consideration  paid  was not taxable under the Sales Tax Act. The  primary  difference  between a  contract  for  work  or service  and  a contract for sale of goods is  that  in  the former there is in the person. performing work or  rendering service  no  property  in  the thing  produced  as  a  whole notwithstanding  that  a  part  or even  the  whole  of  the materials  used by him may have been his property.   In  the case  of a contract for sale the thing produced as  a  whole has  individual existence as the sole property of the  party who  produced  it,  at some time before  delivery,  and  the property  therein  passes only under the  contract  relating thereto  to  the other party for price.   Mere  transfer  of property  in goods used in the performance of a contract  is not  sufficient  :  to constitute a sale there  must  be  an agreement  express or implied relating to sale of goods  and completion of the agreement by passing of title in the  very goods contracted to be sold.  Ultimately the true effect  of an  accretion made pursuant to a contract has to be  judged, not  by  any  artificial  rule that  the  accretion  may  be presumed to have become by virtue of affixing to a  chattel, part of that chattel, but from the intention of the  parties to the contract. [793 D; 794 A-C; 797 H; 798 A, C] In  the instant case, imposition of the obligation to  carry out  the  work  with due diligence,  the  liability  to  pay

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damages  and the right of the Government  representative  to supervise  the  production and to take away  the  unfinished vehicles and get them completed by some other agency are all indicative of the contract being one for work. [795 D-E,  G; 796 D-E]

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  179  to, 181 of 1964. Appeals  by special leave from the judgment and order  dated August  21, 1962, of the Orissa High Court in O.J.C. No.  28 of 1961. A. V.  Viswanatha Sastri and R. Gopalakrishhnan,  for  the appellants (in all the appeals). M.C.  Setalvad, R. Ganapathy Iyer and R. N. Sachthey  for the respondent (in all the appeals). The Judgment of P. B. GAJENDRAGADKAR C.J., M.  HIDAYATULLAH, S. M. SIKRI and R. S. BACHAWAT JJ. was delivered by SIKRI J. SHAH J. delivered a dissenting Opinion. Sikri  J. These three appeals by special leave are  directed against  the  judgment  of the Orissa High  Court  in  three references  made by the Orissa Sales Tax Tribunal  under  S. 24(1) of the 784 Orissa  Sales Tax Act, 1947, in respect of  assessments  for three quarters ending June 30, 1957, September 30, 1957  and December  31,  1957.   All  these  appeals  raise  a  common question of law and it would be sufficient if facts relating to the assessment for the quarter ending June 30, 1957 alone are given. For  the  quarter ending June 30, 1957, the  appellant,  M/s Patnaik  & Co., claimed to deduct from their gross  turnover receipts  totalling  Rs. 11,268.45 received from  the  State Government  of  Orissa for building bodies  on  the  chassis supplied  by the Government, during the quarter.  The  Sales Tax Officer refused to deduct this amount.  On appeal,  this claim was allowed by the Collector of Sales Tax,  purporting to  follow  an  earlier decision of  the  Orissa  Sales  Tax Tribunal.  The Department appealed against this order to the Sales  Tax Tribunal which, by its order dated June 2,  1961, affirmed  the  order  of the Collector.   The  Tribunal,  in brief,  held that it was impossible to spell out a  distinct and  separate contract to sell any materials or chattels  to the  customers in the work of construction of the bodies  on the  chassis.   On the application of  the  Department,  the Sales Tax Tribunal referred to the High Court the  following question :               "Whether in the facts and circumstances of the               case,  the Tribunal is right in  holding  that               the amounts received by the opposite party  on               the construction of bodies on chassis supplied               by  its customers under written contracts  are               not chargeable to the Orissa Sales Tax." The  High Court, in a short order, flowing its  decision  in The  Commissioner  of Sales Tax Orissa v. Patnaik  &  Co.(1) answered the question in the affirmative, i.e., against  the appellant.   In  that case, the High Court had  construed  a similar  contract and had come to the conclusion  that  "the contract, therefore, as contemplated between the parties, is that the assessee was to deliver a specific goods, namely, a finished bus body built under the specifications  prescribed by  the Government for a fixed price. It cannot,  therefore, escape  from the position that the transaction was  one  for

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sale  of  some  goods within the meaning  of  the  Act."  It further  observed that "what exactly is  the  distinguishing feature of a sale from a works contract has been elaborately discussed in a case decided by this very Bench in S.J.C. No. 7  of 1959 M/s. Thakur Das Mulchand v. The  Commissioner  of Sales Tax) on 6th July 1961 where it was held that a  normal contract to make a chattel and deliver it when made includes a contract of sale, but (1)  S.J.C. No. 77 of 1959-Judgment delivered in the  Orissa High Court on July 26,1961.                    785 it  may  not be always so.  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".   The  High Court distinguished  Gannon  Dunkerley’s(1) case on the ground that as far as the terms of the  contract between   the   parties   were   concerned,   they   clearly contemplated  a  case of sale of goods liable to  sales  tax under the Act, and it was not a works contract, as contended by  the  party.   As  stated  above,  the  appellant  having obtained special leave, the appeal is now before us. Mr.   Viswanatha  Sastri,  the  learned  counsel   for   the appellant,  has  addressed an elaborate argument to  us  and contended that the present case is not distinguishable  from the  decision of this Court in Gannon  Dunkerley’s(1)  case. He  has  cited  a number of authorities in  support  of  his contention, but it will not be necessary to review all these authorities  as  we  feel that the answer  to  the  question refer-red  must depend on the construction of the  agreement regarding the building of bus bodies.  As laid down by  this Court  in  Chandra Bhan Gossain v. The State  of  Orissa(2), "was it the intention of the parties in making the  contract that  a  chattel  should be produced and  transferred  as  a chattel for a consideration." The  agreement was entered into on April 20,  1957,  between the  appellant, called in the agreement "the Body  Builders" and  the  State  of  Orissa.  The  State  had  accepted  the quotations and decided to place orders for construction of 4 (four) numbers of Bus Bodies on the Chassis namely 4  (four) numbers  of  190"  Wheel  Base  F.F.C.  Dodge/Fargo  Chassis supplied by the Governor.  The relevant clauses are as below :               "1.  (a)  That  the  Body  Builders  shall  be               responsible  for  the  safe  custody  of   the               chassis as described in Schedule ’A’ from  the               date  of the receipt of the Chassis  from  the               Governor (Supplier) till their delivery to the               Governor  and  shall  insure  their   premises               against fire, theft, damage and riot at  their               cost,  so  that these chassis are  covered  by               insurance against such risks.               (b)That  while the works are in  course  of               construction  and  until the Bus  with  Bodies               built are taken over by the Governor, the Body               Builder  shall be responsible for the  chassis               and materials supplied to them and shall inde-               mnify  the Governor for any loss or damage  to               the said material.               (1)   [1959] S.C.R. 379.               (2) 14 S.T.C. 766.                786               (c)The completed Bus Bodies covered by this               contract shall be delivered to the Governor on               or  before the 28th May 1957 for two and  20th               June 1957 for the remaining two buses.

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             2.That  the passenger Bus Bodies shall  be               constructed   on  the  chassis  in  the   most               substantial  and workmanlike manner,  both  as               regards  materials  and  otherwise  in   every               respect   in   strict  accordance   with   the               specifications mentioned in Schedule ’B’.               3.That   if   any   additional   work   is               considered   necessary   by   the    Transport               Controller,  Orissa  (hereinafter  called  the               ’Controller")  for which no rate is  specified               in   the  contract,  the  Body  Builder   will               immediately inform the Controller, in  writing               the rate which they intend to charge for  such               additional  work.  If the Controller does  not               agree  to the rates the Body Builder will  not               be  under  any obligation to  carry  out  such               additional work.               Provided  that  the Body Builder will  not  be               entitled  to  any payment for  any  additional               work  unless  they have received an  order  in               writing from the Controller to that effect.               4.That  the  Body  Builder  will  give   a               guarantee regarding the durability of the Body               for  a  period of two years from the  date  of               delivery   to   the  Governor   and   if   any               imperfection  or  defective  material   became               apparent within the guaranteed period the Body               Builder shall rectify the defects at their own               expenses.               5.That  the time allowed for carrying  out               the  work as entered in the contract shall  be               strictly  observed  by the  Body  Builder  and               shall  be reckoned from the date of supply  of               Chassis  to them.  The work  shall  throughout               the  stipulated  period  of  the  contract  be               carried  on with all due diligence time  being               deemed  to be of the essence of  the  contract               and the Body Builder shall be liable to pay to               the  Governor as liquidated damages an  amount               equal  to 50 % on the amount of the  estimated               cost  of  the  whole  work  as  shown  in  the               contract  for every day that the work  remains               unfinished  after  the  date  fixed  and   the               Governor may deduct such sum or sums from  any               money  due  to the Body Builders  under  these               presents or may recover it otherwise.               7 8 7               Provided that the work will not be  considered               as  finished  until the  defects  detected  on               inspection  as  provided  by  clause  6,   are               rectified,   to   the  satisfaction   of   the               Controller.               6.That  all  works under or in  course  of               execution  or  executed in pursuance  of  this               contract  shall  at  all  times  be  open   to               inspection  by  the  Controller  or   officers               authorised  by  him in this  behalf  and  they               shall  have  the right to stop  by  a  written               order  any  work which in the opinion  of  the               Controller,  is deemed to have  been  executed               with  unsound,  imperfect,  unskilful  or  bad               workmanship  or  with  materials  of  inferior               quality.  The Body Builder on receipt of  such               written order, shall dismantle or replace such               defective work or material at their own  cost.

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             In  the  event of failure to comply  with  the               order  within 7 days from the date of  receipt               of the order, the Controller shall be free  to               get the balance of the work done by any  other               agency and recover the difference in cost from               the Body Builder.               Provided that for this purpose the  Controller               shall be at liberty to enter upon the premises               of  the Body Builder and take delivery of  the               unfinished bodies.               7.That the Body Builder shall be paid  50%               of  the cost of body building at the  time  of               delivery and the rest one month thereafter.               8.That  the Body Builder will deliver  the               vehicles   complete   with   bodies   at   the               destination or the destinations to be named by               the Controller at their own cost and risk  and               shall be entitled to recover from the Governor               the actual cost of transport by road or  rail,               transit  insurance  charges if any  and  other               necessary incidental charges." Schedule   ’B’   gives  the   various   specifications   for construction  of  composite  bus bodies.  Clause  9  of  the Schedule  provides the specifications of seat  cushions  for the upper class and lower class seats.  Clause 1 1  provides for the fixing of two roof lamps and its necessary switches. Clause 14 provides for the fixing of luggage carrier on  the top of the roof and an iron ladder up to luggage carrier  at the rear.  Various miscellaneous fittings are required to be fitted  by clause 16, e.g., hand operated  driver’s  traffic signal,  nickel plated conductor’s bell, wind screen  wipers for the wind screen, tool box for First Aid equipment, etc. 788 Then, looking at the contract as a whole, what was the  real intention  of the parties ? It will be noticed that the  bus bodies are throughout the contract spoken of as a unit or as a  composite  thing  to  be put on  the  chassis,  and  this composite body consists not only of things actually fixed on the chassis but movable things like seat cushions, and other things  though fixed but which can be very easily  detached, e.g., roof lamps, wind screen wipers, luggage carrier,  tool box for First Aid equipment, etc. The next point to be noticed is that under the contract  the property  in  the bus body does not pass to  the  Government till  the  chassis  with the bus body is  delivered  at  the destination  or destinations to be named by  the  Controller except  in  the  case  contemplated  in  clause  6  of   the agreement.   That clause provides that if some work  is  not satisfactorily  done  and the Body Builder on receipt  of  a written  order does not dismantle or replace such  defective work  or  material at his own cost within  seven  days,  the Controller would be entitled to get the balance of the  work done  by another agency and recover the difference  in  cost from the Body Builder.  The Controller is entitled for  this purpose  to take delivery of the unfinished body.  But  even in this case the, property in the unfinished body would  not pass to the Government till the unfinished body is seized. Suppose  a  fire were to take place on the premises  of  the appellant and before delivery the bus bodies were  destroyed or spoilt.  On whom would the loss fall ? There can only  be one answer to this question and that is that the loss  would fall  on the appellant.  Clause 1 of the agreement  provides for  insurance  of  the chassis but there  is  no  provision regarding  insurance of bus bodies.  Therefore,  it  follows that  till  delivery  is made, the  bus  bodies  remain  the

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property of the appellant.  It could, if it chose to do  so, replace  parts  or  whole of the body  at  any  time  before delivery.   It  seems  to  us  that  this  is  an  important indication of the intention of the parties.  If the property passes  at delivery, what does the property pass in ? Is  it movable  property  or immovable property ? It  will  not  be denied  that the property passes in movable property.   Then was  this  the very goods contracted for ?  Here  again  the answer is plainly in the affirmative. Mr.  Sastri draws our attention to the following passage  in Benjamin On Sales (8th Edition), p. 167               "Where a contract is made to furnish a machine               or  movable thing of any kind and  before  the               property in it passes, to fix it to land or to               another chattel, it is not a               789               contract  for  the  sale of  goods.   In  such               contracts the intention is plainly not to make               a sale of movables as such, but to improve the               land  or  other chattel, as the case  may  be.               The consideration to be paid to the workman is               not  for a transfer of chattel, but  for  work               and labour done and materials furnished." He says that here the bus body is being fitted to a chassis, i.e., another chattel, and if this passage lays down the law correctly and according to him it does-the present  contract is not a contract for the sale of goods. The only case cited in the footnote relating to fixing of  a chattel to another chattle is Anglo-Egyptian Navigation  Co. V.  Rennie(1).  That case would be relevant if the  question in  this case was whether property in the materials used  in the construction of the body passed to the Government  plank by  plank,  or  nail by nail.  The answer would  be  in  the negative,  according to the above decision.  But we are  not concerned  with this question here.  The facts in that  case may   be  conveniently  taken  from  the  head  note.    The defendants contracted with the plaintiff to make and  supply new boilers and certain new machinery for a steamship of the plaintiffs  and to alter the engines of such steamship  with compound   surface   condensing  engines  according   to   a specification.    The  specification   contained   elaborate provisions  as to the fitting and fixing of new boilers  and machinery  on board the ship and the adaptation of  the  old machinery  to the new.  The boilers and other new  machinery contracted  for  were completed, and ready to  be  fixed  on board, and one instalment of pound 2000 had been paid  under the  contract, when the ship was lost by perils of the  sea. A  second  instalment of pound 2000 was  subsequently  paid. The  plaintiffs  claimed delivery of the boilers  and  other machinery  completed  under  the contract,  and  this  being refused, brought an action for the detention of the same, or to  recover  back  the  pound  4000  paid  by  them  to  the defendants.  It was held that the contract was an entire and indivisible   contract  for  work  to  be  done   upon   the plaintiffs’   ship  for  a  certain  price,   from   further performance of which both parties were released by the  loss of the ship; that the property in the articles  manufactured was not intended to pass until they were fixed on board  the ship; and that consequently the plaintiffs were not entitled to  the  boilers and machinery, nor could they  recover  the pound 4000 already paid as upon a failure of  consideration. Here the question was whether according to the contract, the property  in  each  portion certified by  the  inspector  as properly (1)  [1875] L.R. 10 C.P. 271.

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790 done  passed to the plaintiffs as and when  his  certificate was  given.   This question was answered  in  the  negative. This case is no authority for the proposition that  whenever a  contract provides for the fixing of a chattel to  another chattel,   there  is  no  sale  of  goods.   A  few   simple illustrations  will  show that this cannot be  the  law.   A wants  new motor tyres.  He goes to a dealer and  asks  that these may be supplied fitted on the car.  Is there a sale of motor tyres or not ? It is not an easy operation to fix  new tyres;  it needs an expert hand.  But it will not be  denied that  it was in essence a contract for sale of goods.   Take another illustration.  A wants a luggage carrier to be fixed to  his car.  The carrier which B has needs to be altered  a little.   The contract is that lie will alter it and fix  it to the car.  Has there been a sale of the luggage carrier or not ? The answer obviously is ’yes’. Mr.  Sastri  further relies on a passage in  Gannon  Dunker- ley’s(1) case, at pp. 413-414 :-               "It  is  of the essence of this  concept  that               both the agreement and the sale should  relate               to  the same subject-matter.  Where the  goods               delivered under the contract are not the goods               contracted for, the purchaser has got a  right               to  reject them, or to accept them  and  claim               damages  for  breach of warranty.   Under  the               law,  therefore, there cannot be an  agreement               relating to one kind of property and a sale as               regards   another.   We  are  accordingly   of               opinion that on the true interpretation of the               expression  "sale of goods" there must  be  an               agreement between the parties for the sale  of               the  very goods in which  eventually  property               passess.    In   a  building   contract,   the               agreement between the parties is that the con-               tractor should construct a building  according               to   the  specifications  contained   in   the               agreement,  and  in  consideration   therefore               receive  payment as provided therein,  and  as               will  presently be shown there is in  such  an               agreement  neither  a  contract  to  sell  the               materials  used in the construction, nor  does               property  pass  therein as  movables.   It  is               therefore impossible to maintain that there is               implicit  in  a building contract  a  sale  of               materials as understood in law." We  are,  however,  unable to appreciate  how  this  passage assists the appellant.  In this case both the agreement  and sale  relate to one kind of property, namely, the bus  body. The case of a con- (1)  [1959] S.C.R. 379. 791 tract  to  construct a building is quite different  and,  as held by this Court, the property there does not pass in  the materials as movables; but under this contract the bus  body never  loses  its  character as movable  property,  and  the property in the bus body passes to the Government as movable property.   The  following  extract  from  the  judgment  in Dunkerley’s  case  brings out the fact that the title  in  a case  of  building  contract  passes  to  the  owner  as  an accretion thereto :               "That  exception does not apply  to  buildings               which are constructed in execution of a  works               contract,  and the law with reference to  them               is  that the title to the same passes  to  the

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             owner  of  the land as an  accretion  thereto.               Accordingly, there can be no question of title               to the materials passing as movables in favour               of the other party to the contract." As  we  have already said, it is clear on the terms  of  the contract in this case that the property in the bus body does not  pass on its being placed or constructed on the  chassis but  when  the  whole  vehicle including  the  bus  body  is delivered. Mr. Sastri then relied on the decision of this Court in Carl Still v. The State of Bihar(1).  That case does not apply to the  facts  of  this case because this  Court  came  to  the conclusion  on a construction of the agreement in that  case that  the contract there was entire and indivisible for  the construction  of specified works including buildings  for  a lump sum and not a contract of sale of materials as such. Mr.  Sastri then says that clause 3 is inconsistent with  an agreement  for  sale  of goods.  This  clause  provides  for additional work to be done for which no rate is specified in the contract.  The clause, according to us, merely  provides for  extra payment if the Controller decided to  order  some additional  things  to  be placed in the body.   This  is  a neutral clause equally applicable to a contract for sale  of goods or a contract for work and labour. Mr.  Sastri then points to clauses 5 and 6 and submits  that these  are  totally inconsistent with an agreement  for  the sale of goods.  But we are unable to assent to this.  Clause 5 provides for a time schedule and ensures that the delivery of the bus body shall take place within the stipulated time. Clause  6 is designed to avoid disputes in the future as  to the  quality  of the material used and ensures  that  proper material is used.  A contract for the sale of (1) [1962] 2 S.C.R. 81. ASup/65-4 792 goods to be manufactured does not cease to be a contract for sale  of goods merely because the process of manufacture  is supervised by the purchaser.  For example, if in a  contract for  the manufacture and sale of military aircraft, a  great deal  of supervision is insisted upon by the purchaser,  the contract would not become a contract for works and labour. We may now notice some of the Indian cases in which a  simi- lar point arose. In  Commissioner of Sales Tax, U.P. v. Haji Abdul  Majid(1), the  Allahabad High Court arrived at the conclusion that  in the circumstances of the case the transaction was a contract for  the sale of bus bodies and not a contract for work  and labour.   Desai,  C.J., rightly pointed out at p.  443  that "since it makes no difference whether an article is a ready- made  article  or is prepared according  to  the  customer’s specification, it should also make no difference whether the assessee  prepares  it separately from the  thing  and  then fixes  it  on it or does the preparation  and  the  fixation simultaneously in one operation." In  Jiwan  Singh v. State of Punjab (2) the  High  Court  of Punjab  also held that a contract by a firm for fitting  and building motor bodies with its own materials on the  chassis supplied by customers is a contract for the sale of goods. In  Kailash Engineering Co. v. The State of  Gujarat(3),  it was  held  that  the contract in  that  case  for  building, erecting  and furnishing of third class timber coach  bodies on  broad  gauge underframes to be supplied by  the  Railway administration  was  not a contract for the sale  of  goods. The same conclusion was reached in Kays Construction Company v. The Judge (Appeals) Sales Tax, Allahabad (4).  We do  not

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propose to say whether these cases were correctly decided on the  facts  for, as we have said in the beginning,  in  each case it is a question of intention of the parties. To  conclude, we have come to the finding that the  contract as  a whole is a contract for the sale of  goods.   Agreeing with the High Court, we hold that the answer to the question referred  is against the appellant.  The appeal  accordingly fails and is dismissed with costs. In  the  other two appeals relating to assessments  for  the quarters  ending September 30, 1957 and December  31,  1957, the  agreements  are  similar and these also  fail  and  are dismissed with costs.  There will be one set of hearing  fee in all the three appeals. (1)  14 S.T.C. 435.            (2) 14 S.T.C. 957.                                (4) 13 S.T.C.  302. (3)  15 S.T.C. 574. 793 Shah  J. Whether a contract is one for execution of work  or for  performance  of service, or is a contract for  sale  of goods must depend upon the intention of the parties gathered from  the  terms  of the contract viewed  in  the  light  of surrounding circumstances.  If the contract is one for  work or  for performance of service, the mere  circumstance  that the  party  doing the work or performing  the  service  uses goods or materials belonging to him in the execution of  the contract  will  not  be of  any  importance  in  determining whether the contract is one for sale of goods.  It is common ground  that under the scheme of the Sales Tax Acts  enacted by State Legislatures, if in its true nature the contract is one  for performance of service or for  work,  consideration paid is not taxable, for the States have authority under the Constitution by Sch.  VII to legislate on the topics of  tax on  sale  or purchase of goods (other than  newspapers)  and have  no power to tax remuneration received under  contracts for  work  or  service.  The primary  difference  between  a contract  for  work or service and a contract  for  sale  of goods  is  that  in  the  former  there  is  in  the  person performing  work  or rendering service no  property  in  the thing  produced  as a whole notwithstanding that a  part  or even  the whole of the materials used by him may  have  been his property.  In the case of a contract for sale, there  is in the first instance a chattel which belongs exclusively to a  party and under the contract property therein passes  for money  consideration.   As observed in  Halsbury’s  Laws  of England (Third Edition) Vol. 34, pp. 6-7, Para 3 :               "  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 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

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             labour or one for the sale of a chattel."               794 To  constitute a sale there must therefore be  an  agreement and  in performance of the agreement property  belonging  to one  party  must stand transferred to the  other  party  for money  consideration.   Mere transfer of property  in  goods used  in  the  performance of a contract  is,  however,  not sufficient  :  to  constitute  a  sale  there  must  be   an agreement-express  or implied-relating to sale of goods  and completion of the agreement by passing of title in the  very goods  contracted to be sold.  It is of the essence  of  the transaction  that. the agreement and sale should  relate  to the  same subject-matter, i.e., the goods agreed to be  sold and in which the property is transferred. To  determine  the liability of the appellants  to  pay  tax under the Orissa Sales Tax Act on the consideration received by them under the terms of the contract, the true  intention of  the parties must be determined.  The agreement which  is the  subject-matter  of the dispute between the  parties  is executed  on  behalf  of  the Governor  of  Orissa  and  the appellants,  for  constructing "bus bodies" on  the  chassis supplied by the Governor of Orissa.  In the second paragraph of the preamble it is recited that the Governor had accepted the   quotation  and  had  decided  to  place   orders   for construction of "bus bodies" on the chassis supplied by  the Governor   at  the  rates  specified  therein.   The   third paragraph   recites  that  the  appellants  had  agreed   to construct  "bus bodies" at the rate quoted and on the  terms and conditions recited therein.  The agreement then proceeds to  set  out the conditions of the contract.  By  the  first condition  the  appellants  are made  responsible  for  safe custody of the chassis from the date of receipt thereof from the  Governor  till delivery and are bound to  insure  their premises  including the chassis against fire, theft,  damage and  riot  at  their  own  cost.   By  that  condition   the appellants  are  made  " responsible  for  the  chassis  and materials supplied" to them and have undertaken to indemnify the  Governor for any loss or damage to the  said  material. The  clause  also provides that the completed  "bus  bodies" shall  be delivered to the Governor on or before  the  dates specified in the agreement.  By cl. 2 it is stipulated  that the   "bus  bodies"  shall  be  constructed  in   the   most substantial   and  workmanlike  manner,  both   as   regards materials   and  otherwise  in  every  respect   in   strict accordance  with  the  specifications in Sch.   ’B’  of  the agreement.   Clause  3 provides for payment  for  additional work as may be directed by the Transport Controller under an order  in writing to that effect.  By cl. 4 it  is  provided that  the appellants shall guarantee the durability  of  the body  for  two years from the date of delivery  and  if  any imperfection or 795 defective  material  becomes apparent within the  period  of guarantee the appellants shall rectify the defects at  their own cost. These four clauses do not indicate any clear intention as to the  nature of the contract : they are consistent  with  the contract being one for sale of "bus bodies" belonging to the appellants as well as to a contract for building bus  bodies on  chassis  supplied.  Liability imposed  by  the  contract requiring the appellants to indemnify the Governor for  loss or damage to the chassis supplied and liability to carry out the work in the most substantial and workmanlike manner  and to  guarantee durability of the bodies are  consistent  with the  contract  being  one of sale or of  work  and  service.

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Clause 3 also does not indicate any definite intention.   If the contract is one for sale of a "bus body", the  agreement to pay extra payment for additional work to be done  thereon is  not also indicative of any definite intention.   But  by cls.  5  & 6 of the contract a definite intention  that  the contract  is one for work and not sale is, in  my  judgment, indicated.  By the fifth clause it is, inter alia,  provided that the work shall throughout the stipulated period of  the contract  be carried out with all due diligence, time  being deemed  to be of the essence of the contract, and  that  the appellants  shall  be  liable  to pay  to  the  Governor  as liquidated  damages an amount equal to 50% of the  estimated cost  of the whole work as shown in the contract  for  every day  that the work remains unfinished after the date  fixed. In a contract for sale of goods such a covenant is  unusual. If a party to a contract fails to carry out his part  within the  period  specified, unless the other  party  waives  the breach  the contract may be deemed to be broken.  The  other party is ordinarily not concerned with the method or  manner of  producing  the  chattel  agreed  to  be  sold,  if   the specifications relating thereto are otherwise complied with. Imposition  of an obligation to carry out the work with  due diligence is indicative of the contract being one for  work. This inference is strengthened by the proviso to cl. 5 which imposes  liability upon the appellants to pay damages  until the  defects detected on inspection are rectified.   By  the first  part  of cl. 6, all work under or in  the  course  of execution or executed in pursuance of the contract shall  at all  times  be  open  to inspection  by  the  Controller  or officers  authorised  by him in that behalf  and  that  they shall  have  the right to stop by a written order  any  work which  in  the opinion of the Controller has  been  executed with  unsound, imperfect, unskillful or bad  workmanship  or with  materials  of  inferior quality.   The  appellants  on receipt  of  a  written order are obliged  to  dismantle  or replace such, defective work or material at their own  cost. If the appellants 796 fail  to  comply with the order within seven days  from  the date of receipt of the order, the Controller is free to  get the  work  remaining to be done by any other agency  and  is entitled  to  recover  the  difference  in  cost  from   the appellants,  and  for  this purpose  the  Controller  is  at liberty  to  enter upon the premises of the  appellants  and take delivery of the unfinished vehicles.  It is clear  from the   terms  of  cl.  6  that  throughout  the  process   of construction the appellants are under the supervision of the Controller,  and  it is open to the Controller to  stop  any work which is in progress and to call upon the appellants to rectify  the work by dismantling or replacing the  defective work.  If the appellants fail to carry out the order of  the Controller  it is open to the Controller to take  possession of  the  unfinished work and get the same done  through  any other agency and to recover the difference in cost from  the appellants.   The Controller is also given liberty to  enter upon  the  premises of the appellants and to take  over  the unfinished vehicles.  A party agreeing to purchase goods  of certain specifications or description is entitled to  insist that the specifications or the description shall be strictly carried out, but he has ordinarily no right to supervise the production of the goods.  Again the right which is conferred upon the Controller to take away the unfinished vehicles and to  get  them  completed  by some  other  agency  is  wholly inconsistent  with the contract being one for purchasing  an article belonging to the appellants.  What one may ask would

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be the authority of the Controller under a contract of  sale to  take away unfinished vehicles from the person  who  owns them, have the work completed by another person and then  to claim  the  right  to  recover  the  difference  in  cost  ? Paragraph   7   deals  with  the  right   to   recover   the consideration  agreed to be paid to the appellants  and  the time at which it is to be paid.  Paragraph 8 deals with  the place  at  which the completed vehicles  with  bodies  built thereon  are  to  be  delivered and till  the  date  of  the delivery the risk is with the appellants.  Paragraph 9 deals with  the settlement of any dispute which may arise  between the  parties on any question relating to the meaning of  the specifications  and  drawings or as to the  quality  of  the workmanship  or  materials used in the work.   Paragraph  10 deals  with  the jurisdiction of courts in the  event  of  a dispute  between  the parties.  Paragraphs 7 to  10  are  in their  content  neutral  and  may  be  consistent  with  the agreement being either one for sale or for work or service. Schedule ’B’ consists of the specifications for construction of  the composite bodies.  They set out the designs and  the specifications  of  the underframe  and  floor,  frame-work, roof, penelling, side 797 windows, doors, seats, driver’s can, roof lamps, grab rails, window  guard rails, wind screens, luggage carriers,  finish and   miscellaneous   fittings.   It  is   true   that   the specifications  contemplated  that  the  appellants  had  to supply  certain  goods  which  are not  fixed  to  the  "bus bodies".  There are also provisions for supply of additional equipment such as wind screen wipers, locking  arrangements, ever,the  case  of the parties that the contract  is  a composite contract. It  is  part of a  single  contract that the "bus body" to be constructed has to conform to  the specifications  and in the manufacture of the completed  bus body  the  equipment set out under the  head  ’miscellaneous fittings’ and elsewhere has to be provided. An elaborate argument was advanced before us by counsel  for the  State  of Orissa suggesting that the "bus  bodies"  are separately  built  and are thereafter fixed to  the  chassis supplied  by  the State.  The argument,  however,  does  not appear to be correct in view of cls. 3, 4, 5, 6, 7, 8 & 9 of the  specifications.  Again the right which is conferred  by cl. 6 of the main agreement which enables the Controller  to take  possession of the unfinished vehicles  indicates  that the  bodies  were to be built on the chassis  supplied.  and they  were  not to be independently constructed.   But  this has,  in  my  view, no decisive bearing.   The  parties  may contract  that on the chassis supplied by the State  a  body shall  be  built.  If the true intention of the  parties  is that  a body is a chattel belonging to the builder  and  the property therein is to pass under a contract against  price, it would be a contract for sale of the body  notwithstanding the fact that it is built on the chassis. Another question to which counsel devoted considerable argu- ment  was  whether the maxim ’quicquid  fixatur  solo,  solo credit’  which  is a rule of the common law  of  England  is applicable   under  the  Indian  system  to  accretions   to movables.   Under  the English common law a house  which  is constructed being embedded in the land becomes an  accretion to  the land and (subject to a mass of exceptions in  favour of  tenants and in favour of trade fixtures) belongs to  the person to whom the land belongs.  But that rule has not been accepted in India : Thakoor Chunder Poramanick v. Ram Dhonde Bhattacharji(1) and Narayan Das Khitty v. Jatindra Nath  Roy Chowdhury(2).  It is unnecessary to advert to the contention

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whether  the  rule applies to accretions  to  movables,  for ultimately the true effect of an accretion made pursuant  to a contract has to be judged, not by any artificial rule that the  accretion may be presumed to have become by  virtue  of affixing to a chattel (1) 6 Suth Weekly Reports 228 (2) L. R. 54 I. A. 218 798 part of that chattel, but from the intention of the  parties to the contract.  In each case the Court must ascertain what the  intention  of the parties was when  property  in  goods belonging  to  one  person and affixed to  the  property  of another  person,  passed  to  that  other  person.   Whether pursuant  to  a  contract, any moveables  fixed  to  another moveable  the property passes immediately to the  person  to whom  the  primary  property belongs must  depend  upon  the intention of the parties. One strong test to ascertain whether a given contract is for work or for sale of goods is to ascertain whether the  thing produced  as  a whole had individual existence as  the  sole property  of the party who produced it at some  time  before delivery,  and  the property therein passes only  under  the contract relating "hereto to the other party for price.   If the  thing has no individual existence as the sole  property of the party producing it, the contract will be one for work or for service. Under  condition 6 of the contract unfinished goods  may  be taken  possession of by the Controller and  appropriated  to himself notwithstanding the objections which the  appellants may  have to that course.  If the chassis and the body  were destroyed  before delivery, as stipulated loss of  the  body would undoubtedly fall upon the appellants, for by cl. 1  of the  agreement  the appellants, are bound to  indemnify  the State  of  Orissa for any loss that may be suffered  by  the State.  But this covenant is not decisive of the true nature of  the contract.  A bailee of goods under a works  contract may  undertake  a  more  onerous  liability  than  what   is prescribed  by  S.  151 of the Contract Act  :  see  S.  152 Contract  Act.   Undoubtedly before delivery of  a  complete chassis with "bus body" under the terms of the contract  the appellants  have no right to claim the consideration  agreed to be paid to them.  If, because. of the loss of the chassis and  the  "bus  body" constructed  by  the  appellants,  the appellants are unable to deliver the vehicle, the  liability to  indemnify  the State for loss of the chassis  arises  by express  terms of the contract and their claim for  recovery of  the  value of the materials used  or  the  consideration agreed  to be paid would fail, because they have  failed  to carry out their part of the contract. It   is  unnecessary  to  refer  to  "he  large  number   of authorities  to which our attention was invited  by  counsel The question must be decided on a true interpretation of the terms   of  the  contract  in  the  light   of   surrounding circumstances.  If, on a review of all                             799 the terms of the contract, it appears that the intention  of the  parties  was  that the appellants  were  to  sell  "bus bodies" to the State of Orissa the contract would clearly be one  for sale and consideration paid would be taxable  under the Orissa Sales Tax Act.  If, however, the contract is  one for securing a certain result namely the building of a  body on  the  chassis supplied by the State  with  the  materials belonging to the appellants, the contract would. be one  for work done and not liable to sales tax. In  my view the present contract is one for work and  not  a

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contract  for  sale, because the contract is  not  that  the parties  agreed  that  the "bus  body"  constructed  by  the appellants  shall  be  sold to the  State  of  Orissa.   The contract is one in which the appellants agreed to  construct "bus  bodies" on the chasis supplied to them as bailees  and such  a contract being one for work, the consideration  paid is not taxable under the Orissa Sales Tax Act. In my view, therefore, the appeal should be allowed.                        ORDER BY COURT In  accordance  with  the opinion  of  the  majority,  these appeals are dismissed with costs.  One hearing fee. 800