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PETITIONER: STATE OF GUJARAT

       Vs.

RESPONDENT: M/S.  KAILASH ENGINEERING CO.

DATE OF JUDGMENT: 26/09/1966

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHAH, J.C. RAMASWAMI, V.

CITATION:  1967 AIR  547            1967 SCR  (1) 543  CITATOR INFO :  RF         1972 SC 744  (13)  D          1974 SC2309  (13)  RF         1976 SC2108  (48)  RF         1977 SC1537  (23)

ACT: Bombay   Sales-tax  Act,  1953,  s.  27-Contract   for   the construction of Railway coach bodies-Provisions in  contract showing property in construction material vesting in Railway on  arrival  at  site and in  coach  bodies  on  completion- Transaction whether sale or works contract.

HEADNOTE: The  respondent  company, which was an  engineering  concern with  a  workshop  at Morvi, obtained a  contract  from  the Western  Railway  Administration for construction  of  third class   coaches.    Under  the   contract   the   respondent constructed  three  coaches and submitted a bill  which  was properly  certified on October 4, 1958, in  accordance  with the agreement as to the work done by the respondent.   After the  bill  had  been  paid,  the  respondent  wrote  to  the Additional  Collector  of  Sales-tax  requesting  him  under Section  27 of the Bombay Sales-tax Act, 1953 to  hold  that the transaction was a works contract and not a sale, so that no sales-tax was payable under the Act. The  Additional Collector held however that the  transaction was  a sale on which tax was payable.  Dismissing an  appeal from  this  decision, the Sales-tax Tribunal took  the  view that  the  general  conditions of the  contract  showed  the ownership  of the coach bodies only passed to the Rail  when they were completed and handed over to the Railway, so  that way contract was for supply of coach bodies.  Sales-tax  was therefore payable on the price of these coach bodies.   Upon a reference made to it, the High Court held however that the contract  clearly  mentioned  that  the  contract  was   for performance  of  work of building, erecting  and  furnishing coach  bodies on Broad Gauge under frames which already  be- longed  to the Railway.  The terms of the  contract  further showed  that  as  soon as the materials were  taken  by  the respondent  to the site of the construction of coaches,  the ownership  in those materials vested in the Railway and  all

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that  the respondent had to do was to carry out the work  of erecting  and furnishing the coach bodies.  When  the  coach bodies  .were  ready,  the property in them  vested  in  the Railway automatically without any further transfer of rights in  it  to the Railway.  The ownership in  the  ready  coach bodies  never  vested in the respondent company at  all  and although materials for their construction had to be obtained by it and brought to the site, in purchasing those materials it  was acting more or less in the capacity of an agent  !or the  Railway.   Accordingly  the High  Court  came  to  the- finding that the contract between the parties was one entire and indivisible contract for carrying out the works specifi- ed in the agreement and that it did not envisage either  the sale  of the materials by the respondent to the Railway,  or of the coach bodies as such; no sales-tax was therefore held leviable on the transaction. On appeal to this Court. HELD  : The terms of the contract led to the only  inference that  the  respondent was not to be the owner of  the  ready coach bodies and that the property in those bodies vested in the  Railway even during the process of  construction.   The transaction was therefore clearly a works contract which did not involve any sale. [547 G] 544 Patnaik  & Company v. State of Orissa, [1965] 2 S.C.R.  782: distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 945 of 1965. Appeal  by special leave from the judgment and  order  dated December 14, 1962 of the Gujarat High Court in Sales Tax Re- ference No. 16 of 1961. N. S. Bindra and R. H. Dhebar, for the appellant. M. V. Goswami, for the respondent. The Judgment of the Court was delivered by Bhargava, J. This appeal under special leave granted by this Court arises out of proceedings for assessment of  sales-tax under  the  Bombay  Sales  Tax Act  III  of  1953.   Messrs. Kailash  Engineering  Co. (hereinafter referred to  as  "the respondent")   was  an  engineering  concern  having   their workshop at Morvi on the meter gauge section of the  Western Railway.  They obtained a contract from the Western  Railway Administration  for  construction  of  III  class  passenger coaches on certain conditions described as the conditions of tender.   Under that contract which was reduced  to  writing and   was   described  as  an  agreement,   the   respondent constructed  three  coaches and submitted a bill  which  was properly  certified in accordance with the agreement by  the Railway Administration on October 4, 1958.  The net value of the  work  done  by  the respondent  was  certified  at  Rs. 1,22,035/-.   After  receipt of this money,  the  respondent wrote  to the Additional Collector of Sales  Tax  requesting him  under S. 27 of the Bombay Sales Tax Act, 1953, to  hold that this was a works contract, and that the transaction, in respect of which the respondent received the money, did  not amount  to  a sale, so that no sales-tax was  payable  under that Act.  The Additional Collector held that two  questions fell for determination before him: (1)  Whether  the transaction covered by the bill dated  4th October, 1958, is a sale; and (2)  if it is a sale, whether any tax is payable in  respect of the same. The Additional Collector answered both the questions in  the

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affirmative  against the respondent.  The appeal before  the Gujarat  Sales  Tax  Tribunal  failed;  and  thereupon,  the respondent sought a reference to the High Court of  Gujarat. The Tribunal referred the following question for the opinion of the High Court:-               "Whether  on  a  proper  construction  of  the               agreement   as   a  whole  and   its   general               conditions  and specification, the  work  done               and  covered  by  Contract  Certificates   No.               M/60(1)/B-PRTN,  dated 4th October, 1958,  for               the perfor- 545               mance  of the works of building, erecting  and               furnishing  3 B. G. Coaches over  the  chassis               supplied  by the Railway is a  works  contract               not  amounting  to sale, or whether  it  is  a               transaction of sale." The  High  Court  answered the question  in  favour  of  the respondent,  holding  that  the  transaction  was  a   works contract carried out by the respondent and did not amount to a  sale.  Consequently, this appeal has been brought  up  by the  State  of Gujarat challenging the  correctness  of  the decision of the High Court. The Tribunal, when dealing with the case, mentioned a few of the   terms  of  the  contract  entered  into  between   the respondent  and  the Western  Railway  Administration,  and, though  there was a provision in one of the clauses  of  the agreement  that  as  soon as the plant  and  materials  were brought   on  the  site  where  the  coaches  were   to   be constructed,  the  ownership  in  them  would  vest  in  the Railway,  the  Tribunal  held that the  ownership  in  those materials  never  passed  to  the  Railway  because  of  the indication  given by another clause which provided  that  on removal  of  contractor or on rescission  of  contract,  the Railway Authorities would be entitled to take possession and retain  all  materials,  tools,  implements,  machinery  and buildings.  On this basis, the Tribunal held that, from  the general  conditions  of the contract, it appeared  that  the ownership  of  the coach bodies only passed to  the  Railway when  completed and handed over to the Railway, so that  the contract  was for supply of coach bodies.  It was on  supply of these coach bodies that the respondent received the price of  those bodies, and thus received the amount subjected  to sales-tax as sale consideration for those bodies. The  High  Court, however, in its judgment,  reproduced  the preamble  of  the  contract as well as  a  large  number  of clauses of it to show that in the contract, at every  stage, it   was  clearly  mentioned  that  the  contract  was   for performance  of  work of building, erecting  and  furnishing coach  bodies  on  Broad  Gauge  underframes  which  already belonged  to the Railway.  The terms of the contract  showed that  as soon as the materials were taken by the  respondent to the site of construction of the coaches, the ownership in those  materials  vested  in the Railway and  all  that  the respondent  had to do was to carry out the work of  erecting and furnishing the coach bodies.  When the coach bodies were ready,   the  property  in  them  vested  in   the   Railway automatically  without any further transfer of rights in  it to  the Railway.  In fact, the ownership in the ready  coach bodies did not vest in the respondent at all.  No doubt, the materials for building the’ coach bodies had to be  obtained by  the respondent and brought to the site of  construction, but  the  provision that the ownership  in  those  materials would  vest in the Railway as soon as those  materials  were brought  to the site clearly indicated that the  respondent,

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in purchasing those materials, was 546 acting  more  or less in the capacity of an  agent  for  the Railway.   While the materials were at site, the  effect  of vesting  of their ownership in the Railway was that if  they were  destroyed or damaged, the risk had to be borne by  the Railway, even though the Railway might have been entitled to reimburse itself, because those materials -and goods were in the custody of the respondent on behalf of the Railway.   In fact,  under clause 29, there was a specific  provision  for the  contingency  that the materials or plant may  be  lost, stolen, injured or destroyed by fire, tempest or  otherwise. This special provision was to the effect that the  liability of  the contractor was not to be diminished in any way,  nor was  the  Railway to be in any way answerable  for  loss  or damage  on the happening of such contingency.  This  special provision  had  to  be made, because the  ownership  in  the materials  vested in the Railway, though the contractor  was in actual physical possession of the materials and plant  in order  to  carry out the works contract.  It  was  for  this reason  that  a specific provision had to be made  that  the contractor  would be liable to the Railway if any such  loss occurred. Taking  into  account  all the terms of the  contract  as  a whole, the High Court came to the finding that the  contract between the parties was one entire and indivisible  contract for carrying out the works specified in full details in  the agreement,  and that it did not envisage either the sale  of materials by the respondent to the Railway, or of the  coach bodies as such. In this connection, learned counsel for the appellant relied on the decision of this Court in Patnaik & Company v.  State of  Orissa.(1)  In  that particular case,  the  contract  in question  was for the supply of bus bodies, and it was  held that when the bus bodies were supplied by the contractor and money received by him, it amounted to a sale.  It,  however, appears  that the facts and circumstances, on the  basis  of which the Court gave that opinion, do not find place in  the case, Three  main circumstances were relied upon in that case  for holding that the transaction amounted to a sale and not to a works  contract.   The first circumstance was that  the  bus bodies were, throughout the contract, spoken of as a unit or as  a  composite thing to be put on the  chassis,  and  this composite  body consisted not only of things actually  fixed on  the chassis but movable things like seat  cushions,  and other  things which could be very easily detached.   In  the contract, with which we are concerned, the coach bodies  are not  separately  described  as units  or  components  to  be supplied  by  the respondent to the Railway.   The  language used  in the contract everywhere describes the duty  of  the respondent   to  be  that  of  constructing,  erecting   and furnishing coach bodies on the underframes supplied.  At  no stage does the contract mention that ready coach (1)  [1965] 2 S.C.R. 782. 547 bodies  were  to  be  delivered by  the  respondent  to  the Railway.   In fact, even during the process of  construction of  the  coach bodies, the unfinished bodies in  process  of erection  were treated, under the terms of the contract,  as the property of the Railway. The second circumstance found in that case was that if  some work  was not satisfactorily done and the body  builder,  on receipt of a written order, did not dismantle or replace the defective  work  or material at his own  cost  within  seven

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days, the Controller was entitled to get the balance of  the work  done by another agency and recover the  difference  in cost  from  the  body builder; and for  this,  purpose,  the Controller  was entitled to take delivery of the  unfinished body.   In  the  contract  before us,  as  we  have  already mentioned in the preceding paragraph, the unfinished  bodies of  the coaches were from the earliest stage treated as  the property  of  the  Railway, and there  was  no  question  of ownership of the unfinished body passing to the Railway only after  its  seizure  by  it as was the  case  in  the  other contract  in which the property in the unfinished body  did. not  pass  to the Government till the  unfinished  body  was seized. The  third circumstance taken into account in that case  was the liability for the loss, if a fire took place and the bus bodies were destroyed or spoiled.  In that case, there was a provision  for  insurance of the chassis, but there  was  no such  provision regarding. insurance of bus bodies, and  the Court  inferred that till delivery was made, the bus  bodies remained  the  property of the appellant on  whom  the  loss would  fall.  On the other hand, in the contract with  which we  are concerned, the terms envisaged the property  in  the unfinished  bodies vesting in the Railway, and  since  those unfinished  bodies  were to be in charge of  the  respondent during  construction,  a special provision had  to  be  made making the respondent responsible for the loss and  throwing upon  the respondent the liability to reimburse the  Railway for  loss by fire, etc.  Thus, the terms of the contract  in this  case are markedly different from those which  came  up for consideration in that case.  Here, we find that all  the terms  of the contract lead to the only inference  that  the respondent was not to be the owner of the ready coach bodies and that the property in those bodies vested in the  Railway even   during  the  process  of  construction.   This   was, therefore,  clearly a works contract which did  not  involve any sale.  The decision given by the High Court was correct. The appeal fails and is dismissed with costs. R.K.P.S.                Appeal dismissed. 548