1965 (11) TMI 136 - SC - VAT and Sales Tax

Whether in view of the decision of the High Court of Orissa in S.J.C. No. 2 of 1965 dated 29th September, 1958, it is open to the Sales Tax Tribunal, Orissa, to hold that any part of the contract for tunnel-holing by Messrs John Mowlem & Co. Ltd., with the Government of Madras (now Andhra Pradesh) is liable for sales tax? Whether the contract entered into with Messrs John Mowlem & Co. Ltd., by the Government of Madras (now Andhra Pradesh) for tunnel-holing is in the nature of a contract of agency where the goods are Government property from the inception, and there is no passing of title in them, at any time, from the company to the Government? Whether the contract for tunnel-holing between Messrs John Mowlem & Co., Ltd. and the Government of Madras (now Andhra Pradesh) is not composite and indivisible, but contains a separate and distinct contract for the supply of material, viz., plant as such, and the value of the plant being liable for the sales tax? Held that - Appeal allowed. Unable to agree with the learned Judges of the High Court. A covenant in the contract whereby the appellants undertook to deliver goods purchased by them on behalf of the State at the site where they were required by the latter is not inconsistent with the relation between them being of agent and principal, and a stipulation that the appellants will remain responsible for transportation and insurance as far as the site also does not detract from the overwhelming indications furnished by the other terms of the contract. The stipulation that goods purchased will be insured in the joint names of the Government of the State of Madras and the appellants is susceptible of no positive inference in favour of either case, and the learned Chief justice was right in observing that the term about the contractors liability to pay customs duty, if any, was inconclusive. It is not possible to raise an inference from the clause the final accounting for the plant, and its passing into the hands of the purchaser will take place in paragraph 8 of the contract, that till it was delivered at the site of the Machkund Dam, the appellants were the owners of the plant. The clause deals merely with the obligations undertaken by the appellants for transportation and insurance of the plant, and not with the passing of property in the plant from the appellants to the State of Madras.

Summary

Issues Involved:

1. Liability of the appellants to sales tax under the Orissa Sales Tax Act.
2. Nature of the contract between the appellants and the Government of Madras - whether it is a contract of agency or a contract of sale.
3. Whether the contract is composite and indivisible or contains separate and distinct contracts for the supply of materials.

Issue-Wise Detailed Analysis:

1. Liability of the appellants to sales tax under the Orissa Sales Tax Act:

The appellants, John Mowlem & Company Ltd., were assessed to tax by the Sales Tax Officer, Jeypore, under section 12(5) of the Orissa Sales Tax Act on the turnover for the quarters ending June 30, 1950, to December 31, 1951. The High Court of Orissa set aside the assessment, holding that remuneration received under a works contract was not exigible to sales tax. However, the Sales Tax Tribunal later assessed the remuneration received under the contract for additional quarters, treating part of the contract as a sale of plant, machinery, and materials. The High Court affirmed this view, leading to the appellants challenging their liability for the amount received under the contract.

2. Nature of the contract between the appellants and the Government of Madras - whether it is a contract of agency or a contract of sale:

The second question referred to the High Court was whether the contract was in the nature of an agency contract where the goods were Government property from inception, and there was no passing of title from the company to the Government. The High Court recorded a negative answer, but the Supreme Court found that the terms of the contract indicated an agency relationship. The contract described the Government of Madras as "the purchaser" and the appellants as "the contractor." The appellants were to procure plant, machinery, and equipment for use in the execution of the works contract, and the property in these items was not to pass to the State as part of the construction contract. The Supreme Court concluded that the appellants were purchasing agents for the State of Madras, not sellers of the machinery.

3. Whether the contract is composite and indivisible or contains separate and distinct contracts for the supply of materials:

The third question was whether the contract was composite and indivisible or contained separate contracts for the supply of materials. The High Court answered affirmatively, indicating that the contract included a distinct agreement for the supply of plant, machinery, and equipment. The Supreme Court agreed, stating that the terms of the contract showed a severable agreement for procuring machinery, which was independent of the works contract. The machinery was to be used in the execution of the works contract, and the appellants were to be reimbursed for the costs incurred, including a purchasing commission. The Supreme Court held that the High Court was correct in recognizing a separate contract for the supply of materials.

Conclusion:

The Supreme Court allowed the appeals, substituting the High Court's negative answer on the second question with an affirmative one, confirming that the appellants acted as purchasing agents. The appellants were entitled to costs in both the Supreme Court and the High Court. The appeals were allowed, and the High Court's decision was modified accordingly.