1971 (12) TMI 99 - SC - VAT and Sales Tax

Whether the delivery by the respondent-Hindustan Aeronautics Ltd.-hereinafter referred to as the assessee-to the Railway Board of railway coaches models 407, 408 and 411 is liable to sales tax under the Central Sales Tax Act? Held that - Appeal dismissed. The difference between the price of a coach and the cost of material can only be the cost of services rendered by the assessee. The only difference as far as coach model No. 411 is concerned is that in that case the wheelsets and underframes are not supplied free of cost but otherwise there is no essential difference in the terms. This does not make any difference to the result.

Summary

Issues Involved:
1. Liability of sales tax on delivery of railway coaches by the assessee to the Railway Board under the Central Sales Tax Act.
2. Nature of the contract between the assessee and the Railway Board (whether it is a works contract or a contract of sale).

Issue-wise Detailed Analysis:

1. Liability of Sales Tax:
The primary issue in the appeal was whether the delivery of railway coaches (models 407, 408, and 411) by the assessee to the Railway Board was liable to sales tax under the Central Sales Tax Act. The Commercial Tax Officer initially included the turnover from these deliveries in the sales tax assessment for the year 1958-59, rejecting the assessee's contention that no sale was involved in the execution of the works contract. This decision was upheld by the Deputy Commissioner of Commercial Taxes and the Commissioner of Commercial Taxes. The High Court, however, set aside this inclusion, leading to the appeal in the Supreme Court.

2. Nature of the Contract:
The Supreme Court had to determine whether the contract between the assessee and the Railway Board was a works contract or a contract of sale. The analysis involved examining the terms of the contract and the surrounding circumstances. Key points considered included:

- Advance Payments and Material Ownership: The Railway Board made advance payments for materials, which were deemed to be the property of the Railway Board upon purchase, as indicated in the indemnity bond. This suggested that the materials used for constructing the coaches were owned by the Railway Board before their use.

- Contract Terms: The contract specified the "manufacture and supply" of railway coaches, with the final price subject to material and wage escalators. The wheelsets and underframes were supplied free of cost for models 407 and 408, and the contract did not include typical works contract conditions like inspection during execution.

- Commercial Tax Officer's Report: The report confirmed that materials procured for the construction were kept separately and not mixed with other materials, reinforcing the idea that the materials were specifically for the Railway Board's coaches.

- Inspection and Payment Terms: Inspection was required only after the completion of the coaches, and final payment was subject to the inspection and certification of the completed coaches.

- Indemnity Bond: The bond stated that the materials and articles procured for the contract were held in trust for the President of the Union of India, indicating that the property in the materials vested in the Railway Board before their use in construction.

Supreme Court's Conclusion:
The Supreme Court concluded that the contract was a works contract rather than a contract of sale. The critical factor was that all materials used in the construction of the coaches belonged to the Railway Board, making it impossible for there to be a sale of the coaches themselves. The difference between the price of a coach and the cost of materials was attributed to the cost of services rendered by the assessee.

The court also referenced the case of State of Gujarat v. Kailash Engineering Co., which supported the interpretation that the contract was a works contract. The distinction for model 411, where wheelsets and underframes were not supplied free of cost, did not alter the nature of the contract.

Judgment:
The appeal was dismissed, and the High Court's decision to set aside the inclusion of the turnover relating to the construction of railway coaches in the sales tax assessment was upheld. The Supreme Court held that the delivery of the railway coaches under the contract in question was not liable to sales tax as it was a works contract.