1969 (2) TMI 170 - HC - VAT and Sales Tax

Issues Involved:
1. Determination of whether the contract was a pure works contract or a contract for the sale of goods.
2. Analysis of the terms and conditions of the contract to ascertain the nature of the contract.
3. Application of precedents and principles to the facts of the case.

Issue-wise Detailed Analysis:

1. Determination of whether the contract was a pure works contract or a contract for the sale of goods:

The primary question referred to the court was whether the disputed item was a pure works contract and therefore non-taxable, or if it amounted to the supply and sale of railway coaches by the assessee to the railway authorities and was thus taxable. The assessee, a firm of contractors, executed a contract for building railway coaches for the North Eastern Railway on underframes supplied by the railway. The Sales Tax Officer had levied sales tax on the payment received by the assessee, treating it as a sale of goods. However, the revising authority held that the contract was purely a works contract, not involving the sale of goods.

2. Analysis of the terms and conditions of the contract to ascertain the nature of the contract:

The court analyzed the terms of the contract extensively. The preamble of the agreement described the contract as work, not mentioning any sale of coaches. Clause 3 indicated a lump sum amount for the entire work, including the cost of materials, construction, and finishing. A significant clause stated that if sales tax on finished coaches was imposed after the contract date, the railway would bear the responsibility, indicating that the property in the coaches vested automatically in the railway. Clause 4 allowed for 'on account' payments based on the progress of work, suggesting that the property in the coaches vested in the railway even during construction. Clause 5 allowed the Chief Mechanical Engineer to alter specifications, a term more consistent with a works contract. Clause 11 required the contractor to indemnify the railway against any damage to railway property, indicating that the property in materials vested in the railway at all times. Other clauses also supported the view that the contract was for work and labour rather than the sale of goods.

3. Application of precedents and principles to the facts of the case:

The court referred to several precedents, including the Supreme Court's decisions in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., Carl Still G.m.b.H. v. State of Bihar and Others, and State of Gujarat v. Kailash Engineering Co., which dealt with similar contracts. The principle established was that for a contract to be considered a sale of goods, there must be an independent term for the sale of goods for a money consideration. The court found that the instant case was more akin to the Kailash Engineering Co. case, where the property in the finished coaches passed to the railway automatically without any transfer by the contractor. The court distinguished this case from M/s. Patnaik & Co., where the property in bus bodies remained with the contractor until delivery to the government.

The court concluded that the contract was a works contract, not involving the sale of goods. The burden of proving a taxable sale was on the taxing authorities, which they failed to discharge. The court noted that railway coaches are not typically sold in the market, and it is unusual to infer a contract for the sale of railway coaches.

Conclusion:

The court answered the question by stating that the disputed item was a pure works contract not liable to sales tax. The assessee was entitled to costs assessed at Rs. 100, with counsel's fee also assessed at the same figure. The contract did not envisage the sale of coaches by the assessee to the railway, and the main object was the execution and completion of work under the contract. The contract was determined to be a works contract, and the sum received by the assessee was not taxable as a sale of goods.

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