1970 (11) TMI 82 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the contracts for body-building of railway coaches were works contracts or contracts for the sale of goods.

Detailed Analysis:

1. Nature of Contracts:
The primary issue was to determine if the contracts for constructing railway coaches on underframes supplied by the railway amounted to works contracts or contracts for the sale of goods. The Sales Tax Officer, Assistant Commissioner, Deputy Commissioner, and Tribunal all initially determined these were contracts for the sale of goods, thus taxable under the Sales Tax Act. However, the High Court re-examined the terms of the contracts and the intention behind them.

2. Terms and Conditions of the Contracts:
The contracts contained several clauses emphasizing the work aspect:
- Clause 1(a) described the nature of work as "building" railway coaches, not selling them.
- Clause 2 required the work to be executed according to railway administration's drawings and specifications.
- Clauses 3, 4, 20, 21, and 22 dealt with security deposits, deductions from running bills, and penalties for delays, emphasizing diligence and timely execution of work.
- Clauses 7-10 specified the materials' standards and detailed the construction process, showing close supervision by the railway administration.
- Clause 11 stipulated that electrical materials and some labor would be supplied by the railway, further indicating a works contract.

3. Supervision and Execution:
The contracts required the work to be carried out under the close supervision of the railway administration, with specific instructions from the Mechanical Engineer. This level of oversight and the stipulation that the work be carried out on railway premises or mutually agreed locations underscored the labor and skill aspect rather than the sale of a finished product.

4. Personal Nature of the Contracts:
- Clauses 19 and 25 prohibited sub-letting and specified that the contract would terminate upon the contractor's insolvency or death, emphasizing the personal nature of the work.
- Clauses 24, 30, 32, and 33 regulated the contractor's relations with their labor, including fair wages and compliance with labor laws, which are unusual in simple contracts for the sale of goods.

5. Legal Precedents and Principles:
The court referred to several legal precedents and principles:
- Halsbury's Laws of England distinguished between contracts for the sale of goods and works contracts based on the primary object of the contract.
- Supreme Court Decisions in cases like Gannon Dunkerley, Richardson & Cruddas Ltd., and Man Industrial Corporation Ltd. supported the view that contracts emphasizing labor and skill, even if materials were used, were works contracts.
- The court noted that the mere transfer of property as an incident of the contract does not constitute a sale of goods.

6. Distinguishing from Patnaik's Case:
The court distinguished the present case from Patnaik and Company v. The State of Orissa by highlighting differences in the terms and conditions:
- The work site, security deposits, prohibition against assignment, detailed supervision, and labor relations clauses were not present in Patnaik's case.
- The court concluded that these differences were significant enough to classify the contracts in the present case as works contracts.

Conclusion:
The High Court concluded that the contracts for constructing railway coaches were works contracts, not contracts for the sale of goods. The intention behind the contracts, the detailed terms emphasizing labor and skill, and the legal principles applied led to this determination. The reference was answered accordingly, and the costs were to be borne by the Commissioner of Sales Tax.