1976 (4) TMI 190 - SC - VAT and Sales Tax

SALE OF GOODS WORKS CONTRACTS CONTRACT TO BUILD RAILWAY COACHES ON UNDERFRAMES SUPPLIED BY RAILWAY WHETHER SALE OR WORKS CONTRACT LIABILITY TO SALES TAX.

Summary

Issues Involved:
1. Whether the contracts for construction of railway coaches are contracts for sale of goods or works contracts.

Issue-wise Detailed Analysis:

1. Nature of Contracts for Construction of Railway Coaches:
The primary issue in these appeals is whether the contracts entered into by the respondent with the railway administration for the construction of railway coaches are contracts for the sale of goods or works contracts.

The respondent entered into three contracts with the Western Railway Administration for constructing railway coaches on underframes supplied by the railway. The Sales Tax Officer assessed these transactions as sales, leading to the respondent being taxed. The respondent's appeals were unsuccessful at various levels, but the Tribunal referred the legal question to the High Court, which ruled in favor of the respondent.

The Supreme Court examined whether the contracts were for the sale of goods or works contracts by analyzing the terms and conditions of the agreements. The Court noted that the intention of the parties must be gathered primarily from the terms and conditions of the contract.

Contract Clauses Analysis:
- Clause (1): The contractor agrees to build 25 Narrow Gauge Third Class Bogie Coaches on underframes provided by the Western Railway.
- Clause (3): Security deposit for the due fulfillment and completion of the contract.
- Clause (4): Deduction of 10% from each progressive bill as security.
- Clause (9): Contractor to supply constructional material and fittings, with some materials and labor provided by the railway.
- Clause (11): Contractor to supply carpentry labor, with electrical fittings supplied by the railway.
- Clause (15): Contractor to deliver a minimum of two coaches per month.
- Clause (16): Liquidated damages for failure to complete work within the stipulated period.
- Clause (17): Contractor responsible for the safe custody of carriages under construction.
- Clause (18): Railway authorities' right to inspect the work.
- Clause (23): Bills to be submitted based on certified completion of coaches.

The Court emphasized that the predominant element in the contract is the work and labor aspect, with the supply of materials being accessory. The contractor is not the owner of the completed railway coach, as the railway also contributed materials and labor, and the work was carried out under the railway's supervision.

Legal Precedents:
The Court referred to the legal concept of "sale of goods" from the Sale of Goods Act, 1930, and previous judgments, including:
- State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.: To constitute a sale, there must be an agreement relating to goods to be completed by the passing of title in those goods.
- T.V. Sundram Iyengar & Sons v. State of Madras: Distinguished between a contract for the sale of bus bodies and a works contract.
- Commissioner of Commercial Taxes, Mysore v. Hindustan Aeronautics Ltd.: Held that a contract for manufacturing and supplying railway coaches was a works contract.
- State of Gujarat v. Kailash Engineering Co.: Similar case where the contract was held to be a works contract.

Conclusion:
The Court concluded that the contracts in question were works contracts, not contracts for the sale of goods. The intention of the parties was to perform work and labor, with the railway coach being the result of combined efforts and materials from both the contractor and the railway. The appeals were dismissed, and the High Court's decision in favor of the respondent was upheld.

Judgment:
The appeals were dismissed with costs, and the High Court's decision that the contracts were works contracts was affirmed.