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TMI Blog1970 (11) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... ad received some amounts on account of the above contracts for building coaches and that these amounts were not accounted for by the applicants for the purpose of computing their total turnover. The Sales Tax Officer was of the view that the contracts in question amounted to the sale of the coaches in question and, therefore, they were all contracts for sale of goods liable to be taxed under the provisions of the Sales Tax Act. He, therefore, carried out the assessment accordingly by adding the turnover represented by these three contracts. It is found that the assessment for the first period was of Rs. 2,72,803-8-0 while for the second period it was of Rs. 3,82,820. 5.. At this stage, it would be necessary to make some general reference to the terms of contracts, which are to be considered for the purpose of this reference. It is an admitted position that all the three contracts mentioned above contain similar terms. Under the circumstances, the third contract which is dated 14th January, 1956, is taken by the lower authorities and the Tribunal as a standard contract and the parties also have addressed their arguments before us on this basis. A reference to this contract shows t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be entitled under the terms of the contract to the value of the "work already done" together with the refund of security deposit. (10) All the contracts further stipulate that the contractor should pay fair wages to the labour employed for the purpose of construction of the coaches, that no children should be employed, and that the railway administration would not be liable for the payment under the Payment of Wages Act or for compensation under the Workmen's Compensation Act, 1933. These are the main features of the contracts, which are under consideration in this reference. These contracts further mention that the conditions of the tender should form part of the contract but we find that in the record of the case, the conditions which are embodied in tenders, are not produced by either of the parties. We have, therefore, to spell out the intention of the parties only from that part of the written contract, which is found in the record of the case. 6.. As said above, the Sales Tax Officer has construed these contracts as contracts for sale of goods and not as works contracts. The assessees, therefore, preferred two appeals before the Assistant Commissioner for the two period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sold and purchased in such a contract is not a chattel but is the labour and skill of a particular type, which results in producing that chattel. The underlying principle is that in an agreement to purchase one kind of property, there cannot be a sale of a different kind of property. If a different kind of property is eventually acquired in execution of an agreement to purchase the intended property, that acquisition is merely incidental. Title to such a property is acquired not as a result of any contract between the parties because what the parties actually intended to agree upon was altogether a different thing. It is thus first necessary to decide what was really and actually the subject-matter of contract between the parties. If after scrutinising the different terms of the contract between the parties it can be conveniently said that it was essentially a contract for labour and supply of goods for achieving the desired result, then it does not matter whether eventually title to some property passes from one of the parties of the contract to the other party. It is with this view in mind that we presently propose to scrutinise in detail the different terms of the contract bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion that such a mention of a specific rate at which unit of work is to be supplied may be consistent even with an agreement to sell goods but it cannot be said that it is inconsistent with cases where only labour is agreed to be supplied, for the simple reason, that at the end of the contract, some valuation is required to be put even on labour which brings about the desired result. Thus taking the broad view of the four main features of this clause, we are of the opinion that this clause leans more in favour of a contract which was intended for procuring a particular type of work or labour. 10.. Proceeding further, clause No. 2 says that the work should be executed only in accordance with the lay out drawing including the drawings for components to be supplied by the administration. This again shows that the execution of the work was to be made only in the manner desired by the railway administration. 11.. Then we find clauses Nos. 3 and 4 which make stipulations about the security deposit of Rs. 8,000 by the contractor and deduction of 10 per cent. of the amount from each of the progressive running bills submitted by the contractor. Both these clauses should be read toge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilisation of these different parts during the course of construction should be approved by the appropriate officer. The clauses, therefore, make it clear not only that the materials of a particular specification, as required by the railway administration, had to be utilised, but also specify the manner in which the construction of the body was expected to be carried out. This again emphasises the work aspect of the contract. 13.. Proceeding further we find that the materials required for electrical fittings in the coaches are stipulated to be supplied by the railway administration. This particular condition is found in clause No. 11 of the contract. Further the last portion of clause No. 9 provides that provision for the hand brake arrangements in the guard's compartment should be done by the railway administration itself and not by the contractor. Again according to clause No. 11, an appropriate railway staff is expected to work in association with the contractor's staff for the purpose of installation of electrical equipment. These provisions of the contract, therefore, show that apart from the underframes, which were initially supplied by the railway administration, the admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... type. If the answer is in the negative then even this clause can be appreciated along with other terms and conditions of the contract. 16.. Then coming to clause 17, it says that the contractor shall be responsible for the safe custody of the carriages under construction as well as of the materials supplied by the administration for the purpose till the carriages are "taken over" by the railway administration. It should be noted here that in spite of the fact that it is the contractor, who is supposed to bring materials for the construction of the bodies on the underframes, this term of the contract emphasises the fact that the contractor is responsible for the "safe custody" of the carriages under construction. Obviously, the expression "safe custody" emphasises the fact that the construction, which is so far carried out under the supervision of railway, should be preserved in the same condition. In our opinion, the expression "safe custody" and "taken over " reveal that what the parties wanted to emphasise was that work of a particular type, which is carried out, should be preserved and not mutilated even before the carriage is complete and is "taken over" by the administratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his legal representatives is able to comply with the quality and the specification required by the purchaser, the purchaser would not generally insist that only a particular person should comply with its specifications and quality. Therefore, in our opinion, clauses 19 and 25 are such that they should conclude the question as to whether this contract was a works contract or a contract for the purchase and sale of a chattel as a chattel. Moreover, by reference to clause No. 25 we find that in case of death or insolvency of the contractor, the legal representatives or the liquidators of the contractor would be entitled only for the return of the security deposit and money due for the "work done" in the contract. The expression "money due for the work done" under the contract clearly emphasises the work aspect of the contract and shows that what the parties were interested in was principally the "work done" in execution of the contract, and not the "chattel" which would eventually emerge as a result of the total execution of the work. 19.. Then we get another group of clauses, namely, clauses Nos. 24, 30, 32 and 33. Clause No. 24 is with regard to the indemnity to the railway ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ications. 21.. In determining the true nature of a transaction it is permissible to consider how the contract was intended to be performed. It is not the letter of a document but its spirit and essential character which would help us to ascertain whether the transaction evidenced by the document partakes of the nature which renders it liable to the tax in question. Analysis of the different terms of the contract between the parties shows that what was intended to be purchased was labour and skill of the contractor so that the wagons of a desired design and pattern can be obtained. It was, in our opinion, only for this purpose that not only the specifications of the different parts to be utilised in body-building but also the manner and method of executing the contract have been provided for in the agreement. 22.. One basic difference between a contract for sale of goods and a works contract is that while in the former the goods are sold as goods without the purchaser bothering in the least about the manner and method of employment of labour in producing these goods, in the latter, the emphasis is mainly on the manner, method and skill with which the labour is employed in produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dhra Pradesh v. Guntur Tobaccos Ltd.[1965] 16 S.T.C. 240 (S.C.). In this case, three forms of such a contract are pointed out by the Supreme Court. So far as the principle is concerned, it is not necessary to state the facts of that case. But we find that at page 255 of the report, their Lordships have discussed these three forms of such works contracts. This would be apparent from the following observations: "The fact that in the execution of a contract for work some materials are used and property in the goods so used passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that account to sell the materials. A contract for work in the execution of which goods are used may take one of three forms. The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; it may be a contract for work in which the use of materials is accessory or incidental to the execution of the work; or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this case is covered by the provisions of that section. Shri Shah has put much emphasis on the fact that on execution of this contract, a specific property, namely, the body built on the underframe supplied happened to pass to the railway department and since title over this property was to pass on consideration of the payment of Rs. 19,141 in lump, it became a contract for the sale of that property. Even this argument is not acceptable because as stated above, if the real nature of the contract was to obtain labour which would result in the manufacture of a particular property, it is the labour and not that property, which forms the subject-matter and, therefore, the transfer of property which eventually takes place is not qua property. We further find that this aspect of the case is considered at length by the Supreme Court in The State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd.[1958] 9 S.T.C. 353 (S.C.). At page 377 of the report, we find that a contention almost similar to the one raised by Shri Shah was urged on behalf of the department even in that case. The contention was that even if it is held that an agreement between the parties was necessary to constitute a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... title to a particular property passes from one person to the other person, may be taken as one of the factors which would indicate the real nature of a contract. But it cannot be taken as the only factor which would finally determine the true nature and character thereof. This is evident by a reference to the following observations made by the Supreme Court in the above referred case of Gannon Dunkerley and Co.[1958] 9 S.T.C. 353 (S.C.).: "Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods. Unless all these elements are present, there can be no sale. Thus, if merely title to the goods passes but not as a result of any contract between the parties, express or implied, there is no sale." Even in the case of Guntur Tobaccos Ltd.(1), observations on the same lines are found at page 256 of the report: "In order that there should be a sale of goods which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract was a contract for work or a contract for sale of goods. By a majority decision, the Supreme Court decided that the contract as a whole was a contract for sale and, therefore, the taxing provisions of the sales tax were attracted. It was pointed out by Shri Shah by reference to the terms of the contract between the parties in that case that these terms are mostly similar to the terms found in the contract between the assessee and the railway department in the case before us. Shri Shah contended that even in Patnaik's case(2), chassis were supplied to the assessee and it was the assessee who constructed body on these chassis by utilising its own materials and labour. It was further pointed out that the price was stipulated to be paid as per unit of the body so built and the property in that unit ultimately passed from the assessee to the State of Orissa on payment of the stipulated amount. Shri Shah also argued that reference to the decision recorded by the Supreme Court shows that their Lordships held that the liability to sales tax was attracted because the transaction amounted to sale inasmuch as eventually the property in the unit, which was produced by the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Patnaik's case[1965] 16 S.T.C. 364 (S.C.). , there was no prohibition against the assignment of the contract and there was nothing to suggest the personal and objective character of the contract as found in clauses 19 and 25 of the contract before us. (4) Provisions as regards supervision were undoubtedly there in Patnaik's case[1965] 16 S.T.C. 364 (S.C.). , but the provisions as regards rectification of defects and cost of the extra materials required to rectify the defective work as found in clause 18 of the contract before us were absent in the contract considered in Patnaik's case[1965] 16 S.T.C. 364 (S.C.). (5) In Patnaik's case[1965] 16 S.T.C. 364 (S.C.). , there does not appear to be any stipulation about the manner and method of making payment to the workmen and from the reported judgment, we do not find anything to suggest that there was any stipulation between the parties in that case, regulating the contractor's relations with his workmen as found in the contract before us. (6) Unlike this case, there was no stipulation in Patnaik's case[1965] 16 S.T.C. 364 (S.C.). that electric materials should be supplied by the State or any other assistance should be rendered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Supreme Court is not that where the title to property passes from one party to the other, the contract must necessarily be that of sale of goods. These decisions are based on their own peculiar facts but if any guiding principle is to be adduced from them, it is that at the time of considering the real nature and character of a transaction, one question which may be inquired into is whether title to the subject-matter of contract passes from one party to the other and whether it does so on payment of consideration as stipulated in the contract. This was also the ratio of the decision given by the Supreme Court in Kailash Engineering Works[1967] 19 S.T.C. 13 (S.C.). on which the assessee has put reliance. Bound as we are by this view, we may as well apply this test to the facts under our consideration. 31.. While applying this ratio to the facts of the case under our consideration, the first question which would arise for consideration is whether the commodity which the assessees have produced in execution of the contract was their sole property which they could have transferred as such. One test which is accepted by the Supreme Court in the case of Commissioner of Sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anything except the whole unit of railway coach. The body over the underframe which was built by the assessee was not the subject-matter of the contract and was at no stage contemplated to be delivered by the assessee to the railway department. Under the circumstances, the unit of delivery, which is contemplated by the contract, is the one integrated railway coach in its individual existence, meaning thereby that it was the coach built on the underframe supplied by the railway. If this be so, could it be said that such a coach was, in the words of the Supreme Court as used in the case of Purshottam Premji[1970] 26 S.T.C. 38 (S.C.). , "the sole property of the party who produced it". We have no doubt about the correct answer to this question because it cannot be disputed that not only the underframes but also electrical equipments used in building of these coaches were provided by the railway administration. Over and above these materials the railway administration was also expected to supply some labour for providing hand brake arrangements in the guard's compartment and also for fitting the electrical equipments (vide clauses 9 and 11 of the agreement). In this view of the matter, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... build an engine and send the same to the colliery of the defendant where the engine was erected. The court took the view that the engine was not contracted to be delivered as an "engine" and that there was no sale of the engine as an entire chattel. The facts of the case of Richardson Cruddas Ltd.[1968] 21 S.T.C. 245 (S.C.). further show that there was also a contract for installation of "bottle cooling equipment". The assessee in that case fabricated the component parts of this equipment according to the requirements and specifications of the customer and then despatched the component parts to the site and installed the same on a suitable base and foundation at the premises of the customer. On these facts the Supreme Court held that the contract being one for supply for an inclusive price a specially designed fabricated unit to be assembled and installed by specially trained technicians in the premises of the customer, it was not a contract for sale of a unit or different parts of the unit as specific goods, but a works contract. This decision of the Supreme Court was subsequently followed in a later decision given in the case of Man Industrial Corporation Ltd.[1969] 24 S.T.C. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the contract essentially was one of work and labour and the supply of jari materials in the execution of the embroidery work was merely ancillary. In substance, the contract was for skill and labour. This case is obviously in favour of the applicant-assessee of this reference. In the other case, namely, Sarvodaya Motor Works(2), the facts were that the assessee carried on business of body-builders on motor chassis supplied by customers. They entered into a contract with a firm for the construction of the body of a truck belonging to that firm. The assessees agreed to construct the body of the truck in accordance with the specifications mentioned in the contract for a lump sum payment and undertook to deliver the truck on or about a certain day. The assessees prepared two bills, one in respect of the materials used for building the body and another for labour charges. On these facts the assessees contended that the contract was not a contract for sale of goods but was either a purely works contract or a composite agreement consisting of two distinct and separate contracts, one for the supply of materials and the other for doing the work. This court held that on the facts and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contract was liable to determination if the assessee became insolvent or suspended payment or compounded with its creditors, as is the case before us. On these facts, both the learned Judges of a Division Bench of the said High Court have taken a view that the contract was not a contract for sale of goods but was a works contract and was therefore not liable to sales tax. By reference to the separate judgments recorded by both the learned Judges of the said Division Bench, we find that most of the important clauses of the contract, which they considered were quite similar to the important clauses of the contract before us. On a consideration of these clauses, the learned Judges have come to the conclusion as stated above. On the question whether the whole of the coach including the underframe would at any time become the sole property of the assessee-contractor, we find the following pertinent observations made by Pathak, J., in his separate judgment: "Significantly, the underframes remain throughout the property of the railway. The contract provides that when underframes are supplied to the assessee they will be supplied only after the assessee executes an indemnity bond for t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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