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TMI Blog1983 (9) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... er at a cost of Rs. 30,60,000 as per the conditions set out in annexure-A of the agreement coupled with conditions of the contract as contained in form No. D.G.S. D-68 (Revised) including clause 24 thereof and D.G.S. D-72 as modified up to date will apply. Date of delivery: 18 months from the date of order. Terms of delivery: Free delivery to consignee at Port Blair. Special instructions: (a) Terms of Payment: (i) 15 per cent when keel is laid. (ii) 15 per cent when vessel is framed. (iii) 15 per cent when hull is completed. (iv) 20 per cent when vessel is launched. (v) 25 per cent when vessel is completed and accepted after final inspection for trial. (vi) 10 per cent on the expiry of guarantee period of six months. N.B. (i) For the above stage payments you shall have to furnish bank guarantee in the form enclosed as annexure "VI" and comprehensive insurance policy duly assigned to the President of India. (ii) The ferry will be delivered afloat at your yard in Visakhapatnam and will be accepted by consignees after inspection and trials at Visakhapatnam and for the same provisional acceptance certificate will be issued so as to enable you to claim (v) st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld build the ships according to the specifications given by the owners, that during the period the parts are assembled the owners are entitled to depute their own supervising staff, if anything had been omitted from the specification, then it has made at certain stages of the contract and the progress of the work, that the delivery is to be replaced at the expense of the builder, that the payment of the price has to be made at certain stages of the contract and the progress of the work, that the delivery is to be made either at Bombay or Calcutta or any port in India, that any materials unutilised shall be the property of the owners from the date of payment of the first instalment amount, that all the parts should bear the marks of the owner and all the parts which are intended to be appropriated to the contract should become the property of the owners. The question is whether the builder is liable to sales tax. Relying on the decisions in State of Gujarat v. Kailash Engineering Co. [1967] 19 STC 13(SC); AIR 1967 SC 547 and Patnaik Co. v. State of Orissa [1965] 16 STC 364 (SC); AIR 1965 SC 1655 this Court held: "The builders have to carry on the construction of the vessels acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, the respondent was made liable, under the contract, to reimburse the Railway for loss by fire, etc. On the aforesaid material, the Supreme Court held, that "as the terms of the contract indicated that the respondent was not to be the owner of the ready coaches and that the property in those bodies vested in the Railway even during the process of construction, the transaction was clearly a works contract and did not involve any sale." In State of Gujarat v. Variety Body Builders [1976] 38 STC 176 (SC) the Supreme Court held, that "as there was a written contract it would be necessary for the court to find out therefrom the intention of the parties executing the contract. The intention of the parties at the time of entering into the contract was not to transfer any completed railway coach by the contractor to the railway. The end-product, being the railway coach, was the result of work, labour and materials of the contract as well as of the railway as also of the latter's constant supervision and control. From the totality of the material terms and conditions in the agreement, it was not possible to say that the parties intended that the contractor transferred the proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of them without the permission of the Government. One of the clauses in the indemnity bond provided that the company should hold at its works the stores and articles of the railways in respect of which advance might be made to the company. The Special Conditions also provided that 'on account' payment was part of the 'full contract price' for each completed wagon and that the Government had the pre-emptive right to purchase all surplus or unserviceable materials from the company on its being paid such price as the Government might fix with due regard to the condition of the materials. The clause relating to sales tax provided that if and when State and inter-State sales tax on the stock or order became payable under law such payments would be reimbursed by the Railway Board, but no sales tax on materials including steel or components would be reimbursed by the Railway Board." After extracting the definition of "sale" under section 2 of the Rajasthan Sales Tax Act, the Supreme Court held: "Thus, transfer of property in goods for a price is the linchpin of the definition. Under section 4 of the Sale of Goods Act, 1930, also, in the definition of the term 'sale' stress is laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel." Also held: "The upshot of the above discussion is that with the exception of wheelsets (with axle boxes and couplers), substantially all the raw materials required for the construction of the wagons before their use belong to the company and not to the President/Railway Board. In other words, with the exception of a relatively small proportion of the components supplied under Special Condition 6, the entire wagon including the material at the time of its completion for delivery is the property of the company. This means that the general test suggested by Pollock and Chalmers has been substantially, albeit not absolutely, satisfied so as to indicate that the contract in question was one for the sale of wagons for a price, the company being the seller and the President/Railway Board being the buyer. It is true that technically the entire wagon including all the material and components used in its construction cannot be said to be the sole property of the company before its delivery to the purchaser. But as pointed out by Lord Halsbury in the above-q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition to the price stipulated in the contract and the terms of payment provided "25 per cent advance, 65 per cent against delivery and remaining 10 per cent after completion of erection and handing over of shutters to the satisfaction" of the company. The assessee submitted the bill to the company after completion of the fabrication of the rolling shutters, but before they were erected and installed at the premises of the company. The Supreme Court held: "Now the question whether a particular contract is a contract for sale or for work and labour is always a difficult question and it is not surprising to find the taxing authorities divided on it................The distinction between a contract for sale and a contract for work and labour has been pointed out by this Court in a number of decisions and some tests have also been indicated by this Court, but it is necessary to point out that these tests are not exhaustive and do not lay down any rigid or inflexible rule applicable alike to all transactions. They do not give any magic formula by the application of which we can say in every case whether a contract is a contract for sale or a contact for work and labour." Further h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract as the fabrication and supply and it is only on the erection and installation of the rolling shutters that the contract would be fully executed..............These component parts are fabricated by the manufacturer and taken to the site and fixed on the premises and then comes into existence a rolling shutter as an identifiable commercial article.............. After fixing the clamps to the grouted portion of the wall, the same is plastered and then the iron curtain of the shutter is lowered through the guide channels to operate the shutter manually up and down. The rolling shutter is then 'born' and it becomes a permanent fixture to the premises...................All these operations take place at the site after despatch of the component parts of the rolling shutter...................It will, thus, be seen that the component parts do not constitute a rolling shutter until they are fixed and erected on the premises. It is only when the component parts are fixed on the premises and fitted into one another that they constitute a rolling shutter as a commercial article and till then they are merely component parts and cannot be said to constitute a rolling shutter. The er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abricated them, but at no stage does he become the owner of the crane as a unit so as to transfer the property in it to the customer. The crane comes into existence as a unit only when the component parts are fixed in position and erected at the site, but at that stage it becomes the property of the customer, because it is permanently embedded in the land belonging to the customer. The result is that as soon as the crane comes into being, it is the property of the customer and there is, therefore, no transfer of property in it by the manufacturer to the customer as a chattel. It is essentially a transaction for fabricating component parts and putting them together and erecting them at the site so as to constitute a 3-motion electrical overhead travelling crane." The emerging guidelines, though they cannot be termed as infallible tests of universal application, on the above conspectus, are: (1) The essence of the contract or the reality of the transaction as a whole has to be taken into consideration, in judging whether the contract is for a sale or for work and labour. (2) If the thing to be delivered has any individual existence before the delivery, as the sole property of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... semblage and erection, is also one for contract of work and labour. The fabrication and erection is one single indivisible process and the crane comes into existence only when the erection is complete. Conversely, where manufacture or fabrication is a highly specialised and skilled job and the assemblage is not correspondingly highly specialised job, the assemblage being merely incidental or accessory to the end-product, then it becomes a sale. The features of the case on hand are: The petitioner is a builder of ships and ferries. The agreement entered into is for the construction and supply of ferry for a price of Rs. 30,60,000. The construction, no doubt, is to be supervised and inspected by the men of the respondent. The ferry has to be delivered within 18 months from the date of the order to the consignee at Port Blair. Payment of price is in six instalments, but this would be against the bank guarantee. At the end of every stage payment, the work, as finished by them, will have to be ensured by the builder and then to be assigned by endorsement in favour of the respondent. The ferry will have to be delivered afloat for provisional acceptance after inspection at the builder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to pay the premia which shall from time to time become payable in respect thereof respectively, then and in any or either of the cases aforesaid, it shall be lawful for, but not imperative upon, the purchaser to effect and keep in force, so long as he shall think fit, any such insurance or insurances either against loss or damage by fire or accident, and to pay any premium or premia that may be necessary for that purpose, and the contractor will on demand pay to the purchaser any sum or sums which may at any time be expended by him or by his directions for such purposes, or the purchaser may at his discretion deduct any such sum or sums from any money which may at any time or times become payable by him to the contractor under this or any other contract." Clause 22 reads thus: "22. Ownership of materials on payment of first instalment.-Upon payment of the first instalment of the contract price, the vessel so far as then constructed and all machinery and materials either wholly or partially constructed or in preparation and set apart from time to time for the purpose of the contract shall become and shall, with all additions thereto, respectively continue to be the property of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. However, it is the responsibility of the builder to deliver the vessel at his own cost and expense, being obligated in terms of the contract to keep the vessel insured, till the completion of the contract. The property at the completion of the stage craft is said to be the property of the purchaser, but all through, till the completion of the vessel any damage caused to it will be at the risk of the builder. Even the stores bought by the purchaser, though said to become his property after being inspected by the buyer, it would nevertheless be in the custody of the builder till the completion of the vessel and on completion the remaining property will revert to the builder. The learned counsel for the petitioner-assessee laid heavy stress on the Supreme Court decision in Ram Singh Sons Engineering Works v. Commissioner of Sales Tax [1979] 43 STC 195 (SC), and argued that since the features are akin to the case on hand, the ratio is beneficial to the assessee. We apprehend, the ratio will not be of much assistance to the assessee. The nature of the contract and so the ingredients of it are at variance. The contract in the cited case is for fabrication and erection of 3-motion ..... X X X X Extracts X X X X X X X X Extracts X X X X
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