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TMI Blog1995 (2) TMI 419X X X X Extracts X X X X X X X X Extracts X X X X ..... and materials in preparation, though the Tribunal accepted the respondent's submission that property in vessel as then constructed and property in the materials prepared and set apart for the construction of the launch was transferred from the respondent to the Director-General of Supplies and Disposals, New Delhi, against payments made in instalments under condition No. 22 of the special conditions attached to the agreement?" 2.. The assessee, M/s. Mazgaon Docks Limited, is a company owned by the Government of India. During the period April 1, 1968 to March 31, 1969, it supplied one inshore minesweeper to the Indian Navy at the cost of Rs. 42,50,000 and one twin screw steel motor launch to the Director-General of Supplies and Disposals, New Delhi, at a cost of Rs. 12,10,000. The Sales Tax Officer held these transactions to be transactions of sale of vessels subject to levy of sales tax under the Bombay Sales Tax Act, 1959 ("the Act"). While doing so, the Sales Tax Officer, rejected the claim of the assessee that the above transactions were indivisible works contract not involving sale of goods. Against the above order of the Sales Tax Officer, the assessee appealed to the Assis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Reid v. Macbeth Grey [1904] AC 223, Mc Dougall v. Aeromarine of Emsworth Ltd. [1958] 3 All ER 431 and Sir James Laing Sons Limited v. Barclay, Curle Co. Ltd. [1907] AC 35. It was further submitted that English authorities on interpretation of different sections of English Sale of Goods Act, 1893, deserve full consideration. Reliance was also placed in support of this contention on the decision of the Supreme Court in Consolidated Coffee Ltd. v. Coffee Board reported in [1980] 46 STC 164; AIR 1980 SC 1468. Our attention was also drawn to some of the provisions of the Sale of Goods Act, 1930, particularly sections 21, 22 and 24 thereof, and the decisions of the Supreme Court in State of Gujarat v. Kailash Engineering Co. (Pvt.) Ltd. [1967] 19 STC 13, Carl Still G.m.b.H. v. State of Bihar [1961] 12 STC 449, Chandra Bhan Gosain v. State of Orissa [1963] 14 STC 766 and a decision of this Court in Mckenzies Limited v. State of Bombay [1962] 13 STC 602. 4.. The above submission of Ms. Anklesaria was vehemently opposed by Mr. R.V. Patel, learned counsel appearing for the assessee. According to him, though the contract was for the construction of ship which was a movable property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (a) System of payment- Stage payments will be made at the following stipulated intervals: (1) When keel is laid 15% (2) When vessel is framed 15% (3) When hull is welded 15% (4) When launched 20% (5) When vessel is completed and accepted after final inspection and/or trial expiry of 25% (6) After expiry of six months guarantee period 10% Provided that the contractor gives the purchaser 14 days notice before any payment is likely to become due and the amount of the work done. On payment of each instalment the portion of the work which has been completed and for which payment has been made shall be at once deemed to be the property of the purchaser but in the event of it being found not to be in proper condition for any reasons at any time, the deficiency shall be made good by the contractor. The decision of the inspector in this respect will be final and conclusive." Sub-clause (d) makes it clear that,"The price is exclusive of any State sales tax and/or other taxes of a like or similar nature. All such taxes if payable or levied o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. 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 (sic) for the purpose of the contract shall become and shall, with all additions thereto, respectively continue to be the property of the purchaser subject to the purposes of the contract, but the purchaser shall not be liable for any loss or damage by theft, fire, stress of weather or otherwise howsoever. Upon the due completion of contract all such materials which have not been actually used for the purpose of contract shall become the property of and be relinquished to the contractor." It may also be expedient to refer to clauses 12 and 20 of the special conditions applicable to contracts governing supplies of sea and river craft which deal with trials by the Inspector and taking over of the vessel. Clause 12 which provides for trial by the Inspector reads as follows: "Trials by Inspector.The contractor shall, at his own expense and risk in all respects, within the time within which the vessel is to be comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the materials, is conclusive, although such matters may be taken into consideration in determining in the circumstances of a particular case whether the contract is in substance one for work and labour or one for the sale of a chattel." This passage has been quoted with approval by the Supreme Court in a number of cases. 7.. Despite the clear legal position, difficulties do arise in distinguishing between the two types of contracts. As observed by the Supreme Court in Union of India v. Central India Machinery Manufacturing Co. Ltd. [1977] 40 STC 246 (at page 270): "...........Under section 4 of the Sale of Goods Act, 1930, also, in the definition of the term 'sale' stress is laid on the element of transfer of property in the goods. According to the Roman jurists, also, the purport of a contract of sale is that the seller divests himself of all proprietary right in the thing sold in favour of the buyer. It is this requisite which often distinguishes a contract of sale of goods from a contract for work and services. Even so, the difficulty of distinguishing between these two types of contracts is an age-old one. It was much debated even by the Roman jurists (see Inst. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion one way or the other. It will depend upon the facts and circumstances of each case. (See State of Gujarat v. Variety Body Builders [1976] 38 STC 176 (SC) at page 187.) 10.. The various tests laid down by the courts from time to time, therefore, merely afford guidelines for determining the true nature of the contract. One of the important tests is to find out whether the contract is primarily a contract for supply of materials at a price agreed to between the parties for the materials so supplied and the work or service rendered is incidental to the execution of the contract, if so, the contract is one for sale of materials and the sale proceeds would be exigible to tax. The question whether the contract is for sale of goods or for executing works is largely one of fact, depending upon the terms of the contract, nature of the obligations to be discharged thereunder and the surrounding circumstances. It is the true intention and result of the contract that is decisive. If the intention and result of the contract is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract of sale. In the case of contract of sale, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act for sale of goods (bus bodies) and the assessees were liable to pay sales tax on the amount received by them from the State of Orissa for the construction of the said bus bodies. 12.. The above decision was followed by the Supreme Court in T.V. Sundram Iyengar Sons v. State of Madras [1975] 35 STC 24. In this case also, the Supreme Court was concerned with the question whether the construction of the bus bodies and the supply of the same by the assessees to their customers was in pursuance of a contract for sale as distinguished from a contract for work and labour. The salient features of the dealings between the assessees and their customers were that the property in the material used by the assessees in constructing the bus bodies never passed to their customers during the course of their construction. It was only when the complete bus with the body fitted to the chassis was delivered to the customer. There was nothing to prevent the assessee from removing a plank, or other material after fixing it to the chassis and using it for a different bus body. The Supreme Court observed: "........The present is also not the case wherein the assessee undertakes to construct som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking for their safe custody. The assessee-company was obliged to hold as trustee for Government "any raw materials for the execution of the contract" procured with the assistance of Government either by issue from Government stock or purchase under arrangement made or permit or licence and to use such materials economically and solely for the purpose of the contract against which they were issued and not to dispose 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 Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus the contract is for supply of one unit of motor launch built as per specifications contained in the contract for a price of Rs. 12,10,000. Evidently, the object of the work undertaken by the assessee is the transfer of the property in, and the delivery of the possession of the motor launch ("vessel") to the Director-General of Supplies and Disposals for a price of Rs. 12,10,000. The place of delivery is Bombay harbour. It is to be delivered afloat at Bombay harbour. The contract has thus all the essential attributes of a contract of sale of a motor launch. The agreement is for sale of motor launch manufactured by the assessee as per specifications contained in the agreement for a price. The property in the said motor launch passed to the purchaser on delivery of same afloat at Bombay harbour. It is, therefore, clear that it is a contract for sale of motor launch and not a works contract. 16. It may be appropriate at this stage to deal with the argument of the counsel for the assessee based on clause 19 of the schedule of acceptance of tender which deals with the system of payment and clause 22 of the special conditions which provides for vesting of ownership of materials i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submission. We, however, do not find any merit in the same. It is well-settled that the true nature of the contract cannot depend on the mode of payment of the amount provided in the contract. The payment of the amount due under the contract may be spread over the entire period of the execution of the contract with a view either to put the manufacturer or contractor in possession of the funds for the execution of the contract or to secure him against any risk of non-payment by the customer. That cannot have any bearing on the determination of the question whether the contract is one for sale or for work and labour. [See Sentinel Rolling Shutters Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax [1978] 42 STC 409 at page 417 (SC).] 18.. Equally untenable is the contention of the learned counsel of the assessee that the effect of clause 22 of the special conditions vesting the materials in the purchaser, Director-General of Supplies and Disposals, is that those materials themselves must be taken to have been sold. This clause in our opinion, is merely intended by the parties to form a security. But what is sold is a complete motor launch to be delivered afloat at Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e House of Lords in Sir James Laing Sons Limited v. Barclay, Curle Co. Limited [1907] AC 35. In that case, the respondents, a Glasgow firm of ship-builders, agreed to build two ships for an Italian firm, according to certain specifications and under the superintendence of an agent appointed by the Italian firm, for a certain amount payable by instalments at specified stages of construction; but delivery of the ships was not to be considered to be completed till they had passed trials at Greenock and off the Italian coast. Before the ships were fully constructed, but after several instalments had been paid, the appellants, an English firm of ship-builders, arrested the ships in Scotland for a debt alleged to be due to them by the Italian company, but on a petition to the First Division of the Court of Session the arrestments were recalled. This decision of the First Division was affirmed by the House of Lords and it was held that no intention was shown in the contract to make delivery of or to pass the property in the ships before they were completed, and that the arrestments were properly recalled. 21.. Reference may also be gainfully made to a decision of Queen's Bench Divis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales of Goods Acts. In our opinion, there can be no controversy in this regard in view of the decision of the Supreme Court in Consolidated Coffee Ltd. v. Coffee Board [1980] 46 STC 164; AIR 1980 SC 1468 where it is held: "...............It is well-known that our Sale of Goods Act, 1930, is based upon and is largely a reproduction of the English Sale of Goods Act, 1893, and in principle as well as in most details the law of sale of goods in both the countries is now the same and, therefore, the English authorities on interpretation of different sections, although not technically binding in India, would have great persuasive value." 24.. Clauses similar to clause 22 of the special condition in the present case also came up for consideration before the Supreme Court in a number of cases. In Firm of M/s. Peare Lal Hari Singh v. State of Punjab [1958] 9 STC 412, clause 33 of the general conditions of contract issued by the Government was before the Supreme Court. It read: "All stores and materials brought to the site shall become and remain the property of Government and shall not be removed off the site without the prior written approval of the G.E. But whenever the works are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreed terms, the contractor will be entitled to remove from the site their tools, tackles, machines, packing materials, protection roof and other materials as are surplus to the requirements of the normal operation of the coke oven and by-products plant provided that no claim for increased cost is made in respect of anything so removed." It was contended that the above clause in effect amounted to sale of the materials to the owner when they were brought on the site. The Supreme Court referred to its earlier decision in Firm of M/s. Peare Lal Hari Singh's case [1958] 9 STC 412 and compared the above clause with clause 33 in that case and held (at page 457): "......In the present case, clause 15 is even clearer that no sale of materials, as such, was intended, because it expressly provides that if they were destroyed by fire, tempest or otherwise, the loss would fall not on the owner, which must be the result if the property is taken to have been absolutely transferred to it, but on the contractor." 26.. In our opinion, the ratio of the above decisions is squarely applicable to the construction of clause 22 of the special conditions in the present case. Applying the same ..... X X X X Extracts X X X X X X X X Extracts X X X X
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