PETITIONER:
COMMISSIONER OF COMMERCIAL TAXES, MYSOREBANGALORE
Vs.
RESPONDENT:
HINDUSTAN AERONAUTICS LTD.
DATE OF JUDGMENT17/12/1971
BENCH:
SIKRI, S.M. (CJ)
BENCH:
SIKRI, S.M. (CJ)
BHARGAVA, VISHISHTHA
DUA, I.D.
KHANNA, HANS RAJ
MITTER, G.K.
CITATION:
1972 AIR 744 1972 SCR (2) 927
CITATOR INFO :
D 1974 SC2309 (16)
R 1976 SC2108 (48)
D 1977 SC1537 (23,24,25,35)
E 1984 SC 744 (24)
ACT:
Sales Tax-Contract for manufacture and supply of railway
coaches-if sale or Works-contract.
HEADNOTE:
The correspondence between the Railway Board and the
respondent (assessec regarding the terms and conditions for
the manufacture and supply of railway coaches, and the
indemnity bond in respect of the contract, disclosed that,.
(i) The Railway booked capacity of the assessee for the
purpose of construction of railway coaches;
(ii) an advance, on account, was made to the extent of 90%
of the value of the material on the production of a
certificate by the inspecting authority.
(iii) the material used for the construction of coaches
before its use was the property of the railway;
(iv) there was no possibility of any other material being
used for the construction, and
(v) the words used in the contract were, ‘manufacture and
supply of the following coaches.’
On the question whether there was a sale of railway coaches
liable to sales tax. or only a works-contract,
HELD : The answer to the question whether a contract is a
works contract or a contract of sale depends upon the
construction of the terms of the contract in the light of
surrounding circumstances. [935 A-B]
(1) In the present case. when all the material used in the
construction of a coach belonged to the Railways there
cannot be any sale of the coach itself. It was a pure
works-contract, the difference between the price of a coach
and the cost of material being only the cost of service
rendered by the assessee. [935 G-H]
(2) Whether the wheels-sets and under frames were supplied
free of cost or not makes no essential difference, [936 A-B]
(3) The material and wage escalator and adjustments
regarding final price mentioned in the contract are neutral
factors. [935G]
State of Gujarat v. Kailash Engineering Co., 19 S.T.C. 13
(S.C.) followed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 710 of 1968.
Appeal from the judgment and order dated March 1, 1967 of
the Mysore High Court in Sales Tax Appeal No. 8 of 1966.
928
Somanatha Iyer, R. B. Datar and M. S. Narasimhan, for the
appellant.
S. T. Desai, Mrs. A. K. Verma, J. B. Dadachanji, O. C.
Mathur and Ravinder Narain, for the respondent.
B. Sen, Santosh Chatterjee, G. S. Chatterjee and P. K.
Chakravarti, for intervener No, 1.
D. Goburdhun, for intervener No. 2.
The Judgment of the Court was delivered by
Sikri, C.J. In this appeal by certificate granted by
the High Court of Mysore the only question involved is
whether the deliveryby the respondent-Hindustan
Aeronautics Ltd.-hereinafter referred to as the assessee-to
the Railway Board of railway coaches model 407, 408 and 411
is liable to sales tax under the Central Sales Tax etc.
The Commercial Tax Officer, by assessment order dated March
28, 1964, in respect of the assessment year 1958-59,
included the turnover in respect of the supply of these
coaches. The Sales Tax Officer rejected the contention of
the assessee that therewas no sale involved in the
execution of the works-contract inview of certain decisions
of the High Courts; e.g., McKenzievLimited v. The State
of Bombay(1) and Jiwan Singh v. State of Punjab (2).
In appeal, the Deputy Commissioner of Commercial Taxes
confirmed the order. In revision the Commissioner of
Commercial Taxes also came to the same conclusion. He
observed:
“The contracts specifically mentioned that the
under-frame shall always remain the property
of the Railway Board. On the other hand, the
order placed with the assessee company here
was for the ‘manufacture and supply’ of
railway coaches. The payment to the assessee
company is specifically referred to as
‘price’. The conditions normally included in
contracts for works are absent in this order.”
He further observed :
“. . . I would like to reiterate here that
even the actual contract is for manufacture
and supply of rail coaches. There is no
mention that the rail coaches are to be
constructed on the underframes of the
indentor …….. If it was really a works
contract the under-
(1) 13 S.T.C. 602. (2) 14 S.T.C. 957.
929
frames would have been made available for
construction instead of being ‘supplied free
of cost’ and the indentor’s lien on them would
have been made clear. The plain meaning of
the contract is that the underframes were
transferred to the assessee company free of
cost by the Railway Board and that after
construction of rail coaches on them, the rail
coaches were sold to the Railway Board at the
agreed price. The agreement does not also
contemplate any inspection in the course of
execution as would normally be provided for in
a works contract. The only inspection is
after completion and at Perembur.”
He thought that case of the assessee in respect of model 411
railway, coaches was Worse. Regarding the financial
arrangement between the Railway Board and the assessee, he
observed
“The Railway Board made only advance payments
for purchase of materials and did not itself
procure the material and supply them to the
assessee company. The condition that the
materials become property of the Railway Board
as and when purchased is only for purposes of
providing adequate security for the advances.
In the circumstances, the materials can be
deemed to be hypothecated to the Railway Board
and the advance payments are really part
payment of the final price. The transaction
relating to Rail coaches of model 411 is
clearly a sale.”
He, therefore, confirmed the appellate order of the Deputy
Commissioner.
The assessee then took an appeal to the High Court of Mysore
under s. 24(1) of the Mysore Sales Tax Act read with s. 9(3)
of the Central Sales-tax Act. The High Court was not
satisfied with the material on record and directed that a
report be sent on three points, viz :
“(i) Whether and if so to what extent the
assessee has drawn advance payment from the
Railway Board in respect of the material
utilised for completing the contracts in
question;
(ii) Whether any material, in respect of
which no advance have been drawn, has been
utilised by the assessee- for completing the
contracts; and
(iii) Whether the assessee has used for
completing the contracts any material not
specifically procured for the, purposes of
completing the contracts.”
930
The Commercial Tax Officer submitted his report, and certain
extracts may be reproduced below :
“My findings revealed that as and when they
purchased materials, they sent to the Railway
Board ‘an invoice’ accompanied by a list of
the details regarding the materials purchased.
90 per ‘cent of the value of these materials
was then paid to the company after inspection
of the materials by the board’s representa-
tive. Invoice No. 31009 of 15-10-1956 is
obtained as a sample. This invoice shows that
materials for the value of Rs. 2,60,374-12-0
were purchased by the company for 407 model
coaches. The details of the materials are
given in list attached to the invoice. The
invoice and the list were sent to the board
with a covering letter dated 15-10-1956 asking
payment of Rs. 2,34,517-4-0 being 90 per cent
of the invoice amount. The amount of this
invoice is included in the Board’s remittance
note No. 1290 of 30-10-1956 and a cheque was
issued to the company for the total of several
such invoices. The amount of the cheque
received on 30-10-1956 was Rs. 22,90,719-0-O.”
He concluded :
“ (1) It is not possible to specify the exact
amount received from the board as advance
payments. It is said that the
construction was spread out more than one year
and a running, account was maintained showing
the debits and credits for this coaches.
(2) It is said that no materials, for which
advance was not drawn, was utilised for
building the coaches.
(3) It is not possible to find out whether
any materials not specifically procured for
the construction of coaches were used. But it
is said that there is no possibility of any
other materials being used for this
construction. The constructions are said to
be done at particular shed which is separately
located. No other work is undertaken in this
section. All the materials procured for
constructions of coaches are said to be kept
separately in this section alone. Materials
not connected with this work are not mixed up
with the materials in this section. Separate
stock registers are maintained for this
section. Receipts and issues of materials for
the constructions of coaches are being
accounted for in this register under code
numbers.”
931
The High Court allowed the appeal and set aside the order
including the turnover relating to the construction of
railway coaches, models 407, 408 and 411. Facts found by
the High Court and as they appear to us are as follows
On February 3, 1955, the Ministry of Railways wrote to the
Hindustan Aircraft Ltd. regarding the coaching programme
1955-56. The letter reads :
“In order to book your capacity, construction
of the following is planned on your works
against the 1955-56 R.S.P.
1. Third Class Coaches B.G. model 407
120
2. Military Coaches ‘M’ type model 408
60
Total :180
The intention of this intimation is to
facilitate such arrangements as you may find
necessary for provising for materials and for
planning capacity for the question. You
should therefore treat this as a firm booking
of your capacity.”
After discussions and settlement of terms between officers
of ,the Government of India and of the assessee, the Railway
Board placed orders with the assessee. The terms agreed
between the parties are found stated in a letter of the
Government of India, Ministry of Railways (Railway Board)
No. 57/147/RE(163) dated May 4, 1957. This relates (to the
first of the models 407. We may extract some portions of
the letter. It is stated thus
In continuation of their letter No.
56/142/’3/Re dated 8-1-57 the Railway Board
are pleased to place an order on your work for
the manufacture and supply of the following
coaching stock on terms and conditions stated
under para 2 below :-
Item No. Description of stock Particular Nos. Price per
coach
of Rly specification Required (without wheels
Board’s and Drawing and axlesand
Rolling No. under-frames)
Stock
Programme
1957-58
384 Broad Gauge 55-B-14 180 Rs. 94,731/-
Class III (Provisional)
Coaches fully CSC 1119
furnished to
model ’407′
932
Following terms and conditions are relevant:
(i) Price
(a) The price mentioned above is for stock
without wheels and axels and underframes, and
is provisional. Final price will be settled
by negotiations after you have submitted your
claim for the coaches ordered on you up to
1954-55 Rolling Stock Programme on the basis
of the wages and material escalator approved
by the Board.
(b) The final price when settled shall be
subject only to the Standard Wages and
material escalator clauses given below……..
(c) The final payment on completion of this
order shall be subject to examination and
check of your books by the Chief
Administrative Officer, Integral Coach
Factory, Perambur, Madras.
(ii) Wheelsets and Underframes
The Wheelsets and Underframes for the stock
will be supplied to you free of cost f.o.r.
your work siding.
(iv) Delivery
The delivery of the above stock f.o.r. your
works siding is required to commence after the
completion of the stock ordered on your works
against 1956-57 R.S.P. and required to be
completed by January 1957, or earlier.
(v) Inspection Authority
The inspection of this stock shall be carried
out by a representative (C.M.E. Southern
Railway) before the coaches are despatched.
(vi) Terms of payment
(a) Advance ‘on account’ payment to the
extent of 90% of the value of the materials
shall be made to you on receipt of materials
and on production of a certificate from the
Inspecting Authority.
(b) Payment of full contract price, less ‘on
account’ payment already will be made on deli-
very of coaches in complete condition and good
working order, duly certified by the
Inspecting
933
Authority on the lines of procedure laid down
vide Board’s letter No. 57/142/6/M dated 4-2-
1952 (Copy enclosed).
(vii) Other terms of Contract.
(i)………………
(ii) If and when sales tax on this order
becomes payable under law, such payments, when
made, will not be on your account. The
Railway will not, however, be responsible for
payment of the sales tax paid by you under
misapprehension of law.
There is an indemnity bond in respect of this contract and
we may set it out fully.
“1. Standing Indemnity for advance payment
against contract relating to Railway Board’s
order for construction and delivery of all
metal III class B.G. coaches now pending under
orders Nos. 52-142/4/M dated 16th February,
1952 and 53/142/4/M dated 3rd March, 1953 and
against contracts in respect of future orders
that may be given by the Railway Board from
time to time, by the Hindustan Aircraft Ltd.,
Bangalore represented by General Manager
hereinafter called the Company in favour of
the President of Union of India. lie Hindustan
Aircraft Ltd., hereby undertake to hold at
their works at Bangalore for and on behalf of
the President of the Union of India, and as
his property in trust for him the Stores and
articles in respect of which advances are made
to them under Railway Board’s letters, No .
52,/142/4/M dated 16th February, 1952 and
53/142/4/M dated 3rd March, 1953 and
hereafter
to be made to the Company under future orders
from the Railway Board from time to time.
2. The said stores and articles shall be
such as are required of the purpose of the
pending and future contracts and the advances
made and to be made are without prejudice to
the provisions of the contract as to rejection
and inspection and any advance made against
stores and articles rejected or found
unsatisfactory on inspection shall be,
refunded immediately to the President of the
Union of India.
3. The Company shall be entirely
responsible for the safe custody and
protection of the said articles and stores
against all risks till they are duly delivered
to the
12-L736Sup-CI/72
934
.lm15
President of the Union of India or as he may direct and
shall indemnify the President of the Union of India against
any loss, damage or deterioration whatsoever in respect of
the said stores and articles while in our possession. The
said articles and material shall at all times to be open to
inspection of any officer authorised by Government.
4. Should any loss of damage occur or a refund become due,
the President of the Union of India shall be entitled to
recover from the Company compensation for such loss or
damage or the amount to be refunded without prejudice to any
other remedies available to him by deduction from any sum
due or any sum which at any time hereafter may become due to
the Company under this or any other contract.”
We have set out the terms of the Indemnity Bond in great
detail because the learned counsel for the appellant has
strongly relied on the terms thereof.
The text of the invoice sent by the assessee for the purpose
of receiving 90% advance may be seen from the covering
letter dated October 15, 1956 relating to one of the
invoices. The letter reads :
“On account payment of 90% on material pro-
cured for rail coaches-407 and 408 model VI
order. Further to our letter No. Al/Inv/1 169
dated 8-10-56 enclosing our invoice for Rs.
42,892-15-0 we enclose herewith our invoice
No. 31009 dated 15-10-1956 in duplicate for
Rs. 2,34,517-4-0 being 90% of materials
procured in October 1956. Kindly arrange
payment of the invoice alongwith the invoice
already sent. Please instruct your resident
representative to check the stock of materials
as per lists attached to our invoices and send
them to the Deputy Financial Adviser and Chef
Accounts Officer, Integral Coach Factory,
Perambur, so that he may send his represen-
tative to check the value of the materials.”
On these facts we have to decide whether there has been any sale
of the coaches within the meaning of the Central Sales
Tax Act. We were referred to a number of cases* of this
Court and the High Courts, but it seems to us that
ultimately the answer must-depend upon the terms of the
contract. The answer to the
(1) 16S.T.C.518-McKenziesv.State of Maharashtra.
(2) [1965] 2S.C.R.782-Patnaik & Co. v. State of Orissa.
935
question whether it is a works contract or it is a contract
of sale depends upon the construction of the terms of the
contract in the light of the surrounding circumstances. In
this case the salient features of the contract are as
follows :
(1) The Railway books capacity of the assessee for the pur-
pose of construction of railway coaches.
(2) Advance on account is made to the extent of 90% of the
value of the material on the production of a certificate by
the inspecting authority.
(3) The material used for the construction of coaches
before its use is the property of the Railway. This is
quite clear from para I of the Indemnity Bond set out above.
No other meaning can be given to the words in the bond to
the effect that “the Hindustan Aircraft Ltd. hereby
undertake to hold at their works at Bangalore for and on
behalf of the President of the Union of India and as his
property in trust for him the Stores and articles in respect
of which advances are made to them.”
It seems to us clear that the property in the materials
which are used for the construction of the coaches becomes
the property of the President before it is used.
(4) It seems that there is no possibility of any other
material being used for the construction as is borne out
from the report written by the Commercial Tax Officer.
(5) As far as the coaches of models 407 and 408 are
concerned, the wheelsets and underframes are supplied
free of cost.
(6) In the order the words used are “manufacture and supply
of the following coaches.”
(7) The material and wage escalator and adjustments which
are mentioned in the contract are neutral factors.
On these facts it seems to us that it is a pure works
contract. We are unable to agree that when all the material
used in the construction of a coach belongs to the Railways
there can be any sale of the coach itself. The difference
between the price of a coach and the cost of material can
only be the cost of services rendered by the assessee.
If it is necessary to refer to a case which is close to the
facts of this case, then this case is more in line with the
decision of
936
this Court in State of Gujarat v. Kailash Engineering Co.(1)
than any other case.
The only difference as far as coach model No. 41 1 is con-
cerned is that in that case the wheelsets and underframes
are not supplied free of cost but otherwise there is no
essential difference in the terms. This does not make any
difference to the result.
In the result the appeal fails and is dismissed with costs.
V.P.S. Appeal dismissed.
(1) 19 S.T.C. 13.
937