Appeal No 945 of 1965
Appeal by special leave from the judgment and order dated December 14 1962 of the Gujarat High Court in Sales Tax Re ference No 16 of 1961
N section Bindra and R H Dhebar for the appellant
M V Goswami for the respondent
The Judgment of the Court was delivered by Bhargava J
This appeal under special leave granted by this Court arises out of proceedings for assessment of sales tax under the Bombay Sales Tax Act III of 1953
Messrs Kailash Engineering Co hereinafter referred to as the respondent was an engineering concern having their workshop at Morvi on the meter gauge section of the Western Railway
They obtained a contract from the Western Railway Administration for construction of III class passenger coaches on certain conditions described as the conditions of tender
Under that contract which was reduced to writing and was described as an agreement the respondent constructed three coaches and submitted a bill which was properly certified in accordance with the agreement by the Railway Administration on October 4 1958
The net value of the work done by the respondent was certified at Rs 122035 
After receipt of this money the respondent wrote to the Additional Collector of Sales Tax requesting him under section 27 of the Bombay Sales Tax Act 1953 to hold that this was a works contract and that the transaction in respect of which the respondent received the money did not amount to a sale so that no sales tax was payable under that Act
The Additional Collector held that two questions fell for determination before him 1 Whether the transaction covered by the bill dated 4th October 1958 is a sale and 2 if it is a sale whether any tax is payable in respect of the same
The Additional Collector answered both the questions in the affirmative against the respondent
The appeal before the Gujarat Sales Tax Tribunal failed and thereupon the respondent sought a reference to the High Court of Gujarat
The Tribunal referred the following question for the opinion of the High Court Whether on a proper construction of the agreement as a whole and its general conditions and specification the work done and covered by Contract Certificates No M601B PRTN dated 4th October 1958 for the perfor 545 mance of the works of building erecting and furnishing 3 B G Coaches over the chassis supplied by the Railway is a works contract not amounting to sale or whether it is a transaction of sale
 The High Court answered the question in favour of the respondent holding that the transaction was a works contract carried out by the respondent and did not amount to a sale
Consequently this appeal has been brought up by the State of Gujarat challenging the correctness of the decision of the High Court
The Tribunal when dealing with the case mentioned a few of the terms of the contract entered into between the respondent and the Western Railway Administration and though there was a provision in one of the clauses of the agreement that as soon as the plant and materials were brought on the site where the coaches were to be constructed the ownership in them would vest in the Railway the Tribunal held that the ownership in those materials never passed to the Railway because of the indication given by another clause which provided that on removal of contractor or on rescission of contract the Railway Authorities would be entitled to take possession and retain all materials tools implements machinery and buildings
On this basis the Tribunal held that from the general conditions of the contract it appeared that the ownership of the coach bodies only passed to the Railway when completed and handed over to the Railway so that the contract was for supply of coach bodies
It was on supply of these coach bodies that the respondent received the price of those bodies and thus received the amount subjected to sales tax as sale consideration for those bodies
The High Court however in its judgment reproduced the preamble of the contract as well as a large number of clauses of it to show that in the contract at every stage it was clearly mentioned that the contract was for performance of work of building erecting and furnishing coach bodies on Broad Gauge underframes which already belonged to the Railway
The terms of the contract showed that as soon as the materials were taken by the respondent to the site of construction of the coaches the ownership in those materials vested in the Railway and all that the respondent had to do was to carry out the work of erecting and furnishing the coach bodies
When the coach bodies were ready the property in them vested in the Railway automatically without any further transfer of rights in it to the Railway
In fact the ownership in the ready coach bodies did not vest in the respondent at all
No doubt the materials for building the  coach bodies had to be obtained by the respondent and brought to the site of construction but the provision that the ownership in those materials would vest in the Railway as soon as those materials were brought to the site clearly indicated that the respondent in purchasing those materials was 546 acting more or less in the capacity of an agent for the Railway
While the materials were at site the effect of vesting of their ownership in the Railway was that if they were destroyed or damaged the risk had to be borne by the Railway even though the Railway might have been entitled to reimburse itself because those materials and goods were in the custody of the respondent on behalf of the Railway
In fact under clause 29 there was a specific provision for the contingency that the materials or plant may be lost stolen injured or destroyed by fire tempest or otherwise
This special provision was to the effect that the liability of the contractor was not to be diminished in any way nor was the Railway to be in any way answerable for loss or damage on the happening of such contingency
This special provision had to be made because the ownership in the materials vested in the Railway though the contractor was in actual physical possession of the materials and plant in order to carry out the works contract
It was for this reason that a specific provision had to be made that the contractor would be liable to the Railway if any such loss occurred
Taking into account all the terms of the contract as a whole the High Court came to the finding that the contract between the parties was one entire and indivisible contract for carrying out the works specified in full details in the agreement and that it did not envisage either the sale of materials by the respondent to the Railway or of the coach bodies as such
In this connection learned counsel for the appellant relied on the decision of this Court in Patnaik  Company vs State of Orissa1 In that particular case the contract in question was for the supply of bus bodies and it was held that when the bus bodies were supplied by the contractor and money received by him it amounted to a sale
It however appears that the facts and circumstances on the basis of which the Court gave that opinion do not find place in the case Three main circumstances were relied upon in that case for holding that the transaction amounted to a sale and not to a works contract
The first circumstance was that the bus bodies were throughout the contract spoken of as a unit or as a composite thing to be put on the chassis and this composite body consisted not only of things actually fixed on the chassis but movable things like seat cushions and other things which could be very easily detached
In the contract with which we are concerned the coach bodies are not separately described as units or components to be supplied by the respondent to the Railway
The language used in the contract everywhere describes the duty of the respondent to be that of constructing erecting and furnishing coach bodies on the underframes supplied
At no stage does the contract mention that ready coach 1  547 bodies were to be delivered by the respondent to the Railway
In fact even during the process of construction of the coach bodies the unfinished bodies in process of erection were treated under the terms of the contract as the property of the Railway
The second circumstance found in that case was that if some work was not satisfactorily done and the body builder on receipt of a written order did not dismantle or replace the defective work or material at his own cost within seven days the Controller was entitled to get the balance of the work done by another agency and recover the difference in cost from the body builder and for this purpose the Controller was entitled to take delivery of the unfinished body
In the contract before us as we have already mentioned in the preceding paragraph the unfinished bodies of the coaches were from the earliest stage treated as the property of the Railway and there was no question of ownership of the unfinished body passing to the Railway only after its seizure by it as was the case in the other contract in which the property in the unfinished body did
not pass to the Government till the unfinished body was seized
The third circumstance taken into account in that case was the liability for the loss if a fire took place and the bus bodies were destroyed or spoiled
In that case there was a provision for insurance of the chassis but there was no such provision regarding
insurance of bus bodies and the Court inferred that till delivery was made the bus bodies remained the property of the appellant on whom the loss would fall
On the other hand in the contract with which we are concerned the terms envisaged the property in the unfinished bodies vesting in the Railway and since those unfinished bodies were to be in charge of the respondent during construction a special provision had to be made making the respondent responsible for the loss and throwing upon the respondent the liability to reimburse the Railway for loss by fire etc
Thus the terms of the contract in this case are markedly different from those which came up for consideration in that case
Here we find that all the terms of the contract lead to the only inference that the respondent was not to be the owner of the ready coach bodies and that the property in those bodies vested in the Railway even during the process of construction
This was therefore clearly a works contract which did not involve any sale
The decision given by the High Court was correct
The appeal fails and is dismissed with costs
RKPS Appeal dismissed


Summary:
The respondent company which was an engineering concern with a workshop at Morvi obtained a contract from the Western Railway Administration for construction of third class coaches
Under the contract the respondent constructed three coaches and submitted a bill which was properly certified on October 4 1958 in accordance with the agreement as to the work done by the respondent
After the bill had been paid the respondent wrote to the Additional Collector of Sales tax requesting him under Section 27 of the Bombay Sales tax Act 1953 to hold that the transaction was a works contract and not a sale so that no sales tax was payable under the Act
The Additional Collector held however that the transaction was a sale on which tax was payable
Dismissing an appeal from this decision the Sales tax Tribunal took the view that the general conditions of the contract showed the ownership of the coach bodies only passed to the Rail when they were completed and handed over to the Railway so that way contract was for supply of coach bodies
Sales tax was therefore payable on the price of these coach bodies
Upon a reference made to it the High Court held however that the contract clearly mentioned that the contract was for performance of work of building erecting and furnishing coach bodies on Broad Gauge under frames which already be longed to the Railway
The terms of the contract further showed that as soon as the materials were taken by the respondent to the site of the construction of coaches the ownership in those materials vested in the Railway and all that the respondent had to do was to carry out the work of erecting and furnishing the coach bodies
When the coach bodies were ready the property in them vested in the Railway automatically without any further transfer of rights in it to the Railway
The ownership in the ready coach bodies never vested in the respondent company at all and although materials for their construction had to be obtained by it and brought to the site in purchasing those materials it was acting more or less in the capacity of an agent or the Railway
Accordingly the High Court came to the finding that the contract between the parties was one entire and indivisible contract for carrying out the works specifi ed in the agreement and that it did not envisage either the sale of the materials by the respondent to the Railway or of the coach bodies as such no sales tax was therefore held leviable on the transaction
On appeal to this Court
HELD  The terms of the contract led to the only inference that the respondent was not to be the owner of the ready coach bodies and that the property in those bodies vested in the Railway even during the process of construction
The transaction was therefore clearly a works contract which did not involve any sale
547 G 544 Patnaik  Company vs State of Orissa  distinguished