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 section Narasimhan for the appellant
section T Desai Mrs A K Verma J B Dadachanji O C Mathur and Ravinder Narain for the respondent
B Sen Santosh Chatterjee G section Chatterjee and P K Chakravarti for intervener No 1 D Goburdhun for intervener No 2
The Judgment of the Court was delivered by Sikri CJ
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 eg McKenzievLimited vs The State of Bombay1 and Jiwan Singh vs 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 STC 602
2 14 STC 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 section 241 of the Mysore Sales Tax Act read with section 93 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 260374 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 234517 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 2290719 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 RSP 1
Third Class Coaches BG 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 57147RE163 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 56142 3Re 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 94731 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 for
your work siding
iv Delivery The delivery of the above stock for
your works siding is required to commence after the completion of the stock ordered on your works against 1956 57 RSP 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 CME 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 571426M 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
Standing Indemnity for advance payment against contract relating to Railway Board s order for construction and delivery of all metal III class BG coaches now pending under orders Nos
52 1424M dated 16th February 1952 and 531424M 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 
521424M dated 16th February 1952 and 531424M dated 3rd March 1953 and hereafter to be made to the Company under future orders from the Railway Board from time to time
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
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 CI72 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
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 AlInv1 169 dated 8 10 56 enclosing our invoice for Rs 42892 15 0 we enclose herewith our invoice No 31009 dated 15 10 1956 in duplicate for Rs 234517 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 16STC518 McKenziesv
State of Maharashtra
2 1965 2SCR782 Patnaik  Co vs 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 vs Kailash Engineering Co1 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
VPS Appeal dismissed
1 19 STC 13


Summary:
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 vs Kailash Engineering Co 19 STC 13 SC followed