Case: Commissioner Of Commercial Taxes, Mysorebangalore Vs. Hindustan Aeronautics Ltd

India and as his prosperity in trust for him the Stores and articles in respect of which advances are made to them under Railway Boards letters. No 52/142/4/M D/- 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 for 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 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 be open to inspection of any officer authorised by Government.4. Should any loss or 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 to the Company under this or any other contract.9. We have set out the terms of the Indemnity Board 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 procured for rail coaches-407 and 408 model VI order.Further to our letter No. AI/Inv/1169 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 along with 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 Chief Accounts Officer, Integral Coach Factory, Perembur so that he may send his representative to check the value of the materials.10. 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 - (1965) 16 STC 518 (S)C Mckenzies v. State of Maharashtra. (1965) 2 S. C. R. 782 = (AIR 1965 SC 1655 ) - Patnaik and Co. v. State of Orissa, on the subject 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 question whether it is a works contract of 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 purpose 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 1 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 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.11. 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 this Court in State of Gujarat v. Kailash Engineering Co., 19 STC 13 = (AIR 1967 SC 547 ) than any other case.The only difference as far as coach model No. 411 is concerned 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.12.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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.The only difference as far as coach model No. 411 is concerned 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.