Case: John Mowlem and Company Limited Vs. Commissioner of Sales Tax, Orissa

after having them certified by the Director-General India Stores Department, London.The Chief Accounting Officer will pay the contractor on the pro forma invoices, and the contractor will open a separate bank account ............. to be called the Madras Account into which these sums will be paid. As soon as the money is received the contractor will place formal orders for the plant and equipment. He will pay the suppliers from the funds made available in the Madras Account, and will give the purchaser credit for any cash discounts received. He will also be responsible for arranging the transportation and insurance of the plant and equipment to the site. The invoices to be rendered by the contractor in India will be checked and countersigned by the contractors auditors.The purchaser, through its agent the Chief Accounting Officer, will make an advance to the contractor of Rs. 2 lakhs, and this sum will also be credited to the same Madras Account with the bank. This sum will cover the following expenditure :-(i) Salaries, travelling expenses, kit allowances, insurance etc. of personnel despatched to the project.(ii) The salaries of the London clerical and technical staff of the contractor to the extent they are employed on the project. The staff involved will keep monthly time records and will charge the appropriate percentage of their salary.(iii) The salaries, or portion of salaries, requested by the staff on the project to be paid in London.(iv) Insurance and freight charges.(v) Withdrawals on account of anticipated initial profit.(vi) The 2 1/2 per cent. purchasing commission on all new or second-hand plant, machinery, equipment or stores purchased by the contractors London Office.(vii) All other items of prime cost properly chargeable to the project."The "Accountancy Procedure" also contains directions relating to replenishment of the advance of Rs. 2 lakhs and the manner in which the expenses are to be incurred. In paragraph 2 it is directed that the New Delhi office of the contractor will provide supervision over the project as well as over purchasing goods, directing insurances etc. and will prepare monthly accounts with supporting vouchers of all sums paid out on behalf of the project including proportions of salaries and 2 1/2 per cent. purchasing commission. The remaining directions are not material.6. The effect of paragraphs 8, 9, 10 and the Accountancy Procedure is that the State of Madras had under the terms of the contract agreed to make available Rs. 2 lakhs which were to be replenished as and when expenses were incurred out of that amount for purposes mentioned in paragraph 9 of the contract, and in the Accountancy Procedure; that the appellants were to purchase the plant and machinery after approval by the Chief Accounting Officer of the High Commissioner for India, and funds were provided; that the appellants were to receive a commission of 2 1/2 per cent. and all trade discounts were to be accounted for by the appellants to the State, and that the appellants were to be reimbursed for all necessary costs incurred in accomplishing the work, and were to hold money received from the insurers in trust for the Government of the State of Madras. The contract does not provide that the appellants were to sell the machinery described in Appendix B, Part II, to the State of Madras, and the covenants of the contract are consistent only with the appellants being purchasing agents for the State of Madras.Barman, J., who delivered the principal judgment of the High Court was of the view that a contract of sale of the plant, machinery and equipment could be inferred from the existence of three covenants: (1) that the contractors were to remain responsible for transportation and insurance till the plant reached the site of the Machkund Dam as provided in clause 8(a) of the agreement;(2) that under the agreement the contractors were to effect insurance in the joint names of the Government and the contractors, and that showed that they had insurable interest in the goods; and(3) that no customs duty was included in the "target estimates" and if the State of Madras was obliged to pay any duty on equipment or materials provided for the contractor such payment would be accounted for separately in addition to the "final target", indicating thereby that the State of Madras was not liable to pay customs duty. Narasimham, C.J., agreed with Barman, J. He observed that the first two grounds in the judgment of Barman, J., justified the raising of the inference that there was a sale of plant and machinery, but the third ground was inconclusive.7. We are unable to agree with the learned Judges of the High Court. A covenant in the contract whereby the appellants undertook to deliver goods purchased by them on behalf of the State at the site where they were required by the latter is not inconsistent with the relation between them being of agent and principal, and a stipulation that the appellants "will remain responsible for transportation and insurance as far as the site" also does not detract from the overwhelming indications furnished by the other terms of the contract. The stipulation that goods purchased will be insured in the joint names of the Government of the State of Madras and the appellants is susceptible of no positive inference in favour of either case, and the learned Chief Justice was right in observing that the term about the contractors liability to pay customs duty, if any, was inconclusive. It is not possible to raise an inference from the clause, "the final accounting for the plant, and its passing into the hands of the purchaser will take place" in paragraph 8 of the contract, that till it was delivered at the site of the Machkund Dam, the appellants were the owners of the plant. The clause deals merely with the obligations undertaken by the appellants for "transportation and insurance" of the plant, and not with the passing of property in the plant from the appellants to the State of Madras.8.

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

Explanation:
1[ds]The first question referred to the High Court was answered in the affirmative and no serious argument has been raised by counsel for the appellants challenging the correctness of the answer.The third question is easy of solution. Under the terms of the contract, the appellants were not only to carry out the works contract, but also to procure certain plant, machinery and equipment for use in the execution of the works contract. The agreement, it is true, relates to a "target estimate" of Rs. 80, 40, 543 "which is calculated to cover the work in the specifications", and represents an estimate based on the appellants "knowledge and experience of the reasonable and probable cost under efficient management", and is "adjustable in accordance with the alterations to the specification or to the quantities, and with variations in labour rates and cost of materials." But the contract also contains an arrangement under which the appellants were to procure certain plant, machinery, equipment and small tools, details whereof are to be found in Appendix B, Part II, under the heading "to be supplied by the contractor".We are unable to agree with the learned Judges of the High Court. A covenant in the contract whereby the appellants undertook to deliver goods purchased by them on behalf of the State at the site where they were required by the latter is not inconsistent with the relation between them being of agent and principal, and a stipulation that the appellants "will remain responsible for transportation and insurance as far as the site" also does not detract from the overwhelming indications furnished by the other terms of the contract. The stipulation that goods purchased will be insured in the joint names of the Government of the State of Madras and the appellants is susceptible of no positive inference in favour of either case, and the learned Chief Justice was right in observing that the term about the contractors liability to pay customs duty, if any, was inconclusive. It is not possible to raise an inference from the clause, "the final accounting for the plant, and its passing into the hands of the purchaser will take place" in paragraph 8 of the contract, that till it was delivered at the site of the Machkund Dam, the appellants were the owners of the plant. The clause deals merely with the obligations undertaken by the appellants for "transportation and insurance" of the plant, and not with the passing of property in the plant from the appellants to the State of Madras.