Case: Union Of India Vs. Central India Machinery Manufacturing Co. Ltd. &amp; Others

property of the company before its delivery to the purchaser. But as pointed out by Lord Halsbury in the above-quoted passage from his renowned work neither the ownership of the materials nor the value of the skill and labour as compared with the value of the materials used in the manufacture is conclusive. Nevertheless, if the bulk of the material used in the construction belongs to the manufacturer who sells the end-product for a price that will be a strong pointer to the conclusion that the contract is in substance one for the sale of goods and not one for work and labour.Be that as it may clause (1) of Standard Condition 15 dispels all doubt with regard to the nature of the contract. This clause stipulates in unmistakable terms that as soon as a vehicle has been completed, the company will get it examined by the Inspecting Officer and submit to the purchaser an "on account" bill for 90 per cent of the value of the vehicle and within 14 days of the receipt of such bill together with a certificate of the Inspecting Officer, the purchaser will pay 90 per cent bill and on such payment, the vehicle in question will become the property of the purchaser. There could be no clearer expression of the intention of the contracting parties than this clause that the contract was, in substance, one for the sale of manufactured wagons by the company for a stipulated price. 15. We would therefore affirms the finding of the High Court on this point. 16. The ratio of Hindustan Aeronautics [[1972] 29 S.T.C. 438 (S.C.); [1972] 2 S.C.R. 927] is not applicable. The present case has some special features which did not figure in Hindustan Aeronautics [[1972] 29 S.T.C. 438 (S.C.); [1972] 2 S.C.R. 927]. In that case, from the terms and conditions of the contract then under consideration and the report of the Commercial Tax Officer, these facts appear to be well-established :"(i) The material used in the construction of coaches before its use was the property of the railways. (ii) There was no possibility of any other material being used excepting which belonged to the President/railways before its use in the construction. This fact was borne out from the report of the Commercial Tax Officer. (iii) Further in the contract in question in that case, there was no term corresponding to clause (1) of Standard Condition 15. This Court therefore found that the difference between the price of a coach and the cost of material could only be the cost of services rendered by the assessee. Such is not the case here. The bulk of the material used in the construction of the wagons, as already discussed above, in the instant case, belongs to the company before its use.State of Gujarat (Commissioner of Sales Tax, Ahmedabad) v. Variety Body Builders [[1976] 38 S.T.C. 176 (S.C.); A.I.R. 1976 S.C. 2108] cited by Shri Mehta, also is clearly distinguishable from the facts of the instant case. There, the bulk of the materials used in the construction of coaches was supplied by the railways. Even labour was supplied by the railways. The contractor mainly contributed his labour and skill to manufacture the end-product, being the railway coaches, under the constant supervision and control of the railways. From the totality of the material terms and conditions in the agreement, in that case, it was not possible to hold that the parties intended that the contractor transferred the property in the coach to the railways after its completion. Reality of the transaction as a whole indicated that the contract was one for work and labour, while in the instant case the coverse is true." 17. The case before us is more in line with the decision of this Court in Patnaik and Company v. State of Orissa [[1965] 16 S.T.C. 364 (S.C.)]. The appellants therein had entered into an agreement with the State of Orissa for the construction of bus bodies on the chassis supplied by the Governor. The agreement provided, inter alia, that the appellants were responsible for the safe custody of the chassis from the date of their receipt from the Governor till their delivery and they had to insure their premises against fire, theft, etc., at their own costs. The appellants had to construct the bus bodies in the most substantial and workmanlike manner, both as regards materials and otherwise in every respect in strict accordance with the specifications. They had to guarantee the durability of the body for two years from the date of delivery. It was also provided that all works under the contract should be open to inspection by the Controller or officers authorised by him and such officers had the right to stop any work which had been executed badly or with materials of inferior quality, and on receipt of a written order the appellants had to dismantle or replace such defective work or material at their own cost. The builders were entitled to 50 per cent of the cost of the body building at the time of delivery and the rest one month thereafter. The question before the Constitution Bench of this Court was whether, on these facts, the contract was one for work or a contract for sale of goods. This Court held (by majority) that the contract as a whole was a contract for sale of goods and, therefore, the appellants were liable to sales tax on the amounts received from the State of Orissa for the construction of the bus bodies. In reaching at this conclusion the Court paid due regard to the fact that under that contract the property in the bus body did not pass to the Government till the chassis with the bus body was delivered at the destination to be named by the Controller. Till the delivery was made the bus body remained the property of the builder. This clinching circumstance prominently figures in Standard Condition 15 in the instant case also. 18.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 0

Reasoning from the judgment:
0[ds]The real intention of the contracting parties is primarily to be sought within the four corners of the documents containing the Standard and Special Conditions of Contract. If such intention is clearly discernible from these documents, it will not be proper to seek external aid from the stereotyped indemnity bond which is not only collateral but also posterior in point of time to the contract. It will bear repetition that there is no conflict or inconsistency between Standard Condition 15 and the special Conditions. The terms and conditions of the contact, read as a whole, indubitably lead to the conclusion that the property in the materials procured or purchased by the company, against the 90 per cent value of which advance is taken from the railways, does not, before their use in the construction of the wagons, pass to the railways. Reasons for arriving at this conclusion are as under :(i) Clause (a) of Special Condition 4 which provides for "on account" payment up to 90 per cent of the value of steel and other raw materials procured by the firm (company) is to be read with clause (b) which makes it clear that such "on account" payment is a part of the "full contract price" "for each completed) Condition 5, while imposing restrictions as to the use and disposal of materials against which advance is taken, further gives a pre-emptive right to the Government to purchase all surplus or unserviceable materials from the company on its "being paid such price as Government may fix with due regard to the condition of the material". If the materials belonged to the Government or the railways, no question of purchasing the same from the company could arise. No one can be a seller and purchaser of the same property at the same time(iii) Special Condition 10 provides in unequivocal terms that "no sales tax on materials including steel or components will be reimbursed by the Railways Board". This condition postulates two things : First, that the company becomes the owner of the materials by purchase and, therefore, in that capacity becomes liable to the charge of sales tax which it cannot, because of this covenant to the contrary, pass on to the President/Railway Board. Second, such steel and components are not the property of the railways. They are not supplied by the President/railways free of charge under Special Condition 6(iv) There is no condition or term in the contract that the material purchased by the company after drawing "on account" payment to the extent of 90 per cent of the value of the material shall become the property of the railways(v) Standard Condition 16 provides that if within twelve months after delivery, any "defect arises from inferiority of material or workmanship" the company shall be liable to remedy the defect, and to deduction of money due to it. This condition also presupposes that the inferior material used was not the property of the railways but of the company(vi) The stipulation in the indemnity bond making the company responsible for safe custody and protection of the "stores and articles" against all risks till they are duly delivered to the railways, or as they may direct, nor the use of the words "of the railways", therein, in our opinion, in the face of clear conditions of the contract, is a ground to hold that the materials purchased by the company for construction of the wagons would become the property of the railways immediately on advance of an amount equal to 90 per cent of their value under Special Condition 4.As rightly pointed out by the High Court the word "of" in the expression "of the railways" used in the indemnity bound in the context of "stores and articles" appears to have been loosely used. Moreover these "stores and articles" might include the wheelsets and articles supplied by the railways free of charge from its stores under Special Condition 6. The expression "of the railways" might have been possibly used in the context of such components belonging to the railways. Furthermore under condition 5, in respect of all surplus material, the railways had been given a right of pre-emption. Even so, much capital cannot be made out of the use of this loose expression in the indemnity bond, when the conditions embodied in the contract documents, read as a whole, clearly show that the property in the materials purchased by the company with the assistance of the railways/Government does not pass to the railwaysThe upshot of the above discussion is that with the exception of wheelsets (with axle-boxes and couplers), substantially all the raw materials required for the construction of the wagons before their use belong to the company and not to the President/Railway Board. In other words, with the exception of a relatively small proportion of the components supplied under Special Condition 6, the entire wagon including the material at the time of its completion for delivery is the property of the company. This means that the general test suggested by Pollock and Chalmers has been substantially, albeit not absolutely, satisfied so as to indicate that the contract in question was one for the sale of wagons for a price, the company being the seller and the President/Railway Board being the buyer. It is true that technically the entire wagon including all the material and components used in its construction cannot be said to be the sole property of the company before its delivery to the purchaser. But as pointed out by Lord Halsbury in the above-quoted passage from his renowned work neither the ownership of the materials nor the value of the skill and labour as compared with the value of the materials used in the manufacture is conclusive. Nevertheless, if the bulk of the material used in the construction belongs to the manufacturer who sells the end-product for a price that will be a strong pointer to the conclusion that the contract is in substance one for the sale of goods and not one for work and labour.Be that as it may clause (1) of Standard Condition 15 dispels all doubt with regard to the nature of the contract. This clause stipulates in unmistakable terms that as soon as a vehicle has been completed, the company will get it examined by the Inspecting Officer and submit to the purchaser an "on account" bill for 90 per cent of the value of the vehicle and within 14 days of the receipt of such bill together with a certificate of the Inspecting Officer, the purchaser will pay 90 per cent bill and on such payment, the vehicle in question will become the property of the purchaser. There could be no clearer expression of the intention of the contracting parties than this clause that the contract was, in substance, one for the sale of manufactured wagons by the company for a stipulated priceWe would therefore affirms the finding of the High Court on this pointThe case before us is more in line with the decision of this Court in Patnaik and Company v. State of Orissa [[1965] 16 S.T.C. 364 (S.C.)]. The appellants therein had entered into an agreement with the State of Orissa for the construction of bus bodies on the chassis supplied by the Governor. The agreement provided, inter alia, that the appellants were responsible for the safe custody of the chassis from the date of their receipt from the Governor till their delivery and they had to insure their premises against fire, theft, etc., at their own costs. The appellants had to construct the bus bodies in the most substantial and workmanlike manner, both as regards materials and otherwise in every respect in strict accordance with the specifications. They had to guarantee the durability of the body for two years from the date of delivery. It was also provided that all works under the contract should be open to inspection by the Controller or officers authorised by him and such officers had the right to stop any work which had been executed badly or with materials of inferior quality, and on receipt of a written order the appellants had to dismantle or replace such defective work or material at their own cost. The builders were entitled to 50 per cent of the cost of the body building at the time of delivery and the rest one month thereafter. The question before the Constitution Bench of this Court was whether, on these facts, the contract was one for work or a contract for sale of goods. This Court held (by majority) that the contract as a whole was a contract for sale of goods and, therefore, the appellants were liable to sales tax on the amounts received from the State of Orissa for the construction of the bus bodies. In reaching at this conclusion the Court paid due regard to the fact that under that contract the property in the bus body did not pass to the Government till the chassis with the bus body was delivered at the destination to be named by the Controller. Till the delivery was made the bus body remained the property of the builder. This clinching circumstance prominently figures in Standard Condition 15 in the instant case also.