Case: M/S. Damodar Valley Corporation Vs. The State Of Bihar

2. The facts of this case have never been in dispute and may shortly be stated as follows. The appellant is a Corporation incorporated under the Damodar Valley Corporation (Act XIV of 1948) and will hereinafter be referred to as the Corporation. It is a multipurpose Corporation, one of its objects being the construction of a number of dams in Bihar and Bengal with a view to controlling floods and utilising the stored water for purposes of generation of electricity. One of such dams is the Konar Dam in the district of Hazaribagh in Bihar. For the construction of the aforesaid Dam the Corporation entered into an agreement with M/s. Hind Construction Ltd., and M/s. Patel Engineering Co., Ltd., on May 24, 1950 and appointed them contractors for the aforesaid purpose. They will hereinafter be referred to as the Contractors. As a result of a change in the design of the Dam, it became necessary to enter into a supplementary agreement and on March 10, 1951, cl. 8 of Part II of the original agreement was amended and a fresh cl. 8 was substituted. Under the new cl. 8 of the agreement, as amended, the Corporation agreed to make available to the contractors such equipment as was necessary and suitable for the construction aforesaid. The Contractors are charged the actual price paid by the Corporation for the equipment and machinery thus made available, inclusive of freight and customs duty, if any, as also the cost of transport, but excluding sales tax. The equipment thus supplied by the Corporation to the Contractors was classified into two groups. Group A and Group B, as detailed in Sch.3. On August 12, 1952, the Superintendent of Sales Tax, Hazaribagh, assessed the Corporation under S. 13(5) of the Act for the period April 1950 to March 1952. It is not necessary to set out the details of the tax demand, because the amount is not in controversy. What was contended before the authorities below and in this Court was that the transaction in question did not amount to a sale within the meaning of the Act. The Superintendent rejected the contention raised on behalf of the Corporation that it was not liable to pay the tax in respect of the machinery supplied to the Contractors. The Corporation went up in appeal to the Deputy Commissioner of Sales Tax against the said order of assessment. By his order dated May 5, 1953, the Deputy Commissioner rejected the contention of the appellant as to its liability under the Act, but made certain amendments in the assessment, which are not material to the points in controversy before us. The Deputy Commissioner repelling the Corporations contentions based on the Act, held inter alia that the supply of equipment in Group A of the agreement aforesaid amounted to a sale and was not a hire; that the condition in the agreement for the taking over of the equipment on conditions laid down in the agreement was in its essence a condition of re-purchase and that the Corporation was a dealer within the meaning of the Act. The Corporation moved the Board of Revenue, Bihar, in its revisional jurisdiction under section 24 of the Act. The Board of Revenue by its resolution dated October 1, 1953, rejected the revisional application and upheld the order of the authorities below. Thereafter, the Corporation made an application to the Board of Revenue under S. 25 of the Act for a reference to refer the following questions to the High Court at Patna, namely, (a) whether the assessment under S. 13(5) of the Act is maintainable, (b) whether, in the facts and circumstances of the case, it can be held that the property in the goods included in Sch. A did pass to the Contractors and the transaction amounted to a sale and (c) whether the terms of the agreement amount to sale transactions with the Contractors and taking over by the Corporation amounts to re-purchase. This application was made on December 22, 1953, but when the application for making a reference to the High Court came up for hearing before the Board of Revenue on May 20, 1954, and after the parties had been heard, counsel for the Corporation sought leave of the Board to withdraw questions (a) and (c) from the proposed reference and the Board passed the following order:"Leave is sought by the learned advocate for the petitioner to drop questions (a) and (c) from the reference. The leave is granted. There remains only question (b) for reference to the High Court ..............."4. Thereupon the Corporation made an application headed as under Art. 132(1) of the Constitution and prayed that the High Court "be pleased to grant leave to appeal to the Supreme Court of India and grant the necessary certificate that this case is otherwise a fit case for appeal to the Supreme Court .............". Apart from raising the ground of attack dealt with by the High Court on the reference as aforesaid, the Corporation at the time of the hearing of the application appears to have raised other question as would appear from the following extract from the judgment and order of the High Court dated January 31, 1957 :-"It was conceded by learned counsel for the petitioner that the case does not fulfil the requirements of Art. 133(1) of the Constitution; but the argument is that leave may be granted under Art. 132 of the Constitution as there is a substantial question of Law with regard to the interpretation of the Constitution involved in this case. We are unable to accept this argument as correct. It is not possible for us to hold that there is any substantial question of law as to the interpretation of the Constitution involved in this case. The question at issue was purely a matter of construction of S. 2(g) of the Bihar Sales Tax Act and that question was decided by this Court in favour of the State of Bihar and against the petitioner. It is argued now on behalf of the petitioner that the provisions of S. 2(g) of the Bihar Sales Tax Act are ultra vires of the Constitution, but no such question was dealt with or decided by the High Court in the reference. We do not, therefore, consider that this case satisfies the requirements of Art. 132(1) of the Constitution and the petitioner is not entitled to grant of a certificate for leave to appeal to the Supreme Court under this Article5. Having failed to obtain the necessary certificate from the High Court, the Corporation moved this Court and obtained special leave to appeal under Art. 136 of the Constitution. The leave was granted on March 31, 1958.

Reasoning: In our opinion, these additional grounds are not open. They were never raised at any stage of the proceedings before the authorities below, or in the High Court. This Court is sitting in appeal over the decision of the High Court under S. 25 of the Act. The High Court in coming to its conclusion was acting only in an advisory capacity. It is well settled that the High Court acting in its advisory capacity under the taxing statute cannot go beyond the questions referred to it, or on a reference called by it. The scope of the appeal to this Court, even by special leave, cannot be extended beyond the scope of the controversy that could have been legally raised before the High Court. It is manifest that the High Court could not have expressed its opinion on any matter other than the question actually before it as a result of the reference made by the Board of Revenue. The preliminary objection must, therefore, be allowed and the appeal limited to the questionwhether the transaction in question in this case amounted to a sale within the meaning of the Act8. Those substantially are the terms of the contract between the parties and the sole question for determination in this appeal iswhether, in respect of the machinery and equipments admittedly supplied by the Corporation to the Contractors, it was a mere contract of hiring, as contended on behalf of the appellant Corporation, or a sale or a hire purchase, as contended on behalf of the respondent State.The law on the subject is not in doubt, but the difficulty arises in applying that law to the facts and circumstances of a particular case on a proper construction of the document evidencing the transaction between the parties. It is well settled that a mere contract of hiring, without more, is a species of the contract of bailment which does not create a title in the bailee, but the law of hire purchase has undergone considerable development during the last half a century or more and has introduced a number of variations, thus leading to categories, and it becomes a question of some nicety as to which category a particular contract between the parties comes under. Ordinarily, a contract of hire purchase confers no title on the hirer, but a mere option to purchase on fulfilment of certain conditions. But a contract of hire purchase may also provide for the agreement to purchase the thing hired by deferred payments subject to the condition that title to the thing shall not pass until all the instalments have been paid. There may be other variations of a contract of hire purchase depending upon the terms agreed between the parties. When rights in third parties have been created by acts of parties or by operation of law, the question, which does not arise here may arise as to what exactly were the rights and obligations of the parties to the original contract. It is equally well settled that for the purpose of determining as to which category a particular contract comes under, the Court will look at the substance of the agreement and not at the mere words describing the category. One of the tests to determine the question whether a particular agreement is a contract of mere hiring or whether it is a contract of purchase on a system of deferred payments of the purchase price is whether there is any binding obligation on the hirer to purchase the goods. Another useful test to determine such a controversy is whether there is a right reserved to the hirer to return the goods at any time during the subsistence of the contract. If there is such a right reserved, then clearly there is no contract of sale,Applying these two tests to the transaction in the present case, it becomes clear that it was a case of sale of goods with a condition of re-purchase on certain conditions depending upon the satisfaction of the Corporation as to whether the "residual life" of the machinery or the equipment was not less than one-third of the standard life in accordance with the terms agreed between the parties. It is clear on those terms that there is no right reserved to the contractors to return the goods at any time that they found it convenient or necessary. On the other hand, they were bound to pay two-thirds of the total approximate price fixed by the parties in equal instalments. The Contractors were not bound under the terms to return any of the machinery or the equipments nor was the Corporation bound to take them back unconditionally. The term in the agreement regarding the "taking over" of the machinery or equipments by the Corporation on payment of the "residual value" is wholly inconsistent with a contract of mere hiring and is more consistent with the property in the goods having passed to the Contractors, subject to the payment of all the instalments of the purchase price. Furthermore, the stipulation that the Contractors themselves will have to supply the spare parts, as and when needed, for replacements of the worn out parts is also consistent with the case of the respondent that title had passed to the contractors and that they were responsible for the upkeep of the machinery and equipments and for depreciation. If it were a mere contract of hiring, the owner of the goods would have continued to be liable for replacements of worn out parts and for depreciation. Applying those tests to the terms of the agreement between the parties, it is clear that the transaction was a sale on deferred payments with an option to re-purchase and not a mere contract of hiring, as contended on behalf of the appellant.