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

It arises out of these factse company, respondent No. 1 herein, entered into a contract No. 67/RS(I)/954/15/396 dated June 15, 1968, with the Union of India through the Railway Board for the manufacture and supply of 258 BG Bogie covered BCX type wagons and 812 MG covered wagons of MBC type to the railways. The sales tax authorities of the State (respondent No. 3 herein) under the Rajasthan Sales Tax Act, levied the sales tax treating the contract as one of sale and delivery of wagons. Under a similar past contract, the appellant reimbursed the company the amount of sales tax for the wagons supplied by it to the appellant in the months of March and April, 1967. In March, 1967, the High Court of Mysore in the case of Hindustan Aeronautics Ltd., Bangalore Division v. Commissioner of Commercial Taxes, Mysore [Sales Tax Appeal No. 8 of 1966 decided on March 1, 1967 (Mysore High Court); Affirmed by the Supreme Court in [1972] 29 S.T.C. 438 (S.C.)], held that the contract for the supply of wagons to the Railway Board by HAL was in the nature of a works contract and therefore sales tax was not payable on such supplies. In view of this decision, the Railway Board by its letter dated June 7, 1968, informed the company that the money paid by it to the company, which was not deposited with the sales tax department, should be refunded because the real nature of the transaction was that of a works contract and not a sale or purchase and, therefore, the Railway Board was not liable to reimburse the company for the amount of sales tax, if any, paid by the company to the State of Rajasthan. While in reply to the Railway Board, the company contended that the contract was for sale of wagons and not a contract for works, it took a contrary position in its representation to the Commissioner of Sales Tax, Rajasthan. Instead of giving any relief, the sales tax department informed the company that it should stop purchasing material on the strength of form C under the Central Sales Tax Act. Such stoppage would have saddled the company with a further liability to pay tax at the enhanced rate of the purchase of materials used for the manufacture of wagons.The Commercial Taxes Officer provisionally assessed the company under section 7D of the Rajasthan Sales Tax Act on the sale of wagons to the Railway Board for the month of May, 1968, and served a demand notice for payment of Rs. 1, 91, 827.79 including Rs. 1, 899.29 as penalty. Since the company was registered as a dealer under the Sales Tax Act, it had to bear, in the first instance, the charges of the tax although its incidence normally passes on to the purchaser, in the absence of a contract to the contrary under the provisions of section 64(a) of the Sale of Goods ActBy its letter of August 14, 1968, the Railway Board finally informed the company that, in future, it would not reimburse the company for the sales tax if paid by it in connection with the supply of wagons. The company thereupon invoked the writ jurisdiction of the High Court by a petition under article 226 of the Constitution. In the writ petition, the Commercial Taxes Officer, Special Circle, Jaipur, the Union of India through the Railway Board and the State of Rajasthan were impleaded as respondentsThe relief prayed in the petition was :"(1) That an appropriate order be made determining whether the contract in question is in the nature of a contract for sale of goods, or works contract(2) That in the event of a finding that the contract is in reality a contract for sale the respondent-Union of India be prohibited from claiming refund from the petitioner of the sum of Rs. 1, 56, 703.20 lying in its hands for payment of sales tax(4) That an appropriate writ, directive or order be made directing the respondent-Union of India through the Railway Board to reimburse the petitioners in respect of sales tax for the purchases from May, 1968, onwards from month to months."The writ petition was contested by the Union of India, inter alia, on the ground that the contract in question was a contract for works and not a contract of sale. The State of Rajasthan and the Commercial Taxes Officer in their joint reply contended that the contract was one for sale of wagonsAt the final hearing before the High Court all the parties requested the court to resolve the dispute in the exercise of its extraordinary jurisdiction under article 226 of the Constitution, notwithstanding the availability of an alternative remedy. The court, in consequence, proceeded to decide the dispute on merits. After examining in detail the terms and conditions of the contract as disclosed by the relevant documents on the record, the High Court took the view that the contract in question was a contract for the manufacture and sale of wagons to the Union of India by the company and, as such, sales tax was payable on these transactions. It thus decided the main issue against the Union of India and allowed the writ petitionHence this appeal by the Union of India.

Court's reasoning:
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.