Case: M/s. Patnaik &amp; Co Vs. State of Orissa

: These three appeals by special leave are directed against the judgment of the Orissa High Court in three references made by the Orissa Sales Tax Tribunal under S. 24 (1) of the Orissa Sales Tax Act, 1947, in respect of assessments for three quarters ending June 30, 1957, September 30, 1957 and December 31, 1957. All these appeals raise a common question of law and it would be sufficient if facts relating to the assessment for the quarter ending June 30, 1957 alone are given.For the quarter ending June 30, 1957, the appellant, M/s. Patnaik and Co., claimed to deduct from their gross turnover receipts totalling Rs. 11,268.45 received from the State Government of Orissa for building bodies on the chassis supplied by the Government, during the quarter. The Sales Tax Officer refused to deduct this amount. On appeal, this claim was allowed by the Collector of Sales Tax, purposing to follow an earlier decision of the Orissa Sales Tax Tribunal. The Department appealed against this order to the Sales Tax Tribunal which, by its order dated June 2, 1961, affirmed the order of the Collector. The Tribunal, in brief, held that it was impossible to spell out a distinct and separate contract to sell any materials or chattels to the customers in the work of construction of the bodies on the chassis. On the application of the Department, the Sales Tax Tribunal referred to the High Court the followingin the facts and circumstances of the case, the Tribunal is right in holding that the amounts received by the opposite party on the construction of bodies on chassis supplied by its customers under written contracts are not chargeable to the Orissa SalesHigh Court, in a short order, following its decision in Commissioner of Sales Tax, Orissa v. Patnaik and Co., S. J. C. No. 77 of 1959, dated(Orissa), answered the question in the affirmative, i.e., against the appellant. In that case, the High Court had construed a similar contract and had come to the conclusioncontract, therefore, as contemplated between the parties, is that the assessee was to deliver a specific goods, namely, a finished bus body built under the specifications prescribed by the Government for a fixed price. It cannot, therefore, escape from the position that the transaction was one for sale of some goods within the meaning of thehat exactly is the distinguishing feature of a sale from a works contract has been elaborately discussed in a case decided by this very Bench in S. J. C. No. 7 of 1959, (Thakur Dass Mulchand v. Commissioner of Sales Tax) on 6th July 1961 (Orissa), where it was held that a normal contract to make a chattel and deliver it when made includes a contract of sale, but it may not be always so. The test would, be whether the thing to be delivered has any individual existence before delivery as the sole property of the party who is to deliverHigh Court distinguished, State of Madras v. Gannon Dunkerley and Co. (Madras), Ltd., 1959 SCR 379   :(AIR 1958 SC 560  ), on the ground that as far as the terms of the contract between the parties were concerned, they clearly contemplated a case of sale of goods liable to sales tax under the Act, and it was not a works contract, as contended by the party. As stated above, the appellant having obtained special leave, the appeal is now before us.

Court's reasoning:
If the contract is one for work or for performance of service, the mere circumstance that the party doing the work or performing the service uses goods or materials belonging to him in the execution of the contract will not be of any importance in determining whether the contract is one for sale of goods. It is common ground that under the scheme of the Sales Tax Acts enacted by State Legislatures, if in its true nature the contract is one for performance of service or for work, consideration paid is not taxable, for the States have authority under the Constitution by Schedule VII to legislate on the topics of tax on salt or purchase of goods (other than newspapers) and have no power to tax remuneration received under contracts for work or service. The primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in the person performing work or rendering service no property in the thing produced as a whole notwithstanding that a part or even the whole of the materials used by him may have been his property.In the case of a contract for sale, there is in the first instance a chattel which belongs exclusively to a party and under the contract property therein passes for moneyconstitute a sale there trust, therefore, be an agreement and in performance of the agreement, property belonging to one party must stand transferred to the other party for money consideration. Mere transfer of property in goods used in the performance of a contrast is, however, not sufficient; to constitute a sale there must be anng to sale of goods and completion of the agreement by passing of title in the very goods contracted to be sold. It is of the essence of the transaction that the agreement and sale should relate to the samei.e., the goods agreed to be sold and in which the property is transferred.3.These four clauses do not indicate any clear intention as to the nature of the contract: they are consistent with the contract being one for sale of "bus bodies" belonging to the appellants as well as to a contract for building bus bodies on chassis supplied. Liability imposed by the contract requiring the appellants to indemnify the Governor for loss or damage to the chassis supplied and liability to carry out the work in the most substantial and workmanlike manner and to guarantee durability of the bodies are consistent with the contract being one of sale or of work and service. Clause 3 also does not indicate any definite intention. If the contract is one for sale of a "bus body", the agreement to pay extra payment for additional work to be done thereon is not also indicative of any definite intention. But by cls. 5 and 6 of the contract a definite intention that the contract is one for work and not sale is, in my judgment, indicated. By the fifth clause it is, inter alia, provided that the work shall throughout the stipulated period of the contract be carried out with all due diligence, time being deemed to be of the essence of the contract, and that the appellants shall be liable to pay to the Governor as liquidated damages an amount equal to 50 per cent of the estimated cost of the whole work as shown in the contract for every day that the work remains unfinished after the date fixed. In a contract for sale of goods such a covenant is unusual. If a party to a contract fails to carry out his part within the period specified, unless the other party waives the breach the contract may be deemed to be broken. The other party is ordinarily not concerned with the method or manner of producing the chattel agreed to be sold, if the specifications relating thereto are otherwise complied with. Imposition of an obligation to carry out the work with due diligence is indicative of the contract being one for work. This inference is strengthened by the proviso to cl. 5 which imposes liability upon the appellants to pay damages until the defects detected on inspection are rectified. By the first part of cl. 6, all work under or in the course of execution or executed in pursuance of the contract shall at all times be open to inspection by the Controller or officers authorised by him in that behalf and that they shall have the right to stop by a written order any work which in the opinion of the Controller has been executed with unsound, imperfect, unskillful or bad workmanship or with materials of inferior quality. The appellants on receipt of a written order are obliged to dismantle or replace such defective work or material at their own cost. If the appellants fail to comply with the order within seven days from the date of receipt of the order, the Controller is free to get the work remaining to be done by any other agency and is entitled to recover the difference in cost from the appellants, and for this purpose the Controller is at liberty to enter upon the premises of the appellants and take delivery of the unfinished vehicles. It is clear from the terms of cl. 6 that throughout the process of construction the appellants are under the supervision of the Controller, and it is open to the Controller to stop any work which is in progress and to call upon the appellants to rectify the work by dismantling or replacing the defective work. If the appellants fail to carry out the order of the Controller it is open to the Controller to take possession of the unfinished work and get the same done through any other agency and to recover the difference in cost from the appellants. The Controller is also given liberty to enter upon the premises of the appellants and to take over the premises of the appellants and to take over the unfinished vehicles. A party agreeing to purchase goods of certain specifications or description is entitled to insist that the specifications or the description shall be strictly carried out, but he has ordinarily no right to supervise the production of the goods. Again the right which is conferred upon the Controller to take away the unfinished vehicles and to get them completed by some other agency is wholly inconsistent with the contract being one for purchasing an article belonging to the appellants.What one may ask would be the authority of the Controller under a contract of sale to take away unfinished vehicles from the person who owns them, have the work completed by another person and then to claim the right to recover the difference in cost? Paragraph deals with the right to recover the consideration agreed to be paid to the appellants and the time at which it is to be paid. Paragraph 8 deals with the place at which the completed vehicles with bodies built thereon are to be delivered and till the date of the delivery the risk is with the appellants. Paragraph 9 deals with the settlement of any dispute which may arise between the parties on any question relating to the meaning of the specifications and drawings or as to the quality of the workmanship or materials used in the work. Paragraph 10 deals with the jurisdiction of Courts in the event of a dispute between the parties. Paragraphs 7 to 10 are in their content neutral and may be consistent with the agreement being either one for sale or for work orargument, however, does not appear to be correct in view of cls. 3, 4, 5, 6, 7, 8 and 9 of the specifications. Again the right which is conferred by cl. 6 of the main agreement which enables the Controller to take possession of the unfinished vehicles indicates that the bodies were to be built on the chassis supplied and they were not to be independently constructed. But this has, in my view, no decisive bearing. The parties may contract that on the chassis supplied by the State a body shall be built. If the true intention of the parties is that a body is a chattel belonging to the builder and the property therein is to pass under a contract against price, it would be a contract for sale of the body notwithstanding the fact that it is built on thethe English common law a house which is constructed being embedded in the land becomes an accretion to the land and (subject to mass of exceptions in favour of tenants and in favour of trade fixtures) belongs to the person to whom the land belongs. But that rule has not been accepted in India : Thakoor Chunder Poramnick v. Ram Dhonde Bhuttacharji, 6 Suth WR 228 and Narayan Das Khetty v. Jatindar Nath Roy, 54 Ind App 218 : (AIR 1927 PC 135). It is unnecessary to advert to the contention whether the rule applies to accretions to movables, for ultimately the true effect of an accretion made pursuant to a contract has to be judged, not by any artificial rule that the accretion may be presumed to have become by virtue of affixing to a chattel part of that chattel, but form the intention of the parties was when property in goods belonging to one person and affixed to the property of another person passed to that other person. Whether pursuant to a contract any movables fixed to another movable the property passes immediately to the person to whom the primary property belongs must depend upon the intention of the parties.One strong test to ascertain whether a given contract is for work or for sale of goods is to ascertain whether the thing produced as a whole had individual existence as the sole property of the party who produced it at some time before delivery, and the property therein passes only under the contract relating thereto to the other party for price. If the thing has no individual existence as the sole property of the party producing it, the contract will be one for work or for service.Under condition 6 of the conduct unfinished goods may be taken possession of by the Controller and appropriated to himself notwithstanding the objection which the appellants may have to that course. If the chassis and the body were destroyed before delivery, as stipulated loss of the body would undoubtedly fall upon the appellants, for by cl. 1 of the agreement the appellants are bound to indemnify the State of Orissa for any loss that may be suffered by the State. But this convenant is not decisive of the true nature of the contract. A bailee of goods under a works contract may undertake a more onerous liability than what is prescribed by S. 151 of the Contract Act : see S.152, Complete chassis with "bus body" under the terms of the contract the appellants have no right to them. If, because of the loss of the chassis and "bus body" constructed by the appellants, the appellants are unable to deliver the vehicle, the chassis arises by express terms of the contract and their claim for recovery of the value of the materials used or the consideration agreed to be paid would fail, because they have failed to carry out their part of the contract.It is unnecessary to refer to the large number of authorities to which our attention was invited by counsel. The question must be decided on a true interpretation of the terms of the contract in the light of surrounding circumstances. If, on a review of all the terms of the contract, it appears that the intention of the parties was that the appellants were to sell "bus bodies" to the State of Orissa the contract would clearly be one for sale and consideration paid would be taxable under the Orissa Sales Tax Act. If, however, the contract is one for securing a certain result namely the building of a body on the chassis supplied by the State with the materials belonging to the appellants, the contract would be one for work done and not liable to sales tax.In my view of the present contract is one for work and not a contract for sale, because the contract is not that the parties agreed that the "bus body" constructed by the appellants shall be sold to the State of Orissa. The contract is one in which the appellants agreed to construct "bus bodies" on the chassis supplied to them as bailees and such a contract being one for work, the consideration paid is not taxable under the Orissa Sales Tax Act.That the passenger Bus Bodies shall be constructed on the chassis in the most substantial and workmanlike manner, both as regards materials and otherwise in every respect in strict accordance with the specifications mentioned in Schedule B3. That if any additional work is considered necessary by the Transport Controller, Orissa (hereinafter called the Controller) for which no rate is specified in the contract, the Body Builder will immediately inform the Controller, in writing the rate which they intend to charge for such additional work. If the Controller does not agree to the rates the Body Builder will not be under any obligation to carry out such additional work.Then, looking at the contract as a whole, what was the real intention of the parties? It will be noticed that the bus bodies are throughout the contract spoken of as a unit or as a composite thing to be put on the chassis, and this composite body consists not only of things actually fixed on the chassis but movable things like seat cushions, and other things though fixed but which can be very easily detached, e.g., roof lamps, wind screen wipers, luggage carrier, tool box, box for First Aid equipment, etc.The next point to be noticed is that under the contract the property in the bus body does not pass to the Government till the chassis with the bus body is delivered at the destination or destinations to be named by the Controller except in the case contemplated in cl. 6 of the agreement. That clause provides that if some work is not satisfactorily done and the Body Builder on receipt of a written order dues not dismantle or replace such defective work or material at his own cost within seven days, the Controller would be entitled to get the balance of the work done by another agency and recover the difference in cost from the Body Builder. The Controller is entitled for this purpose to take delivery of the unfinished body. But even in this case the property in the unfinished body would not pass to the Government till the unfinished body is seized.Suppose a fire were to take place on the premises of the appellant and before delivery the bus bodies were destroyed or spoilt. On whom would the loss fall? There can only be one answer to this question and that is that the loss would fall on the appellant. Clause 1 of the agreement provides for insurance of the chasis but there is no provision regarding insurance of bus bodies. Therefore, it follows that till delivery is made, the bus bodies remain the property of the appellant. It could, if it chose to do so, replace parts or whole of the body at any time before delivery. It seems to us that this is an important indication of the intention of the parties. If the property passes at delivery what does the property pass in? Is it movable property or immovable property? It will not be denied that the property passes in movable property. Then was this the very goods contracted for? Here again the answer is plainly in the affirmative.The only case cited in the footnote relating to fixing of a chattel to another chattel isn Co. v. Rennie,(1875) 10 CPThat case would be relevant if the question in this case was whether property in the materials used in the construction of the body passed to the Government plant by plank, or nail by nail. The answer would be in the negative according to the above decision. But we are not concerned with this question here. The facts in that case may be conveniently taken from the headnote. The defendants contracted with the plaintiff to make and supply new boilers and certain new machinery for a steamship of the plaintiffs and to alter the engines of such steamship with compound surface condensing engines according to a specification. The Specification contained elaborate provisions as to the fitting and fixing of new boilers and machinery on board the ship and the adaptation of the old machinery to the new. The boilers and other new machinery contracted for were completed, and ready to be fixed on board, and one instalment of +2000 had been paid under the contract, when the ship was lost by perils of the sea. A second instalment +2000 was subsequently paid. The plaintiffs claimed delivery of the boilers and other machinery completed under the contract, and this being refused, brought an action for the detention of the same, or to recover back the +4000 paid by them to the defendants. It was held that the contract was an entire and indivisible contract for work to be done upon the plaintiffs ship for a certain prid, from further performance of which both parties were released by the loss of the ship; that the property in the articles manufactured was not intended to pass until they were fixed on board the ship; and that consequently the plaintiffs were not entitled to the boilers and machinery, nor could they recover the +4000 already paid as upon a failure of consideration. Here the question was whether according to the contract, the property in each portion certified by the inspector as properly done passed to the plaintiffs as and when his certificate was given. This question was answered in the negative. This case is no authority for the proposition that whenever a contract provides for the fixing of a chattel to another chattel, there is no sale of goods. A few simple illustrations will show that this cannot be the law. A wants new motor tyres. He goes to a dealer and asks that these may be supplied fitted on the car. Is there a sale, of motor tyres or not? It is not an easy operation to fix new tyres; it needs an expert hand. But it will not be denied that it was in essence a contract for sale of goods. Take another illustration. A wants a luggage carrier to be fixed to his car. The carrier which B has needs to be altered a little. The contract is that he will alter it and fix it to the car. Has there been a sale of the luggage carrier or not? The answer obviously is yes.We are, however, unable to appreciate how this passage assists the appellant. In this case both the agreement and sale relate to one kind of property, namely, the bus body. The case of a contract to construct a building is quite different and, as held by this Court, the property there does not pass in the materials as movables; but under this contract the bus body never loses its character as movable property, and the property in the bus body passes to the Government as movable property. The following extract from the judgment in Dunkerleys case, 1959 SCR 379   :(AIR 1958 SC 560  ), brings out the fact that the title in a case of building contract passes to the owner as an accretion theretoexception does not apply to buildings which are constructed in execution of a works contract, and the law with reference to them is that the title to the same passes to the owner of the land as an accretion thereto. Accordingly, there can be question of title to the materials passing as movables in favour of the other party to thewe have already said, it is clear on the terms of the contract in this case that the property in the bus body does not pass on its being placed or constructed on the chassis but when the whole vehicle including the bus body is delivered.Mr. Sastri then relied on the decision of this Court in Carl Still v. The State of Bihar,SCR 81 : (AIR 1961 SC 1615  ). That case does not apply to the facts of this case because this Court came to the conclusion on a construction of the agreement in that case that the contract there was entire and indivisible for the construction of specified works including buildings for a lump sum and not a contract of sale of materials as such.Mr. Sastri then says that clause 3 is inconsistent with an agreement for sale of goods. This clause provides for additional work to be done for which no rate is specified in the contract. The clause, according to us, merely provides for extra payment if the Controller decided to order some additional things to be placed in the body. This is a neutral clause equally applicable to a contract for sale of goods or a contract for work and labour.