COMMISSIONER OF COMMERCIAL TAXES, MYSORE BANGALORE v. HINDUSTAN AERONAUTICS LTD.

Citation: [1972] 2 S.C.R. 927; 1971 INSC 352

Court: Supreme Court of India

Bench: S.M. SIKRI , J.M. SHELAT, G.K. MITTER, I.D. DUA, HANS RAJ KHANNA

Judgment date: 1971-12-17

Case summary

1971 INSC 352. Supreme Court of India judgment dated 1971-12-17. COMMISSIONER OF COMMERCIAL TAXES, MYSORE BANGALORE v. HINDUSTAN AERONAUTICS LTD. Read the...

Judgment text

A B c D E F G H COMMISSIONER OF COMMERCIAL TAXES, MYSORE BANGALORE v. HINDUSTAN AERONAUTICS LTD. December 17, 1971 [S. M. S! KRI, C. J. , J. M. SHELAT, I. D. DUA, H. R. KH. \NNA AND G. K. MITTER, JJ. ) Sales Tax-Contract for manufacture and supply of railway coaches- If sale or works-contract. The correspondence between the Railway Board and the respondent ( "'~"ssec regarding the terms and conditions for the manufacture and supply of railway coaches. and the indemnity bond in respect of the contract, disclosed that: (i) The Railway bookod capacity of the assessee for the purpose of construction of railway coaches; (ii) an advance, on account, was made to the extent of 90% of the value of the material on the production of a certificate by the inspecting autho'rity. (iii) the material used for the construction of coaches before its use was the property of the railway; (iv) there was no possibility of any other material being used for the cons. truction, 1a.

nd (v) the words used in the contract were. 'manufacture and supply of the following coaches. ' On the question whether there was a sale @f railway coaches liable to sales tax. or only a \\'orks·contract, HELD : The answer to the question whether a contract is a works· contract or a contract of sale depends upon the construction of the terms of the contract in the light of surrounding dircumstances. [935 A-Bl ( l) In the present case. when all the material used in the construction of a coach belonged to ·the Railways there cannot be any sale of the coach itself. It was a pure works-contract, the difference between the rrico of a coach and 'the cost of material being only the cost of service rendered by the ass. ossee. [935 G-Hl ( 2) Whetbor the wheelsets and underframes were supplied free of cost or not makes no essential difference. [936·· A-Bl ( 3) The material and wage escalator and adjustments regarding final price mentioned in the contract are neutral factors.

[93501 State of Gujamt v. Kai/ash Engineering Co. , 19 S. T. C. 13 (S. C. ) followed: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 710 of 1968. Appeal from the . iudgment and order dated March 1, 1967 of the Mysore High Court in Sales Tax Appeal No. 8 of. 1966. '928 SUPREME COURT REPORTS [1972] 2 S. C. R. Somanatha Iyer, R. B. Datar and M. S. Narasimhan, for the :appellant. S. T. Desai, Mrs. A. K. Verma, J. B. Dadachanji, 0. C. Mathur filld Ravinder Narain, for the respondent. B. Sen, Santosh Chatterjee, G. S. Chatterjee and P. K. Chakra- . varti, for intervener No. 1. D. Goburdhun, for intervener No. 2. The Judgment of 'the Court was delivered by Sikri, C. J. In this appeal by certificate granted by the High Court of. l\1ysore the only question involved is whether the delivery by the respondent-Hindustaill Aeronautics Ltd.

-hereinafter re- ferred ito as the assessee-to the Railway Board of railway coaches model 407, 408 - and 411 is liable 10 sales tax under the Central Sales Tax etc. The Commercial Tax Officer, by assessment order dated March 28, 1964, in respect of the assessment year 1958-59, in- cluded the turnover in respect of the supply of these coaches. The . Sales Tax Officer rejected the contention of the assessee that there was no sale involv-~d in the execution of the works-contract in view of certain decisions of the High Courts; e. g. , McKenzies Limited v. The State of Bombay(1) and Jiwan Singh v. S1ate of Punjab('). In appeal, the Deputy Commissioner of Commercial Taxes confirmed the order. In revision the Commissioner of Commer- cial Taxes also came to the same conclusion. He observed : "Th. e contracts specifically mentioned that the under-frame shall always remain the property of the Railway Board.

On the other hand, the order placed with the assessee company here was for the 'manufac · ture and supply' of railway coaches. The payment to the assessee company is specifically referred to as 'price'. The conditions normally included in contracts for works are absent in. this order. " He further observed : " ... I would like to reiterate here that even the actual contract is for manufacture and supply of rail coaches. There is no mention that the rail coaches are to be constructed on 1 the underframes of the indentor ........ If it was really a works contract the under- . (J) I J S. T. C. 602. (2) 14 S. T. C. 957 • A B c D E F G H A B c D E F G H c. C. T. V, HINDUSTAN AERONAUTICS LTD. (Sikri, C. /. ) 929' frames would have been made available for construc- tion instead of being 'supplied free of cost' and the in- den_tor's lien on diem would have been made clear. The plain IM.

llning of the contract is that the underframes were transferred to the assessee company free of cost by the Railway Board and that after construction of rail coaches on them, the rail coaches were sold to the Railway Board at the agreed price. The agreement does not also contemplate any inspec- tion in the course of eXecution as would normally be provided for in a works contract. The only inspec- tion is after completion and at Perembur. " He thought that case of the assessee in respect of model 4U railway coaches was worse. Regarding ithe financial arrange- ment between the Railway Board and the assessee, he observed : "The Railway Board made only advance payments for purchase of materials and did not itself procure the material and supply them to the assessee company. The conc! ition that the ma:terials become property of the Railway Board as and when purchased is only for purposes of providing adequate security for the ad- vances.

In the circumstances, the materials can be deemed to be hypothecated to the Railway Board and the advance payments are really part payment of the final price. The transaction relating to Rail coache r Rs. 2,34,517-4-0 being 90% (ff materials procured in October 1956. Kinclly F :irr~nge payr. ilent of the invoiCe alon~ith the invoice a! J:e!! dY §. ~nt. ,Please instruct your resident representa- tive ,\o c)leck the stock of materials as per lists attached ,(o _our invoices and send them to the Deputy Financial A<;lvi§er and Chjef Accounts Officer, Integral Coach :Factory, }'erambur, so that )le may send his represen- G tative to check the value of the materials. " On these facts we have to decide whether there has been any sale of the coaches within the meaning of the Central Sales Tax Act. We were referred to a number of cases• of this Court and the High Courts, but it seems to us that ultimately the answer ~ must depend upon the terms of the contract. The answer to the H ! {I) .

16 :;:re. HB-"fcK•nzl•~ v. Stpte of Malzarashtra. (~) fl9/l. 5J 2 S. C. R. 182-Palnalk & Ca. v. Stal• of Orlssa. B c D F G C. C. T. V, HINDUSTAN AERONAUTICS LTD. (Sikri, C. /. ) 935 question whether it is a works contract or it is a contract oi. sale depends upon the construction of the tenns of the contract in the light of the surrounding circumstances. In this case the salient features of the contract are as follows : ( 1 ) The Railway books capacity of the assessee for the pur- pose of construction of railway coaches. ( 2) Advance on account is made to the extent of 90% of the value of the material on the production of a certificate by the inspecting authority. ( 3) The material used for the construction of coaches before its use is the property of the Railway. This is quite clear from para 1 of the Indemnity Bond set out above. No other meaning can be given to the words in the bond to the effect that "the Hindustan Aircraft Ltd.

hereby undertake to hold at their works at Bangalore for and on behalf of the President of the Union of India and as his property in trust for him the Stores and articles in respect of which advances are made to them. " It seems to us clear that the property in the materials which are used for the construction of the coaches becomes the property of the President before it is used. ( 4) ·It seems that there is no possibility of any other material being used for the. construction as is borne out from the report written by the Commercial Tax Officer. ( 5) As far as the coaches of models 407 and 408 are con- cerned, the wheelsets and underframes are supplied free of cost. ( 6) In the order the words used are "manufacture and sup- ply of the following coaches. " (7) The material and wage escalator and adjustments which are mentioned in the, contract are neutral factors. On these facts it seems to us that it is a pure works contract.

We are unable to agree that when all the material used in the construction of a c? ach belongs t. o the Railways there can be any sale of the coach itself. _ ~e difference between the price of a coach and the cost of material can only be the cost of services H rendered by the assessee. If. it is necessary to refer to a case which is close to the facts of this case, then this case is more in line with the decision of 936 SUPREME COURT REPORTS [1972] 2 S. C. R.. this Court in State of Gujarat v. Kai/ash Engineering Co. ( 1 ) than any other case. The only difference as far as coach model No. 411 ls con- cerned is that in that case the wheelsets and underframes are not supplied free of cost but otherwise there is no essential difference in the terms. This does not make any difference to the result. Jn the result the appeal fails and is dismissed with costs. V. P. S. Appeal dismissed. (I) 19 s. T. c. u. A B

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