# [1967] 1 S.C.R. 543

- **Citation:** [1967] 1 S.C.R. 543
- **Court:** Supreme Court of India
- **Decided:** 1966-09-26
- **Bench:** J.C. Shah, V. Ramaswami, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1967-1-s-c-r-543-3875
- **Pages:** 5

## Headnote

Bombay Sales-tax Act, 1953, s. 21--Comract for the construction of
Railway coach bodies-Provisions in con.tract showing property in construction material vesting in Railway on arrival at site and in coach bodies
on completion-Transaction whether sale or works contract.
The respondent Company, which was an engineering concern with a
workshop at Morvi,. obtained a contract from the Western Railway Administration for construction of third class coaches.
Under the contract
the respondent constructed three coaches and submitted a bill which was
properly certified on October 4, 1958, in accordance with the agreement
as to the work done by the respondent. , After the bill had been paid,
the respondent wrote to the Additional Collector of Sales-tax requesting
him under Section 27 of the Bombay Sales-tax Act, 1953 to hold that
the transaction was a works contract and not a sale, so that no sales-tax
was payable under ·the Act.
The Additional Collector held however that the transaction was a sale
on which tax was payable.
Dismissing an appeal from this decision, the
Sales-tax Tribunal took the view that the general conditions of the contract showed the ownership of the coach bodies only passed to the Railway when they were completed and handed over to the Railway, so that
the contract was for supply of coach bodies. Sales-tax
was therefore
payable on the price of these coach bodies.
Upon a reference made to
it, the High Court held however that the contract clearly mentioned that
the contract was for performance of work of building,
erecting and .
furnishing coach bodies on Broad Gauge underframes which already belonged to the Railway. The teJms of the contract further showed that
as soon as the materials were taken by the respondent to the site of the
construction of coaches, the ownership in those materials vested in
the
Railway and all that· the respondent had to do was to carry out the woi:Jc
of erecting and furnishing the coach
bodies.
When the coach bodies
were ready, the property in them vested in the Railway automatically
without any further transfer of rights in it to the Railway. The ownership in the ready coach bodies never vested in the respondent company
at all and although materials for their construction had to be obtained
by it and brought to the site, in purchasing those materials it was acting
more or less in the capacity of an agent for the Railway,
Accordingly
the High Court came to the finding that the contract between the parties
was one entire and indivisible contract for carrying out the works specified in the agreement and that it did not envisage either the sale of the
-..aterials by the respondent to the Railway, or of the coach bodies
as
&uch; no sales.tax was therefore held leviable on the transaction . .
On appeal to this Court.
HELD : The terms of the contract led to the only inference that the
respondent was not to be the owner of the ready coach bodies and that
the property in those bodies vested in the Railway even during the pr~
·cess of construction. The transaction was therefore clearly a works contract which did not involve a_ny sale. · [547 G]
·
·
544
SUPllBMB COUllT RBPOR.TS
(1967] I S.C.R.
Patnaik cl Company v. State of Ori.ssa, [1965] 2 S.C.R. 782 : distinguished.
C!v1L APPELLATI! JURIS01cnoN: Civil Appeal No. 945 of 1965.
Appeal by special ieave from the judgment and order dated
December 14, 1962 of the Gujarat High Court in Sales Tax Reference No. 16 of 1961.
N. S. Bindra and R. H. Dhebar, for the appellant.
M. V. Goswami, for the respondent.

## Text

B
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STATE OF GUJARAT
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M/S. KAILASH ENGINEERING CO.
September 26, 1966
[J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.]
Bombay Sales-tax Act, 1953, s. 21--Comract for the construction of
Railway coach bodies-Provisions in con.tract showing property in construction material vesting in Railway on arrival at site and in coach bodies
on completion-Transaction whether sale or works contract.
The respondent Company, which was an engineering concern with a
workshop at Morvi,. obtained a contract from the Western Railway Administration for construction of third class coaches.
Under the contract
the respondent constructed three coaches and submitted a bill which was
properly certified on October 4, 1958, in accordance with the agreement
as to the work done by the respondent. , After the bill had been paid,
the respondent wrote to the Additional Collector of Sales-tax requesting
him under Section 27 of the Bombay Sales-tax Act, 1953 to hold that
the transaction was a works contract and not a sale, so that no sales-tax
was payable under ·the Act.
The Additional Collector held however that the transaction was a sale
on which tax was payable.
Dismissing an appeal from this decision, the
Sales-tax Tribunal took the view that the general conditions of the contract showed the ownership of the coach bodies only passed to the Railway when they were completed and handed over to the Railway, so that
the contract was for supply of coach bodies. Sales-tax
was therefore
payable on the price of these coach bodies.
Upon a reference made to
it, the High Court held however that the contract clearly mentioned that
the contract was for performance of work of building,
erecting and .
furnishing coach bodies on Broad Gauge underframes which already belonged to the Railway. The teJms of the contract further showed that
as soon as the materials were taken by the respondent to the site of the
construction of coaches, the ownership in those materials vested in
the
Railway and all that· the respondent had to do was to carry out the woi:Jc
of erecting and furnishing the coach
bodies.
When the coach bodies
were ready, the property in them vested in the Railway automatically
without any further transfer of rights in it to the Railway. The ownership in the ready coach bodies never vested in the respondent company
at all and although materials for their construction had to be obtained
by it and brought to the site, in purchasing those materials it was acting
more or less in the capacity of an agent for the Railway,
Accordingly
the High Court came to the finding that the contract between the parties
was one entire and indivisible contract for carrying out the works specified in the agreement and that it did not envisage either the sale of the
-..aterials by the respondent to the Railway, or of the coach bodies
as
&uch; no sales.tax was therefore held leviable on the transaction . .
On appeal to this Court.
HELD : The terms of the contract led to the only inference that the
respondent was not to be the owner of the ready coach bodies and that
the property in those bodies vested in the Railway even during the pr~
·cess of construction. The transaction was therefore clearly a works contract which did not involve a_ny sale. · [547 G]
·
·
544
SUPllBMB COUllT RBPOR.TS
(1967] I S.C.R.
Patnaik cl Company v. State of Ori.ssa, [1965] 2 S.C.R. 782 : distinguished.
C!v1L APPELLATI! JURIS01cnoN: Civil Appeal No. 945 of 1965.
Appeal by special ieave from the judgment and order dated
December 14, 1962 of the Gujarat High Court in Sales Tax Reference No. 16 of 1961.
N. S. Bindra and R. H. Dhebar, for the appellant.
M. V. Goswami, for the respondent.
The Judgment of the Court was delivered by
Bbargava, J. Titls appeal under special leave granted by this
Court arises out of proceedings for assessment of sales-tax under
the Bombay Sales Tax Act III of 1953. Messrs. Kailash Engineering
Co. (hereinafter referred to as "the respondent") was an engineering
concern having their workshop at Morvi on the meter gauge section
of the Western Railway. They obtained a contract from the Western
Railway Administration for construction of III class passenger
coaches on certain conditions described as the conditions of tender.
Under that contract which was reduced to writing and was described
as an agreement, the respondent constructed three coaches and
submitted a bill which was properly certified in accordance with the
agreement by the Railway Administration on October 4, 1958.
The net value of the work done by the respondent was certified at
Rs. 1,22,035/-. After receipt of this money, the respondent wrote
to the Additional Collector of Sales Tax requesting him under s. 27
of the Bombay Sales Tax Act, 1953, to hold that this was a works
contract, and that the transaction, in respect of which the respondent
received the money, did not amount to a sale, so that no sales-tax
was payable under that Act. The Additional Collector held that
two questions fell for determination before bun:
(I) Whether the transaction covered by the bill dated
4th October, 1958, is a sale; and
(2) if it is a sale, whether any tax is payable in respect
of the same.
The Additional Collector answered both the questions in the
affirmative against the respondent. The appeal before the Gujarat
Sales Tax Tribunal failed; and thereupon, the respondent sought a
reference to the High Court of Gujarat. The Tribunal referred the
following question for the opinion of the High Court:-
"Whether on a proper construction of the agreement
as a whole and its general conditions and specification,
the work done and covered by Contract Certificates No.
M/60(1)/B-PRTN, dated 4th October, 1958, for the perforB
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GUJARAT v. KAILASH ENG. co. (Bhargava, /.)
545
mance of the works of building, erecting and furnishing 3
B. G. Coaches over the chassis supplied by the Railway is
ll works contract not amounting to sale, ot whether it is a
transaction of sale."
The High Court answered the question in favour of the respondent,
holding that the transaction was a works contract carried out by the
respondent and did not amount to a sale. Consequently, this appeal
has been brought up by the State of Gujarat challenging the correctness of the decision of the High Court.
The Tribunal, ,when dealing with the case, mentioned a few of
the terms of the contract entered into between the respondent and
the Western Railway Administra.tion, and, though . there was. a
provision in one of·the clauses of the agreement that as soon a8 the
plant and materials 'were brought on the site where the coaches were
to be constructed, the ownership i.n them would vest in the Railway,
the Tribunal held that the ownership in those materials never passed
to the Railway because of the indication given by another clause
which provided that on removal of contractor or on rescission of
contract, the Railway Authorities would be entitled to take possession and retain all .materia!S, tools, implements, machinery and
buildings. On this basis, the Tribunal held that, from the general
conditions of the contract, it appeared that the ownership of the
coach bodies only passed to the Railway when completed and
handed over to the Railway, so that the contract was for supply of
coach bodies. It was on supply of these coach bodies that the
respondent received the price of those bodies, and thus received the
amount subjected to sales-tax as sale corisideration for those bodies.
The High Court, however, in its judgment, reproduced the
preamble of the contract as well as a large number of clauses of it to·
show that in the contract, at every stage, it was clearly mentioned that
the contract was for performance of work of building, erecting and
furnishing coach bodies on Broad Gauge underframes which already belonged to the Railway. The terms of the contract showed
that as soon as the materials were taken by the respondent to the
site of construction of the coaches, the ownership in those ·materials
·Vested in the Railway and· all that the respondent had to do was to
carry out the work of erecting and furnishing the coach bodies.
When the coach bodies were ready, the property in them vested in
the Railway automatically without any further transfer of rights in
it to the Railway. In fact, the ownership in the ready coach bodies
did not vest in the respondent at all.
No doubt, the materials for
building the coach bodies had to be obtained by the respondent
and brought to the site of construction, but thii provision that
the ownership in those materials would vest in the Railway as soon as those materials were brought to the site clearly
indicated that the respondent, in purchasing those materials, was
546
SUP.RBMB COUltT REPORTS
(1967] l S.C.IL
acting more or less in the capacity of an agent for the Railway.
While the materials were at site, the effect of vesting of their ownership in the Railway was that if they were destroyed or damaged,
the risk had to be borne by the Railway, even though the Railway
might have been entitled to reimburse itself, because those materials
and goods were in the custody of the respondent on behalf of the
Railway. In fact, under clause 29, there was a specific provision
for the contingency that the materials or plant may be lost, stolen,
injured or destroyed by fire, tempest or otherwise. This special
provision was to the effect that the liability of the contractor was
not to be diminished in any wrry, nor was the Railway to be in any
way answerable for loss or damage on the happening of such contingency. This special provision had to be made, because the ownership in the materials vested in the Railway, though the contractor
was in actual physical possession of the materials and plant in order
to carry out the works contract. It was for this reason that. a specific
provision had to be made that the contractor would be liable to the
Railway if any such loss occurred.
Taking into account all the terms of the contract as a whole,
the High Court came to the finding that the contract between the
parti.es was one entire and indivisible contract for carrying out the
works specified in full details in the agreement, and that it did not
envisage either the sale of materials by the respondent to the Railway,
or of the coach bodies as such.
In this connection, learned counsel for the appellant relied on
the decision of this Court in Patnaik & Companyv. St;ite o/Orissa.(1)
In that particular case, the contract in question was for the supply
of bus bodies, and it was held that when the bus bodies were supplied
by the contractor and money received by him, it amounted to a sale.
It, however, appears that the facts and circumstances, on the basis
of which the Court gave that opinion, do not find place in the case
before us.
Three main circumstances were relied upon in that case for
holding that the transaction amounted to a sale and not to a works
contract. The first circumstance was that the bus bodies were,
throughout the contract, spoken of as a unit or as a composite thing
to be put on the chassis, and this composite body consisted not
only of things actually fixed on the chassis but movable things like
seat cushions, and other things which could be very easily detached.
Jn the contract, with which we are concerned, the coach bodies are
not separately described as units or components to be supplied by the
respondent to the Railway. The language used in the contract
everywhere describes the duty of the respondent to be that of constructing, erecting and furnishing coach bodies on the underframes
supplied. At no stage does the contract mention that ready coach
(I} 119651 2 S.C.R. 782.
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GUJARAT v. KAILASH ENG. co. (Bhargava, J.)
547
bodies were to be delivered by tl1e respondent to the Railway. Iri
fact, even during the process of construction of the coach bodies,
the unfinished bodies in process of erection were treated, under the
terms of the contract, as the property of the Railway.
The second circumstance found in that case was that if some
wbrk was not satisfactorily done and the body builder, on receipt
of a written order, did not dismantle or replace the defective work
or material at his own cost within seven days, the Controller was
entitled to get the balance of the work done by another agency and
recover the difference in cost from the body builder; and for this
purpose, the Controller was entitled to take delivery of the unfinished
body. In the contract before us, as we have already mentioned
in the preceding paragraph, the unfinished bodies of the coaches
were from the earliest stage treated as the property of the Railway,
and there was no question of ownership of the unfinished body
passing to the Railway only after its seizure by it as was the case in
the other contract in which the property in the unfinished body did
not pass to the Government till the unfinished body was seized.
·
The third circumstance taken into account in that case was
the liability for the Joss, if a fire· took place and the bus bodies
were destroyed or spoiled. In that case, there was a provision for
insurance of the chassis, but there was no such provision regarding
insurance of bus bodies, and the Court inferred that till delivery
was made, the bus bodies remained the property of the appellant
on whom the Joss would fall. On the other hand, in the contract
with which we are concerned, the terms envisaged the property
in the unfinished bodies vesting in the Railway, and since those
unfinished bodies were to be in charge of the respondent during
construction, a special provision had to be made making the respondent responsible for the loss and throwing upon the respondent
the liability to reimburse the Railway for loss by fire, etc. Thus, the
terms of the contract in this case are markedly different from those
which came up for consideration in that case. Here, we find that
all the terms of the contract lead to the only inference that the
respondent was not to be the owner of the ready coach bodies· and
that the property in those bodies vested in the Railway even during
the process . of construction. This was, therefore, clearly a works
contract which did not involve any sale. The decision given by
the High Court was correct. The appeal fails and is dismissed
with costs.
R.K.P.S.
Appeal dismissed.