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

- **Citation:** [1972] 2 S.C.R. 927
- **Court:** Supreme Court of India
- **Decided:** 1971-12-17
- **Case number:** Civil Appeal No. 710 of 1968
- **Bench:** S. M. S!Kri, J. M. Shelat, I. D. Dua, H. R. Kh.\Nna, G. K. Mitter
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-commercial-taxes-mysore-bangalore-v-hindustan-aeronautics-ltd-5582
- **Pages:** 10

## Headnote

Sales Tax-Contract for manufacture and supply of railway coachesIf 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:

## Text

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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 coachesIf 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 referred 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, included 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 Commercial 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 1the 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 •
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c.C.T. V, HINDUSTAN AERONAUTICS LTD. (Sikri, C./.)
929'
frames would have been made available for construction instead of being 'supplied free of cost' and the inden_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 inspection in the course of eXecution as would normally be
provided for in a works contract. The only inspection 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 arrangement 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 advances.
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<
of model 411 is clearly a sale."
He, therefore, confirmed the appellate order of the Deputy Commissioner.
The assessee then took an appeal to the High Court of Mysore·
under s. 24(1) of the Mysore Sales Tax Act read with s. 9(3)
of 'the Central Sales-tax Act.
The High Court was not satisfiad·
with the m;iterial on record and directed that a report be sent
on three points, viz :
" ( i) Whether and if so to what extent the assessee
has drawn advance payment from the Railway Board
in respect of the material utilised for completing the
contracts in question;
·
(ii) Whether any material, in respect of which no
advance have been drawn, has been utilised by the
assessee. for completing the contracts; and
(iii) Whether the assessee has .used for completing
the con'!racts any material not specifically procured for
the purposes of completing the contracts."
930
SUPREME COURT REPORTS
(1972] 2 S.C.R.
The Commercial Tax Officer submitted his report, and certain
extracts may be reproduced below :
"My findings revealed 1hat as and when they purchased materials, they sent to the Railway Board 'an
invoice' accompanied by a list of the details regarding
the m<1terials purchased.
90 per cent of the value of
these materials was then paid to the company
after
inspection of the materials by the board's representative.
Invoice No. 31009 of 15-10-1956 is obtained
as a sample.
This invoice shows that materials for the
value of Rs. 2,60,374-12-0 were purchased~ the company for 407 model coaches.
The details of the materials are given in list attached to the invoice. The invoice and the list were sent to the board with a covering letter dated
15-10-1956 asking payment of
Rs. 2,34,517-4-0 being 90 per cent of the invoice amount.
The amount of this invoice is included in the Board's
remittance note No. 1290 of 30-10-195.6 and a cheque
was issued to the company for the total of several such
invoices.
The amounit of the cheque
received
on
30-10-1956 was Rs. 22.90,719,0-0."
He concluded :
"(I ) It is not possible to specify the exact am aunt
received from the board as advance payments. It is
said that the construction was spread out more than one
year and a running account was maintained showing the
debi's and credits for this coaches.
(2) It is said that no materials, for which advance
was not drawn, was utilised for building the coaches.
(3) It is not possible to find
out whether
any
materials nat specifically procured for the construction
of coac]:ies were used.
But it is said that there is no
possibilitv of any other materials being used foe this
construction. The constructions are said to be done at
particular shed which 'is· separrutely located.
No other
work is undertaken in this section. · All the materials
procured for constructions of coaches are said to be kept
separately in this section
alone. . Materials not connected with this work are not mixed up with the materials in this section.
Separate stock registers are maintained fo~. this section. Receipts and issl,les of materials
for the constructions of coaches are being accounted for
in this register under code numbers."
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C.C.T. v. HINDUSTAN AERONAllTICS LTD. (Sikr;, C.J.)
931
The High Court allowed the appeal and set aside the order
including the turnover relating to the construction of
railway
coaches, models 407, 408 and 411. Facts found by the High
Court and as they appear to us are as follows :
On February 3, 1955, 'the Ministry of Railways wrote to the
Hindustan Aircraft Ltd. regarding
the coaching
programme
1955-56. The letter reads :
"In order to book your capacity, construction of the
following is planned on your works against the 1955-56
R.S.P.
1. Third Class Coaches B.G. model 407
2.
Military Coaches 'M' type model 408
Total :
12-0
60
180
The intention of this intimation is to facilitate such
arrangements as you may find necessary for provising
for materials and for planning capacity for the stock in
question.
You should therefore treat this as a firm
bookinJ! of your capacity."
After discussions and settl·~ment of terms between officers of
•the Govi;rnment of India and of the assessee, the Railway Board
placed orders with the assesse.e.
The tenns jigreed between the
parties are found stated in a letter of the Government of India,
Ministry of Railways (Railway Board) No. 57/147/RE(163)
dated May 4, 1957.
This relates 'to the first of the models 407.
We may extract some portions of the letter.
It is stated thus :
In continuation of their letter No. 56/142/3/Re
dated 8-1-57 t1:.e Railway Board are pleased to place
an order on your work for the manufacture and supply
of the following coaching stock on tenns and conditions stated under para 2 .below :-
Item No.
Description of stock
Particular
Nos.
Price per coach
of Rly
specif.cation
Required
(without
wheels
Board's
and Drawing
and axles
and
Rolling
No.
under~fraines'J
Stock
Programme
1957-58
384
Broad Gauge
55-B-.14
180
Rs. 94,731/-
Ciassm
{Provish;:inall
.coachea :fμUy
~J~jl.9
furnished .to
model '407'
932
SUPREME COURT REPORTS·
Following terms and conditions are relevant:,:
(j) Price
[1972] 2 S.C.R.
(a) The price mentioned above is for stock without
wheels and lW:ls and underframes, and is provisional. Final price will be settled by negotiations
after you have submitted your claim for the
coaches ordered on you up to 1954-55 Rolling
Stock Programme on the basis of the wages and
material escalator approved by the Board.
( b) The final price when settled shall be subject
only to the Standard Wages and material escalator clauses given below ... ' ....
( c) The final payment on completion of this order
shall be subject to examination and check
of
your books by the Chief Administra"tive Officer,
Integral Coach Factory, Perambur, Madras.
I ii) Whee/sets and Underframes
The Wheelsets and U nderframes for the stock will
be supplied to you free of cost f.o.r. your work siding.
(iv) Delivery
The delivery of the above stock f.o.r. your works
siding is required to commence after the completion of
the stock ordered on your
works
against
1956-57
R.S.P. and required to be completed by January 1957,
or earlier.
(v) Inspection Aurhorirv
The inspection of thic' stock shall be carried out by
a representative (C.M.E. Southern Railway)
before
the coaches are despctched.
(vi) Terms of payment
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(a) Advance 'on a~count' payment to the extent of
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90"'< of the value d the materials shall be made
tu you on receipt of mater.ials and on production of a certificate from the Inspecting A uthority.
( b) Payment of
full
contract
price,
less
'on
account' payment already will be made on deliH
very of coaches i;1 complete condition and good
working order, duly certified by the Inspecting
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c.c.T. v. HINDUSTAN AERONAUTICS LTD. (Sikri, C./.}
933
Authority on the lines of procedure laid down
vide Board's
letter No.
571142/6/M dated
4-2-19 5 2 (Copy enclosed) .
(vii) Other terms of Contract.
( i) ................. .
(ii) If and when sales tax on this order becomes
p~yable under law, such payments, when made,
w~l not be on your
account.
The Railway
will not, however, be responsible for payment of
the sales tax paid by you under misapprehension
of law.
There is an indemnity bond in respect of this contract and
we may set it out fully.
"L Standing
Indemnity
for
advance payment
against contract relating to Railway Board's order for
construction and delivery of all metal III class B.G.
coaches now pending under orders Nos. 52-142/4/M
dated 16th February, 1952 and 53/142/4/M dated
3rd March, 1953 and against contracts in respect of
future orders that may be given by the Railway Board
from time to time; by the Hindustan Aircraft Ltd.,
Bangalore represented by General Manager hereinafter
called the Company in favour of the President of Union
of India.
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 under Railway
Board's letters, No 521142/4/M dated 16th February,
1952 and 53/142/4/M dated 3rd March, 1953 and
hereafter to be made to the Company under future
orders from the Railway Board from time to time.
2. The said stores and articles shall be such as are
required of the purpose of the pending and future contracts and .the advances made and to be made are without prejudicti to the provision~ of, the contract as to
rejection and inspection and any advance !Uade
against stores and articles rejected o~ foun~ unsatisfactory on inspection shall be refunded nnmediately to the
President of the Union of India .
3. The Company shall be entirely r_espon.sible for
the safe custody and protection of the said. articles and
stores against all risks till they are duly dehvered to the
12-L736Sup.CI/n
934
SUPREME COURT REPORTS
[1972] 2 s.c.a.
President of the Union of India or as he may direct and
shall indemnify the President of the Union of India
against ;my Joss, damage or deterioration whatsoever in
respect of the said stores and articles while in our possession.
The said articles and material shall at all
times to be open to inspection of any officer authorised
by Government.
4. Should any loss. of damage occur or a refund
become due, the President of the Union of India shall
be entitled to recover from the Company compensation
for such loss or damage or the amount to be refunded
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without prejudice to any other remedies available to
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him by deduction from any sum due or any sum which
at 'any time hereafter may become due to the Company
under this or any other contract."
'JNe have set out the terms of .the Indemnity Bond in great
det11il .\Jeci1μse the learned counsel for the appellant has strongly
relied 0n the terms thereof.
D
The text of the invoice sent by the assessee for the purpose of
receiving- 90% advance may be seen from the covering letter
dated October 15, 1956 relating to one of the invoices.
The_
letter reads :
"On account payment of 90% on, material proE
cur.:;d for rail coache~-407 and 408 model VI order.
Further to
our letter No.
AI/,{nv/1169
dated
Jl~l0-56 enclosing our invoice for Rs. 42,892-15-0 \Ve
eiwlose
herewith our inyojce No.
31009 dated
J5~t(l-l956 'in duplic!l\e fc;>r Rs.
2,34,517-4-0 being
90% (ff materials procured in October 1956. Kinclly
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:irr~nge payr.ilent of the invoiCe alon~ith the invoice
a!J:e!!dY §.~nt. ,Please instruct your resident representative ,\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 represenG
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.
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C.C.T. V, HINDUSTAN AERONAUTICS LTD. (Sikri, C./.)
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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 purpose 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 concerned, the wheelsets and underframes are supplied free of cost.
( 6) In the order the words used are "manufacture and supply 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 concerned 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.
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