# M/S. DAMODAR VALLEY CORPORATION v. THE STATE OF BIHAR

- **Citation:** [1961] 2 S.C.R. 522
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Case number:** Civil Appeal No. 285 of 1959
- **Bench:** B. P. Sinha, s. J. IMAM, A. K. Sarkar, K. SuBBA RAO, J.C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-damodar-valley-corporation-v-the-state-of-bihar-1978
- **Pages:** 15

## Headnote

Sales Ta%-Liabi!ity-Agreement to supply equipment and
macl1inery to contractor-If a sale or hire-Test-Bihar Sales Tax
Act, I947 (I9 of z947) s. z(g), z3(5), z5.
The appellant Corporation was assessed to sales tax under
s. 13(5) of the Bihar Sales Tax Act, 1947, on the price of machi-
• nery and equipment, amounting approximately to Rs. 42,63,305,
supplied to two contractor firms on the basis of an agreement
which it entered into with them for the construction of a dam.
The agreement provided, inter alia, that the price of the
machinery and equipment supplied was to be paid by the contractors and until that was done they were to remain the property of the Corporation. It was further agreed that the Corporation would take them over after the completion of the
work at their residual value, to be calculated in the manner set
out in the agreement, provided· that they were properly looked
after during the period of operation; and if the contractors so
chose earlier, if they were declared surplus and certified as
such by the consulting Engineer. The price was to be paid in
18 equal instalments, two-thirds of which was realisable in any
case, and thereafter the Corporation was to consider the date or
dates of taking them over after assessment of the depreciation
in order to arrive at the residual value. The Corporation was
not bound to take over if the residual life of the equipment fell
below one-third of the standard life as fixed by the parties.
2 S.C.R. SUPREME COURT REPORTS
523
The contractors were to. replenish the stock of spare parts supplied to them at their own cost. The appellant's case was t_hat
the transaction represented by the agreement was not a sale
within the meaning of the Act. The Sales Tax authorities held
against it and the only question that was ultimately referred to
the High Court by the Board of Revenue.under s. 25 of the Act
was whether the property in the equipment and machinery
passed to the contractors and the transaction amounted to a
sale. The High Court answered the question in the affirmative,
holding that the transaction was a sale within the meaning of
s. 2(g) of the Act. The High Court having refused the necessary certificate, the appellant appealed by special leave granted
by this court.
Held, that the appeal must be confined to the question
debated in the High Court. It is well settled that, while functioning .in its advisory capacity under a taxing statute, the High
Court cannot go beyond the question referred to it or on a
reference called by it. That the appeal was by special leave
could make no difference and the scope of the controversy could
not be extended beyond what could be legally raised before the
High Court.
The two fold test to determine whether a particular agreement is a contract of mere hiring or of purchase on deferred
payments is (1) whether the hirer is under an obligation to purchase the goods and (2) whether he has the right to return the
goods at any time during the subsisterce of the contract.
What has to be considered in each case is the substance of the
agreement and not the words describing its category.
Helby v. Matthews and others, (1895) A.C. 471, referred to.
So judged, there could be no doubt that on the terms of the
agreement between the parties the transaction in the instant
case was clearly a sale on deferred payments with an option to
repurchase and not a mere contract of hiring.

## Text

522
SUPREME COURT REPORTS
[1961]
to uphold his conviction under s. 65(£) of the Act.
Keki Bejonji at1d
.Another
It was finally urged that the sentence should be
reduced. In our opinion, the sentence imposed cannot
be said to be unduly severe having regard to the provisions of the Act.
v.
The Stale of
Bombay
Accordingly, the appeal of appellant No. 2 is allowed and his conviction and sentence are set aside but
the appeal of appellant No. I is dismissed.
Imam ].
z960
November 2 r.
Appeal disposed of acrordingly.
M/S. DAMODAR VALLEY CORPORATION
v.
THE STATE OF BIHAR
(B. P. SINHA, c. J., s. J. IMAM, A. K. SARKAR,
K. SuBBA RAO and J.C. SHAH, JJ.)
Sales Ta%-Liabi!ity-Agreement to supply equipment and
macl1inery to contractor-If a sale or hire-Test-Bihar Sales Tax
Act, I947 (I9 of z947) s. z(g), z3(5), z5.
The appellant Corporation was assessed to sales tax under
s. 13(5) of the Bihar Sales Tax Act, 1947, on the price of machi-
• nery and equipment, amounting approximately to Rs. 42,63,305,
supplied to two contractor firms on the basis of an agreement
which it entered into with them for the construction of a dam.
The agreement provided, inter alia, that the price of the
machinery and equipment supplied was to be paid by the contractors and until that was done they were to remain the property of the Corporation. It was further agreed that the Corporation would take them over after the completion of the
work at their residual value, to be calculated in the manner set
out in the agreement, provided· that they were properly looked
after during the period of operation; and if the contractors so
chose earlier, if they were declared surplus and certified as
such by the consulting Engineer. The price was to be paid in
18 equal instalments, two-thirds of which was realisable in any
case, and thereafter the Corporation was to consider the date or
dates of taking them over after assessment of the depreciation
in order to arrive at the residual value. The Corporation was
not bound to take over if the residual life of the equipment fell
below one-third of the standard life as fixed by the parties.
2 S.C.R. SUPREME COURT REPORTS
523
The contractors were to. replenish the stock of spare parts supplied to them at their own cost. The appellant's case was t_hat
the transaction represented by the agreement was not a sale
within the meaning of the Act. The Sales Tax authorities held
against it and the only question that was ultimately referred to
the High Court by the Board of Revenue.under s. 25 of the Act
was whether the property in the equipment and machinery
passed to the contractors and the transaction amounted to a
sale. The High Court answered the question in the affirmative,
holding that the transaction was a sale within the meaning of
s. 2(g) of the Act. The High Court having refused the necessary certificate, the appellant appealed by special leave granted
by this court.
Held, that the appeal must be confined to the question
debated in the High Court. It is well settled that, while functioning .in its advisory capacity under a taxing statute, the High
Court cannot go beyond the question referred to it or on a
reference called by it. That the appeal was by special leave
could make no difference and the scope of the controversy could
not be extended beyond what could be legally raised before the
High Court.
The two fold test to determine whether a particular agreement is a contract of mere hiring or of purchase on deferred
payments is (1) whether the hirer is under an obligation to purchase the goods and (2) whether he has the right to return the
goods at any time during the subsisterce of the contract.
What has to be considered in each case is the substance of the
agreement and not the words describing its category.
Helby v. Matthews and others, (1895) A.C. 471, referred to.
So judged, there could be no doubt that on the terms of the
agreement between the parties the transaction in the instant
case was clearly a sale on deferred payments with an option to
repurchase and not a mere contract of hiring.
CIVIL APPELLATE JURISDICTION:
Civil Appeal
No. 285 of 1959.
Appeal by Special Leave from the Judgment and
Decree dated the 13th July, 1956, of the Patna. High
Court in M. J.C. No. 404 of 1954.
M. C. Setalvad, Attorney-General for India and
S. P. Varma, for the Appellants.
A. V. V iswanatha Sastri, Buresh Aggarwala and
D. P. Singh, for the Respondent.
1960. ·November 21. The Judgment of the Court
was delivered by
M /s. Damodar
Valley
Corporalio>J
v.
The State of
Bihar
1960
M/s. Damoda,
Valley
Corporation
v.
Th• State of
Biliar
Sinha C. j.
524
SUPREME COURT REPORTS
(1961)
SINHA, C.J.-This appeal, by special leave, is directed against the judgment and order of the High Court
of Patna dated July 13, 1956 disposing of a reference
under s. 25(1) of the Bihar Sales Tax Act, 1947, which
hereinafter will be referred to as the Act, made by
the Board of Revenue, Bihar.
The facts of this case have never been in dispute
and may shortly be stated as follows.
The appellant
is a Corporation incorporated under the Damodar
Valley Corporation Act (XIV of 1948) and will hereinafter be referred to as the Corporation. It is a multipurpose Corporation, one of its objects being the construction of a number of dams in Bihar and Bengal
with a view to controlling floods and utilising the stored water for purposes of generation of electricity. One
of such dams is the Konar Dam in the district of
Hazaribagh in Bihar. For the construction of the
aforesaid Dam the Corporation entered into an agreement with Messrs Hind Construction Ltd. and Messrs
Patel Engineering Co. Ltd. on May 24, 1950, and
appointed them contractors for the aforesaid purpose.
They will hereinafter be referred to as the Contractors.
As a result of a change in the design of the Dam, it
became necessary to enter into a supplementary agreement and on March 10, 1951, cl. 8 of Part II of the
original agreement was amended and a fresh cl. 8 was
substituted. Under the new cl. 8 of the agreement, as
amended, the Corporation agreed to make available
to the contractors such equipment as was necessary
and suitable for the construction aforesaid. The Contractors are charged the actual price paid by the Corporation for the equipment and machinery thus made
available, inclusive of freight and customs duty, if
any, as also the cost of transport, but excluding sales
tax. The equipment thus supplied by the Corporation to the Contractors was classified into two groups,
Group A and Group B, as detailed in Schedule No. 2.
The machinery in Group A was to be taken over from
the Contractors by the Corporation, after the completion of the work at their "residual value" which was
to be calculated in the manner set out in the agreement. The machinery in Group B was to become the
2 S.C.R. SUPREME COURT REPORTS
525
property of the Contractors after its full price had
been paid by them. No more need be said about the
machinery in Group B, because there is no dispute
a.bout that group, the Contractors having accepted the
position that Group B machinery had been sold to
them. The controversy now remaining between the
parties relates to the machinery in Greup A.
On August· 12, 1952, the Superintendent of SMes
Tax, Hazaribagh, assessed the Corporation under
s. 13(5) of the Act for the period April, 1950 to March,
1952. It is not necessary to set out the.details of the
tax demand, because the amount is not in controversy.
What was contended before the authorities below and
in this Court was that the transaction in question did
not amount to a "sale" within the meaning of the
Act. The Superintendent rejected the contention
raised on behalf of the Corporation that it was not
liable to pay the tax in respect of the machinery sub.
plied to the Contractors. . The . Corporation went up
in appeal to the Deputy Commissioner of Sales Tax
against the said order of assessment. By his order
dated May 5, 1953, the Deputy Commissioner rejected
the contention of the appellant as to its liability under
the Act, but ma.de certain amendments in the assessment, which a.re not material to the points in controversy before us. The Deputy Commissioner repelling
the Corporation's contentions based on the Act, held
inter.alia that the sup:ply of equipment in Group A of
the agreement aforesaid amounted to a sale and was
not a. hire ; that the condition in tlie agreement for
the "taking over" of the equipment on conditions laid
down in the agreement was in its essence a. condition
of re-purchase and that the Corporation was a. "dealer" within the meaning of the Act. The Corporation
moved the Boa.rd of Revenue, Bihar, in its revisional
jurisdiction under s. 24 of the Act. The Board of
Revenue by its resolution dated October 1, 1953, rejected the revisions.I application and upheld the order
of the authorities ~elow. Thereafter, the Corporation
made an application to the Board of Revenue under
a. 25 of the Act for a reference to refer the following
67
M/s, Damodar
Valley
Corporatio•
v.
T/11 Stat• of
Bi liar
Sinha C. J;
!ti /s. Damodar
Valley
Corporation
v.
The Stale of
Bihar
Sinha C. ].
526
SUPREME COURT REPORTS
[1961]
questions to the High Court at Patna, namely, (a)
whether the assessment under s. 13(5) of the Act is
maintainable, (b) whether, in the facts and circumstances of the case, it can be held that the property
in the goods included in Schedule A did pass to the
Contractors and the transaction amounted to a sale,
and (c) whether the terms of the agreement amount
to sale transactions with the Contractors and taking
over by the Corporation amounts to re-purchase.
This application was made on December 22, 1953, but
when the application for making a reference to the
High Court came up for hearing before the Board of
Revenue on May 20, 1954, and after the parties had
been heard, counsel for the Corporation sought leave
of the Board to withdraw questions (a) and (c) from
the proposed reference and the Board passed the
following order :-
"Leave is sought by the learned advocate for the
petitioner to drop questions (a) and (c) from the reference. The leave is granted. There remains only
question (b) for reference to the High Court ...... "
Thus only question (b) set out above was referred to
the High Court for its decision. After hearing the
parties, a Division Bench of the High Court, Ramaswami, C. J. and Raj Kishore Prasad, J., heard the
reference and come to the conclusion by its judgment
dated July 13, 1956, that the reference should be
answered in the affirmative, namely, that the transaction in question amounted to a sale within the meaning of s. 2(g) of the Act.
Thereupon the Corporation made an application
headed as under Art. 132(1) of the Constitution and
prayed that the High Court "be pleased to grant
leave to appeal to the Supreme Court of India and
grant the necessary certificate that this case is otherwise a fit case for appeal to the Supreme Court ...... "
Apart from raising the ground of attack dealt with by
the High Court on the reference as aforesaid, the
Corporation at the time of the hearing of the application appears to have raised other questions as would
appear from the following extract from the judgment
and order of the High Court dated January 31, 1957 :-
2 S.C.R. SUPREME COURT REPORTS
527
"It was conceded by learned counsel for the petitioner that the case does not fulfil the requirements of
Article 133(1) of the Constitution; but the argument
is that leave may be granted under Article 132 of the
Constitution as there is a substantial question of law
with regard to the interpretation of the Constitution
involved in this case. We are unable to accept this
argument as correct. It is not possible for us to hold
that there is any substantial question of law as to the
interpretation of the Constitution involved in this
case. The question at issue was purely a matter of
construction of se.ction 2(g) of the Bihar Sales Tax
Act and that question was decided by this Court in
favour of the State of Bihar and against the petitioner. It is argued now on behalf of the petitioner that
the provisions of section 2(g) of the Bihar Sales Tax
Act are ultra vires of the Constitution, but no such
question was dealt with or decided by the High Court
in the reference. We do not, therefore, consider that
this case satisfies the requirements of Art. 132(1) of
the Constitution and the petitioner is not entitled to
grant of a certificate for leave to appeal to the Supreme Court under this Article.
The application is accordingly dismissed."
Having failed to, obtain the necessary certificate
from the High Court, the Corporation moved this
Court and obtained special leave to appeal under Art.
136 of the Constitution. The leave was granted on
March 31, 1958.
Though the scope of the decision of the High Court
under s. 25 of the Act on a reference made to it is
limited, the Corporation has raised certain additional
points of controversy, which did not form part of ·the
decision of the High Court. Apart from the question
whether the transaction in question amounted to a
sale within the meaning of the Act, the statement of
the case on behalf of the appellant raises the following additional grounds of attack, namely, (1) that the
Corporation is not a dealer within the meaning of the
Act, (2) that the proviso to s. 2(g) of the Act is ultra
vires the Bihar Legislature and (3) that the Act itself
is ultra vires the Bihar Legislature by reason of the
M/s. Damodar
Valley
Corporation
v.
Tha Slala of
Bihar
Sinha C. ].
r960
M /s. Damodar
Valley
Corporalio#
v.
The State of
Bihar
Sinha C. ].
528
SUPREME COURT REPORTS
[1961)
legislation being beyond the scope of entry 48 in
List II of Schedule 7 of the Government of India Act,
1935. Hence, a preliminary objection was raised on
behalf of the respondent that the additional grounds
of attack were not open to the Corporation in this
Court. It is, therefore, necessary first · to determine
whether the additional grounds of attack set out above
are open to the Corporation. In our opinion, those
additional grounds are not open. They were never
raised at any stage of the proceedings before the
authorities below, or in the High Court. This Court
is sitting in appeal over the decision of the High Court
under s. 25 of the Act. The High Court in coming to
its conclusion was acting only in an advisory capacity ..
It is well settled that the High Court acting in its
advisory capacity under the taxing statute cannot go
beyond the questions referred to it, or on a reference
called by it. The scope of the appeal to this Court,
even by special leave, cannot be extended beyond the
scope of the controversy that could have been legally
raised before the High Court. It is manifest that the
High Court could not have expressed its opinion on
any matter other than the question actually before it
as a result of the reference made by the Board of
Revenue. The preliminary objection must, therefore,
be allowed and the · appeal limited to tlw question
whether the transaction in question in this case amounted to a sale within the meaning of the Act.
It is manifest that this controversy between the
parties has to be resolved with reference to the terms
of the contract itself. Clause 8 of the agreement as
amended is a very complex one as will presently appear from the following extracts, being the relevant
portions of that clause :-
"The Corporation may hire or make available
such of its equipment as is suitable for- construction
for the use of the Contractor. The actual prices paid
by the Corporation for the equipment thus made
- avajlable, inclusive of freigM,, insurance and custom
duties, if any, and the cost of its transport to site
but excluding such tax as sales tax whether local,
municipal, State or Central, shall be charged to the
2 S.C.R. SUPREME COURT REPORTS
529
Contractor a.nd the equipment shall remain the
property of the Corporation until the full prices thereof
have been realised from the Contractor.
Equipment
lent for the Contractor's use, if any, shall be charged
to him on terms of hiring to be mutually agreed upon;
such terms will cover interest on capital cost and the
depreciation of the equipment.
The Corporation will supply to the Contractor
the machinery mentioned in Schedule No. 2, Group A
and Group B below."
Then follows a description seriatim of the many items
cif machinery in Group A with the number of such
machinery and the approximate cost thereof. In this
Group A, there are fourteen items of which it is only
necessary to mention the first one, that is to say, four
excavators with accessories approximately valued at
Rs. 12,46,390; and no. 14, two excavators of another
model, approximately costing Rs. 3,35,000. The total
approximate cost of the machinery in Group A is
estimated to be Rs. 42,63,305. Then follow the descriptions of machinery in Group B, the approximate
cost of which is Rs. 21,84,148. Then follow certain
conditions in respect of equipments included in Group
A, in these words:-
"The Corporation will take over from the Contractor item 1 and 14 on the completion of the work at
a residual v,alue calculated on the basis of the actual
number of hours worked .assuming the total life to be
30,000 hours and assuming that the machinery will be
properly looked after during the period of its operation. The remaining items of this group will be taken
over by the Corporation at their residual value taking
into account the actual number of hours worked and
the standard life of such machinery for which Schedule F, as last relised,? of the U.S. Bureau of Industrial Revenue, on the probable useful life and depreciation rates allowable for Income Tax purpose (vide
Engineering News Record dated March 17, 1949) will
serve as a basis, provided that the machinery shall
be properly looked after by the Contractor during the
period of its operation. Provided further that such
residual value of the machinery shall be assessed
M /s. Damodar
Valley
Corporation
v.
The Slate of
Biha.r
Sinha C. }.
M /s. Damodar
Vall•y
Corporation
v.
Thi Stat1 of
Bihar
Si•ha C. ].
530
SUPREME COURT REPORTS
[1961)
jointly by representatives of the Corporation and of
the Contractor and that in case of difference of opinion
between the two parties the matter shall be settled
through arbitration by a third party to be agreed to
both by the Corporation and the Contractor.
The items included in this group will be taken
over by the Corporation from the Contractor either
on the completion of the work or at an earliar d.ate if
the Contractor so wishes, provided that in the latter
case the equipments will be taken over by the Corporation only when they are declared surplus at Konar
and such declaration is duly certified by the Consulting Engineer, within a period of 15 days of such
declaration being received by the Corporation.
In respect of the machinery which shall have
, been delivered to the Contractor on or before the 31st
of December 1950, their cost shall be recovered from
the Contractor in eighteen equal instalments beginning
with January 1951 and in respect of the remaining
items included in this group of machinery, their cost
will be recovered from the Contractor in eighteen
equal instalments beginning with July 1951, provided
that these remaining items shall have been delivered
to the Contractor prior to the last specified date.
Provided-
( a) that the total actual price for these equipments which has been provisionally estimated at
Rs. 42,63,305 will be chargeable to the Contractor as
per first para of clause 1 above.
(b) that after approxmimately two thirds of total
cost or an amount of Rs. 28,43,000 (Rupees twenty
eight lakhs forty three thousand) approximately has
been recovered from the Contractor on account of
these equipments the Corporation will consider the
date or dates when it could take over the equipments
still under use by the Contractor, assess the extent to
which they have already been depreciated and thereby arrive at their residual value; and
(c) that the recovery or refund of the amount
payable by or to the Contractor on account of these
equipments will be decided only if the Corporation is
fully satisfied that their residual life at the time of
2 S.C.R. SUPREME COURT REPORTS
531
their being finally handed over to the Corporation
shall under no circumstances fall below one third of
their respective standard life as a.greed upon by the
Corporation and the Contractor."
Then follow terms and conditions in respect of Group
'B' which are not relevant to our purpose. Thereafter,
the following conditions appear:-
"In respect of equipments whether in Group A
· or B made available by the Corporation to the Contra.ctor.
The following conditions shall apply to all equipments, i.e., those included in Group A and B above
and others, if any;
(a) The Contractor shall continuously maintain
proper ma.chine cards separately in respect of each
item of equipment, clearly showing therein,· day by
day, the number of actual hours the machine has
worked together with the dates and other relevant
particulars.
(b) The Contractor shall maintain all such equipments in good running condition and shall regularly
and efficiently give service to all plant and machinery,
as may be required by the Corporation's Chief Engineer who shall have the right to inspect, either personally or through his authorised representatives all
such plant and equipment and the machine cards
maintained in respect thereof at mutually convenient
hours.
(c) No item of equipment ma.de available by the
Corporation on loan or hire shall at any time be removed from the work site under any circumstances
until the full cost thereof has been recovered from the
Contractor by the Corporation and thereafter only if
• in the opinion of the Consulting Engineer the removal
of such item or items is not likely to impede the satisfactory prosecution of the work.
Similarly no item of equipment or material belonging to the Contractor but towards the cost of
which money has been advanced by the Corporation
shall at any time be removed from the work site under
any circumstances until the a.mount of money so
advanced has been recovered from the Contractor by
M /s. Damodt"
Valley
Corporaliott
v.
rhs Stale of
Bihr1r
SinhrJ C. ].
r960
M /s. Damodar
Valley
Corporation
•'
The Slate of
Bihar
Sinha C. ].
532
SUPREME COURT REPORTS
[1961]
the Corporation and thereafter if in the opinion of the
Consulting Engineer the removal of such item or
items is not likely to impede the satisfactory prosecution of the work.
(d) The Corporation shall supply to the Contractor whatever spares have been procured or ordered
for the equipment already supplied or to be supplied
by the Corporation to the Contractor under the terms
of this Agreement and that thereafter the replenishment of the stock of spares shall be entirely the responsibility of the Contractor who shall therefore take
active steps in time to procure fresh spares so as to
maintain a sufficient reserve.
The spares to be supplied by the Corporation will
be issued to the Contractor by the Executive Engineer, Konar as and when required by the Contractor
against indent accompanied by a certificate that the
spares previously issued to him have been actually
used up on the machines for which they were intended.
(e) Whenever spares are issued to the Contractor
in accordance with this provision, their actual prices
inclusive of freight, insurance and customs but excluding storage and handling charges shall be debited
against him and recovered from his next fortnightly
bill.
(f) In order to enable the Contractor to take
active steps for planning the procurement of additional spares in advance, the Corporation shall forthwith
furnish to him a complete list of all the spares which
it has procured or ordered for the equipment to be
supplied to the Contractor."
The portions quoted above contain the relevant terms
and conditions in respect of the transaction in question, so far as it is necessary to know them for the
purpose of this case. It will be noticed that the Corporation made available to the Contractors different
kinds of machinery and equipment detailed in Group
A of the approximate value of Rs. 42,63,000 odd, for
which the price paid by the Corporation inclusive of
freight, insurance, customs duty etc. has to be charged to them. But tlie machinery and the equipment so
2 S.O.R. SUPREME COURT REPORTS
533
made available to the Contractors were to remain the
property of the Corporation until the full price thereof
had been realised from the Contractors. It is also
noteworthy that the agreement makes a distinction
between the aforesaid part of the agreement and the
equipment lent to the contractors in respect of which
the contractors had to be charged in terms of hiring,
including interest on capital cost and the depreciation
of equipment. Thus clearly the agreement between.
the parties contemplated two kinds of dealings between them, namely (1) the supply of machinery and
equipments by the Corporation to the Contractors and
(2) loan on hire of other equipment on terms to be
mutually agreed between them in respect of the
machinery and equipment supplied by the Corporation to the Contractors. There is a further condition
that the Corporation will take over from the contractors items 1 and 14, specifically referred to above, and
the other items in Group A at their "residual value"
calculated on the basis indicated in the para.graph
following the description of the machinery and the
equipments. But there is a condition added that the
"taking over" is dependent upon the condition that
the machinery will be properly looked after during
the period of its operation. There is an additional
condition to the ta.king over by the Corporation,
namely, the work for which they were meant had been
completed, or earlier, at the choice of the Contractors,
provided that they a.re declared surpl.ua for the purposes of the construction of the Kona.r Dam and so
certified by the Consulting Engineer. Hence, it is not
an unconditional agreement to take over the machinery
and equipment as in GroupB. The total approximate
price of Rs. 42,63,305 is payable by the Contractors in
18 equal instalments. Out of the total cost thus ma.de
realisable from the Contractors two-thirds, namely,
Rs. 28,42,000 approximately, has to be realised in any
case. After the two-thirds a.mount aforesaid has been
realised from the contractors on account of supply of
the equipments by the Corporation, the Corporation
had to consider the date or dates of the "ta.king over"
of the equipment after assessing the extent to which it
68
M /s. Damodar
Valley
Corporation
v.
The State of'
Bihar
Sinha C. J.
M/s. Datnodar
Valley
Corporation
v.
The Slate of
Bihar
Sinha C. ].
534
SUPREME COURT REPORTS
[1961]
had depreciated as a result of the working on the project in order to arrive at the "residual value" of the
same. The refund of the one third of the price or such
other sum as may be determined as the "residual
value" would depend upon the further condition _that
the Corporation was fully satisfied that their "residual
life" shall, under no circumstances, fall below one-third
of their respective standard life as agreed upon by the
parties. It would, thus, appear that the "taking over"
of such of the equipments as were available to be
returned was not an unconditional term. The Corporation was bound to take them over only if it was satisfied that their "residual life" was not less than onethird of the standard life fixed-by the parties. It is
clear from the terms and conditions quoted above that
there was no right in the contractors to return any of
the machinery and equipments at any time they liked,
or found it convenient to do so. The conditions which
apply to all equipments, whether in Group A or in
Group B, a.re also relevant to determine the nature of
the transaction. The contractors are required to "continuously maintain proper machine cards showing
certain relevant particulars". It is their duty to maintain the equipments in good running condition and to
regularly and effectively service them. No item of
machinery and equipment could be removed by the
contractors under any circumstances until the full cost
thereof had been recovered from them and even then
only if the removal of those items of machinery or
equipment was not likely to impede the satisfactory
progress of the work. Then follows the most impor!
tant condition that the Contractors themselves shall
have to replenish their stock of spa.re parts of the
machinery made available tQ them by the Corporation.
When spa.re parts a.re supplied to the Contractors by
the Corporation, they shall be liable for the actual
price of those parts inclusive of freight, insurance and
customs duty.
Those substantially a.re the terms of the contra.ct
between the parties and the sole question for determination in this appeal is whether, in respect of the
machinery and equipments admittedly supplied by
the Corporation to the Contractors, it was a mere
2 S.C.R. SUPREME QOURT REPORTS
535
contract of hiring, as contended on behalf of the appellant Corporation, or a sale or a hire purchase, as contended on behalf of the respondent State. The law
on the subject is not iu doubt, but the difficulty arises
in applying that law to t.he facts and circumstances of
a particular case on a proper construction of the
document evidencing the transaction between the
parties. It is well settled that a mere contract of
hiring, without more, is a species of the contract of
bailment, which does not create a title in the bailee,
but1the law of hire purchase has undergone considerabl!} development during the last half a .century or
mote and has introduced a number of variations, thus
leading to categories, and it becomes a question of
some nicety as to which category a particular contract
between the parties comes under. Ordinarily, a contract of hire purchase confers no title on the hirer, but
a mere option to purchase on fulfilment of certain
conditions. But a contract of hire purchase may also
provide for the agreement to purchase the thing hired
by deferred payments subject to the condition that
title to the thing shall not pass until all the instal- ·
ments have been paid. There may be other :variations
of a contract of hire purchase depending upon the
terms agreed between the parties. When rights in
third parties have been created by acts of parties or
by operation of law, the question, which does not
arise here, may arise as to what exactly were the
rights and obligations of the parties to the original
contract. It is equally well-settled that for the purpose of determining as to which category a particular
contract comes under, the court will look &t the substance of the agreement and not at the mere words
describing the category. One of the tests to determine
the question whether a particular agreement is a contract of mere hiring or whether it is a contract of
purchase on a system of deferred payments of the
purchase price is whether there is any binding obligation on the hirer to purchase the goods. Another
useful test to determine such a controversy is whether there is a right reserved to the hirer to return
the goods at any time during the subsistence of the
contra.ct. If there is such a right reserved, then
x960
M/s. 'Damodar
Valley
Corporation
v.
The State of
Bihar
Sinha C. ].
.1960
M /s. Damodar
Valley
Corporation
v.
The Slate of
Bihar
Sinha C. ].
536
SUPREME COURT REPORTS
[1961]
clearly there is no contract of sale, vide Helby v. Matthews and others (1). Applying these two tests to the
transaction in the present case, it becomes clear that
it was a case of sale of goods with a condition of repurchase on certain conditions depending upon the
satisfaction of the Corporation as to whether the
"residual life" of the machinery or the equipment was
not less than one-third of the standard life in accordance with the terms agreed between the parties. It
is clear on those terms that there is no right reserved
to the contractors to return the goods at any time
that they found it convenient or necessary. On the
other hand, they were bound to pay two-thirds of the
total approximate price fixed by the parties in equal
instalments. The Contractors were not bound under
the terms to return any of the machinery or the
equipments, nor was the Corporation bound to take
them back unconditionally. The term in the agreement regarding the "taking over" of the machinery or
equipments by the Corporation on payment of the
"residual value" is wholly inconsistent with a contract of mere hiring and is more consistent with the
property _in the goods having passed to the Contractors, subject to the payment of all the instalments of
the purchase price. Furthermore, the stipulation that
the Contractors themselves will have to supply the
spare parts, as and when needed, for replacements of
the worn out parts is also consistent with the case of
the respondent that title had passed to the contractors
and that they were responsible for the upkeep of the
machinery and equipments and for depreciation. If
it were a mere contract of hiring, the owner of the
goods would have continued to be liable for replacements of worn out parts and for depreciation.
Applying those tests to the terms of the agreement
between the parties, it is clear that the transaction
was a sale on deferred payments with an option to
re-purchase and not a mere contract of hiring, as
contended on behalf of the appellant.
It must, therefore, be held that the judgment of the
High Court is entirely correct and the appeal must be
dismissed with costs.
Appeal dismissed.
(1) (1Sg5) A.C. 471.
.
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