# PATNAIK & COMPANY v. STATE OF ORISSA

- **Citation:** [1965] 2 S.C.R. 782
- **Court:** Supreme Court of India
- **Decided:** 1965-01-19
- **Case number:** Civil Appeals Nos. 179 to 181of1964
- **Bench:** P. B. Gajendragadkar, M. Hidayatullah, J.C. Shah, B S. M. Siicri, R. S. BACHAWA'f
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/patnaik-company-v-state-of-orissa-3334
- **Pages:** 18

## Headnote

Orissa Sales Tax Act, ( 14 of 1941)-Contract to build bus bodies
•n chassis supplied by purchaser-If a contract for sale or for work.
The appellant claimed to deduct from its gross turnover, amounts
received from the State Government for buildiog bus bodies, on the chassia
supplied by the Government under a contract.
C
Under the contract, the bus bodies were to be put on the chassis and
the body consisted not only of things actually fixed .on the chassis but
movable things like seat cushions and other !biogs which though fixed
coold be easily detached, like roof-lamps etc. The chassis wi1h the bus
body was to be delivered at the destination named within the stipulated
tiine. If some work was not satisfactorily done the Government was
entitled to seize the unfinished vehicle, get the work done by another
D
agency and recover the difference in cost from the appellant. While the
appellant was required to protect the chassis by iosurance, there was no
provision regardiog iosurance of bus bodies. The contract also provided
that the process of manufacture was to be supervised on behalf of the
Government, and that the work should be done with due deligence. There
was also a provision for payment of damages until the defects detected
on inspection were rectified.
The Sales Tax Officer refused to allow the deduction. On appeal, the
E
·claim was allowed by the Collector, whose order was affirmed by the Sales
Tax Tribunal, on appeal by the Department. On a reference to the High
Court, the question, as to whether the amounts were not chargeable to
sales tax, was answered against the appellant.
In the appeal to the Supreme Court, on the question as to whether
the contract was one for execution of work or for performance of service,
or whether it was a contract for sale of goods.
F
HELD : (Per Gajendragadkar C.J., Hidayatullah, Sikri and Bachawat,
JJ) : The contract as a whole was a contract for the sale of goods and
the amounts were therefore chargeable to sales tax. [792 G]
The answer to the question depended on the construction of the
agreement regarding the building of bus bodies. On the terms of the
contract the property in the bus body did not pass on its being placed
or constructed on the chassis but when the whole 'l"'hicle iocluding the
G
bus body was delivered. The provision regarding insurance showed that
till delivery was made, the bus bodies remained the property of the appellant and unlike the case of a contract a construct a building, where the
property does not pass in the materials as movables the bus body never
lost its character as movable property and the property in it passed to
Government as movable property. It is not the law, that whenever a
contract provides for the fixing of a chattel to another chattel there is
no sale of goods; and, a contract for the sale of goods to be manuH
factured does not cease to be a contract for sale of goods, merel}
because the process of manufacture is supervised by the purchaser. [785 C-D;
788 F; 790 A-B; 791 A, D; 792 A]
.
PATNAIK & CO. V. STATE (Sikri, /.)
783·
A
Gannon Dunkerley', Care, [1959) S.C.R. 379 and Carl Still v. State of
Bihar, [1962) 2 S.C.R. 81, distinguished.
Anglo-Egyptian Navigation Co. v. Rennie, (1875) L.R. 10 C.P. 271,
explained.
Per Shah, J. (dissenting) : The contract was one for work and not
a contract for sale, because, the contract was not that the parties agreed
that tho "bus body" constructed by the appellants should be sold to the
B
State. The contract was one in which the appellants agreed to construct
"bus bodies" on the chassis supplied to them as liailees, and such a contract
being one for work, the consideration paid was not taxable under the
Sales Tax Act.
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 poperty in the thing produced
C
as a whole notwithstanding that a part or even the whole of the materials
used by him

## Text

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782
PATNAIK & COMPANY
v.
STATE OF ORISSA
January 19, 1965
A
[P. B. GAJENDRAGADKAR, C. J., M. HIDAYATULLAH, J.C. SHAH, B
S. M. SIICRI AND R. S. BACHAWA'f, JJ.J
Orissa Sales Tax Act, ( 14 of 1941)-Contract to build bus bodies
•n chassis supplied by purchaser-If a contract for sale or for work.
The appellant claimed to deduct from its gross turnover, amounts
received from the State Government for buildiog bus bodies, on the chassia
supplied by the Government under a contract.
C
Under the contract, the bus bodies were to be put on the chassis and
the body consisted not only of things actually fixed .on the chassis but
movable things like seat cushions and other !biogs which though fixed
coold be easily detached, like roof-lamps etc. The chassis wi1h the bus
body was to be delivered at the destination named within the stipulated
tiine. If some work was not satisfactorily done the Government was
entitled to seize the unfinished vehicle, get the work done by another
D
agency and recover the difference in cost from the appellant. While the
appellant was required to protect the chassis by iosurance, there was no
provision regardiog iosurance of bus bodies. The contract also provided
that the process of manufacture was to be supervised on behalf of the
Government, and that the work should be done with due deligence. There
was also a provision for payment of damages until the defects detected
on inspection were rectified.
The Sales Tax Officer refused to allow the deduction. On appeal, the
E
·claim was allowed by the Collector, whose order was affirmed by the Sales
Tax Tribunal, on appeal by the Department. On a reference to the High
Court, the question, as to whether the amounts were not chargeable to
sales tax, was answered against the appellant.
In the appeal to the Supreme Court, on the question as to whether
the contract was one for execution of work or for performance of service,
or whether it was a contract for sale of goods.
F
HELD : (Per Gajendragadkar C.J., Hidayatullah, Sikri and Bachawat,
JJ) : The contract as a whole was a contract for the sale of goods and
the amounts were therefore chargeable to sales tax. [792 G]
The answer to the question depended on the construction of the
agreement regarding the building of bus bodies. On the terms of the
contract the property in the bus body did not pass on its being placed
or constructed on the chassis but when the whole 'l"'hicle iocluding the
G
bus body was delivered. The provision regarding insurance showed that
till delivery was made, the bus bodies remained the property of the appellant and unlike the case of a contract a construct a building, where the
property does not pass in the materials as movables the bus body never
lost its character as movable property and the property in it passed to
Government as movable property. It is not the law, that whenever a
contract provides for the fixing of a chattel to another chattel there is
no sale of goods; and, a contract for the sale of goods to be manuH
factured does not cease to be a contract for sale of goods, merel}
because the process of manufacture is supervised by the purchaser. [785 C-D;
788 F; 790 A-B; 791 A, D; 792 A]
.
PATNAIK & CO. V. STATE (Sikri, /.)
783·
A
Gannon Dunkerley', Care, [1959) S.C.R. 379 and Carl Still v. State of
Bihar, [1962) 2 S.C.R. 81, distinguished.
Anglo-Egyptian Navigation Co. v. Rennie, (1875) L.R. 10 C.P. 271,
explained.
Per Shah, J. (dissenting) : The contract was one for work and not
a contract for sale, because, the contract was not that the parties agreed
that tho "bus body" constructed by the appellants should be sold to the
B
State. The contract was one in which the appellants agreed to construct
"bus bodies" on the chassis supplied to them as liailees, and such a contract
being one for work, the consideration paid was not taxable under the
Sales Tax Act.
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 poperty in the thing produced
C
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 the thing produced as a whole has 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. Mere transfer of property in goods used in the performance of a contract is not sufficient : to constitute a sale there must beD
llll agreement express or implied relating to sale of goods and completion
of the agreement by passing of title in the very goods contracted to be
sold.
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 from the intention of the parties to the contract. [793 D; 794
A.C; 797 H; 798 A, CJ
E
F
G
H
In the instant case, imposition of the obligation to cJ.rry out the work
with due diligence. the liability to pay damages and the right of the Government representative to supervise the production and to take away the·
unfinished vehicles and get them completed by some other agency are all
indicative of the contract being one for work. [795 D-E, G; 796 D-E]
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 179 to
181of1964.
Appeals by special leave from the judgment and order dated
August 21, 1962, of the Orissa High Court in 0.J.C. No. 28 of
1961.
A. V. Viswanatha Sastri and R. Gopalakrishnan, for the appellants (in all the appeals).
M. C. Setalvad, R. Ganapathy Iyer and R. N. Sachthey for the
respondent (in all the appeals).
The Judgment of P. B. GAJENDRAGADKAR C.J., M. HIDAYATULLAH, s. M. SIKRI and R. s. BACHAWAT JJ. was delivered by
S!KRI J.
SHAH J. delivered a dissenting Opinion.
Sikri, J. These three appeals by special leave are directed
against the judgment of t!u: Orissa High Court in three references
made by the Ori~sa Sales Tax Tribunal under s. 24(1) of the
'
'"784
SUl'lll!MB COUllT Rl!PORTS
[1965] 2 S.C.R.
·Orissa Sales Tax Act, 1947, in respect of assessments for three
quarters ending June 30, 1957, September 30, 1957 and Decem·
··:ber 31, 1957. All these appeals raise a co=on. 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 & 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 Govern-
. .ment, during the quarter. The Sales Tax Officer refused to deduct
·this amount. On appeal, this claim was allowed by the Collector
A
B
·of Sales Tax, purporting to follow an earlier decision of the Orissa .. c
.Sales Tax Tribunal. The Department appealed against tills 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 following question :
"Whether in 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 Sales Tax."
"The High Court, in a short order, folowing its decision in The
Comn;iissioner of Sales Tax Orissa v. Patnaik &: Co.(1} 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 conclusion that "the contract, 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 the Act."
It further observed that "what 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 (M/s.
Thakur Das Mulcharid v. The Commissioner of Sales Tax} .on 6th
July 1961 .where it was held that a norm.il contract to make a
ch::ttel ru_id deliver it whe11 made includes a contract of sale, but
(1) S.J.C. No. 77 of 1959-Judgment delivered in the Orissa Hi&h Court on
July 26, 1961.
D
E
F
G
-
PATNAIK & CO. v. STATE (Sikri, J.)
785
A it may not be always so.
The test would be whether the thirtg
to be delivered has any individual existence before delivery as the
wk property of ·the party who is to deliver it". The High Court
distinguished Gannon Dunkerley's(') case 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
B 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.
Mr. Viswanatha Sastri, the learned counsel for the appellant,
has addressed an elaborate argument to us and contended that the
C present case is not distinguishable from the decision of this Court
in Gannon Dunkerley's(') case. He has cited a number of authorities in support of his contention, but it will not be necessary to
rmew all these authorities as we feel that the answer to the question referred must depend on the construction of the agreement
regarding the building of bus bodies. As laid down by this Court
D in Chandra Bhan Gossain v. The State of Orissa( 2), "was it the
intention of the parties in making the contract that a chattel should
be produced and transferred as a chattel for a consideration."
F
G
'lbe agreement was entered into on April 20, 1957, between
the appellant, called in the agreement "the Body Builders" and
the State of Oriss,a. The State had accepted the quotations and
decided to place orders for construction of 4 (four) numbers of
Bus Bodies on the Chassis nam,ely 4 (four) numbers of 190" Wheel
Base F.F.C. Dodge/Fargo Chassis supplied by the Governor. The
relevant clauses are as below :
"l. (a) That the Body Builders shall be responsible
for the safe custody of the chassis as described in Schedule 'A' from the date of the receipt of the Chassis from
the Governor (Supplier) till their delivery to the Governor
and shall insure their premises against fire, theft, damage
and riot at their cost, so that these chassis are covered by
insurance against such risks.
(b) That while the works are in course of construction and until the Bus with Bodies built are taken over by
the Governor, the Body Builder shall be responsible for
the cb,assis and materials supplied to them an4 shall indeH
mnify the Governor for any loss or damage to the 11aid
material.
(I) [19'9) S.C.R. 379.
(2) 14 S.T.C. 766.
7116
SUPUMB COUllT REPORTS
(1965] 2 S.C.R.
{c) The completed Bus Bodies covered by this contract shall be delivered to the Governor on or before the
28th May 1957 for two and 20th June 1957 for the
remaining two buses.
2. That the passenger Bus Bodies shall be constructed on the chassis in the most substantial and workmanlike wanner, both as regards materials and otherwise in
every respect in strict accordance with the specifications
mentioned in Schedule 'B'.
3 .. 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.'
Provided that the Body Builder will not be entitled
to any payment for any additional work unless they have
received an order in writing from the Controller to that
effect.
4. That the Body Builder will give a guarantee regarding the durability of the Body for a period of two
years from the date of delivery to the Governor and if
any imperfection or defective material became apparent
within the guaranteed period the Body Builder shall
rectify the defects at their own expenses.
5. That the time allowed for carrying out the work
as entered in the contract _shall be strictly observed by
the Body Builder and shall be reckoned from the date of
supply of Chassis to them. The work shall throughout
the stipulated period of the contract be carried on with
all due diligence time being deemed to be of the essence
of the contract and the Body Builder shall be liable to
pay to the Governor as linquidated damages an amount
equal to 50% on the amount 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 and
the Governor may deduct such sum or sums from any
money dueJo the Body Builders under these presents or
may recover it otherwise.
A
B
c
D
E
F
G
ff
A
•
c
D
E
F
PATNAIK & CO. v. STATE (Sikri, /.)
Provided that the work will not be considered as
finished until the defects detected on inspection as provided by clause 6, are rectified, to the satisfaction of the
Controller.
6. That all works under or in course of execution or
executed in pursuance of this contract shall at all times
be open to inspection by the Controller or officers authorised by him in this behalf and they shall have the right
to stop by a written order any work which in the opinion
of the Controller, is deemed to have been executed with
unsound, imperfect, unskilful or bad workmanship or
with materials of inferior quality. The Body Builder on
receipt of such written order, shall dismantle or replace
such defective work or material at their own cost. In
the event of failure to comply with the order within 7
days from the date of receipt of the order, the Controller
shall be free to get the balance of the work done by any
other agency and recover the difference in cost from the
Body Builder.
Provided that for this purpose the Controller shall
be at liberty to enter upon the premises of the Body
Builder and take delivery of the unfinished bodies.
7. That the Body Builder shall be paid 50% of the
cost of body building at the time of delivery and the rest
one month thereafter.
8. That the Body Builder will deliver the vehicles
complete with bodies at the destination or the destinations
787
to be named by the Controller at their own cost and risk -- ·
and shall be entitled to recover from the Governor the
actual cost of transport by road or rail, transit insurance
charges if any and other necessary incidental charges."
Schedule 'B' gives the various specifications for construction of
G composite bus bodies. Clause 9 of the Schedule provides the
specifications of seat cushions for the upper class and lower class
seats. Clause 11 provides for the fixing of two roof lamps and its
necessary switches. Clause 14 provides for the fixing of luggage
carrier on the top of the roof and an iron ladder up to luggage carll rier at the rear. Various miscellaneous fittings are required to be
fitted by clause 16, e.g., hand operated driver's traffic signal, nickel
plated conductor's bell, wind screen wipers for the wind screen,
tool box, box for First Aid equipment, etc.
788
SUPREME COURT REPORTS
(1965] 2 S.C.R.
Then, looking at the contract as a whole, what wa.~ the real
A
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 chassi~, 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
B
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
C
clause 6 of the agreement. That clause provides that if some wort
is not satisfactorily done and the Body Builder on receipt of a
written order does 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 D
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 appelE
!ant 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 chassis
but there is no provision regarding insurance of bus bodies. Therefore, it follows that till delivery is made, the bus bodies remain the F
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
•ot be denied that the property passes in mova.ble property. Then
G
was this the very goods contracted for ? Here again the answer
is plainly in the affirmative.
Mr. Sastri draws our attention to the following passage in
Benjamin On Sales (8th Edition), p. 167:
"Where a contract is made to furnish a machine. or
movable thing of any kind and before the property in it
passes, to fix it to land or to another chattel, it is not a
H
PATNAII: a: CO. v. STATJ! (Sikri, /.)
78&
A
contract for the sale of goods. In such contracts the
intention is plainly not to make a sale of movables as
such, but to improve the lan4 or other chattel, as the
case may be. The consideration to be paid to the workman is not for a transfer of chattel, but for work and
labour done and materials furnished."
He says that here the bus body is being fitted to a chassis, i.e., another chattel, and if this passage lays down the law correctlyand according to him it does-the present contract is not a contract for the sale of goods.
The only. case cited in the footnote relating to fixing of a
C chattel to another chattle is Anglo-Egyptian Navigation Co. v.
Rennie('). That 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 plank 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
D 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 corμpound
surface condensing engines according to a specification.
The
E 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
r
instalment of £ 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 fient that the contract was an entire and
indivisible contract for work to be done upon the plaintiffs' ship
G for a certain price, 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 ~t entitled to tlie boilers and machinery, nor could they
recovet the £4000 .already paid as upon a failure of consideraH
tion. Here the question was whether according to the contract,
the property in each portion certified by-the inspector as properly
(1875] L.R. 10 C.P. 271.
790
SUPRJ!MB COtlllT llBPOllTS
[196S] 2 S.C.Jl.
done passed to the plaintiffs as and when his certificate was given.
A
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 Jaw. 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 iyres B
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
C
and fix it Jo the car. Has there been a sale of the luggage carrier or
not ? The answer obviously is 'yes'.
Mr. Sastri further relies on a passage in Gannon Dunker-
./ey's(') case, at pp. 413-414 :-
"It is of the essence of this concept that both the
agreement and the sale should relate to the same subject-matter. Where the goods delivered under the contract are not the goods contracted for, the purchaser has
got a right to reject them, or to accept them and claim
damages for breach of warranty. Under the law, therefore, there cannot be an agreement relating to one kind
of p_roperty and a sale as regards another. We are accordingly of opinion that on the true interpretation of the
expression "sale of goods" there must be an agreement
between the parties for the sale of the very goods in
which eventually property passess. In a building contract, the agreement between th~ parties is that the contractor should construct a building according to the specifications contained in the agreement, and in consideration therefor receive payment as provided therein,
and as will presently be s~·thcre is in such an agreement neither a contract to sell the materials used in the
construction, nor does property pass therein as movables.
It is therefore impossible to maintain that there is implicit in a building contract a sale of materials as understood in law."
We are, however, unable to appreciate how this passage assiits
D
E
F
G
the appellant. In this case both the agreement and sale relate to H
one kind of property, namely, the bus body. The case of a con-
(1) (1959] S.C.R. 379.
PATNAIK & CO. V. STATE (Shah, !.)
791
A tract 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 Dunkerley's case brings out the fact that the
B title in a case of building contract passes to the owner as an
accretion thereto :
"That exception 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
C
passes to the owner of the land as an accretion thereto.
Accordingly, there can be no question of title to the
materials passing as movables in favour of the other
party to the contract."
As we have already said, it is clear on the terms of the contract
0
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. Th~ State of Bihar('). That case does not apply to the facts
of this case because this Court came to the conclusion on a conE struction of the agreement in that case that the contract there was
entire and indivisible for the construction of specified works including buildings for a lumpsum and not a contract of sale of
materials as such.
Mr. Sastri then says that clause 3 is inconsistent with an agreeF ment 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.
G
Mr. Sastri then points to clauses 5 and 6 and submits that these
are totally inconsistent with an agreement for the sale of goods.
But we are unable to assent to this. Clause 5 provides for a time
schedule and ensures that the delivery of the bus body shall take
place within the stipulated time.
Clause 6 is designed to avoid
R
disputes in the future as to the quality of the material used and
ensures that proper material is used. A contract for the sale ~f
(1) [1962) 2 S.C.R. 81.
IASup/65__.
SUPRJ!ID OOUllT ll!PORTS
(1965] 2 S.C.L
goods to be manufactured does not cease to be a contract for sale
A
of goods merely because the process of manufacture is supervised
by the purchaser.
For example, if in a contract for the manufacture and sale of military aircraft, a great deal of supervision ia
insisted upon by the purchaser, the contract would not become a
contract for works and Jabour.
B
We may now notice some of the Indian cases in which a simi~
Jar point arose.
·
In Commissioner of Sales Tax, U.P. v. Haji Abdul Majid('),
the Allahabad High Court ilrrived at the conclusion that in the
circumstances of the case the transaction was a contract for the
sale of bqs bodies and not a contract for work and Jabour. Desai,
C
C.J., rightly pointed out at p. 443 that "since it makes no difference
whether an article is a ready-made article or is prepared according
to the eu~tomer's specification, it should also make no difference
whether the assessee prepares it separately from the thing and
then fixes it on it or does the preparation and the fixation simultaneously in one operation."
D
In Jiwan Singh v. State of Punjab(') the High Court of Punjab
also held that a contract by a firm for fitting and building motor
bodies with its own materials on the chassis supplied bj 'customers
is a contract for the sale of goods.
In Kai/ash Engineering Co. v. The State of Gujarat("), it was E
held that the contract in that case for building, erecting and furnishing of third class timber coach bodies on broad gauge underframes to be supplied by the Railway administration was not a
contract for the sale of goods. The same conclusion was reached
in Kays Construction Company v. The Judge (Appeals) Sales Tax,
Allahabad(') . We do not propose to say whether these cases were F
correctly dedded on the facts for, as we have said in the beginning,
in each case it is a question of intention of the parties.
To conclude, we have come to the finding th.at the contract as
a whole is a contract for the sale of goods.
Agreeing with the
High Court, we hold that the answer to the question referred is
G
against the appellant.
The appeal accordingly fails and is dismissed with costs.
In the 9ther two appeals relating to assessments for the quarters ending September 30, 1957 and December 31, 1957, the
agreements are similar and these also fail and are dismissed with
costs. There will be one set of hearing fee in all the three appeals.
H
(I) 148.T.C. 435.
(3) 1' S.T.C. 574.
(2) 14 S.T.C. 951.
(4) 13 S.T.C. 302.
PATNAIK & CO. V. STATE (Shah, /,)
793
A.
SllllJa J. Whether a contract is one for execution of work or
for performance of service, or is a contract for sale of goods must
depend upon the intention of the parties gathered from the terms
of the contract viewed in the light of surrounding circumstances.
If the contract is one for work or for performance of service, the
mere circumstance that the party doing the work or performing
B 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 perC formance of service or for work, consideration paid is not taxable,
for the States have authority under the Constitution by Sch. VII
to legislate on the topics of tax on sale 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
D
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
E
passes for money consideration. As observed in Halsbury's Laws
of England (Third Edition) Vol. 34, pp. 6-7, Para 3 :
F
G
H
"A contract of sale of goods must be distinguished
from a contract for work and labour. The distinction is
often a fine one. A contract of sale is a contract whose
main object is the transfer "of the property in, and the
delivery of the possession of, a chattel as a chattel to
the buyer. Where the main object of work undertaken
by the payee of the price is not the transfer of a chattel
qua chattel, the contract is one for work and labour.
The test is whether or not the work and labour bestowed
end in anything that can properly become the subject
of sale; neither the ownership of the materials, nor the
value of the skill and labour as compared with the value
of the materials, is conclusiv~. although such matters
may be taken into considei;ation in determining, in the
circumstances of a particular case, whether the contract
is in substance one for work and labour or one for the
sale of a chattel."
794
SUPRBMJ! COURT REPORTS
[1965] 2 S.C.R.
To constitute a sale there must therefore be an agreement and in A
pedormance 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 contract is, however, not sufficient : to constitute a sale there
must be an agreement-express or implied-relating to sale of
goods and completion of the agreement by passing of title in the B
very goods contracted to be sold.
It is of the essence of the
transaction that the agreement and sale should relate to the same
subject-matter, i.e., the goods agreed to be sold and in which the
property is transferred.
To determine the liability of the appellants to pay tax under
the . Orissa Sales Tax Act on the consideration received by them
under the terms of the contract, the true intention of the parties
must be determined. The agreement which is the subject-matter
c
of the dispute between the parties is executed on behalf of the
Governor of Orissa and the appellants, for constructing "bus D
bodies" on the chassis supplied by the Governor of Orissa. In
the second paragraph of the preamble it is recited that the
Governor had accepted the quotation and had decided to place
orders for construction of "bus bodies" on the chassis supplied by
the Governor at the rates specified therein. The third paragraph
recites that the appellants had agreed to construct "bus bodies"
E
at the rate quoted and on the terms and conditions recited th~in.
The agreement then proceeds to set out the conditions of the
contract. By the first condition the appellants are made responsible for safe custody of the chassis from the date of receipt
thereof from the Governor till delivery and are bound to insure
their premises including the chassis against fire, theft, damage and F
riot at their own cost. By that condition the appellants are made
"responsible for the chassis and materials supplied" to them and
have undertaken to indemnify the Governor for any loss or
damage to the said material. The clause also provides that the
completed "bus bodies" shall be delivered to the Governor on or
before the dates specified in the agreement. By cl. 2 it is stipulated G
that the "bus bodies" shall be constructed in the most substantial
and workmanlike manner, both as regards materials and otherwise in every respect in strict accordance with the specifications in
Sch. 'B' of the agreement.
Clause 3 provides for payment for
additional work as may be directed by the Transport Controller H
under an order in writing to that effect. By cl. 4 it is provided
that the appellants shall guarantee the durability of the body for
two years from the date of delivery and if any imperfection or
PATNAIK & CO. v. STATE (Shah, /,)
79 S
A defective material becomes apparent within the period of guarantee the appellants shall rectify the defects at their own cost.
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
B 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
C service.
Clause 3 also does not indicate any definite intention.
H 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 els. 5 & 6 of the
contract a definite intention that the contract is one for work and
D 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 confract 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 ro the Governor as liquidated
damages an amount equal to 50% of the estimated cost of the
E whole work as shown in the contract f(!r 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
F 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 rectiG fied.
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, unskilful or bad workH
manship 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.
796
SUPllBMll COUKT llBPORTS
(1965) 2 S.C.R.
fail to comply with the order within seven days from the date of A
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 B
appellants are under the supervision of the Controller, and it is
-0pen 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
C
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 unfinished vehicles.
A party agreeing to purchase goods of certain specifications or
-description is entitled to insist that the specifications or the desD
c~iption 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 :r.
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 7 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 F
deals with the place at wh.ich the completed vehicles with bodies
built thereon are to be delivered and till the date of the delivery
· the risk is with the appellants. Paragi!aph 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 tht:
G
work. Paragraph 10 deals with the jurisdiction of courts in the
event of a dispute between {be-parties. Paragraphs 7 to 10 are
in their content neutral and may be consi~tent with the agreement
being either one for sale or for work or service.
Schedule 'B' consists of/,the specifications for construction of B
the composite bodies. They set ,oiri the designs and the specifica-
•
tions of the underframe and floor, frame-work, roof, penelling; 11ide
.
I
.
.
.
PATNAIK & CO. V. STATE (Shah, /.)
797
A windows, doors, seats, driver's can, roof lamps, grab rails, window
guard rails, wind screens, luggage carriers, finish and miscellaneous
fittings.
It is true that the specifications contemplated that the
appellants had to supply certain goods which are not fixed to the
"bus bodies".