# STATE OF GUJARAT (COMMISSIONER OF SALES TAX, AHMEDABAD) v. M/S. VARIETY BODY BUILDERS

- **Citation:** [1976] Supp. 1 S.C.R. 131
- **Court:** Supreme Court of India
- **Decided:** 1976-04-26
- **Case number:** Civil Appeal Nos. 1492 and 1493 of 1971
- **Bench:** H. R. Khanna, P. K. Goswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/state-of-gujarat-commissioner-of-sales-tax-ahmedabad-v-m-s-variety-body-builders-7084
- **Pages:** 14

## Headnote

Bon1bay Sales Tax Act-Contracts for sale of goods and works conrractsJ'ests for decidin!l works contracts.
The respondents entered into three written contracts with the Raihvays for
the construction of railway coaches according to the design provided by them,
A
B
·On the under-frames supplied by the Railways. The contractor was required
C
to make security deposit for the due fulfilment and completion of the contract
which, in the event of breach, was liable to be forfeited and confiscated. Supply
including n1anufacture, assembly, fitting, fixing and· finishing of all constructional
n1aterials and fittings including timber was by the contractor. The Railways
were required to supply electric fitting~ Railway staff would work in association
with the contractor's staff for installation of electrical equipment;
Railway
site was provided for the work and for no other purpose.
The_ Railways had
the right of inspection at all times and of maintenance of control over standard
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of workmanship requiring rectification of '\Vork and replacement of materials
when ordered.
The Sales Tax Officer, holding that the transactions were salCs, charged
the1n to tax. The respondents' appeal to the Assistant Commi3sioncr of Sales
·Tax. as also a revision application before the Deputy Cornmi~sioner of Sales
Tax :-ind the Tribunal were unsuccessful. On reference, the High Court held
that the contracts were works contracts.
,
Dismissing the appeals,
JJELD : (1) From the totality of the material terms and conditions in
the agreement it is not possible to hold that the parties intended that the
-contractor transferred the property in the railway coaches to the Railways after
its coinpletion.
The essence of the contract or the reality of the transaction
as a whole indicates that the contract was a contract for work and labour.
[139FJ
(2) The predominant element in the contract was the work and labour
aspect and supply of materials was only accessory although the lnaterials \Vere
definitely necessary for the· execution of the work. The term that if the con-
·tractor died, his legal representatives would have no interest whatsoever in
the agreement save in respect of a claim for the money due nnd for the
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return of the security deposit, clearly showed that the contract was n works
contract. The unfinished work became the property of the Raih~'ays and the
legal representatives were entitled only to claim for the value of the \''Ork
·done.
Jn the event of the death of the contractor, there was no provision for
the handing over of the unfinished coaches by the legal representatives to
the Railways. In such an event the Railways automatically becaine the ov.·ner
,of the unfinished property. (140 E-G)
T. Y. Sundaram Iyengar & Sons v. The State of Madras (1975) 35 STC 24
nd Patnoik and Company v. The State, of Orissa, (1965) 16 STC 364, di•ti1>.
:uished.
Conimissioner of Con1mercial Taxes, Mysore v. Hindustan Aeronautics Ltd.,
(1972) 29 STC 438; State of Gujarat v. Kaila1h Engineerin~ Co, (1967) 1'.
STC 13; State of Madra,~ v.r Richardson & Cruddas Ltd., (1968) 21 STC 245:
Go.emment of Andhra Pradesh v. Guntur Tobaccos Ltd., (1965) 16 240 and
131
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132
SUPREME COURT REPORTS
[1976] SUPPLEMENTARY
Commissioner of &les Tax, M.P. v. Purshottani Premji, ( 1970) 16 STC 38,
followed.

## Text

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STATE OF GUJARAT (COMMISSIONER OF SALES TAX,
AHMEDABAD)
v.
M/S. VARIETY BODY BUILDERS
April 26, 1976
(H. R. KHANNA AND P. K. GOSWAMI, JJ.]
Bon1bay Sales Tax Act-Contracts for sale of goods and works conrractsJ'ests for decidin!l works contracts.
The respondents entered into three written contracts with the Raihvays for
the construction of railway coaches according to the design provided by them,
A
B
·On the under-frames supplied by the Railways. The contractor was required
C
to make security deposit for the due fulfilment and completion of the contract
which, in the event of breach, was liable to be forfeited and confiscated. Supply
including n1anufacture, assembly, fitting, fixing and· finishing of all constructional
n1aterials and fittings including timber was by the contractor. The Railways
were required to supply electric fitting~ Railway staff would work in association
with the contractor's staff for installation of electrical equipment;
Railway
site was provided for the work and for no other purpose.
The_ Railways had
the right of inspection at all times and of maintenance of control over standard
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of workmanship requiring rectification of '\Vork and replacement of materials
when ordered.
The Sales Tax Officer, holding that the transactions were salCs, charged
the1n to tax. The respondents' appeal to the Assistant Commi3sioncr of Sales
·Tax. as also a revision application before the Deputy Cornmi~sioner of Sales
Tax :-ind the Tribunal were unsuccessful. On reference, the High Court held
that the contracts were works contracts.
,
Dismissing the appeals,
JJELD : (1) From the totality of the material terms and conditions in
the agreement it is not possible to hold that the parties intended that the
-contractor transferred the property in the railway coaches to the Railways after
its coinpletion.
The essence of the contract or the reality of the transaction
as a whole indicates that the contract was a contract for work and labour.
[139FJ
(2) The predominant element in the contract was the work and labour
aspect and supply of materials was only accessory although the lnaterials \Vere
definitely necessary for the· execution of the work. The term that if the con-
·tractor died, his legal representatives would have no interest whatsoever in
the agreement save in respect of a claim for the money due nnd for the
r
return of the security deposit, clearly showed that the contract was n works
contract. The unfinished work became the property of the Raih~'ays and the
legal representatives were entitled only to claim for the value of the \''Ork
·done.
Jn the event of the death of the contractor, there was no provision for
the handing over of the unfinished coaches by the legal representatives to
the Railways. In such an event the Railways automatically becaine the ov.·ner
,of the unfinished property. (140 E-G)
T. Y. Sundaram Iyengar & Sons v. The State of Madras (1975) 35 STC 24
nd Patnoik and Company v. The State, of Orissa, (1965) 16 STC 364, di•ti1>.
:uished.
Conimissioner of Con1mercial Taxes, Mysore v. Hindustan Aeronautics Ltd.,
(1972) 29 STC 438; State of Gujarat v. Kaila1h Engineerin~ Co, (1967) 1'.
STC 13; State of Madra,~ v.r Richardson & Cruddas Ltd., (1968) 21 STC 245:
Go.emment of Andhra Pradesh v. Guntur Tobaccos Ltd., (1965) 16 240 and
131
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132
SUPREME COURT REPORTS
[1976] SUPPLEMENTARY
Commissioner of &les Tax, M.P. v. Purshottani Premji, ( 1970) 16 STC 38,
followed.
CIVIL APPELLATE JURISDICTION : Civil Appeal
Nos. 1492 and
1493 of 1971.
Appeals by Special Leave from the Judgment and Order dated
the 7th and 9th November, 1970 of the
Gujarat High Court at
Ahrnedabad in Sales Tax Reference No. 5 of 1969.
S. T. Desai and M. N. Shroff; for the Appellants.
V. S. Desai!, Vimal Dave, Ram Phal, Ganpat Rai, (Mrs.) S/uif
Sethi and (Miss) Kai/ash Mehta; for Respondent.
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The Judgment of the Court· was delivered by
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GOSWAMI, J.-This judgment will govern both the appeals.
These two apeals by special leave ar·~ directed &gainst the common
judgment of the Gujarat High Court in Sales Tax Reference No. 5 of
J 969 relating to two periods, namely, (l) from 24th October, 1955
to 31st March, 1956 and (2) from 1st April, 1956 to 31st March,
1957.
The Tribunal had earlier delivered a common judgment in two
revision applications No. 121 and No. 122 of 1961 and made a composite reference to the High Court under the Bombay Sales Tax Act
stating the following question for answer :-
"Whether on the facts 1and in the circumstances of the
case the three contracts for constmction of coaches on the
under-frames supplied by the Railway Administration, the
contracts containing similar terms were contracts for sale of
goods and not works contracts?"
The facts appearing from the statement of case are .as follows
The respondent, M/s: Variety Body Builders, Baroda, entered
int•> three contracts with the
Western Railway
Administration for
construction of railway coaches on the umler .. frames supplied by fl~
said rarlway Administration.
The three comracts were reduced into
writing ancl contained the terms ancl conditim1s under which the eontracts were to be performed. The first agreement dated September 17,
1954 was for construction of 25 N.G. coaches.
The second agreement dated July 11, 1955, was in respe~t of construction of 6 T.L.R.
coaches. The third agreement dated January 14, 1956, was for coos··
truction of 25 N.G. coaches.
The Sales Tax Officer held that the
transactions relating to the construction of the said coaches were
transactions of sales of these coaches by the respondent.
On that
basis the respondent was assessed at Rs. 2,72,803/8/- for the first
period and at Rs. 3,82,820/- for the second period. The respondent's
appeals to the Assistant Commissioner of Sales Tax were unsuccessful.
The re\1sion applications of the respondent before the Deputy Commissioner of Sales Tax and later before the Tribunal met with the
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GUJARAT STATE v. VARIETY BODY BUILDERS (Goswami, J.)
133
oSame fate.
The Tribunal, however, referred the question of law as
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~et out earlier to the High Court and the High Court answered the
same in favour of the respondent and hence these appeals by special
-leave.
The only question with which we are concerned in these appeals
is whether the contracts entered into by the respondent with the Railway Administration for construction of railway coaches are contracts- B
for sak of goods or works contracts.
Since the three contracts are substantially similar the High Court
.and the authorities below took note of the recitals of the third contract
dated Jarman 14, 1956, and we will also take the same into consideration.
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Mr. S. T. Desai appearing on behalf of the appellant and Mr.
Ram Phal appearing on behalf of the respondent took us through all
the clauses of the agreement and pressed their rival viewpoints. Mr.
Desai submits that from the totality of the conditions laid down in
1he agreement the contract is one for sale, being transfer of property
in the railway bogies as a unit of goods and, therefore, the transaction
is liable to Sales Tax. Mr. Ram Phal, on the other hand, relying on
the same terms and conditions in the contract, submits that it is a
pure 8nd simple worh contract and not a contract for sale of goods.
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It is well-settled that when there is a written contract it will be
11ecessary for the Court to find out therefrom the intention of the
parties executing the particular contract.
That intention has to be
primarily gathered from the terms and conditiom which are agreed
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upon by the parties. We will, therefore, immediately tum our attention
to the agreement in question.
The preamble of the agreement shows that it is an agreement
·enterrd into between the Railway Administration and the respondent
·described as "the contractor''.
The first clause describes the "natu!'ll of work". It states "the
contrnctor hereby ·agrees to undertake the building of 25 Nos. Narrow
Gauge Third Class Bogie Coaches .... on I.R.S. under-frames to be
provided· by the Western Railway to the design indicated ...... at
the rate of .... : . Rs. 19141/- only.
The said work of
building
bodies will be carried out by the contractor in the area of premises
of the Western Railway Workshop at Pratapnagar, Baroda or at such
other location as may be mutually agreed upon". It also appears in
the second part of clause (1) that each employee working under the
contractor "for this work" will have a gate pass issued in his favour
Qn a deposit of Rs. 5 /- for each gate pass. It is also stated in the
-second part of clause ( 1) that "all gate passes issued to the contractor
are returnable within a week of termination of the contract".
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Clause (3) provides for security deposit "for the due fulfllment and
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-completion of this contract".
Gause (3) further says that the security
deposit will be retained by the Administration "for the due performance of and observance of the terms and conditions· of this contract"
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and the same is liable to forfeiture "in !he event of any breach on the
part of the contractor of the terms and conditions of this contract".
Clause ( 4) provides for deduction of 10 per cent from each pro-
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gressive bill submitted by the contractor and the security deposit shalt
be refunded to the contractor "only on successful completion or termi1rntion of this contract".
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BClame (9) provides that constructionai material and fittings must
be supplied by the contractor whkh should be ordinarily as per the
R~ilway'o standard.
"The provision of the hand-brake arrangement~
in the Guard's compartment will be done by the Railway",
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(Jame (11) says that the contractor is required to supply carpentry
labour for equipping coaches with electric lights, fans switches ancl
regulators.
The appropriate Railway stalf will work in association
with the contractor's staff to an extent required for the installation of
electrical equipment and all .electrical fittings will be supplied by the
Railw«y.
Clause ( 13) provides for removal of rubbish, debris or temporary
structure at contractor's own cost on the expiration of the contract
fir in tltc event of earlier termination of the contract.
Cfausc (14) says that the contractor shall provide
all essential
oquipment, tools and plant for satisfactory execution of the work.
By clause (15) "The contractor is required to deliver a minimum
num~er of two coaches per month starting from the expiry of six
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month:-: fro1n the date of signing this agreen1ent".
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Claus" (16) says that "in the event of the contractor failing to
carry out and complete the work within the period stipulated as herein
before provided the contractor shall be liable to pay to the Administration by way of ascertained and liquidated damages a sum equivalent
tc on= per cent of the value of the work in arrears for each and every
month or part of a month by which the contractor shall be in default
upio <: maximum of 20% of the va!toc 0f the contract but the contractrr shall not by reason of the reco·1cry by any means by the Administration of such damages be relieved from his other obligations
and ii abilities under the contract. ..... The recoveries may be made
from the security deposit or running bills or any sums due to the contractor".
Clause (17) may be set out :
"The contractor shall be responsible for the safe custody
o! carria~s under construction as well as of the material
supplied by the Administration for the purpose till the materiai or the carriages are taken over by the Administration.
DaJes of completion of the building work will be deemed to
be the respective dates on which the
Chief
Mechanical
Engineer or his authorised representative certifies each coach
as ha\·ing been built to his satisfaction".
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GUJARAT STATE v. VARIETY BODY BUILDERS (Goswami, J.)
135
Ciausc (18) provides that the Railway
authorities are free to
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inspect the work.
"The Chief Mechamcal Engineer or his authorised
representative will be the sole judge t·:> determine whether the standard
of workmanship is
according to the
Railway's
requirement and
whether any part or parts of the carriage require replacement due to
bad or indifferent workmanship."
Clause (19) provides that "the contractor shall not under any cirB
cums1anccs sub-lS"t this contract either in part or in full without the
previous consent in writing of the Chief Mechanical Engineer .... "
Clause (20) provides for termination of the contract by giving
one month's notice to the contractor "in the event of the contractor
failing to execute the contractual dntie.s with diligence, competence
and ex;iedition".
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Clause (21) provides· for the duration of the contract which in the
normal course be in force for a period of 16 months from the date
of signing of the same. There is also provision therein for allowing
such additional time as the Administration may consider to be justified
by the circumstances of the case.
(:J2usc (22) provide~ for contractor's liability for damages in the
event of failure to execute the work with diligence and expedition or
in complying with any orders given by the Chief Mechanical Engineer
or his authorised representative from time to time.
Clause (23) provides that "the contractor will present bill through
District Mechanical Engineer, Partapnagar for payment on the basis of
ce:·tified completion in terms of coaches completed and handed over
f<_1 hirri".
C!~use (25) states that "if during the continuance of this agreement the contractor shall die or be adjudicated insolvent or if the contractor being a company shall enter into liquidation whether rnluntary
or compulsory. . . . this agreement ;hall absolutely cease and determine and the legal represntative of the contractor or.lhis assignee in
insolvency or (in the case of a company) the liquidators shall liave no
interest whatsoever under this agreement other than in respect of a
claim for the money due for the work done under this contract und for
the return of the security deposit subject to the provisions herein contained . ..... "
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Ciausc ( 30) makes provision for fair wage~ to the labourers engaged
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by tl1e contractor.
C!ause (31) says that the contractor shall have to abide by safety
rules.
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Clause (32) provides that the contractor shall not employ children
under 15 years of age.
Clause (33) says that the contractor shall complv with the proH
visions of the Payment of Wages Act and the rules made thereunder.
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Clause (34) provides that "the contractor shall pay a nominal rent
of Re. 1 /- per mensem for the area which may be allotted to him for
the purposes of building the coaches".
Clo.use (35) provides for water and conservancy charges to be
paid by the contractor.
Clame (36) provides for supply of electrical energy to· the contractor on payment
Clause (38) says that certain conditions of Tender shall be deemed to l:>e incorporated in the agreement. These tenders are. however,
not before us.
Before we proceed further we may. observe that for the meaning
of the expression "sale of goods" we will have to deriv~ assistance
for the legal connotation of those words from the prov1s10ns of the.
Sale •)f Goods Act, 1930. As has been held by a Constitution Bench
of this Court in the Stat' of Madras v.
Gannon
Dunkerley & Co.
(Madri.uj Ltd.(') "that, both under the common law and the statute
;aw relating to sale of goods in England and in India, to constitute
a transaction of sale there should be· an agreement, expres. or implied,
relating to goods to be comploted by passing of title in those good~.
It is of the essence of this concept that both the agreement and the
sale soould relate to the same subject ·matter ..... On the true interpretation of the expression 'sale of gooos' there must be an agreement
between the parties for the ~ale of the very goods in which eventually
property passes".
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Bearing in mind the above legal concept of the sale of goods we
will have to consider whether the terms oc the contract, which we have
set out earlier, can be construed in favour of a contract for sale of the
railway coaches which were constructed by the respondent.
l\k Desai is right when he
submits that the word
contractor
appearing in the preamble is not decisive on the question. As we have
stated earlier, the entire document with all the relevant and material
clauses throwing light upon the real intention of the parties and the
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real nature of the transaction must be given due weight in coming to a
conclusion one way or the other.
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The following material features in the agreement immediately draw
our attention so far as may be rele·Jant in considering whether the
contract is one of sale or contract of work and labour :
( 1) Undertaking by the
Contractor
work of building
bodies on under-frames supplied by Railway according to design provided by a Railway (Cl. l (a).
( 2) Security deposit by contractor for due fulfilment and
completion of the contract (Clause 3).
( 3) Confiscation or forfeiture of security deposit in the
event of any breach by the contractor of termi and
conditions of the contract (Clause 3).
(I) 9 S.T.C. 353.
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'GUJARAT STATE v. VARIETY BODY BUILDERS (Goswami, /.)
137
( 4) Deduction of 10% from each progressive bill of contractor to cover any likely loss, damage etc. (Clause
4) .
(5) Import licence and foreign exchange arrangements by
contractor (Clause 6).
( 6) Supply, including manufacture,
assembly,
fitting,
fixing and finishing, of all constructional materials
and fittings including timber by the contractor (Clause
9).
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( 7) Provision of hand-brake arrangements in the Guard's
compartment by Railway (Claus~ 9).
( S) Supply of electrical fittings by Railway (Cl. 11).
(9) Railway staff ·working in association with contractor's
staff for installation of ek;trical equipment. (Clause
11).
(10) Use of Railway site provided for the work and for
no other purpose. (Clause 12).
(11) Removal of rubbish, debris, or temporary structure
at contractor's O\VIl cost.
(Claus~ 13).
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(12) Earlier
termination
of
contract also
envisaged.
(Clause 1-3).
(l 3) Essential equipment to be provided by contractor for
execution of the work:. (Clause 14).
(14) At least two coa_ches to be delivered per month after
expiry of six months from the signing of the contract.
(Clause 15).
O 5) Contractor's liability to pay liquidated damages in
the event of failure to carry out and complete the
work within stipulated perlod. (Clause 16).
(16) Provision for running bills. (Clause 16).
( 17) Re_sponsibility of contractor for safe custody of carriages under construction as well as of the materials
supplied by Railway till they are taken over by Railway.
(Clause 17).
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(18) Date of completion of b'lilding work on the date of
certification by Railway's representative to his satisfaction.
(Clause 17).
(! 9) Right of inspection of the work by Railway at all
times and of maintenance of control over standard of
workmanship requiring rectification of work: and replacement of materials whea ordered. (Clause 18).
(20) No subletting of contract whoily or in part without
the previous written consent of Chief
Mechanical
Engineer.
(Clause 19).
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(2i) Authority to terminate comract by one month's notice
in the event of the
contractnr·s Jack of diligence,
competence and expedit1on in executing contractual
duties.
(Clause 20).
(22j Any losses
incurred by
Railway and
occasioned
through failure of coutractor to
comply with con·
tractual obligations will be deducted from
security
deposit.
(Clause 20).
(23) Co11tract to be iu force [or 16 months unless extended
on reasonable ground subject to waiver of Joss or
damage by Railway.
(Cla.w;e 21).
(24) Contractor's liability for damages for failure to execute the work with diligence an,J expedition or to comply with orders of Railway Administratio11. (Clause
22).
(25) Bills to be submitted by contractor ow the basis of
certified completion in terms of coaches completed
and handed over to the District Mechanical Engineer.
(Clause 23).
(26) Contractor, his heirs, :~xccut<Jrs or administrators to
indemnify Railway Administration from and against
all claims including
claims under the
Workmen's
Compensation Act, Payment of Wages Act, Factory
Act, etc. (Clause 24).
( 2 7) In case of contractor's insolvcnc y or death, Rgreement
shall absolutely cease and determine and the iegal
representatives of the contractor or the liquidators
shall have no interest whatsoever under the agreement other than in resp·eGt of a claim for the money
due for the work done under the contract and for
the return of the security deposit subject to the provisions of the agreement.
(Clause 25).
(28) Arbitration clause in the ~vent of any dispute in connection with the contract.
(Clause 28).
(29) Contractor to pay fair wages to labourers ~mployed.
(Clause 30).
(30) Contractor to abide by safety rules. (Clause 31).
( 31) No employment of children under 15 year; by contractor. (Clause 32).
(32) Responsibility of contractor under Payment of Wages
Act. (Clause 33).
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(33) Norn~] rent of Re. 1/- per month for occupation of
the Railway area for the purpc•se of
building the
coaches.
(Clause 34).
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GUJARAT STATE v. VARIETY BODY BUILDERS (Goswami, !.)
139
( 34) Contractor to pay to the llailwa y conservancy charges
and for supply of electrical energy.
(Clauses 35 and
36).
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Reading the agreement as a whole and bearing in mind the above
features, is it possible to conclude that what is contracted is to sell
the railway coa.ch constructed by the contractor to the Railway ? In
that event the railway coach when constructed must b~ as a unit the
1t
property o( the contractor. But has the assessee alone contributed
to the result? There were materials supplied by railway. There was
labour supplied by Railway. It is differeut from the case of a bus-body
fitted into the chassis with all materials supplied by the contrm·tor and
all skill and labour contributed by the contractor.
A contricts to sell a certain article to B.
A must be the owner
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of the article and B must be at the re,:eiviH~ end having nn interest
in the article prior to passing of the property therein. Is the contractor
owner of the railway coach when it was completeJ'? The answer must
be in the negative. Apart from the fact th"t the under-frame is not
of the contractor (which may in a given case be a neutral factor) not
all his materials nor all his labour and skill contributed to the coach.
The Railway supplied men and material;
although the
substantial
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portion is of the contractor. This goes to bring out the intention of
the patties in that they were intent upon performance of the work,
the manner of the work, the quality of the materials used in the work
and upcn completion of the work in the most efficient way resulting
ultimately in a completed coach.
The intention of the parties at the
time of entering upon the contract was not to transfer any completed
railway conch by the contractor \o the Railway.
The cud-product,
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being the railway coach, is the result of work, labour and materials
of the contractor as well as of the Railway as also of the
latter's
constant supervision and control.
From llte totality of the material terms aud conditions in the agreement set out above, it is not possible to hold that the parties intend
that the contractor transfers the property in the railway coach to the
Railway after its completion.
The essence o" the contract or the
reality of thr transaction as a whole indicates that the contract is a
contract for work and labour.
Mr. Demi submits that clauses 15, 17 and 23 in particular make
it absolutely clear that the property in a 1111it, in the shape of a completed railway coach, passes only on handing over of the same to the
District Mechanical Engineer after the same has been completed and
the specified authority certifies the coach as having been built to his
satisfaction. He particularly draws our attention to the word ''deliver"
in clause 15 and the words "taken over'' in clause 17 and "handed
over" in clause 23. According to Mr. Desai these three clauses clearly
disclose the intention o! the parties that a railway coach as a unit, after
its compkt'tcn, is contracted to be han<led over by the respondent to
the Administration.
The contract, therefore, that is entered in terms·
of the ngre.ement is one of contract of sale of goods and not a works
contract, &ays Mr. Desai.
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Although the submission on the !irst blush is attracttve and appears
to be of s0me force, it will not bear close scrutiny. Perusal of clause
17 itself upon which great reliance has been placed by Mr. Desai
shows that "dates of completion of the buiidi ng work will be deemed to
be the respective dates on which the Chief Mechanical Engineer or
his authrnised representative certifies et>ch coach as having been built
to his satisfaction".
It is also apparent from the contract that the
contractor .has to complete two coaches each month after the expiry
of the fiist six months of the contract. It is also clear that the contractor has to get payment by submitting running bills on completion
of the coaches eyery month.
In the above context when clause 17
refers to a fictional completion of the building work on the date of
certtfkate by the Chief Mechanical Engineer or his authorised representatl.vc there is no requirement for a further ritual of delivery or
handing over to which reference is made in clauses 15 and 23 respectively.
The work is undertaken in the RailY'av premises.
Materials are brought to the Railway premises.
People are admitted on
gate passes for building the railway c.x1ches on the under.frames supplied by the Administration. Some materials, such as electrical goods,
were supplied by the Railway.
B0sidcs; there is cooperation of Railway's labour with the contractor's labour in construction of the coach
The hand-brake arrangements in the Guard's compartment are also
agreed to be done by the Railway.
Regular inspection of the coutractcr's work is carried out at all times and instructions to rectify
c1efects leave to be carried out immediately. Unless a close in;pection
of the work is carried out from day to day, it may be ditlicult to
rectify defects after the work progressc>.
All this would go to show
that the predominant element in the contract is the work and labour
aspe.;t and supply of materials is onlv accessory although the materials
'f"erc definitely. necessary for execntion of the work.
There is yet
another important clause which thr<iws a flood of light on this issue.
Clause 25 deals with the contractor's insolvency or death. Jt is agreed
between the parties, as per clause 25, that if the contractor dies, his
legal representatives shall have no interest whatsoever in this agreement save in respect of a claim for the money due for the work already
done under the contract and for the return of the
security deposit
subject to other provisions.
This would also clearly show that the
contract is a works contract and unfinished work would become the
property of the Railway and the legal representatives will be entitled
only to claim for the value of the work done. There is no provision
in the a!!feement in that event for handing over of the
unfinished
railwny conch by the
resppndent
or hi~ JegaJ
representatives
or
assignees to the Railway Administrntion. The Railway Admiliistration
automatically becomes the owner of the unfinished property 'f"hich was
lying in its premises. This is another reason whv no exaggerated importan~c can be assigned to the \Vonis "delivery" and "handed over''
in clauses 15 and 23 respectively ns urged by Mr. Desai.
·This is. therefore, not a contract where it can be said that there is
an ogreerncnt to supply a completed railway coach which when prodt•ced will be the propertv of the contraclor. Along with those of the
i:ontractor's. materials and labour of R.aihvay are also required to be
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GUJARAT STATE v. VARIETY BODY BUILDINGS (Goswami, I.) 141
pnt in for production of the completed railway coach. It is ~ contract primarily for work and labour and that clement predommantly
runs through the entire document from the preamble to the end as seen
abov~.
A
Mr. Desai very strenuously relies upon a recent decision of this
Court in T. V. Sundaram Iyengar & Sons v. The State of·Madras( 1)
B.
to which my learned brother was a party.
That was a case relating
to the contract for supply of bus bodies constructed and fitted to the
chassis provided by the customer. This Court held that the rule laid
down in Patnaik and Company v. The State of Orissa( 2) was applicable to the facts of the two cases that came up for consideration in
the above decision. This Court held that the property in the material•
used by the assessees in constructing the bus bodies never passed to
C
their customers during the course of construction and that it was only
when the complete bus with the body fitted to the chassis was deli-
.,
vered to the customer that the property in the bus body passed to the
customer. This Court, therefore, held that the supply of bodies consituted a sale and the assessees were liable to sales tax. The conclusion
of this Court in T. V. Sundaram /yengar's case (supra) is brought out
clearly in the following passage
:
D·
"The salient features of the deaiirn'.s between the two assessees
wir!t whom we are concerned and their customers as they
emerge from the facts given a ~ove are that the property in
tile material used by the assessees in constructing the bus
{Jo,Ees never passed to their 'ustomcrs during the course of
constrnction. It was only when the complete bus with _the
body fitted to the chassis was delivere-0 to the cu;tomer that
the property in the bus body passed to the customer. There
\vas nothing to prevent the assessees fron1 removing a piank,
or other material after fixin1t it to a chassis, and using it for a
different purpose or for a different bus body".
•
Thts Cnmt in several decisions quoted with approval the followin~
I'
passage from Halsbury's Laws of England, Third Edition, Volume 34,
at page 6. with regard to the distincti•.m between a contract of sale and
a contract for work and labour :
"A contract of sale of goods must be distinguished from
a contract for work and labour.
The distinction is often a
fine cne. A contract of sale is a contra~t whose main object
is the transfer of the property in, and t11e deliverv of the rosse'Sion of, a chattel as a chattel to the buyer.· Where the
niain object of work undertaken by the payee of the price is
not tl1e transfer of a chattel qua chattel. the contract is one
f0f work and labour. The test is whether or not the work
and labour bestowed end in anything that can properly bec:-mc the subject of sale; nei.ther the <'Wnership of the mate··
m I; nor the value of the skill anu labour as compared with
(1) (!q75) 35 S. T. C. 24.
(2) (1965) 16 S. T. C. 364.
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142
SUPREME COURT REPORTS
j 1976) SUPPLEMENTARY
the value of the materials, ,, conch1sive, although such
matters may be taken into considernti.on in determining, iu
the circumstance of a particular case, whether the contract is
i11 ml>stance one for work and labour or one for the sale of.
a cha~tel".
It can be treated as well-settled that there is no standard formula
by which one can distinguish a contract of sale from a contract for
work and labour.
There may be many common features in beth the
contracts. some neutral in particular context, antl yet certain clinching
tenns .in a given case may fortify a conclusio11 one way or the other.
It will depend upon the facts and circumstance' of each case.
The
question is not always easy and has for all time vexed jurists ali over.
In Commissioner of Commercial Taxes,
klysore
v.
Hi11dusta11
Aeronautical Ltd.( 1) a bench of five Judges of this Court, to which
my learned brother was a party, had to deal with a works contract with
regard t,, manufacture and supply of railway coaches.
This Court
after consideration of all the facts ill that case and the salient features
0f the contract came to the conclusion that it was a pure works contract.
The Court further
held lhat the case
was in line with the
decision in State of Gujarat v.
K,1i/ash Engineering Co.(').
Indeed
Kai/ash Engineering's case (supra) was relied upon by the respondent
before· us. It was held in that case that as the termr. 0f the contract
indicated that the respondent was not to be the owner of tloe ready
railway coaches and that the property in those bodies vested in the
Rail\'Vay eveu during the process of conslrL:ction, the transactior~ \vas
clearly a .works contract and did not involve any sale.
Mr. Desai. strenuously contends that clause (291 of the contract in
Kailash Engineering's case (supra) distinguishes that case from the
case at l;and.
Clause 29 was a specific provision for certain contingencies in case of loss, theft or destruction of the materials or plant.
This sperial provision was to the effect that the liability of the contractor was not to be diminished in any way notwithstanding the fact
that the materials and plant became the property of the Raiiway as
soon as they were brought to the Railway premises.
We, however,
do no1 see much point in this sHbmi3sion. In that case since the piant
an<l 111aterials were brought on the site ,x,herc the coache3 "·"ere to be
conmucted the ownership is said to h:ive vesterl in the Railway.
In
the present case also substantially the same resnlt follows. The a~ree
ment here shows that when the contractor dies, his Ie~al representatives
or assignees have no interest in the contract which terminates anct
they will bt only paid for the value of the work done.
This would
mean the property constructed uoto that point was impliedly agreed
upon to be vested in the Railway as
and
when
materials
were worked into the chassis. This is the implication of the agreement
and not merely on the theory of accretion. At ;my rate the passing of
property in this case is ancillary to the primary contract for execution
of the work.
(I) (1972) 29 S. T. C. 438.
(2) (1967) 19 S. T. C 13
GUJARAT STATE v: VARIETY BODY BUILDINGS (Goswami, /.)
143
In the State of Madras v. Richardson & Cruddas L"1.( 1)
this
·Court was dealing with a contract for fabrication and installation of
"> ·
steel structure for sugar factory in the State of Mysore. In the course
·of the judgment this Court obser\'ed as follows :--
"lt had, therefore, to be estabEsheJ that the consideration
was received under a contract to sell specific goods for a
price, and property in the goods contracted to be sold passed
to the society, when the goods were delivered in pursuance
of the contract. If the contract was for completing the stipulated work and for that purpose to use materials belonging to the respondents in the performance or executi<ln ol the
contn1ct as accessory to 'work and labour' the contract must
be regarded as a works contract, and not <l contract for sale,
even if the property in the goods ultuuately J .. asses as a result
of the .contract".
The Comt further observed at page 252 as follows :
"The contract _being one for supplying for an inclusive
price " specially designed fabricated unit to be assembled
·and installed by specially trained technicians in the premises
of the customer, it was not a contract for sale of a unit or
·differem parts of the unit as specific goods, but ~ works
cuntract".
In the Government of Andhra Pradesh. v.
Guntur
Tobaccos
Ltd. (2) this Court dealing with an identical issue observed as follows
, 'at page 255 :
,.
"The fact that in the execution of a contract for work
s0me materials are used and property in the goods so used
passes to the other party, the comrcctor undertaking to do
the work will not necessarily he deemed on that account to
sen the materials".
Again at page 258 :
"Whether a contract for service or for executioa of work,
involves a taxable sale of goods must he decided on the facts
and circumstances of the case,
The burden in such a case
lies upon the taxing authorities to show that there was a taxable sale, and that burden is not discharged by merely showing that property in goods which belonged to the party performing service or executing the contract stands transferred
to the other party".
This Court in Commissioner uf Sales Tax, M.P. v. Purshottam
Premji(') dealt with the difference between a contract of work or
senke and a contract for sale of goods in the fo!iowing passage :
''The primary difference between a contract for work or
service and a contract for sale of goods in that in the former
(!) (1968) 21 S. T. C. 245.
(2) (1965) 16 S. T. C. 240.
(3) (1970) 26 S. T. C. 38.
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144
SUPREME COURT REPORTS
(1976] SUPPLEMENTARY
there is in the person performing work or rendering service no
property in the thing produced as a whoi.e 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
prke. Mere transfer of property in goods used in the performanC'c of a contract is not sufficient; to constitute a sal•
there must be an agreement express or implied relating to
the sale of goods and completion of the agreement by passing
of title in !_he very goods contracted to be sold. Ultimately the
true effect of an accertion made pursuance to a contract has
to be judged, not by an artitkial rule that the accretion may
be presumed to have become by 'irtue o'. affixing to a chattel,
part of that chattel, but from the intention of the partir;; to
the c0ntract".
·
We are fortified by all the above decisions of this Court in our
conclusi.on in favour of the assessee.
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~
We are, therefore, clearly of opinion that the contract in the pre1ent
case is one of works contract and the High Court is right in answering
•
the question in favour of the assessee.
The appeals, therefore, fail
and are dismiss~d with costs.
One hearing fee for counsel.
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P.B.R.
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