# UNION OF INDIA v. CENTRAL INDIA MACHINERY MANUFACTURING CO. LTD. & OTHERS

- **Citation:** [1977] 3 S.C.R. 437
- **Court:** Supreme Court of India
- **Decided:** 1977-04-06
- **Bench:** V. R. Krishna Iyer, R. S. Sarkaria, Jaswant Singh
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-v-central-india-machinery-manufacturing-co-ltd-others-7154
- **Pages:** 18

## Headnote

E
Rajasthan Sales Tax Act, 1954-Section 2(0)-Defi11ition of sale-Sale of
Goods Act, s. 64(a)-Distinction between contract of sale and work contractManufacturing and supplying wagons to Railways-Whether sale or work con~
tract-Tests to be applied-Interpretation of
contract-When external
aid
pennissible.
The appellant and respondent No. 1 company entered into a contract
for the manufacture and
supply of wagons.
By the
correspondence exchanged~ the number of wagons to be supplied and the pric'!. of wagon of
·each type ·was indicated. It was
provided that the
contract would
be
governed by the Standard Conditions in so far as they are not inconsistent
with the correspondence exchanged betw~en the parties. Under the Standard
cond\tions, _90 per cent· of the payment had to be ·made against the Com4
pany submitting the bill to the
purchaser together with the
completion
certificate and on payment of such 90 per cent price the vehicle in question
would become the property of the purchaser. The balance of 10 per cent
was to be treated as security for tl.te due fulfilment of the contract. The
balance was to be received on the receipt of certificate from the purchaser
to the effect that the actual delivery of the vehicle was taken and that the
delivery was made in due time. One of the clauses provided that where
any raw materials for the execution of the contract are procured with the
assistance of the appellant the company would hold the said materials as
trustee for Government and use such materials economically and solely for
the purpose of the contract against which they are issued .and not
dispose
them of without -the permission of the Government and
return, if required
by the purchaser. all surplus or unserviceable materials that might be left
after the completion of the contract or its termination for any reason whatsoever on his being paid such price as Government might fix
with due
regard to the condition of the material. Clause IO further provided
that
if and when the State and inter-State Sales Tax on the stock on order becomes payable under law such payments would be reimbursed by the Railway Board. The Railway Board, however, is not to be· made liable for
the payment of Sales Tax paid under misapprehension of la\V.
No sales
tax on 1naterials including steel and components would be reimbursed by
the Railway Board. That the
stores and
articles shall be such as arc
required for the execution of the contract and the advance made by the
Railways is without prejudice. to the provisions· of the contract and is subject
to inspection and reiection of the stores.
That the said articles and materials shall at all times be open to inspection of any officer auLhorised by
the Railwavs.
There are 3
categories of
materials,
the
first
category
admittedly was the property .of the Railways;
the second category is
the
material procured by the Company against 90 per cent advance;
and the
third category was at all times material of the Company. Paragraph 3 of the
Jetter exchanged between the parties fixed
the
period
of
delivery. Para
4 provided for doing the packing of axle boxes by the Railway for which
no packing charges were to be recovered from the Company. Section 2(o)
of the Rnjasthan Sales Tax Act, 1954 defines sale as any
transfer of property in goods for cash or for deferred payment or for any other valuable
consideration.
The appellant relied on the following circumstances :
Under the Special Conditions read with the indemnity bond th~ property
in the raw materials purchased by the Company for the construction of the
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438
SUPREME COURT REPOKTS
(1977) 3 s.c.R.
wagons passed to the Railway Board as soon as the latter advanced 90 per
cent of the value of such material: which thereafter is held by the Company
merely as an
agent or trustee for the Board. Condition No. 5 obligates
the contractor to hold "as trustee for Government" and ra\v materials for
the execution of the contract procured with the assistance of Go

## Text

_Characters 0–39,813 of 53,450. This is a partial read: ask again with offset=39813 for what follows._

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437
UNION OF INDIA
A
v.
CENTRAL INDIA MACHINERY MANUFACTURING CO.
LTD. & OTHERS
April 6, 1977
[V. R. KRISHNA IYER, R. S. SARKARIA AND JASWANT SINGH, JJ.J
E
Rajasthan Sales Tax Act, 1954-Section 2(0)-Defi11ition of sale-Sale of
Goods Act, s. 64(a)-Distinction between contract of sale and work contractManufacturing and supplying wagons to Railways-Whether sale or work con~
tract-Tests to be applied-Interpretation of
contract-When external
aid
pennissible.
The appellant and respondent No. 1 company entered into a contract
for the manufacture and
supply of wagons.
By the
correspondence exchanged~ the number of wagons to be supplied and the pric'!. of wagon of
·each type ·was indicated. It was
provided that the
contract would
be
governed by the Standard Conditions in so far as they are not inconsistent
with the correspondence exchanged betw~en the parties. Under the Standard
cond\tions, _90 per cent· of the payment had to be ·made against the Com4
pany submitting the bill to the
purchaser together with the
completion
certificate and on payment of such 90 per cent price the vehicle in question
would become the property of the purchaser. The balance of 10 per cent
was to be treated as security for tl.te due fulfilment of the contract. The
balance was to be received on the receipt of certificate from the purchaser
to the effect that the actual delivery of the vehicle was taken and that the
delivery was made in due time. One of the clauses provided that where
any raw materials for the execution of the contract are procured with the
assistance of the appellant the company would hold the said materials as
trustee for Government and use such materials economically and solely for
the purpose of the contract against which they are issued .and not
dispose
them of without -the permission of the Government and
return, if required
by the purchaser. all surplus or unserviceable materials that might be left
after the completion of the contract or its termination for any reason whatsoever on his being paid such price as Government might fix
with due
regard to the condition of the material. Clause IO further provided
that
if and when the State and inter-State Sales Tax on the stock on order becomes payable under law such payments would be reimbursed by the Railway Board. The Railway Board, however, is not to be· made liable for
the payment of Sales Tax paid under misapprehension of la\V.
No sales
tax on 1naterials including steel and components would be reimbursed by
the Railway Board. That the
stores and
articles shall be such as arc
required for the execution of the contract and the advance made by the
Railways is without prejudice. to the provisions· of the contract and is subject
to inspection and reiection of the stores.
That the said articles and materials shall at all times be open to inspection of any officer auLhorised by
the Railwavs.
There are 3
categories of
materials,
the
first
category
admittedly was the property .of the Railways;
the second category is
the
material procured by the Company against 90 per cent advance;
and the
third category was at all times material of the Company. Paragraph 3 of the
Jetter exchanged between the parties fixed
the
period
of
delivery. Para
4 provided for doing the packing of axle boxes by the Railway for which
no packing charges were to be recovered from the Company. Section 2(o)
of the Rnjasthan Sales Tax Act, 1954 defines sale as any
transfer of property in goods for cash or for deferred payment or for any other valuable
consideration.
The appellant relied on the following circumstances :
Under the Special Conditions read with the indemnity bond th~ property
in the raw materials purchased by the Company for the construction of the
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438
SUPREME COURT REPOKTS
(1977) 3 s.c.R.
wagons passed to the Railway Board as soon as the latter advanced 90 per
cent of the value of such material: which thereafter is held by the Company
merely as an
agent or trustee for the Board. Condition No. 5 obligates
the contractor to hold "as trustee for Government" and ra\v materials for
the execution of the contract procured with the assistance of Government
and further requires the contractor to use such materials economically nnd
solely for the purpose of the contract against which they are' issued and not
to dispose them of without the permission of the Govcrnn1ent. l_"hc
Rail~
way \Vagon at the time of its delivery had no individual existence as the
sole property of the Company.
The respondents contended that there \Vas nothing in the Special Condi-
~·
tions which militates or is inconsistent with the Standard Condition No. 15.
The Special Conditions,
read as a whole show that the raw
materials
purchased by the Company against 90 per cent of advance payment do
not become the property of the Railway Board or the Union of India h<c-
·-cause under the express tern1s of the contract
such advance pay1nent
1s
made towards the contract price of the wagons and not to,vards price of
the materials.
Dismissing the appeal,
.'
HELD: (1) "fransf'1' of property in goods for .n Pri.:e is the linch-pin
of the definition of 'sale'. The difficulties in
distinguishing bl!tween
the
contract of sale and work contract is an age-old one. It was n1uch debated
even by the Roman Jurists. Accordin"'g to Pollock & Mulla, the test v..·ould
be whether the thing to be delivered has any individual existence before
delivery as the sole property of the party who is to deliver it. If the answer
is in the affirmative it is sale of the thing otherwise not. Another rule is
that if the main object of the contract is the transfer from A to B for a
price of the property in a thing in \Vhich B had no previous
property then
the contract is a contract of sale. According to Lord Halsbury, the distinction is often a fine one.
A contract of sale is a contract whose main ob~
ject is the transfer of the property in and the delivery of the possession of
a chattel as a chattel to the buyer.
\Vhere the main object of 'vork 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 -and in anYthing that can properly become the
\vork and Jabour bestowed and in anything that can properly become the subject
of sale, neither the ownersWp of materials nor the value of the skill and Jabour
as compared \Vith the value of the materials is conclusive, although such matters
may be taken into consideration in determining in the . circumstancee of a
particular case whether the contract is in substance one for \\'Ork and Jabour
or one for the sale of a chattel. [446 F-H, 447 A-DJ
(2) The question, whether a contract is one for sale of goods or for
executing work or rendering services is largely one of fact depending upon
the terms of the contract including the nature of the obligations to be discharged thereunder and the surrounding circumstances. In the
present case
the contract is expressly one for the manufacture and supply of wagons for
a price. Price has been fixed taking the wagon as a unit. Payment .of the
price· is made for each vehicle on its completion and delivery by the contractor to the purchaser who is described as
the Union of India
acting
throu2h the Railway Board. The payment is made in two instalments;
90 per cent of the value of the vehicle on completion against an On Account
Bi1t together \Vith the completion certificate and 10 per cent after delivery.
The real intention of the contracting parties is primarily to
be
sought
within the fourRcorners of the documents containing Standard
and
Special
Condition of the contract. If such intention is clearly discernible from these
documents it \vould not be proper to seek external aid from the stereo-typed
indemnity bond. The terms and conditions of_ the contract read as a \vho1e
undoubtedly lead to the conclusion that the property in the material procured or purchased by the Company i.'lg:ainst the 90 per cent value of which
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UNION v. CENTRAL INDIA MACHINERY (Sarkaria, J.)
439
advance i$ taien from the Railways, does not before their use in the cons
4
truction of the wagons, PllS8 to the Railways, for the following reasons :
(a) On account payment upto 90 per cent is a part of the full contract
price for each completed wagon;
·
(b) Condition No. S while imposing restriction as to the use and disposal
of material against which 11dvance is taken further gives a pro-emp-
-
tivc right to the Government to purchase all surplus or unservicea4
blo materials from the company on its "being paid such price as
Government may fix with due regard to the condition of material".
If tbe material belonged to the Government or the Railways, no
que5tion of purchasing the same from the Company could
arise.
No one can be seller and purchaser of the same property at the same
time.
A
B
(c) Condition No. 10 which provides that no sales tax on materials
including steel and components will be reimbursed by the Railway
C
Board clearly postulates that the Company becomes the owner ot
the materials by purchase and, therefore, becomes liable to pay th& .
sales tax. There is no condition or term in the contract that the
material purchased by the Company a,fter drawing on Account pay.
ment to the extent of 90 per cent of the value
of the material
became the property of the Railways. The conditions embodied in
1he contract read as a whole clearly show that the property in the
material purchased by the company with the assistance of the Rail·
way, does not pass to the Railway. Thus, most of the raw mate·
D
rials required for the construction of the wagons belong to the CQm·
.pany and not to the Railway Board. With the exception of a rela~
tively small proportion of the components, the entire wagon includ·
ing the material, at the time of its completion for delivery, is the
property of the Company.
·
Clause 15 stipulates in unmistakable terms that as soon as a vehicle has been
eompleted the Company will get it examined by the Inspecting Officer
and
submit to the purchaser an On Account· Bill for 90 per cent of the valu• of the
E
vehicle. This clearly shows that the contract was in substance one for the sale
of manufactured wagons by
the
Company
for
the
stipulated
prices.
[441 G, 447 E-F, 4Sl B-H & 4SS B-C]
Mis. Hindustan Aeromiutics Ltd. Bangalore Division v. The Conunissioner
of Commercial Taxes, Mysore [1972] 2 SCR 927 and State of Gujarat (Commis-
.Tioner of Sales Tax, Ahmedabad) v. M/s. Variety Body Builders AlR 1976 SC
2108, distinguished.
Patnaik & Company v. State of Orissa [196S] 16 STC 369 (SC), followed.
CrvIL APPELLATE JuRJSD!CTION : Appeal No. 1812 of 1969.
(From the Judgment and Order dated 31-1- ~69 of the Rajasthan High Court in Civil Misc. Writ No. 733 of 1968).
S. K. Mehta and Girish Chandra, for the appellant.
S. T. Desai, G. A. Shah and S. K. Dholakia, for respondent No. 1.
L. M. Singhvi, S. M. Jain and Indra Mapwana, for respondents
2-3.
.
Leila Seth and G. S. Chatterjee for the Intervener.
The Judgment of the Court was delivered by :
SARKARIA, J.-Whether on· the facts of this case, the contract
<lated 15-6-1968 between the Union of India and the Central India
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440
SUPREME COURT REPORTS
(1977] 3 S.C.R.
J\:1achinery Manufacturing Company Ltd.
(Wagon & Structural Divis10n) .Bharatpn_r (heremafter called the Company) for the manufacture and supply ot wagons, was a contract 01 sale or work contract, is
the prmcipal quest10n that tails to be determmed in this appeal by
certiJicate, filed by the Union of India against a judgment dated January 31, 1969 of the High Court of Rajasthan. It arises out of these
facts :
·
The Com}lany, Respondent No. 1 herein entered into a contract
(No. 67/RS(l)/954/15/396, dated 15-6-1968 with the Union of
India through the Railway Board for the manufacture and supply of
258 BG Bogie covered .BCX type wagons and 812 MG covered wagons
of M.BC type to the Railways.
The sales-tax authorities of the State
(Respondent 3 herein) under the Rajasthan Sales Tax Act, levied' the
sales tax treating the contract as one of sale and delivery of wagons.
Under a similar past contract, the appellant reimbursed the Company
the amount of ~ales-tax for the wagons supplied by it ~o the appellant
in the months of March and April, 1967. In March 1967, the High
Court of Mysore in the case of Hindustan Aeronautics Ltd., Bangalore
]);vision v. The Commissioner of commercial Taxes, Mysore,(') held
that the contract for the supply of wagons to the Railway Board by
HAL was in the nature of works contract and therefore sales-tax .was
not payable on 'such supplies. In view of this decision, the Railway
Board by its Jetter dated June 7, 1968 informed the Company that the
money paid by it to the Company which was not deposited with the
Sales-tax Department should be refunded because the real nature of
the transaction was that of a works contract and not a sale or purchase
and therefore the Railway Board was not liable to reimburse the
Company for the amount of sales-tax if any, paid by the Company to
the State of Rajasthan.
While in reply to the Railway Board at Company contended that the contract was for sale of wagons and not a
contract for works, it took a contrary position in its representation to
the Commissioner of Sales-tax, Rajasthan. Instead of giving any relief, the Sales-tax Department informed the Company that it should
stop purchasing material on the strength of Form 'C' under
the
Central Sale8-tax Act.
Such stoppage would have saddled the Company with a further liability to pay tax at the enhanced rate on the
purchase of material used for the manufacture of wagons.
The Commercial Tax Officer provisionally assessed the Company
under s. 7 (D) of the Rajasthan Sales-tax Act on the Sale of wagons to
the Railway Board for the month of May 1968, and served a demand
notice for payment of Rs. 1,91,827/79p. including Rs. l,899.29p/ as
penalty.
Since the Company was registered a·s a d<;aler under the
Sales-tax Act, it had to bear, in the first instance, the charge of the
tax although its incidence normally passes on to the purchaser, in the
absence of a contract to the contrary under the provisions of s. 64(a)
of Sales of Goods Act.
By its letter of August 14, ·1968, the Railway Board finally informed the Company that, in future it would not reimburse the Company
for the sales-tax if paid by it in connection with the supply of wagons.
(I) [1972] 2 S.C.R. 927.
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UNION v. CENTRAL INDIA MACHINERY (Sarkaria, !.) . 441
'Che Company thereupon invoked the writ jurisdiction of the
High
· Court by a petition under Article 226 of the Constitution.
In tlie
writ petition, the Commercial Taxes Officer Special Circle Jaipur, the
Union of India through the Railway Board and the State of Rajasthan
were impleaded as Respondents.
The relief prayed in the petition was :
"(1) That an appropriate Order be made
determining
whether the contract in question is in the nature of
a contract for sale of goods, or works contract.
.
(2) That in the event of a finding that the contract is in
reality a contract for sale the respondent Union of
India b!l prohibited from claiming refunct from the
petitioner of the sum of Rs. 1,56,703.20 lying in its
hands for payment of Sales Tax.
(3)
( 4) That an appropriate writ, Directive or Order
be
made directing the respondent Union of India through
A
B
c
the Railway Board to reimburse the Petitioners in
D
respect of Sales Tax for the purchases from
May
1968 onwards from month to month."
The writ petition was contested by the Union of India, inter ali11,
on the ground that the contract in question was contract ~or works
and not a contract of sale. The State of Rajasthan and the Commercial Taxes Officer in their joint reply contended that the contract was
one for sale of wagons.
At the final hearing before the High Court all the parties requested
the Court to resolve the dispute in the exercise of its extraordinary
jurisdiction under Article 226 of the Constitution, notwithstanding the
availability of an alternative remedy.
The Court, in consequence, proceeded to decide the dispute on merits.
After examining in detail the
terms and conditions of the contract a·s disclosed by the relevant documents on the record, the High Court took the view that the contract
in question was a contract for the manufacture and Sale of wagons to
the Union of India by the Company anct as such sales-tax was payable
on these transactions. It thus decided the main issue against the
Union of India and allowed the writ petition.
Hence thi·s apeal by the Union of India.
The question, whether a contract is one for sale of goods or for
executipg works or rendering service.s, is largely one of fact, depending upon the terms of the Contract, including the nature of the obligations to be discharged thereunder and the surrounding circumstances.
It is therefore, necessary to examine the terms and conditions of the
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contract in question.
H
There is no consolidated contract deed formally executed by the
parties, on record.
There are however, several documents, including
442
SUPREME COURT REPORTS
(19771 3 s.c.R.
A
the correspondence between the parties, which embody the terms and
conditions of the contract.
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D
By its letters No. 67/RS(I)/954/15 dated December 23, 1967,
and letter dated June 15, 1968, the Railway Board communicated to
the Company, the farmer's acceptance of the offer made by the Company in its earlier letters, including the letter, dated 12-12-1967, to
manufacture and supply, B. G. Bogie covered wagons BCX Type and
M. G. Covered wagon MBC Type. The numbers of the wagons to be
supplied and the price· per wagon of each type were indicated in these
letters.
Paragraph 2 ?f the letter, dated December 23, 1967, stated:
"2. Terms and Conditions : The contract shall be governed by the General Conditions of Contract A5-51 (Revised)
in so fa~ as these are not inconsistent with the Special Condition·s of contract attached as per Annexure 'A' and these
given in Paras 3 and 7 below."
Paragraphs 3 to 6 of the letter provide as under :
"3. Delivery : The delivery of the stock F.O.R. your
works siding is required to be completed by 30-6-69.
"4. Packing of axle boxes : Packing of
axle
boxes
(Wherever necessary) will be done by Western Railway.
No packing charges on account of the same will be received
from you."
"5. Inspecting
Authority :
Joint Director
(R.I.),
E
R.D.S.D., Calcutta or his representative shall con·stitute the
Inspecting Authority for the inspection of stock built by you
against this order.
·
'6. Accounting and payments: F.A. & C.A.O., Northern Railway, New Delhi will maintain
accounts
and
arrange all payments."
F
Para 7 dealt with "Material Escalations", while in para 8 it was
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expressed that the order was being issued in the name of the President
of India.
Now the salient Standard Conditions referred to in paragraph 2
of this Jetter may be seen.
Conditions 1 and 2 are as follows :
"l. The"Purchaser" means the President of India in
the case of carriage underframes and goods wagons (hereinafter called vehicles) ordered for Indian Railways."
2. "The work" includes materials of every kind .... "
Standard Condition 15 is crucial and may be extracted in full.
"SYSTEM OF PAYMENT
15. Payments for completed vehicles delivere_d by the
Contractor shall be made in two instalments, viz. 90 per
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.UNION v. CENTRAL INDIA MACHINERY (Sark aria, !.)
44 3
cent on completion and 10 per cent as provided in paragraph
A
(2) of this clause.
The procedure for such paymenfs will
be as follows :
(I) The Contractor on receipt of a Certificate signed by ·
the Inspecting Officer (whose decision shall be final)
to the effect that one or more vehicles have been completed will submit to the Purchaser on account bill
for 90 per cent of the yaJue of vehicles in question,
together with the completion certificate, the Purchaser
will pay the 90 per cent bill, and on payment of this
bill the vehicles in qiiestion will become the property
of the Purchaser.
(underlining ours)
(2) The balance of 10 percent shall be treated as security
for the due ftilfilment 9f the contract and the Contractor shall be entitled to receive payment of the
balance of 10 per cent on vehicles as completed on
his receiving a certificate from the Purchaser to the
effect that the
actual delivery of the vehicles
m
question has been taken, that the deEvery was made
in the due time, and that the Contract has
been
duly fulfilled in every respect in so far as it relates
to the completed vehicles.
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Condition 16 lays down that if the "defect arises from inferiority
of material or workmanship, or from imperfect protection or other
default on the Contractor's part, the Railway shall be at liberty to
ask the Contractor to remedy the defect and deduct from any money
E
due to the Contractor.
The Special Conditions of Contract contains in Annexure 'A'
to ~he letter dated 23-12-1967, are as under:
SPECTAL CONDTTTONS
l.3 Material Escalations : Adjustments due to variations
in the cost of mater'al will be confined to the variations in
the prices of steel at Col. 1 rate through
Governmental
action for controlled categories and those fixed by J.P.C.
for de-controlled categories of steel. The escalation would
be allowed in respect of such of the quantities of the material which were purchased and paid for the manufacture
of wagons on order after the variation in price over the
base date and subject to examination of the actual amounts
paid for the supply of such tonnage of steel which is
considered reasonable for the manufacture of the wagons on
order and for which prices have varied over the base date
· whether supplied to the Contractor or sub-contractor ....
F
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4. Specifications and Drawings :
H
The stock shall be built conforming to specifications and
drawings indicated in the order which are obtainable on
A
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444
SUPREME COURT REPORTS
[1977] 3 S.C.R.
payment frQlil the Research Design and Standards Organisation, Lucknow, with such modifications as may be required or approved by the Railway Board, from time to
time during the execution of this contract.
The basic price ·shall have reference to the specification
shown in the order.
Any modification to specification or
design shall be subject to price adjustment over and above
the basic price ............ "
Special Condition 4 is important. A good deal of argument was
made as to whether 90% advance made under this Condition should
be taken a·s p~yment towards the price of the material or towards
the price of the wagons.
This condition reads :
"4. Terms of Paymen~s :
(a) 'On Account' payment upto 90% of the value .of
steel and other raw materials procured by the firm
for this order will be made against such materials,
on its receipt in the firms' works, on production of
a certificate to that effect from the concerned officer
of the Inspection and Liaison Organisation and on
the firm furnishing nece'ssary indemnity bond to the
paying Authority.
Note : 'On Account' payment wil\ be permissible
on steel procured according to Joint Director
(Iron & Steel), Calcutta's planning after taking
into consideration any steel offers from
the
floating stock held by the Railways. If such
offers are refused and steel of similar quality
is obtained from other sources such quantities
will be excluded from 'On Accounf payment.
The claim for 'On Account' payment will be ·
accompanied by a further certificate that similar
, steel has not been offered from the floating
stock held by the Railways and refused by
the Wagon Builders.
(b) Payment of 90% of the full contract price less 'On
Account' payment already made vide
(a)
above
will be made on production of inspection certificate
for each completed wagon.
(c) Payment of the balance 10% of the contract price
will be made on tjle certification by the consignee
Railways that wagons have been received in com-
. plete condition and in good working order, provided that the payment so made shall be provisional
and subject to adjustment and finalisation by deduction of rebate in acordance with provision of clause
1.4."
(underlining ours)
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UNION v. CENTRAL INDIA MACHINERY (Sarkaria, J.)
445
The other material Special Conditions are :
A
"5. USE OF RAW MATERIALS SECURED WITH
THE GOVERMENT ASSISTANCE :
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\Vhere any raw materials for the execution of the contract are procured with the assistance of Government either
by issue from Government stock or purchase under arrangements made or permit(s) or licence(s) issued by Government, the Contractor shall hold the said materials as trustee for Government and use such materials economically
and solely for lhe purpose of the contract against which
they are issued and not dispose of them, without the permission of the Government and return, if required by the
purchaser, all surplus or unserviceable materials that may
be left with after the completion of the contract or at its
termination for any reason whatsoever, on his being paid
such price_ as Govemme.nt may fix with due regard to the
condition of the material.
The freight charges for
the
return of the materials according to the directions of the
purchaser shall be borne by the Contractor, in the event
of the contract being cancelled for any default on his part.
The decision of Government shall be final and conclusive.
(underlining ours)
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"10. Sales Tax : If and when
State and
Inter-State
Sales Tax on the ·stock on order becomes payable under Law
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such payments will be reimbursed by the Railway Board.
The Railway Board will, not, however, be responsible for
the payments of sales tax paid under mis-apprehension of
Law.
No sales tax on materials including steel or components will be reimbursed by the Railway Board.
(underlining ours)
F
The material part of the Indemnity Bond which was ·subsequently
executed by the Company in connection with the Contract, provide :
"Wperyas under Railway
Board's
order
No.
67 /
RS(l)/954/15 dated 23-12-1967, the said Contractor has
been given the contract for manufacture of 258 Nos. B.G.
covered wagons BCX type with Transition
type
Centre
Buffer couplers at both ends and 812 numbers MG covered wagons MBC type (1968-69 R.S.P.) at Bharatpur. And
whereas advance payment are to be made by the Railways
to the Contractor against Railway Board's ·said order_ ...
That the Contractor shall hold at his works at Bharatpur and/or at the works of his sub-contractors the Stores
and articles of the Railways in respect of which advance
may be made to him against the sajd order.
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That the said Stores and articles ·shall be such as are
required for the execution of the above contract and the
advance made to him by the Railways is withou.t prejudice
to the provision of the contract and is subject to inspection
and rejection of the Stores and any advance made against
stores and articles rejected or found unsatisfactory on inspection shall be refunded immediately to the Railways.
That the Contractor shall be solely responsible for the
safe custody and protection of the said stores and articles
against all risks till _they are duly delivered to the Railways
or as they may direct.
The said artic/.ee and materials
shall <it all times be open lo inspection of any officer authorised by th.e Railways.
(underlining ours)
Now these presents witnesseth that the Contractor ....
hereby undertakes to indemnify the Railway~, should any
loss or damage or deterioration occur in re·spect of the said
stores and articles while in his possession or in the possession of his sub-contractors or if any refund becomes due
to the Railwa)1S without prejudice to any other remedies
available, the Railways may also deduct such amount from
any sums due, or any sum which at any time hereinafter
may become due to the Contractor .......... "
Clanse (o) of S. 2 of the Rajasthan Sales Tax Act, 1954, defines
"sale".
It says :
" 'Sale' with all its grammatical variations and cognate
explanations, means any transfer of property in goods for
cash or for deferred payment or for any other valuable consideration, and inclnde·s a transfer of goods on the hirepurchase or other system of payment by instalments .... "
Thus, transfer of property in goods for a price is the linchpin of the
definition.
Under Section 4 the Sale of Goods Act, 1930, also, in
the definition of the term "sale" stress is laid on the element of transfer of property in the goods.
According to the Roman jurists, also,
the purport of a contract of sale is that the seller divests himself of
all proprietary right in the thing sold in favour of the buyer.
It is
this requisite which often distinguishes a contract of sale of goods
from a contract for work and services.
Even so, the difficulty
of
di'stinguishing between these two types of contracts is an age-old one.
It was much debated even by the Roman jurists (see Inst. III, 24,4,
and De Zuluete, The Romaro Law of Sale, pp. 15, 16). Difficulty has
also been felt in England and other Common law jurisdictions to the
effect of a contract to make a chattel and deliver it wh~n made. Generally, such ,i contract is one of sale of Chattel, but not alwa~s.
Jurists have differed much and striven much about the test for distinguishing between these two types of contracts. Since each contract presents its own. features, and imp?nderables ~t h_as not been
possible to devise an mfallible test of umversal apphcat10n. Accordino to Pollock & Mulla, "the test would seem to be whether the thing
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UNION v. CENTRAL INDIA MACHINERY (Sarkaria, J.)
447
to be delivered has any individual existence before delivery as
the
A
sole nronertv of the nart.v who is to deliver it". If the answer is in
the affirmative, it is -a 'sale' of the thing, otherwise not.
Another
learned author enunciates that "the general rule deducible from the
cases seems to be that if the main object of the contract is the transfer
from A to B, for a price, of the property in a thing in which B had no
previous property, then the contract is a contract of sale,"
(See
Chalmers' Sale of Goods, 16th Edn, page 52). The broad criteria
B
for distinguishing between these two types of contracts have been
neatly summed up in Halsbury's Laws of England, (3rd Edn., Vol.
34, page 6) thus :
"A contract of sale of goods must be distinguished from
a contract for work and labou.r.
The distinction is often
a fine one.
A contract of sale is a contract whose main
C
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 whetQer or
not.the work and labour bestowed end in anything that can
properly become the subject of sale; neither the ownershi•p
D
of materials, nor the value of the skill and labour as compared with the value of the materials is conclusive, although
such matters may be taken into consideration in determining in the circum·stances of a particular case, whether the
contract is in substance one for work and labour or one for
the sale of a chattel."
Let us now apply the above criteria to the contract in question. The
contract is expressly one for the manufacture and supply of wagons
for a price.
Price has been fixed taking the wagon as a unit. Payment of the price is made for each vehicle on its completion and
delivery by the contractor to the Purchaser, who is described a·s the
Union of India acting through the Railway Board.
Such payment
E
is made in two instalments, viz., 90 per cent of the value of the
F
vehicle on completion against an 'On account' bill, together with the
Completion Certificate from the Inspecting Officer appointed by the
Railway Board, and the balance of 10 per cent after delivery. If
clause ( 1) of the Standard Condition 15 is not inconsistent with
anything in the Special Conditions, and as we shall presently notice
it is not so-it clinche's the issue in as much as it declares in unequivocal terms the invention of the contracting parties that on payG
mcnt of the 90 per cent of the value, 'the vehicles in question will
become the property of the purchaser." Prima facie, the contract in
question has all the essenti'al attributes of' a contract of sale of moveable.
That is to say,
hare is an agreement to sell finished goods
manufactured by the Sellers (Company) for a price, the property in
the goods paS'sing to the Purchaser, on completion and delivery pur·
suant to the agreement. .
H
Mr. Mehta, learned counsel for the appellant, contended that
what clause (1) of Standard Condition 15 appears to convey about
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the transfer of fhe properly in the completed vehicle stands inferentially negated an~ superseded by the terms of the Special Conditions
and the lndemmty Bond to which the Standard Conditions are subject.
It is urged that under Special Conditions read with the Indemnity Bond the property in the raw material purchased by the Company for the construction of the wagons,
passed to the Railway
Board as soon as the latter advance 90 per cent of the value of such
material, which thereafter is held by the Company merely as an agent
or trustee for the Board.
Our attention has been in'lited to Special
Condition 4 under which 'On Account' payment upto 90% of the
value of '·steel and other materials" procured by the Company for
this Order" will be made against such materials, on production of a
certificate from the officer of the Inspection and Liaison Organisation
and on furnishing necessary indemnity Bond to the Paying Authority.
We are also adverted to the Note under clause (a) of that Condition,
according to which ''On Account" payment will not be permissible
against steel procured by the Company from a source other than the
floating stock held by the Railway's, except when an offer to procure
it from that source is refused.
Counsel has also referred to Special
Conditions. 5 which obligates the contractor to hold "as trustee for
Government" any raw materials for the execution of the contract"
procured with the assistance of Government either by issue from
Government stock or purcha·se under arrangement made or permit(s)
or licence(s) and to "use such materials economically and solely for
the purpose of the contract against which they are issued and not
dispose of them, without the permission of the Government."
Mr.
Mehta further pointed out that under Special Condition 6, other
essential components, viz., wheelsets for all the stock '(and roller
bearing axle boxes and C.F. couplers wherever applicable) are supplied to the contractor free of cost F.O.R. against a proper undertaking
for their safe custody.
Counsel further took us through the contents
of the Jndemnhy Bond and placed special emphasis on its clause :
"That the contractor shall hold at bis works at Bharatpur and/or at the works of his Sub-contractors the Stores
and articles of the Railways in respect of which
advance
may, be made to him against the said order."
From a conjoint reading of the Special Conditions 4, 5, 7 and
the Indemnity Bond it is sought to be spelt out that all the raw
materials and components used in the manufacture of the wagons,
belonged to. the Railway Board; such materials were either procured
under Special Condition 4 against 90% 'On Account' payment which
should be taken as a payment towards the price of the material purchased and held by the Company on behalf of the Railway Board,
or procured under Special Condifain 6 f~ee of cost; It i's main;ained
that since purchases of raw matenal agarnst 90% On Account payment were made by the Company on behalf of and/or the Railway
Board, that was why in the Indemnity Bond, the "stores ~nd articles"
in respect of which the advan.ce has been '?ade by the Ra~lway Boar?,
are described as 'of the Railways". It 1s further submitted t11at m
view of the facility avai_lable to the contractor, there was li!tle or no
possibility of any materials other than those procured agamst 90%
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UNION v. CENTRAL INDIA MACHINERY (Sarkaria, J.)
419
'on account' payment, or supplied free of cost by the Railway under
Special Condition 6, being used in the manufacture of the wagons
by the Company. In sum, the proposition propounded is that since
the raw materiajs and components used in the manufacture of a wagon
under the terms of the contract belonged to the Railway Board, the
wagon produced had, at the time of its completion and deliverv, uo
individual existence as the sole property of the Company.
'
Although counsel has not specifically cited from Pollock and Mulla's
commentary on the Sale of Goods Act, the test sought to be invoked
is the same which has been suggested by the learned authors. fodged
by this test, proceeds the argument, the contract in question is not a
contract of sale of wagons, but one for work and labour.
In support of his contentions, Mr. Mehta relies on three decisions
of this Court :
i
M/s. Hin;/u:Ytan Aeronautics Ltd., Bangalore Division v. The
Commissioner of Commercial Taxes, Mysore(') State of Gujarat v.
Kai/ash Engineering Co.( 2) and the other in State of Gujarat (Commissioner of
Sales Tax,
Alunedabad), v. M/s.
Variety
Body
Builders(').
According to counsel, the terms and conditions of the
contract which came up for consideration in M/s. Hindustan Aeronautics were substantially the same, and there it was held that the
contract was one for work and not of sale of vehicles. On the other
hand, Dr. L. M. Singhvi, Learned Advocate-General appearing for
the State of Rajasthan, and Shri S. T. Desai, learned counsel appearing for the Company have pointed out that there is nothing in the
Spedal Conditions which militates against or is inconsistent with the
Standard Condition 15; that the Special Conditions, read as a whole,
show beyond all doubt that the raw materials
purchased by the
Company against 90% advance payment do not become the property
of the Railway Board or the Union of India, because under the
express terms of the contract, such advance payment is made towards
the "contract price" of the wagons and not towards the price of the
materials purchased by the Company, although to safeguard
the
interests of the Railway Board some restrictions have been placed
with regard to the use and disposal of those materials on the Company
who had become aware thereof by purchase for a price.
In refutation of the stand taken by the appellant, it is asserted that under
the terms and conditions of the contract, it is not obligatory for the
Company to purchas'~ all the materials required for the con'struction
of the wagons, from the Government stores or with the assistance of
the Government against 90% advance payment.
It is submitted
that in accord with the terms of the contract, lot of raw material
against which no such advance was taken, was purcha.sed by the
Company and used in the construction of the wagon.
With our permission, an affidavit has been filed before us on behalf of the Company to support this assertion of fact.
(I) [1972] 2 S.C.R. 9n.
(2) [1967] '95 S.T. (1360).
(3) A.LR. 1976 S.C. 2108.
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Dr. Singhvi has further submitted that the terms of the contract
in question are materially different from those which were in question
in Hindustan Aeronautics case and in Mis. Variety Body Builders
(supra) and consequently those decisions cannot govern the instant
case. According to the Counsel, the instant case is more in line with
the decisions of this Court in Patnaik and Company v.
State of
Orissa(') and T. V. Sundram Iyengar & Sons v.