1. This appeal under special leave granted by this Court arises out ofproceedings for assessment of sales-tax under the Bombay Sales Tax Act III of1953. Messrs. Kailash Engineering Co. (hereinafter referred to as 'therespondent') was an engineering concern having their workshop at Morvi onthe meter gauge section of the Western Railway. They obtained a contract fromthe Western Railway Administration for construction of III class passengercoaches on certain conditions described as the conditions of tender. Under thatcontract which was reduced to writing and was described as an agreement, therespondent constructed three coaches and submitted a bill which was properlycertified in accordance with the agreement by the Railway Administration onOctober 4, 1958. The net value of the work done by the respondent was certifiedat Rs. 1,22,035/-. After receipt of this money, the respondent wrote to theAdditional Collector of Sales Tax requesting him under s. 27 of the BombaySales Tax Act, 1953, to hold that this was a works contract, and that thetransaction, in respect of which the respondent received the money, did notamount to a sale, so that no sales-tax was payable under that Act. TheAdditional Collector held that two questions fell for determination before him:
(1) Whether the transactioncovered by the bill dated 4th October, 1958, is a sale; and
(2) if it is a sale, whether anytax is payable in respect of the same.
2. The Additional Collector answered both the questions in the affirmativeagainst the respondent. The appeal before the Gujarat Sales Tax Tribunalfailed; and thereupon, the respondent sought a reference to the High Court ofGujarat. The Tribunal referred the following question for the opinion of theHigh Court :-
'Whether on a proper construction of the agreementas a whole and its general conditions and specification, the work done andcovered by Contract Certificates No. M/60(1)/B-PRTN, dated 4th October, 1958,for the performance of the works of building, erecting and furnishing 3 B.G.Coaches over the chassis supplied by the Railway is a works contract notamounting to sale, or whether it is a transaction of sale.'
3. The High Court answered the question in favour of the respondent, holdingthat the transaction was a works contract carried out by the respondent and didnot amount to a sale. Consequently, this appeal has been brought up by theState of Gujarat challenging the correctness of the decision of the High Court.
4. The Tribunal, when dealing with the case, mentioned a few of the terms ofthe contract entered into between the respondent and the Western RailwayAdministration, and, though there was a provision in one of the clauses of theagreement that as soon as the plant and materials were brought on the sitewhere the coaches were to be constructed, the ownership in them would vest inthe Railway, the Tribunal held that the ownership in those materials neverpassed to the Railway because of the indication given by another clause whichprovided that on removal of contractor or on rescission of contract, theRailway Authorities would be entitled to take possession and retain allmaterials, tools, implements, machinery and buildings. On this basis, theTribunal held that, from the general conditions of the contract, it appearedthat the ownership of the coach bodies only passed to the Railway whencompleted and handed over to the Railway, so that the contract was for supplyof coach bodies. It was on supply of these coach bodies that the respondentreceived the price of those bodies, and thus received the amount subjected tosales-tax as sale consideration for those bodies.
5. The High Court, however, in its judgment, reproduced the preamble of thecontract as well as a large number of clauses of it to show that in thecontract, at every stage, it was clearly mentioned that the contract was forperformance of work of building, erecting and furnishing coach bodies on BroadGauge underframes which already belonged to the Railway. The terms of thecontract showed that as soon as the materials were taken by the respondent tothe site of construction of the coaches, the ownership in those materialsvested in the Railway and all that the respondent had to do was to carry outthe work of erecting and furnishing the coach bodies. When the coach bodieswere ready, the property in them vested in the Railway automatically withoutany further transfer of rights in it to the Railway. In fact, the ownership inthe ready coach bodies did not vest in the respondent at all. No doubt, thematerials for building the coach bodies had to be obtained by the respondentand brought to the site of construction, but the provision that the ownershipin those materials would vest in the Railway as soon as those materials werebrought to the site clearly indicated that the respondent, in purchasing thosematerials, was acting more or less in the capacity of an agent for the Railway.While the materials were at site, the effect of vesting of their ownership inthe Railway was that if they were destroyed or damaged, the risk had to beborne by the Railway, even though the Railway might have been entitled toreimburse itself, because those materials and goods were in the custody of therespondent on behalf of the Railway. In fact, under clause 29, there was aspecific provision for the contingency that the materials or plant may be lost,stolen, injured or destroyed by fire, tempest or otherwise. This specialprovision was to the effect that the liability of the contractor was not to bediminished in any way, nor was the Railway to be in any way answerable for lossor damage on the happening of such contingency. This special provision had to bemade, because the ownership in the materials vested in the Railway, though thecontractor was in actual physical possession of the materials and plant inorder to carry out the works contract. It was for this reason that a specificprovision had to be made that the contractor would be liable to the Railway ifany such loss occurred.
6. Taking into account all the terms of the contract as a whole, the HighCourt came to the finding that the contract between the parties was one entireand indivisible contract for carrying out the works specified in full detailsin the agreement, and that it did not envisage either the sale of materials bythe respondent to the Railway, or of the coach bodies as such.
7. In this connection, learned counsel for the appellant relied on thedecision of this Court in Patnaik & Company v. State of Orissa : 2SCR782 . In that particular case, the contract in question was for thesupply of bus bodies, and it was held that when the bus bodies were supplied bythe contractor and money received by him, it amounted to a sale. It, however,appears that the facts and circumstances, on the basis of which the Court gavethat opinion, do not find place in the case before us.
8. Three main circumstances were relied upon in that case for holding thatthe transaction amounted to a sale and not to a works contract. The firstcircumstance was that the bus bodies were, throughout the contract, spoken ofas a unit or as a composite thing to be put on the chassis, and this compositebody consisted not only of things actually fixed on the chassis but movablethings like seat cushions, and other things which could be very easilydetached. In the contract, with which we are concerned, the coach bodies arenot separately described as units or components to be supplied by therespondent to the Railway. The language used in the contract everywheredescribes the duty of the respondent to be that of constructing, erecting andfurnishing coach bodies on the underframes supplied. At no stage does the contractmention that ready coach bodies were to be delivered by the respondent to theRailway. In fact, even during the process of construction of the coach bodies,the unfinished bodies in process of erection were treated, under the terms ofthe contract, as the property of the Railway.
9. The second circumstance found in that case was that if some work was notsatisfactorily done and the body builder, on receipt of a written order, didnot dismantle or replace the defective work or material at his own cost withinseven days, the Controller was entitled to get the balance of the work done byanother agency and recover the difference in cost from the body builder; andfor this purpose, the Controller was entitled to take delivery of theunfinished body. In the contract before us, as we have already mentioned in thepreceding paragraph, the unfinished bodies of the coaches were from theearliest stage treated as the property of the Railway, and there was noquestion of ownership of the unfinished body passing to the Railway only afterits seizure by it as was the case in the other contract in which the propertyin the unfinished body did not pass to the Government till the unfinished bodywas seized.
The third circumstance taken into account in that case was the liability forthe loss, if a fire took place and the bus bodies were destroyed or spoiled. Inthat case, there was a provision for insurance of the chassis, but there was nosuch provision regarding insurance of bus bodies, and the Court inferred that tilldelivery was made, the bus bodies remained the property of the appellant onwhom the loss would fall. On the other hand, in the contract with which we areconcerned, the terms envisaged the property in the unfinished bodies vesting inthe Railway, and since those unfinished bodies were to be in charge of therespondent during construction, a special provision had to be made making therespondent responsible for the loss and throwing upon the respondent theliability to reimburse the Railway for loss by fire, etc. Thus, the terms ofthe contract in this case are markedly different from those which came up forconsideration in that case. Here, we find that all the terms of the contractlead to the only inference that the respondent was not to be the owner of theready coach bodies and that the property in those bodies vested in the Railwayeven during the process of construction. This was, therefore, clearly a workscontract which did not involve any sale. The decision given by the High Courtwas correct. The appeal fails and is dismissed with costs.
10. Appeal Dismissed.