PETITIONER: PATNAIK & COMPANY Vs. RESPONDENT: STATE OF ORISSA DATE OF JUDGMENT: 19/01/1965 BENCH: SHAH, J.C. BENCH: SHAH, J.C. GAJENDRAGADKAR, P.B. (CJ) HIDAYATULLAH, M. SIKRI, S.M. BACHAWAT, R.S. CITATION: 1965 AIR 1655 1965 SCR (2) 782 CITATOR INFO : D 1967 SC 547 (6) RF 1969 SC1245 (11) RF 1972 SC 744 (11) RF 1972 SC1131 (10) F 1974 SC2309 (9,10,11,12,13,17) RF 1976 SC2108 (45) R 1977 SC1537 (37) RF 1989 SC 962 (24) ACT: Orissa Sales Tax Act, (14 of 1947)--Contract to build bus bodies on chassis supplied by purchaser-If a contract for sale or for work. HEADNOTE: The appellant claimed to deduct from its gross turnover, amounts received from the State Government for building bus bodies, on the chassis supplied by the Government under a contract. Under the contract, the bus bodies were to be put on the chassis and the body consisted not only of things actually fixed on the chassis but movable things like seat cushions and other things which though fixed could be easily detached, like roof-lamps etc. The chassis with the bus body was to be delivered at the destination named within the stipulated time. If some work was not satisfactorily done the Government was entitled to seize the unfinished vehicle, get the work done by another agency and recover the difference in cost from the appellant. While the appellant was required to protect the chassis by insurance, there was no provision regarding insurance of bus bodies. The contract also provided that the process of manufacture was to be supervised on behalf of the Government, and that the work should be done with due deligence. There was also a provision for payment of damages until the defects detected on inspection were rectified. The Sales Tax Officer refused to allow the deduction. On appeal, the claim was allowed by the Collector, whose order was affirmed by the Sales Tax Tribunal, on appeal by the Department. On a reference to the High Court, the question, as to whether the amounts were not chargeable to sales tax, was answered against the appellant. In the appeal to the Supreme Court, on the question as to whether the contract was one for execution of work or for performance of service, or whether it was a contract for sale of goods. HELD : (Per Gajendragadkar C.J., Hidayatullah, Sikri and Bachawat, JJ) : The contract as a whole was a contract for the sale of goods and the amounts were therefore chargeable to sales tax. [792 G] The answer to the question depended on the construction of the agreement regarding the building of bus bodies. On the terms of the contract the property in the bus body did not pass on its being placed or constructed on the chassis but when the whole vehicle including the bus body was delivered. The provision regarding insurance showed that till delivery was made, the bus bodies remained the property of the appel- lant and unlike the case of a contract a construct a building, where the property does not pass in the materials as movable the bus body never lost its character as movable property and the property in it passed to Government as movable Property. It is not the law, that whenever a contract provides for the fixing of a chattel to another chattel there is no sale of goods; and, a contract for the sale of goods to be manufactured does not cease to be a contract for sale of goods, merely because the process of manufacture is supervised by the purchaser. [785 C-D; 788 F; 790 A-B; 791 A, D; 792 A] 783 Gannon Dunkerley's Case, [1959] S. C.R. 379 and Carl Still v. State of Bihar, [1962] 2 S.C.R. 81, distinguished. Anglo-Egyptian Navigation Co. v. Rennie, (1875) L.R. 10 C.P. 271, explained. Per Shah, J. (dissenting) : The contract was one for work and not a contract for sale, because, the contract was not that the parties agreed that the "bus body" constructed by the appellants should be sold to the State. The contract was one in which the appellants agreed to construct "bus bodies" on the chassis supplied to them as bailers, and such a contract being one for work, the consideration paid was not taxable under the Sales Tax Act. The primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in the person. performing work or rendering service no property in the thing produced as a whole notwithstanding that a part or even the whole of the materials used by him may have been his property. In the case of a contract for sale the thing produced as a whole has individual existence as the sole property of the party who produced it, at some time before delivery, and the property therein passes only under the contract relating thereto to the other party for price. Mere transfer of property in goods used in the performance of a contract is not sufficient : to constitute a sale there must be an agreement express or implied relating to sale of goods and completion of the agreement by passing of title in the very goods contracted to be sold. Ultimately the true effect of an accretion made pursuant to a contract has to be judged, not by any artificial rule that the accretion may be presumed to have become by virtue of affixing to a chattel, part of that chattel, but from the intention of the parties to the contract. [793 D; 794 A-C; 797 H; 798 A, C] In the instant case, imposition of the obligation to carry out the work with due diligence, the liability to pay damages and the right of the Government representative to supervise the production and to take away the unfinished vehicles and get them completed by some other agency are all indicative of the contract being one for work. [795 D-E, G; 796 D-E] JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 179 to,
181 of 1964.
Appeals by special leave from the judgment and order dated
August 21, 1962, of the Orissa High Court in O.J.C. No. 28
of 1961.
A. V. Viswanatha Sastri and R. Gopalakrishhnan, for the
appellants (in all the appeals).
M.C. Setalvad, R. Ganapathy Iyer and R. N. Sachthey for
the respondent (in all the appeals).
The Judgment of P. B. GAJENDRAGADKAR C.J., M. HIDAYATULLAH,
S. M. SIKRI and R. S. BACHAWAT JJ. was delivered by SIKRI J.
SHAH J. delivered a dissenting Opinion.
Sikri J. These three appeals by special leave are directed
against the judgment of the Orissa High Court in three
references made by the Orissa Sales Tax Tribunal under S.
24(1) of the
784
Orissa Sales Tax Act, 1947, in respect of assessments for
three quarters ending June 30, 1957, September 30, 1957 and
December 31, 1957. All these appeals raise a common
question of law and it would be sufficient if facts relating
to the assessment for the quarter ending June 30, 1957 alone
are given.
For the quarter ending June 30, 1957, the appellant, M/s
Patnaik & Co., claimed to deduct from their gross turnover
receipts totalling Rs. 11,268.45 received from the State
Government of Orissa for building bodies on the chassis
supplied by the Government, during the quarter. The Sales
Tax Officer refused to deduct this amount. On appeal, this
claim was allowed by the Collector of Sales Tax, purporting
to follow an earlier decision of the Orissa Sales Tax
Tribunal. The Department appealed against this order to the
Sales Tax Tribunal which, by its order dated June 2, 1961,
affirmed the order of the Collector. The Tribunal, in
brief, held that it was impossible to spell out a distinct
and separate contract to sell any materials or chattels to
the customers in the work of construction of the bodies on
the chassis. On the application of the Department, the
Sales Tax Tribunal referred to the High Court the following
question :
“Whether in the facts and circumstances of the
case, the Tribunal is right in holding that
the amounts received by the opposite party on
the construction of bodies on chassis supplied
by its customers under written contracts are
not chargeable to the Orissa Sales Tax.”
The High Court, in a short order, flowing its decision in
The Commissioner of Sales Tax Orissa v. Patnaik & Co.(1)
answered the question in the affirmative, i.e., against the
appellant. In that case, the High Court had construed a
similar contract and had come to the conclusion that “the
contract, therefore, as contemplated between the parties, is
that the assessee was to deliver a specific goods, namely, a
finished bus body built under the specifications prescribed
by the Government for a fixed price. It cannot, therefore,
escape from the position that the transaction was one for
sale of some goods within the meaning of the Act.” It
further observed that “what exactly is the distinguishing
feature of a sale from a works contract has been elaborately
discussed in a case decided by this very Bench in S.J.C. No.
7 of 1959 M/s. Thakur Das Mulchand v. The Commissioner of
Sales Tax) on 6th July 1961 where it was held that a normal
contract to make a chattel and deliver it when made includes
a contract of sale, but
(1) S.J.C. No. 77 of 1959-Judgment delivered in the Orissa
High Court on July 26,1961.
785
it may not be always so. The test would 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”. The High Court distinguished Gannon Dunkerley’s(1)
case on the ground that as far as the terms of the contract
between the parties were concerned, they clearly
contemplated a case of sale of goods liable to sales tax
under the Act, and it was not a works contract, as contended
by the party. As stated above, the appellant having
obtained special leave, the appeal is now before us.
Mr. Viswanatha Sastri, the learned counsel for the
appellant, has addressed an elaborate argument to us and
contended that the present case is not distinguishable from
the decision of this Court in Gannon Dunkerley’s(1) case.
He has cited a number of authorities in support of his
contention, but it will not be necessary to review all these
authorities as we feel that the answer to the question
refer-red must depend on the construction of the agreement
regarding the building of bus bodies. As laid down by this
Court in Chandra Bhan Gossain v. The State of Orissa(2),
“was it the intention of the parties in making the contract
that a chattel should be produced and transferred as a
chattel for a consideration.”
The agreement was entered into on April 20, 1957, between
the appellant, called in the agreement “the Body Builders”
and the State of Orissa. The State had accepted the
quotations and decided to place orders for construction of 4
(four) numbers of Bus Bodies on the Chassis namely 4 (four)
numbers of 190″ Wheel Base F.F.C. Dodge/Fargo Chassis
supplied by the Governor. The relevant clauses are as below
:
“1. (a) That the Body Builders shall be
responsible for the safe custody of the
chassis as described in Schedule ‘A’ from the
date of the receipt of the Chassis from the
Governor (Supplier) till their delivery to the
Governor and shall insure their premises
against fire, theft, damage and riot at their
cost, so that these chassis are covered by
insurance against such risks.
(b)That while the works are in course of
construction and until the Bus with Bodies
built are taken over by the Governor, the Body
Builder shall be responsible for the chassis
and materials supplied to them and shall inde-
mnify the Governor for any loss or damage to
the said material.
(1) [1959] S.C.R. 379.
(2) 14 S.T.C. 766.
786
(c)The completed Bus Bodies covered by this
contract shall be delivered to the Governor on
or before the 28th May 1957 for two and 20th
June 1957 for the remaining two buses.
2.That the passenger Bus Bodies shall be
constructed on the chassis in the most
substantial and workmanlike manner, both as
regards materials and otherwise in every
respect in strict accordance with the
specifications mentioned in Schedule ‘B’.
3.That if any additional work is
considered necessary by the Transport
Controller, Orissa (hereinafter called the
‘Controller”) for which no rate is specified
in the contract, the Body Builder will
immediately inform the Controller, in writing
the rate which they intend to charge for such
additional work. If the Controller does not
agree to the rates the Body Builder will not
be under any obligation to carry out such
additional work.
Provided that the Body Builder will not be
entitled to any payment for any additional
work unless they have received an order in
writing from the Controller to that effect.
4.That the Body Builder will give a
guarantee regarding the durability of the Body
for a period of two years from the date of
delivery to the Governor and if any
imperfection or defective material became
apparent within the guaranteed period the Body
Builder shall rectify the defects at their own
expenses.
5.That the time allowed for carrying out
the work as entered in the contract shall be
strictly observed by the Body Builder and
shall be reckoned from the date of supply of
Chassis to them. The work shall throughout
the stipulated period of the contract be
carried on with all due diligence time being
deemed to be of the essence of the contract
and the Body Builder shall be liable to pay to
the Governor as liquidated damages an amount
equal to 50 % on the amount of the estimated
cost of the whole work as shown in the
contract for every day that the work remains
unfinished after the date fixed and the
Governor may deduct such sum or sums from any
money due to the Body Builders under these
presents or may recover it otherwise.
7 8 7
Provided that the work will not be considered
as finished until the defects detected on
inspection as provided by clause 6, are
rectified, to the satisfaction of the
Controller.
6.That all works under or in course of
execution or executed in pursuance of this
contract shall at all times be open to
inspection by the Controller or officers
authorised by him in this behalf and they
shall have the right to stop by a written
order any work which in the opinion of the
Controller, is deemed to have been executed
with unsound, imperfect, unskilful or bad
workmanship or with materials of inferior
quality. The Body Builder on receipt of such
written order, shall dismantle or replace such
defective work or material at their own cost.
In the event of failure to comply with the
order within 7 days from the date of receipt
of the order, the Controller shall be free to
get the balance of the work done by any other
agency and recover the difference in cost from
the Body Builder.
Provided that for this purpose the Controller
shall be at liberty to enter upon the premises
of the Body Builder and take delivery of the
unfinished bodies.
7.That the Body Builder shall be paid 50%
of the cost of body building at the time of
delivery and the rest one month thereafter.
8.That the Body Builder will deliver the
vehicles complete with bodies at the
destination or the destinations to be named by
the Controller at their own cost and risk and
shall be entitled to recover from the Governor
the actual cost of transport by road or rail,
transit insurance charges if any and other
necessary incidental charges.”
Schedule ‘B’ gives the various specifications for
construction of composite bus bodies. Clause 9 of the
Schedule provides the specifications of seat cushions for
the upper class and lower class seats. Clause 1 1 provides
for the fixing of two roof lamps and its necessary switches.
Clause 14 provides for the fixing of luggage carrier on the
top of the roof and an iron ladder up to luggage carrier at
the rear. Various miscellaneous fittings are required to be
fitted by clause 16, e.g., hand operated driver’s traffic
signal, nickel plated conductor’s bell, wind screen wipers
for the wind screen, tool box for First Aid equipment, etc.
788
Then, looking at the contract as a whole, what was the real
intention of the parties ? It will be noticed that the bus
bodies are throughout the contract spoken of as a unit or as
a composite thing to be put on the chassis, and this
composite body consists not only of things actually fixed on
the chassis but movable things like seat cushions, and other
things though fixed but which can be very easily detached,
e.g., roof lamps, wind screen wipers, luggage carrier, tool
box for First Aid equipment, etc.
The next point to be noticed is that under the contract the
property in the bus body does not pass to the Government
till the chassis with the bus body is delivered at the
destination or destinations to be named by the Controller
except in the case contemplated in clause 6 of the
agreement. That clause provides that if some work is not
satisfactorily done and the Body Builder on receipt of a
written order does not dismantle or replace such defective
work or material at his own cost within seven days, the
Controller would be entitled to get the balance of the work
done by another agency and recover the difference in cost
from the Body Builder. The Controller is entitled for this
purpose to take delivery of the unfinished body. But even
in this case the, property in the unfinished body would not
pass to the Government till the unfinished body is seized.
Suppose a fire were to take place on the premises of the
appellant and before delivery the bus bodies were destroyed
or spoilt. On whom would the loss fall ? There can only be
one answer to this question and that is that the loss would
fall on the appellant. Clause 1 of the agreement provides
for insurance of the chassis but there is no provision
regarding insurance of bus bodies. Therefore, it follows
that till delivery is made, the bus bodies remain the
property of the appellant. It could, if it chose to do so,
replace parts or whole of the body at any time before
delivery. It seems to us that this is an important
indication of the intention of the parties. If the property
passes at delivery, what does the property pass in ? Is it
movable property or immovable property ? It will not be
denied that the property passes in movable property. Then
was this the very goods contracted for ? Here again the
answer is plainly in the affirmative.
Mr. Sastri draws our attention to the following passage in
Benjamin On Sales (8th Edition), p. 167
“Where a contract is made to furnish a machine
or movable thing of any kind and before the
property in it passes, to fix it to land or to
another chattel, it is not a
789
contract for the sale of goods. In such
contracts the intention is plainly not to make
a sale of movables as such, but to improve the
land or other chattel, as the case may be.
The consideration to be paid to the workman is
not for a transfer of chattel, but for work
and labour done and materials furnished.”
He says that here the bus body is being fitted to a chassis,
i.e., another chattel, and if this passage lays down the law
correctly and according to him it does-the present contract
is not a contract for the sale of goods.
The only case cited in the footnote relating to fixing of a
chattel to another chattle is Anglo-Egyptian Navigation Co.
V. Rennie(1). That case would be relevant if the question
in this case was whether property in the materials used in
the construction of the body passed to the Government plank
by plank, or nail by nail. The answer would be in the
negative, according to the above decision. But we are not
concerned with this question here. The facts in that case
may be conveniently taken from the head note. The
defendants contracted with the plaintiff to make and supply
new boilers and certain new machinery for a steamship of the
plaintiffs and to alter the engines of such steamship with
compound surface condensing engines according to a
specification. The specification contained elaborate
provisions as to the fitting and fixing of new boilers and
machinery on board the ship and the adaptation of the old
machinery to the new. The boilers and other new machinery
contracted for were completed, and ready to be fixed on
board, and one instalment of pound 2000 had been paid under
the contract, when the ship was lost by perils of the sea.
A second instalment of pound 2000 was subsequently paid.
The plaintiffs claimed delivery of the boilers and other
machinery completed under the contract, and this being
refused, brought an action for the detention of the same, or
to recover back the pound 4000 paid by them to the
defendants. It was held that the contract was an entire and
indivisible contract for work to be done upon the
plaintiffs’ ship for a certain price, from further
performance of which both parties were released by the loss
of the ship; that the property in the articles manufactured
was not intended to pass until they were fixed on board the
ship; and that consequently the plaintiffs were not entitled
to the boilers and machinery, nor could they recover the
pound 4000 already paid as upon a failure of consideration.
Here the question was whether according to the contract, the
property in each portion certified by the inspector as
properly
(1) [1875] L.R. 10 C.P. 271.
790
done passed to the plaintiffs as and when his certificate
was given. This question was answered in the negative.
This case is no authority for the proposition that whenever
a contract provides for the fixing of a chattel to another
chattel, there is no sale of goods. A few simple
illustrations will show that this cannot be the law. A
wants new motor tyres. He goes to a dealer and asks that
these may be supplied fitted on the car. Is there a sale of
motor tyres or not ? It is not an easy operation to fix new
tyres; it needs an expert hand. But it will not be denied
that it was in essence a contract for sale of goods. Take
another illustration. A wants a luggage carrier to be fixed
to his car. The carrier which B has needs to be altered a
little. The contract is that lie will alter it and fix it
to the car. Has there been a sale of the luggage carrier or
not ? The answer obviously is ‘yes’.
Mr. Sastri further relies on a passage in Gannon Dunker-
ley’s(1) case, at pp. 413-414 :-
“It is of the essence of this concept that
both the agreement and the sale should relate
to the same subject-matter. Where the goods
delivered under the contract are not the goods
contracted for, the purchaser has got a right
to reject them, or to accept them and claim
damages for breach of warranty. Under the
law, therefore, there cannot be an agreement
relating to one kind of property and a sale as
regards another. We are accordingly of
opinion that on the true interpretation of the
expression “sale of goods” there must be an
agreement between the parties for the sale of
the very goods in which eventually property
passess. In a building contract, the
agreement between the parties is that the con-
tractor should construct a building according
to the specifications contained in the
agreement, and in consideration therefore
receive payment as provided therein, and as
will presently be shown there is in such an
agreement neither a contract to sell the
materials used in the construction, nor does
property pass therein as movables. It is
therefore impossible to maintain that there is
implicit in a building contract a sale of
materials as understood in law.”
We are, however, unable to appreciate how this passage
assists the appellant. In this case both the agreement and
sale relate to one kind of property, namely, the bus body.
The case of a con-
(1) [1959] S.C.R. 379.
791
tract to construct a building is quite different and, as
held by this Court, the property there does not pass in the
materials as movables; but under this contract the bus body
never loses its character as movable property, and the
property in the bus body passes to the Government as movable
property. The following extract from the judgment in
Dunkerley’s case brings out the fact that the title in a
case of building contract passes to the owner as an
accretion thereto :
“That exception does not apply to buildings
which are constructed in execution of a works
contract, and the law with reference to them
is that the title to the same passes to the
owner of the land as an accretion thereto.
Accordingly, there can be no question of title
to the materials passing as movables in favour
of the other party to the contract.”
As we have already said, it is clear on the terms of the
contract in this case that the property in the bus body does
not pass on its being placed or constructed on the chassis
but when the whole vehicle including the bus body is
delivered.
Mr. Sastri then relied on the decision of this Court in Carl
Still v. The State of Bihar(1). That case does not apply to
the facts of this case because this Court came to the
conclusion on a construction of the agreement in that case
that the contract there was entire and indivisible for the
construction of specified works including buildings for a
lump sum and not a contract of sale of materials as such.
Mr. Sastri then says that clause 3 is inconsistent with an
agreement for sale of goods. This clause provides for
additional work to be done for which no rate is specified in
the contract. The clause, according to us, merely provides
for extra payment if the Controller decided to order some
additional things to be placed in the body. This is a
neutral clause equally applicable to a contract for sale of
goods or a contract for work and labour.
Mr. Sastri then points to clauses 5 and 6 and submits that
these are totally inconsistent with an agreement for the
sale of goods. But we are unable to assent to this. Clause
5 provides for a time schedule and ensures that the delivery
of the bus body shall take place within the stipulated time.
Clause 6 is designed to avoid disputes in the future as to
the quality of the material used and ensures that proper
material is used. A contract for the sale of
(1) [1962] 2 S.C.R. 81.
ASup/65-4
792
goods to be manufactured does not cease to be a contract for
sale of goods merely because the process of manufacture is
supervised by the purchaser. For example, if in a contract
for the manufacture and sale of military aircraft, a great
deal of supervision is insisted upon by the purchaser, the
contract would not become a contract for works and labour.
We may now notice some of the Indian cases in which a simi-
lar point arose.
In Commissioner of Sales Tax, U.P. v. Haji Abdul Majid(1),
the Allahabad High Court arrived at the conclusion that in
the circumstances of the case the transaction was a contract
for the sale of bus bodies and not a contract for work and
labour. Desai, C.J., rightly pointed out at p. 443 that
“since it makes no difference whether an article is a ready-
made article or is prepared according to the customer’s
specification, it should also make no difference whether the
assessee prepares it separately from the thing and then
fixes it on it or does the preparation and the fixation
simultaneously in one operation.”
In Jiwan Singh v. State of Punjab (2) the High Court of
Punjab also held that a contract by a firm for fitting and
building motor bodies with its own materials on the chassis
supplied by customers is a contract for the sale of goods.
In Kailash Engineering Co. v. The State of Gujarat(3), it
was held that the contract in that case for building,
erecting and furnishing of third class timber coach bodies
on broad gauge underframes to be supplied by the Railway
administration was not a contract for the sale of goods.
The same conclusion was reached in Kays Construction Company
v. The Judge (Appeals) Sales Tax, Allahabad (4). We do not
propose to say whether these cases were correctly decided on
the facts for, as we have said in the beginning, in each
case it is a question of intention of the parties.
To conclude, we have come to the finding that the contract
as a whole is a contract for the sale of goods. Agreeing
with the High Court, we hold that the answer to the question
referred is against the appellant. The appeal accordingly
fails and is dismissed with costs.
In the other two appeals relating to assessments for the
quarters ending September 30, 1957 and December 31, 1957,
the agreements are similar and these also fail and are
dismissed with costs. There will be one set of hearing fee
in all the three appeals.
(1) 14 S.T.C. 435. (2) 14 S.T.C. 957.
(4) 13 S.T.C. 302.
(3) 15 S.T.C. 574.
793
Shah J. Whether a contract is one for execution of work or
for performance of service, or is a contract for sale of
goods must depend upon the intention of the parties gathered
from the terms of the contract viewed in the light of
surrounding circumstances. If the contract is one for work
or for performance of service, the mere circumstance that
the party doing the work or performing the service uses
goods or materials belonging to him in the execution of the
contract will not be of any importance in determining
whether the contract is one for sale of goods. It is common
ground that under the scheme of the Sales Tax Acts enacted
by State Legislatures, if in its true nature the contract is
one for performance of service or for work, consideration
paid is not taxable, for the States have authority under the
Constitution by Sch. VII to legislate on the topics of tax
on sale or purchase of goods (other than newspapers) and
have no power to tax remuneration received under contracts
for work or service. The primary difference between a
contract for work or service and a contract for sale of
goods is that in the former there is in the person
performing work or rendering service no property in the
thing produced as a whole notwithstanding that a part or
even the whole of the materials used by him may have been
his property. In the case of a contract for sale, there is
in the first instance a chattel which belongs exclusively to
a party and under the contract property therein passes for
money consideration. As observed in Halsbury’s Laws of
England (Third Edition) Vol. 34, pp. 6-7, Para 3 :
” A contract of sale of goods must be
distinguished from a contract for work and
labour. The distinction is often a fine one.
A contract of sale is a contract whose main
object is the transfer “of the property in,
and the delivery of the possession of, a
chattel as a chattel to the buyer. Where the
main object of work undertaken by the payee of
the price is not the transfer of a chattel qua
chattel, the contract is one for work and
labour. The test is whether or not the work
and labour bestowed end in anything that can
properly become the subject of sale; neither
the ownership of the materials, nor the value
of the skill and labour as compared with the
value of the materials, is conclusive,,
although such matters may be taken into
consideration in determining, in the
circumstances of a particular case, whether
the contract is in substance one for work and
labour or one for the sale of a chattel.”
794
To constitute a sale there must therefore be an agreement
and in performance of the agreement property belonging to
one party must stand transferred to the other party for
money consideration. Mere transfer of property in goods
used in the performance of a contract is, however, not
sufficient : to constitute a sale there must be an
agreement-express or implied-relating to sale of goods and
completion of the agreement by passing of title in the very
goods contracted to be sold. It is of the essence of the
transaction that. the agreement and sale should relate to
the same subject-matter, i.e., the goods agreed to be sold
and in which the property is transferred.
To determine the liability of the appellants to pay tax
under the Orissa Sales Tax Act on the consideration received
by them under the terms of the contract, the true intention
of the parties must be determined. The agreement which is
the subject-matter of the dispute between the parties is
executed on behalf of the Governor of Orissa and the
appellants, for constructing “bus bodies” on the chassis
supplied by the Governor of Orissa. In the second paragraph
of the preamble it is recited that the Governor had accepted
the quotation and had decided to place orders for
construction of “bus bodies” on the chassis supplied by the
Governor at the rates specified therein. The third
paragraph recites that the appellants had agreed to
construct “bus bodies” at the rate quoted and on the terms
and conditions recited therein. The agreement then proceeds
to set out the conditions of the contract. By the first
condition the appellants are made responsible for safe
custody of the chassis from the date of receipt thereof from
the Governor till delivery and are bound to insure their
premises including the chassis against fire, theft, damage
and riot at their own cost. By that condition the
appellants are made ” responsible for the chassis and
materials supplied” to them and have undertaken to indemnify
the Governor for any loss or damage to the said material.
The clause also provides that the completed “bus bodies”
shall be delivered to the Governor on or before the dates
specified in the agreement. By cl. 2 it is stipulated that
the “bus bodies” shall be constructed in the most
substantial and workmanlike manner, both as regards
materials and otherwise in every respect in strict
accordance with the specifications in Sch. ‘B’ of the
agreement. Clause 3 provides for payment for additional
work as may be directed by the Transport Controller under an
order in writing to that effect. By cl. 4 it is provided
that the appellants shall guarantee the durability of the
body for two years from the date of delivery and if any
imperfection or
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defective material becomes apparent within the period of
guarantee the appellants shall rectify the defects at their
own cost.
These four clauses do not indicate any clear intention as to
the nature of the contract : they are consistent with the
contract being one for sale of “bus bodies” belonging to the
appellants as well as to a contract for building bus bodies
on chassis supplied. Liability imposed by the contract
requiring the appellants to indemnify the Governor for loss
or damage to the chassis supplied and liability to carry out
the work in the most substantial and workmanlike manner and
to guarantee durability of the bodies are consistent with
the contract being one of sale or of work and service.
Clause 3 also does not indicate any definite intention. If
the contract is one for sale of a “bus body”, the agreement
to pay extra payment for additional work to be done thereon
is not also indicative of any definite intention. But by
cls. 5 & 6 of the contract a definite intention that the
contract is one for work and not sale is, in my judgment,
indicated. By the fifth clause it is, inter alia, provided
that the work shall throughout the stipulated period of the
contract be carried out with all due diligence, time being
deemed to be of the essence of the contract, and that the
appellants shall be liable to pay to the Governor as
liquidated damages an amount equal to 50% of the estimated
cost of the whole work as shown in the contract for every
day that the work remains unfinished after the date fixed.
In a contract for sale of goods such a covenant is unusual.
If a party to a contract fails to carry out his part within
the period specified, unless the other party waives the
breach the contract may be deemed to be broken. The other
party is ordinarily not concerned with the method or manner
of producing the chattel agreed to be sold, if the
specifications relating thereto are otherwise complied with.
Imposition of an obligation to carry out the work with due
diligence is indicative of the contract being one for work.
This inference is strengthened by the proviso to cl. 5 which
imposes liability upon the appellants to pay damages until
the defects detected on inspection are rectified. By the
first part of cl. 6, all work under or in the course of
execution or executed in pursuance of the contract shall at
all times be open to inspection by the Controller or
officers authorised by him in that behalf and that they
shall have the right to stop by a written order any work
which in the opinion of the Controller has been executed
with unsound, imperfect, unskillful or bad workmanship or
with materials of inferior quality. The appellants on
receipt of a written order are obliged to dismantle or
replace such, defective work or material at their own cost.
If the appellants
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fail to comply with the order within seven days from the
date of receipt of the order, the Controller is free to get
the work remaining to be done by any other agency and is
entitled to recover the difference in cost from the
appellants, and for this purpose the Controller is at
liberty to enter upon the premises of the appellants and
take delivery of the unfinished vehicles. It is clear from
the terms of cl. 6 that throughout the process of
construction the appellants are under the supervision of the
Controller, and it is open to the Controller to stop any
work which is in progress and to call upon the appellants to
rectify the work by dismantling or replacing the defective
work. If the appellants fail to carry out the order of the
Controller it is open to the Controller to take possession
of the unfinished work and get the same done through any
other agency and to recover the difference in cost from the
appellants. The Controller is also given liberty to enter
upon the premises of the appellants and to take over the
unfinished vehicles. A party agreeing to purchase goods of
certain specifications or description is entitled to insist
that the specifications or the description shall be strictly
carried out, but he has ordinarily no right to supervise the
production of the goods. Again the right which is conferred
upon the Controller to take away the unfinished vehicles and
to get them completed by some other agency is wholly
inconsistent with the contract being one for purchasing an
article belonging to the appellants. What one may ask would
be the authority of the Controller under a contract of sale
to take away unfinished vehicles from the person who owns
them, have the work completed by another person and then to
claim the right to recover the difference in cost ?
Paragraph 7 deals with the right to recover the
consideration agreed to be paid to the appellants and the
time at which it is to be paid. Paragraph 8 deals with the
place at which the completed vehicles with bodies built
thereon are to be delivered and till the date of the
delivery the risk is with the appellants. Paragraph 9 deals
with the settlement of any dispute which may arise between
the parties on any question relating to the meaning of the
specifications and drawings or as to the quality of the
workmanship or materials used in the work. Paragraph 10
deals with the jurisdiction of courts in the event of a
dispute between the parties. Paragraphs 7 to 10 are in
their content neutral and may be consistent with the
agreement being either one for sale or for work or service.
Schedule ‘B’ consists of the specifications for construction
of the composite bodies. They set out the designs and the
specifications of the underframe and floor, frame-work,
roof, penelling, side
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windows, doors, seats, driver’s can, roof lamps, grab rails,
window guard rails, wind screens, luggage carriers, finish
and miscellaneous fittings. It is true that the
specifications contemplated that the appellants had to
supply certain goods which are not fixed to the “bus
bodies”. There are also provisions for supply of additional
equipment such as wind screen wipers, locking arrangements,
ever,the case of the parties that the contract is a
composite contract. It is part of a single contract
that the “bus body” to be constructed has to conform to the
specifications and in the manufacture of the completed bus
body the equipment set out under the head ‘miscellaneous
fittings’ and elsewhere has to be provided.
An elaborate argument was advanced before us by counsel for
the State of Orissa suggesting that the “bus bodies” are
separately built and are thereafter fixed to the chassis
supplied by the State. The argument, however, does not
appear to be correct in view of cls. 3, 4, 5, 6, 7, 8 & 9 of
the specifications. Again the right which is conferred by
cl. 6 of the main agreement which enables the Controller to
take possession of the unfinished vehicles indicates that
the bodies were to be built on the chassis supplied. and
they were not to be independently constructed. But this
has, in my view, no decisive bearing. The parties may
contract that on the chassis supplied by the State a body
shall be built. If the true intention of the parties is
that a body is a chattel belonging to the builder and the
property therein is to pass under a contract against price,
it would be a contract for sale of the body notwithstanding
the fact that it is built on the chassis.
Another question to which counsel devoted considerable argu-
ment was whether the maxim ‘quicquid fixatur solo, solo
credit’ which is a rule of the common law of England is
applicable under the Indian system to accretions to
movables. Under the English common law a house which is
constructed being embedded in the land becomes an accretion
to the land and (subject to a mass of exceptions in favour
of tenants and in favour of trade fixtures) belongs to the
person to whom the land belongs. But that rule has not been
accepted in India : Thakoor Chunder Poramanick v. Ram Dhonde
Bhattacharji(1) and Narayan Das Khitty v. Jatindra Nath Roy
Chowdhury(2). It is unnecessary to advert to the contention
whether the rule applies to accretions to movables, for
ultimately the true effect of an accretion made pursuant to
a contract has to be judged, not by any artificial rule that
the accretion may be presumed to have become by virtue of
affixing to a chattel
(1) 6 Suth Weekly Reports 228
(2) L. R. 54 I. A. 218
798
part of that chattel, but from the intention of the parties
to the contract. In each case the Court must ascertain what
the intention of the parties was when property in goods
belonging to one person and affixed to the property of
another person, passed to that other person. Whether
pursuant to a contract, any moveables fixed to another
moveable the property passes immediately to the person to
whom the primary property belongs must depend upon the
intention of the parties.
One strong test to ascertain whether a given contract is for
work or for sale of goods is to ascertain whether the thing
produced as a whole had 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 “hereto to the other party for price. If
the thing has no individual existence as the sole property
of the party producing it, the contract will be one for work
or for service.
Under condition 6 of the contract unfinished goods may be
taken possession of by the Controller and appropriated to
himself notwithstanding the objections which the appellants
may have to that course. If the chassis and the body were
destroyed before delivery, as stipulated loss of the body
would undoubtedly fall upon the appellants, for by cl. 1 of
the agreement the appellants, are bound to indemnify the
State of Orissa for any loss that may be suffered by the
State. But this covenant is not decisive of the true nature
of the contract. A bailee of goods under a works contract
may undertake a more onerous liability than what is
prescribed by S. 151 of the Contract Act : see S. 152
Contract Act. Undoubtedly before delivery of a complete
chassis with “bus body” under the terms of the contract the
appellants have no right to claim the consideration agreed
to be paid to them. If, because. of the loss of the chassis
and the “bus body” constructed by the appellants, the
appellants are unable to deliver the vehicle, the liability
to indemnify the State for loss of the chassis arises by
express terms of the contract and their claim for recovery
of the value of the materials used or the consideration
agreed to be paid would fail, because they have failed to
carry out their part of the contract.
It is unnecessary to refer to “he large number of
authorities to which our attention was invited by counsel
The question must be decided on a true interpretation of the
terms of the contract in the light of surrounding
circumstances. If, on a review of all
799
the terms of the contract, it appears that the intention of
the parties was that the appellants were to sell “bus
bodies” to the State of Orissa the contract would clearly be
one for sale and consideration paid would be taxable under
the Orissa Sales Tax Act. If, however, the contract is one
for securing a certain result namely the building of a body
on the chassis supplied by the State with the materials
belonging to the appellants, the contract would. be one for
work done and not liable to sales tax.
In my view the present contract is one for work and not a
contract for sale, because the contract is not that the
parties agreed that the “bus body” constructed by the
appellants shall be sold to the State of Orissa. The
contract is one in which the appellants agreed to construct
“bus bodies” on the chasis supplied to them as bailees and
such a contract being one for work, the consideration paid
is not taxable under the Orissa Sales Tax Act.
In my view, therefore, the appeal should be allowed.
ORDER BY COURT
In accordance with the opinion of the majority, these
appeals are dismissed with costs. One hearing fee.
800