IMPORTANT POINTS
1. Transfer of property of goods for a price is the linchpin of the definition of sale. Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. It is the substance of the contract document/s and not merely the form, which has to be looked into.
2. Transaction involved in manufacture and supply of ships by Hindustan Shipyards under orders placed by customers amounted to sale as defined in clause (a) of Section 2 of the Andhra Pradesh General Sales Tax Act, since the contract was for sale of completely manufactured ship to be delivered after successful trials in all respect and to the satisfaction of customers and till then property belonged to Builder.

Headnote:Andhra Pradesh General Sales Tax Act, 1957-Section 2(n)/2(t)-Sale/works contract-Determination of-Manufacture and Supply of Ships to customers-Appellant assessee engaged in activity of building ship s for different ship owners under orders placed by them-Contract for sale of completing manufactured ship to be delivered after successful trials in all respects and to satisfaction of buyer-Plans and specification provided by customer-Work progressed under supervision of customer-Components used in building ship all belonged to appellant builder-Payment in phased manner at stages depending upon development of progress in building ship-Property passed from seller to buyer only on ship having been built fully and delivered to buyer-Property in vessel started passing gradually to buyer proportionately with percentage of payments made and passed fully with payment of last instalment on delivery of vessel being accepted-Damage or loss occasioned to vessel before delivery was to be suffered by builder-Contract involved sale of ship within meaning of clause (n) to Section 2 and not merely works contract-Principles for determining whether a contract is for sale or works contract explained
       The distinction between a contract of sale and a works contract is not free from difficulty and has been subject matter of several judicial decisions. No straight-jacket formula can be made available nor can such quick-witted tests devised as would be infallible. It is all a question of determining the intention of the parties by culling out the same on an overall reading of the several terms and conditions of a contract. The principles deducible from the several decided cases may be summed up as under :-
        1. It is difficult to lay down any rule or inflexible rule applicable alike to all transactions so as to distinguish between a contract for sale and a contract for work and labour.
        2. Transfer of property of goods for a price is the linchpin of the definition of sale. Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. It is the substance of the contract document/s and not merely the form, which has to be looked into. The Court may form an opinion that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and mateials are incidentally used in execution of such work then the contract is one for work and labour.
        3. If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. If A may transfer property for a price in a thing in which B had no previous property then the contract is a contract for sale. On the other hand 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.
        (4) The bulk of material used in construction belongs to the manufacturer who sells the end product for a price, then it is a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not one for work and labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee which have to be weighed. If the major component of the end product is the material consumed in producing the chattel to be delivered and the skill and labour are employed for converting the main components into the end products, the skill and labour are only incidentally used and hence the delivery of the end product by the seller to the buyer would constitute a sale. On the other hand if the main object of the contract is to avail the skill and labour of the seller though some material or components may be incidentally used during the process of the end product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour. (Paras 6 & 14)
       There may be three categories of contracts: (1) The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (ii) It may be a contact for work in which the use of the materials is accessory or incidental to the execution of the work; and (iii) It may be a contract for supply of goods where some work is required to be done as incidental to the sale. The first contract is a composite contract consisting of two contracts one of which is for the sale of goods and the other is for work and labour. The second is clearly a contract for work and labour not involving sale of goods. The third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale. Two simple illustrations may be given to demonstrate applicability of the above-said principles. A customer goes to a tailoring shop accompanied by a suit length in his hands and entrusts the same to the tailor for stitching a suit for him as per his measurements. The tailor by devoting his skill and labour stitches the suit and delivers the same to the customer. In this process the tailor utilises lining, buttons and threads of his own. The transaction would remain a contract for work and labour. The stitched suit delivered by the tailor to the customer is not a sale. It would not make any difference if the customer would have selected a piece of cloth of his own choice for a price to be paid or paid and having purchased the suit length left it with the tailor for being stitched into a suit. The property in the suit length had passed to the customer and physical possession over the suit length by the tailor thereafter was merely that of a bailee entrusted with the suit length. However, if the tailor promises to stitch and deliver the suit for a price agreed upon, investing his own cloth and stitching materials such as lining, buttons and threads, and utilising his own skill and labour then though the customer might have chosen the piece of cloth as per his own liking as to the texture, colour and quality and given his own instructions in the matter of style, the transaction would remain a contract for sale of goods, that is, a stitched suit piece in as much as the object of the contract was to transfer property in the stitched suit piece alongwith delivery of the suit by the tailor to the customer, all investments, whether of material or of skill and labour having been made by the tailor incidental to the fulfillment of the contract. Yet another illustration is provided by Benjamin (ibid, para 1.046). A doctor or veterinary surgeon who supplies medicines does so as an incident to a contract for professional services, which include diagnosis and advice over and above any work in the making up of the medicine. In contrast, a chemist who makes up a prescription sells it, since his work and skill goes entirely into the product-it is simply a component reflected in the price of the goods. Benjamin concludes - "Where work or skill is involved over and above what goes into the making of the goods delivered, it is possible and often correct to view the contract as substantially one for work or services." In our opinion a reverse case would be one of sale. Benjamin gives yet another illustration. A meal supplied to a customer in a restaurant is a sale of goods, the element of service being subsidiary; but a meal supplied to a lodger or a resident hotel guest is part of a contract for services. (Paras 15 & 16)
       In the instant case the contract is for sale of a completely manufactured ship to be delivered after successful trials in all respects and to the satisfaction of the buyer. It is a contract for sale of made of order goods, that is, ship for an ascertained price. Although the plans and specifications for the ship are to be provided by the customer and the work has to progress under the supervision of the classification surveyor and representative of the buyer, but the components used in building ship, all belong to the appellant. The price fixed is of the vessel completely built up although the payment is in a phased manner or, in other words, at certain percentages commensurate with the progress of the work. The payment of 15 of the price is to be made on satisfactory completion of the dock trials, that is when the vessel is ready to be delivered and strictly speaking excepting the delivery nothing substantial remains to be done. 20 of the price is to be paid upon delivery of the vessel. Thus 65 of the price paid before the trials is intended to finance the builder and to share a part of the burden involved in the investments made by the builder towards building the ship. It is a sort of an advance payment of price. The title and risk clause quoted as sub-para 14 above is to be found in 6 out of 8 contracts in question. So far as these 6 contracts are concerned they leave no manner of doubt that property in goods passes from seller to the buyer only on the ship having been built fully and delivered to the buyer. In all the contracts the ultimate conclusion would remain the same. The ship at the time of delivery has to be a completely built up ship and also seaworthy whereupon only the owner may accept the delivery. A full reading of the contract shows that the chattel comes into existence as a chattel in a deliverable state by investment of components and labour by the seller and property in chattel passes to the buyer on delivery of chattel being accepted by the buyer. Article 15 apparently speaks of property in vessel passing to the buyer with the payment of first instalment of price but we are not to be guided by the face value of the language employed; we have to ascertain intention of the parties. The property in machines, equipments, engine etc. purchased by the seller is not agreed upon to pass to the buyer. The delivery of the ship must be preceded by trial run or runs to the satisfaction of the owner. All the machinery, materials, equipment, appurtenances, spare-parts and outfit required for the construction of the vessel are to be purchased by the builder out of its own funds. Neither any of the said things nor the hull is provided by the owner and in none of these the property vests in the owner. It is not a case where the builder is utilising in building the ship, the machinery, equipment, spares and material etc. belonging to the owner, whosoever might have paid for the same. The builder has thereafter to exert and invest its own skill and labour to build the ship. Not only the owner does not supply or make available any of the said things or the hull of the ship the owner does not also pay for any of the said things or the hull separately. All the things so made available by the builder are fastened to the hull belonging to the builder and become part of it so as to make a vessel. What the owner pays to the builder in instalments and in a phased manner are all payments at the specified percentage which go towards the payment of the contract price i.e. the price appointed for the vessel as a whole. 65 per cent payment of the price is up to the stage of the main engine having been lowered in position on board the vessel i.e. the stage by which the building of the vessel is complete. 15 per cent payment is to be done on satisfactory completion of the trial and 20 per cent upon delivery of the vessel. Giving maximum benefit in the matter of construction and interpretation of this clause in favour of the appellant it can be said that it is the property in vessel which starts passing gradually to the buyer proportionately with the percentage of payments made and passes fully with the payment of last instalment on delivery of vessel having been accepted. The payments made by buyer are not towards any components but towards the vessel which is yet to come in existence. The built up vessel, if the contract may fail, is available to be sold to some one else by the seller. The comparative importance is more of the hull, machine, equipments, engine, etc. then that of the labour. Present one is not a case where the materials used are insignificant or secondary or have been used just incidental to the skill and labour bestowed. If the builder may commit a default in fulfilling his obligations under the contract the owner may take possession of the vessel in the State in which she is and have the remaining building of the vessel completed elsewhere out of the price remaining unpaid and the deficiency, if any, shall be made good by the builder. Vide Article 17, the insurance cover is to be obtained by the builder, the policy or policies being taken out in the joint names of the builder and the owner. What is pertinent to note is that the loss or damage, if any, occasioned to the vessel before delivery to the owner is to be suffered by the builder which would not have been so if the property in the vessel had already stood passed to the owner. It is the obligation of the builder to make the loss or destruction good for which purpose the builder may reimburse itself by claim under the policy. In the event of destruction of the vessel the loss though responsibility of the builder may be partly or fully satisfied to the owner by refunding the amount of the instalments of the contract price plus interest at the rate of 5 per cent per annum for which purpose the builder has to make necessary endorsements on the policy and the owner may directly receive payments from the insurer. This clause also shows that interest of the owner is only to the extent of the percentage of the contract price paid by the owner to the builder. Else the loss has to be borne by the builder. The High Court has observed, and in our opinion rightly, that Article 15 is a piece of artistic drafting. Though it is said that the things mentioned therein become the property of the owner simultaneously with the first payment of the instalment, other clauses of the contract generally, and Articles 16 and 17 immediately, go to show that for all practical purposes the property in the vessel, continues to remain with the builder and passes to the owner only (i) on satisfactory completion of the work, (ii) the vessel coming into existence in a deliverable state, and (iii) satisfaction of the owner as to the vessel being seaworthy also having been built up to the satisfaction of the owner in accordance with the terms and conditions of the contract. It is not the meaning of an individual recital or the inference flowing from any term or condition of the contract read in isolation but an overview of the contract wherefrom the nature of the transaction covered thereby has to be determined. Therefore the contracts in question involve sale of the respective vessels within the meaning of clause (n) of the Andhra Pradesh General Sales Tax Act, 1957 and are not merely works contract as defined in clause (t) thereof. (Paras 22, 24, 26 & 28)

JUDGMENT

R.C. Lahoti, J.-The question arising for decision in these appeals is whether the transactions involved in manufacture and supply of ships by the appellant to its customers are a sale as defined in clause (n) of Section 2 of the Andhra Pradesh General Sales Tax Act, 1957 (hereinafter the Act , for short) as held by the High Court or a works contract as defined in clause (t) of Section 2 of the Act and hence not exigible to sales-tax as contended by the assessee-appellant.

2. M/s. Hindustan Shipyard Limited, the appellant before us, is a public sector undertaking. It is engaged in the activity of building ships for different ship owners under the orders placed by them and as evidenced by the contracts entered into between them.

3. The facts in brief. Between the assessment years 1974-75 and 1983-84 (both years inclusive) there were 18 ships involved and formed subject matter of different assessments. The Assessing Authority and the Commissioner (Appeals) held all the transactions in question as transactions of sale liable to payment of sales-tax by the appellant. Several tax appeals preferred by the appellant were disposed of by the Sales Tax, Appellate Tribunal, Andhra Pradesh, Hyderabad by a common order dated 19th July, 1989. It appears that earlier also transactions regading building of ships by this very assessee have been a subject of controversy travelling upto the High Court of Andhra Pradesh and disposed of by a Division Bench by its order dated 17th January, 1969 reported as Hindustan Shipyard Limited, Visakhapatnam v. The Commercial Tax Officer, Visakhapatnam1. The High Court having examined several clauses of the contract dated 12.4.1965 entered into between the appellant and its customers concluded that the building of the ships under the contract under scrutiny was works contract and not sale. This decision was heavily relied on by the appellant before the Tribunal. The Tribunal has analysed the terms and conditions of all the contracts forming subject matter of appeals before it and thereafter divided the contracts into two groups. The Tribunal noticed that the contracts relating to 10 ships before it incorporated recitals identical or similar to the contract dated 12.4.1965 involved before the High Court in 1970(1) Andhra Weekly Reporter 197. As to such contracts the Tribunal held that it was bound to follow the Division Bench decision of the High Court more so when the Department had not pursued its challenge to the correctness of the findings of fact and the principles laid down therein by approaching the Supreme Court. Such contracts were held to be works contract following the abovesaid decision. This time also the Department has not pursued the matter further. Therefore as to the transactions involving 10 ships the order of the Tribunal has become final.

4. The Tribunal has then noted in its impugned order that after the decision of the High Court dated 27th January, 1969 there was a decision of a three-Judges Bench of the Supreme Court delivered on 6th April 1977 reported as Union of India v. The Central India Machinery Manufacturing Co. Ltd. (CIMMCO) & Ors.2, wherein the relevant law was dealt with and the tests for determining the distinction between a contract of sale and a works contract were laid down. The decision in CIMMCO s case was followed by the High Court of Andhra Pradesh in P.S. & Co. v. State of Andhra Pradesh3 dealing with exigibility to Sales-tax of a transaction involved in construction and supply of harbour ferry. Having followed the law laid down by the Supreme Court in the case of CIMMCO and several other decisions and having also considered the earlier Division Bench decision of the High Court of Andhra Pradesh in the case of this assessee, the Division Bench held in P.S. & Co. s case the transaction before it to be a sale and not merely a contract for work and labour. This being the latest decision of the jurisdictional High Court placed before the Tribunal, for the transac

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2000 Supreme(SC) 1124

Cases Referred (8)