1. Supply of machinery to contractors under an agreement where the provider recovers costs in installments and conditionally takes back equipment at residual value — Bihar Sales Act. (Para 2 )
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1960 Supreme(SC) 294
SUPREME COURT OF INDIA
21st November 1960
B.P. SINHA, C.J.I., S.J. IMAM, A.K. SARKAR, K. SUBBA RAO AND J.C. SHAH, JJ.
M/s. Damodar Valley Corporation, Appellants
Versus
the State of Bihar, Respondent.
Civil Appeal No. 285 of 1959.
Advocates Appeared
Mr. M. C. Setalvad, Attorney-General for India (M/s. Kanhaiyaji and S. P. Varma, Advocates, with him), for Appellants; Mr. A. V. Viswanatha Sastri, Sr. Advocate, (M/s. Suresh Aggarwala and D. P. Singh, Advocates, with him), for Respondent.
Advocates:
A.V.VISHWANATHA SASTRI, D.P.Singh, KANHAIYAJI, M.C.SETALVAD, S.P.Varma, SURESH AGARWAL
A.V.VISHWANATHA SASTRI, D.P.Singh, KANHAIYAJI, M.C.SETALVAD, S.P.Varma, SURESH AGARWAL
A transaction is a sale on deferred payments rather than a hire agreement if the hirer has a binding obligation to purchase and no right to return the goods at will, particularly when the hirer is responsible for maintenance and spare parts.
Headnote:(A) Sales Tax Act - Section 2(g) - Definition of "sale" - Distinction between a contract of hire and a contract of sale or hire-purchase - To determine whether an agreement is a contract of mere hiring or a purchase on a system of deferred payments, the court examines whether there is a binding obligation on the hirer to purchase the goods and whether there is a right reserved to the hirer to return the goods at any time during the subsistence of the contract (Para 8).
(B) Appeal - Scope - Where a High Court acts in an advisory capacity on a reference under a taxing statute, the scope of an appeal, even by special leave, cannot be extended beyond the scope of the controversy that could have been legally raised before the High Court (Para 6).
Facts of the case:
An entity provided machinery to contractors for a construction project. The contractors were charged the actual price of the equipment, payable in installments. The equipment remained the property of the entity until the full price was realized. The entity agreed to take over the machinery at its residual value upon completion of the work, subject to conditions regarding the machinery's maintenance and residual life. The contractors were responsible for the upkeep and the procurement of spare parts, and had no unconditional right to return the machinery at will.
Findings of Court:
The transaction was a sale on deferred payments with an option to re-purchase and not a mere contract of hiring.
Issues: Whether the supply of machinery and equipment under the terms of the agreement amounted to a sale within the meaning of the relevant sales tax legislation.
Ratio Decidendi: The court applied two tests: the existence of a binding obligation to purchase and the absence of a right to return the goods at will. Since the contractors were bound to pay a significant portion of the price and had no unconditional right to return the machinery, and were further responsible for maintenance and spares, the transaction constituted a sale rather than a bailment or hire agreement.
Result: Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether the supply of equipment under the agreement constituted a mere contract of hiring or a sale/hire-purchase transaction taxable under the Sales Act. (Para 3 , 8 )
3. The absence of a right to return goods at will and the obligation to pay a substantial portion of the price indicate a sale transaction. (Para 7 , 8 )
4. A contract is a sale on deferred payments rather than hiring if the hirer has no right to return goods and is bound to purchase. (Para 8 )
5. Appeal dismissed; the transaction was held to be a sale within the meaning of the Act. (Para 9 )
6. How does a court distinguish between a contract of mere hiring and a contract of sale or hire-purchase?
The court examines the substance of the agreement using two primary tests: whether there is a binding obligation on the hirer to purchase the goods, and whether the hirer retains a right to return the goods at any time during the subsistence of the contract. (Para 8 )
7. Does a conditional agreement to repurchase equipment at its residual value indicate a hiring contract?
Not necessarily. If the repurchase is conditional upon specific factors—such as the equipment's residual life or being declared surplus—and the user is bound to pay a significant portion of the price, it is consistent with a sale on deferred payments with an option to repurchase. (Para 7 , 8 )
8. What is the legal significance of the obligation to provide spare parts in determining the nature of a transaction?
The requirement for the user to replenish and pay for spare parts is consistent with the passing of title to the user. In a mere hiring contract, the owner typically remains responsible for replacements of worn-out parts and depreciation. (Para 7 , 8 )
Judgment
SINHA, C.J.I. : This appeal, by special leave, is directed against the judgment and order of the High Court of Patna dated July 13, 1956, disposing of a reference under S. 25(1) of the Bihar Sales Act. 1947, which hereinafter will be referred to as the Act, made by the Board of Revenue, Bihar.
2. The facts of this case have never been in dispute and may shortly be stated as follows. The appellant is a Corporation incorporated under the Damodar Valley Corporation (Act XIV of 1948) and will hereinafter be referred to as the Corporation. It is a multipurpose Corporation, one of its objects being the construction of a number of dams in Bihar and Bengal with a view to controlling floods and utilising the stored water for purposes of generation of electricity. One of such dams is the Konar Dam in the district of Hazaribagh in Bihar. For the construction of the aforesaid Dam the Corporation entered into an agreement with M/s. Hind Construction Ltd., and M/s. Patel Engineering Co., Ltd., on May 24, 1950 and appointed them contractors for the aforesaid purpose. They will hereinafter be referred to as the Contractors. As a result of a change in the design of the Dam, it became necessary to enter into a supplementary agreement and on March 10, 1951, cl. 8 of Part II of the original agreement was amended and a fresh cl. 8 was substituted. Under the new cl. 8 of the agreement, as amended, the Corporation agreed to make available to the contractors such equipment as was necessary and suitable for the construction aforesaid. The Contractors are charged the actual price paid by the Corporation for the equipment and machinery thus made available, inclusive of freight and customs duty, if any, as also the cost of transport, but excluding sales tax. The equipment thus supplied by the Corporation to the Contractors was classified into two groups. Group A and Group B, as detailed in Sch. No 2. The machinery in Group A was to be taken over from the Contractors by the Corporation after the completion of the work at their residual value, which was to be calculated in the manner set out in the agreement. The machinery in Group B was to become the property of the Contractors after its full price had been paid by them. No more need be said about the machinery in Group B, because there is no dispute about that group, the Contractors having accepted the position that Group B machinery had been sold to them. The controversy now remaining between the parties relates to the machinery in Group A.
3. On August 12, 1952, the Superintendent of Sales Tax, Hazaribagh, assessed the Corporation under S. 13(5) of the Act for the period April 1950 to March 1952. It is not necessary to set out the details of the tax demand, because the amount is not in controversy. What was contended before the authorities below and in this Court was that the transaction in question did not amount to a sale within the meaning of the Act. The Superintendent rejected the contention raised on behalf of the Corporation that it was not liable to pay the tax in respect of the machinery supplied to the Contractors. The Corporation went up in appeal to the Deputy Commissioner of Sales Tax against the said order of assessment. By his order dated May 5, 1953, the Deputy Commissioner rejected the contention of the appellant as to its liability under the Act, but made certain amendments in the assessment, which are not material to the points in controversy before us. The Deputy Commissioner repelling the Corporation s contentions based on the Act, held inter alia that the supply of equipment in Group A of the agreement aforesaid amounted to a sale and was not a hire; that the condition in the agreement for the taking over of the equipment on conditions laid down in the agreement was in its essence a condition of re-purchase and that the Corporation was a dealer within the meaning of the Act. The Corporation moved the Board of Revenue, Bihar, in its revisional jurisdiction under section 24 of
