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TMI Blog1965 (1) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 Schedule 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 (Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 be Governor on or before the dates specified in the agreement. By clause 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 Schedule "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 clause 4 it is provided that the appellants shall guarantee the durabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecuted 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, unskilful 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 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 taken every of the undefined vehicles. It is clear from the terms of clause 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions for supply of additional equipment such as wind screen wipers, locking arrangements, boxes for first aid equipment and complaint book. It is not, however, 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 else- where 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 clauses 3, 4, 5, 6, 7, 8 and 9 of the specifications. Again the right which is conferred by clause 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 bearings. The parties may contract that on the chassis supplied by the State a body shall be built. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 clause I 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 section 151 of the Contract Act: see section 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 the large number of authorities t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate 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, following its decision in Commissioner of Sales Tax, Orissa v. Patnaik & Co. S.J.C. No. 77 of 1959-Judgment delivered by the Orissa High Court on July 26, 1961., 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sup- plied to them and shall indemnify the Governor for any loss or damage to the said material. (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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises 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 II 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 upto 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, box for first aid equipment, etc. Then, lookin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 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 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 chattel is Anglo-Egyptian Navigation Co. v. Rennie [1875] L.R. 10 C.P. 271., 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Dunkerley's case [1959] S.C.R. 379; 9 S.T.C. 353., at pages 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 passes. In a building contract, the agreement between the parties is that the contractor should construct a building according to the specifications contained in the agreement, and in consideration therefor receive payment as provided therein, and as will presently be shown there is in such an agreement neither a con- tract to sell the materials u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i 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 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. 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 con- tract would not become a contract for work and labour. We may now notice some of the Indian cases in which a similar point arose. In Commissioner of Sales Tax, U.P. v. Haji Abdul Majid [1963] 14 S.T.C. 435., the Allahabad High Court arrived at the conclusion that in the circum- stances 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 a page 443 that "s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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