TMI Blog2000 (7) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 July 19, 1989. It appears that earlier also transactions regarding building of ships by this very assessee have been a subject of controversy travelling up to the High Court of Andhra Pradesh and disposed of by a division Bench by its order dated January 27, 1969, reported as Hindustan Shipyard Limited v. Commercial Tax Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re it to be a sale and not merely a contract for work and labour. This being the latest decision of the jurisdiction of High Court placed before the Tribunal, for the transactions relating to remaining 8 ships before it, the Tribunal applied the ratio of P.S. Co.'s case [1984] 56 STC 283 (AP), and held the transactions to be those of sales liable to sales tax and dismissed appeals filed by the appellant. The appellant, feeling aggrieved by the decision of the Tribunal to the extent to which the transactions were held to be sales, filed tax revision cases before the High Court. The decision in Hindustan Shipyard Ltd. v. Commercial Tax Officer [1970] 1 An. WR 197 was once again heavily relied on by the appellant before the High Court. The High Court examined the contention of the appellant, scrutinised the terms and conditions of the contracts entered into by the appellant with the several ship owners and then held that the relevant terms and clauses led to an irresistible inference of sales having taken place and such a situation was governed by the division Bench decision in P.S. Co.'s case [1984] 56 STC 283 (AP). Accordingly, the revisions filed by the appellant have been dism ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these several contracts are more or less similar to each other though not the same and it will suffice if the terms and conditions of one contract, viz., the one entered into between the appellant and the Great Eastern Shipping Co. Ltd. dated February 3, 1971, are taken into consideration. This contract relates to construction of four motor vessels of "Jag Darshan" type. The relevant recitals and terms and conditions of the contract are summarised and wherever necessary reproduced, as under: (1) The appellant is called the "builder" and the customer, the Great Eastern Shipping Co. Ltd., is called the "owner". (2) The preamble to the contract speaks of the builder having agreed to build, launch, fit, equip, test and complete in all respects four vessels at its shipyard and after completion and successful trials in all respects deliver them alongside safe berth at Visakhapatnam from which supplies could be conveniently loaded and the crew embarked and the owner having agreed to accept delivery from the builder of the said four vessels upon the terms and conditions hereinafter set forth. (3) The vessels shall have builder's hull numbers 171002-3-4-7 respectively and shall be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried out by the builder subject to mutual agreement arrived at in writing between the owner and the builder regarding additional debits and credits involved. (10) Before the vessel being delivered there shall be trial runs intimation whereof shall be given by thirty working days advance notice in writing and all expenses in connection with the trial runs of the vessel are to be borne by the builder. Prior to the trial runs the vessel shall be dry-docked and the bottom shall be painted as per the specifications. Dry-docking and painting shall be at the expenses of the builder. The required quantity of the fuel oil, lubricating oils and greases shall be provided by the owner but paid for by the builder. (11) Clause 5 of article 6 provides method of acceptance or rejection as under: "If after successfully completed technical trial test procedures according to the specifications no legitimate complaints are made concerning the completion or correct functioning of the vessel according to this contract, the drawings and specifications, the owner shall accept the vessel and confirm the acceptance in writing." (12) If any defects become evident they shall be made good by the builde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work proceeds, become the property of the owner and such property shall be conspicuously marked with the hull number or with other appropriate markings for identification, as belonging to vessel/owner as its property and shall not be within the ownership or disposition of the builder. Until the vessel is completed and delivered, the builder shall not use or permit to be used any such part/s material/s, equipment and machinery so allocated to the vessel for any other vessel. The owner to the extent of payment made by him will have a right to mortgage his interest in materials mentioned above to Indian Government, lender and/or Shipping Development Fund Committee for loans taken by owner and formalities as required by lender/owner shall be completed by the builder. But the builder at all times shall have a lien on the abovementioned property for any unpaid portion of the price. All materials and other things appropriated, but not used for the purpose of this contract, shall after completion of the vessel, become the property of the builder." (18) Vide article 16, in the event of the builder defaulting in the construction of the vessel, the owner may at his option and after due n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the owner to the builder out of monies payable by the underwriters under the insurance effected with them in terms of this contract. Every amount of the instalment, shall be endorsed on the policy/ policies and such endorsement shall be sufficient authority to the underwriters, to pay to the owner the amount of such instalments plus interest. On payment of such instalments by the underwriters to the owner, the owner shall have no further right or claim on the builder in respect of this contract and the contract in respect of the particular vessel or vessels shall be deemed to have ended in all respects. The remaining amounts received from the underwriters shall be retained by the builder. The decision of the underwriters as to whether the vessel is a total or constructive, arranged or compromised total loss shall be binding upon the parties to this agreement. Even if the recovery of the claim for loss, damage or destruction of the ship cannot be made from the insurers in terms of insurance policies either because the risks are not insured or for any reason whatsoever the builder shall refund to the owner the amounts of instalments paid by the owner together with interest at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te elements in the bargain; but it breaks down in the case where all the work goes into the making of the goods to be supplied, so that the two are inseparable. This point has unfortunately not been appreciated. In the former type of contract, the determination of 'the substance' is a matter of degree, involving an assessment of the relative importance of the two elements; but in the latter type the designation of the contract as one of work or sale must depend upon either an arbitrary formula or a superficial impression." 10.. The same learned author discusses the following types of contracts: "1. Chattel to be affixed to land or another chattel.- Where work is to be done on the land of the employer or on a chattel belonging to him, which involves the use or affixing of materials belonging to the person employed, the contract will ordinarily be one for work and materials, the property in the latter passing to the employer by accession and not under any contract of sale. 2.. Materials supplied wholly or principally by employer.- Where an article is to be manufactured, and all the materials are supplied by the person for whom the work is to be done, it is obvious that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after noted by way of illustrations several decided cases to notice how the principles has played with several courts in its actual application and then drawn the following deduction from the decided cases: "It will be observed that in the cases where there is no sale there is never a moment when the thing produced is as a whole the maker's absolute property, notwithstanding that part, or even the whole, of the materials may have been his property, whereas in the other case he might, if he found it possible and profitable, and if not restrained by patent, copyright or any other similar branch of laws, make in duplicate or in greater numbers chattels of the kind ordered, appropriate one at his will to fulfil the special contract, and sell the others to other person(s)". 13.. A number of authorities were cited at the Bar during the course of hearing. It would suffice for our purpose to notice only a few of them, namely, Patnaik and Company v. State of Orissa [1965] 16 STC 364 (SC), State of Gujarat v. Kailash Engineering Co. (Pvt.) Ltd. [1967] 19 STC 13 (SC), State of Gujarat [Commissioner of Sales Tax, Ahmedabad] v. Variety Body Builders [1976] 38 STC 176 (SC), Union of India v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umed 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. 15.. There may be three categories of contracts: (i) 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 contract for work in which the use of the materials is ancillary 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 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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. 17.. Patnaik Co.'s case [1965] 16 STC 364 (SC), is a Constitution Bench decision. The appellant entered into a contract with the State of Orissa for the construction of bus bodies on the chassis supplied by the State. On an interpretation of the terms of the contract this Court by a majority of 4: 1 concluded that the bus body built by the appellant passed to the Government as movable. It did not make any difference that the process of manufacture was supervised by purchaser. The contract was held to be a contract for sale of goods. 18.. In Sentinel Rolling Shutters Engineering Company's case [1978] 42 STC 409 (SC), the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by HAL on behalf of the Government of India. The materials imported by HAL, stocks and stores, work-in-progress, etc., were the property of the Air Force. The bills drawn by HAL against the Government of India indicated a break-up of the material cost, labour cost and sundry direct charges and further profit at a percentage. This Court held that at no point of time before the delivery of MIG engines HAL was the owner of the property, either in the equipment or in the spares or in the aircrafts and as such there could not have been any transfer of property from HAL to the Government of India. The transaction was held to be a works contract. 22.. Reverting back to the facts of the contract under consideration before us, a few prominent features of the transaction are clearly deducible from the several terms and conditions and recitals of the contract. 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 to order goods, that is, ship for an ascertained price. Although the plans and specifications for the ship are to be provided by the customer a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the phraseology employed in drafting these clauses. Article 15 provides the property in the vessel vesting in the owner simultaneously with the payment of the first instalment and the ownership or disposition of the builder ceasing therewith. The owner also becomes entitled to mortgage his interest in the vessel to the extent of the payments made by him. However, the same clause goes on to say that such passing of the property is subject to article 17 of the contract and also subject to the lien of the builder for the unpaid portion of the price. 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
