Commr. of Commercial Taxes v. Hindustan Aeronautics Ltd.(1972) 1 SCC 395 : AIR 1972 SC 744

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S. M. SIKRI, C. J. – In this appeal by certificate granted by the High Court of Mysore the only
question involved is whether the delivery by the respondent -Hindustan Aeronautics Ltd. (the
assessee) to the Railway Board of railway coaches model 407,408 and 411 is liable to sales-tax
under the Central Sales Tax Act.

2. The Commercial Tax Officer, by assessment order, dated March 28, 1964, in respect of the
   assessment year 1958-59, included the turnover in respect of the supply of these coaches. The
   Sales Tax Officer rejected the contention of the assessee that there was no sale involved in the
   execution of the works-contract.
3. In appeal, the Deputy Commissioner of Commercial Taxes confirmed the order. In revision
   the Commissioner of Commercial Taxes also came to the same conclusion. He, therefore,
   confirmed the appellate order of the Deputy Commissioner.
4. The assessee then took an appeal to the High Court of Mysore under Section 24(1) of the
   Mysore Sales Tax Act, read with Section 9(3) of the Central Sales Tax Act. The High Court was
   not satisfied with the material on record and directed that a report be sent on three points, viz:
   “(i) Whether and if so to what extent the assessee has drawn advance payment
   from the Railway Board in respect of the material utilised for completing the contracts in
   question;
   (ii) Whether any material, in respect of which no advance have been drawn, has
   been utilised by the assessee for completing the contracts; and
   (iii) Whether the assessee has used for completing the contracts any material not
   specifically procured for the purposes of completing the contracts.”
5. The Commercial Tax Officer submitted his report, and certain extracts may be reproduced
   below:
   “My findings revealed that as and when they purchased materials, they sent to the
   Railway Board “an invoice” accompanied by a list of the details regarding the materials
   purchased. 90 per cent. of the value of these materials was then paid to the company after
   inspection of the materials by the Board’s representative.
   Invoice No. 31009 of October 15, 1956, is obtained as a sample. This invoice shows
   that materials for the value of Rs 2,60,374-12-0 were purchased by the company for 407
   model coaches. The details of the materials are given in list attached to the invoice. The
   invoice and the list were sent to the Board with a covering letter, dated October 15, 1956,
   asking payment of Rs 2,34,517-4-0 being 90 per cent of the invoice amount. The amount

of this invoice is included in the Board’s remittance note No. 1290 of October 30, 1956,
and a cheque was issued to the company for the total of several such invoices. The
amount of the cheque received on October 30, 1956, was Rs 22,90,719-0-0.”
He concluded:
“(1) It is not possible to specify the exact amount received from the Board as
advance payments. It is said that the construction was spread out more than one year and
a running account was maintained showing the debits and credits for this coaches.
(2) It is said that no materials, for which advance was not drawn, was utilised for
building the coaches.
(3) It is not possible to find out whether any materials not specifically procured for
the construction of coaches were used. But it is said that there is no possibility of any
other materials being used for this construction. The constructions are said to be done at
particular shed which is separately located. No other work is undertaken in this section.
All the materials procured for construction of coaches are said to be kept separately in
this section alone. Materials not connected with this work are not mixed up with the
materials in this section. Separate stock registers are maintained for this section. Receipts
and issues of materials for the constructions of coaches are being accounted for in this
register under code numbers.”

6. The High Court allowed the appeal and set aside the order including the turnover relating
   to the construction of railway coaches, models 407, 408 and 411. Facts found by the High Court
   and as they appear to us are as follows.
7. On February 3, 1955, the Ministry of Railways wrote to the Hindustan Aircraft Ltd.
   regarding the coaching programme 1955-56.
8. After discussions and settlement of terms between officers of the Government of India and
   of the assessee, the Railway Board placed orders with the assessee. The terms agreed between the
   parties are found stated in a litter of the Government of India, Ministry of Railways (Railway
   Board) No. 57/142/RE(163), dated May 4, 1957. This relates to the first of the models 407.
9. There is an indemnity bond in respect of this contract.
10. On these facts we have to decide whether there has been any sale of the coaches within
    the meaning of the Central Sales Tax Act. We were referred to a number of cases of this Court
    and the High Courts, but it seems to us that the answer must depend upon the terms of the
    contract. The answer to the question whether it is a works contract or it is a contract of sale
    depends, upon the construction of the terms of the contract in the light of the surrounding
    circumstances. In this case the salient features of the contract are as follows:
    (1) The Railway books capacity of the assessee for the purpose of construction of
    railway coaches.

(2) Advance on account is made to the extent of 90% of the value of the material on
the production of a certificate by the inspecting authority.
(3) The material used for the construction of coaches before its use is the property of
the Railway. This is quite clear from para 1 of the Idemnity Bond set out above. No other
meaning can be given to the words in the bond to the effect that “the Hindustan Aircraft
Ltd. hereby undertake to hold at their works at Bangalore for and on behalf of the
President of the Union of India and as his property in trust for him the Stores and articles
in respect of which advances are made to them”.
It seems to us clear that the property in the materials which are used for the
construction of the coaches becomes the property of the President before it is used.
(4) It seems that there is no possibility of any other material being used for the
construction as is borne out from the report written by the Commercial Tax Officer.
(5) As far as the coaches of models 407 and 408 are concerned, the wheelsets and
underframes are supplied free of cost.
(6) In the order the words used are “manufacture and supply of the following
coaches”.
(7)The material and wage escalator and adjustments which are mentioned in the
contract are natural factors.

13. On these facts it seems to us that it is a pure works contract. We are unable to agree that
    when all the material used in the construction of a coach belongs to the Railways there can be any
    sale of the coach itself. The difference between the price of a coach and the cost of material can
    only be the cost of services rendered by the assessee. If it is necessary to refer to a case which is
    close to the facts of this case, then this case is more in line with the decision of this Court in State
    of Gujarat v. Kailash Engineering Co. [19 STC 13] than any other case.
14. The only difference as far as coach model No. 411 is concerned is that in that case the
    wheelsets and underframes are not supplied free of cost but otherwise there is no essential
    difference in the terMs This does not make any difference to the result.
15. In the result the appeal fails and is dismissed with costs.