GULATI, J. - (1.) AT the instance of the Commissioner of Sales Tax, Uttar Pradesh, the Additional Revising Authority, Sales tax, Varanasi Range, Varanasi, has submitted this reference under section 11(3) of the U.P. Sales Tax Act for the opinion of this court on the following question of law : "Whether upon the facts and in the circumstances of the case, the disputed item was a pure works contract and, therefore, non-taxable; or whether it amounted to supply and sale of railway coaches by the assessee to the railway authorities and, therefore, taxable ?"
(2.) THE assessee, M/s. Noorullah Ghazanffurullah is a firm of contractors which carries on business at Allahabad. In the assessment year 1958-59, the assessee executed a contract of building railway coaches for the North Eastern Railway on the underframes supplied by the railway. The coaches were to be built according to the specifications and drawings annexed to the agreement on a siding within the railway yard for which the assessee had to pay a nominal rent of Re. 1 per month. The assessee was required to build altogether 14 coaches - eight first-third class coaches and 6 janata tourist cars. The assessee was to receive payment at the rate of Rs. 62,300 for each first-third class coach plus a sum of Rs. 800 for fixing dynamo, suspension, gear etc., and Rs. 57,900 for each C.T.T. coach plus Rs. 800 for fixing dynamo, suspension, gear etc. This was inclusive of the cost of all materials and labour charges for building, furnishing, finishing and polishing. The contract was to be completed within a stipulated time. In the assessment year in question, the assessee received a total payment of Rs. 5,87,265 upon which the Sales Tax Officer levied sales tax at the rate of 3 pies per rupee rejecting the assessee's plea that no sales tax was payable as the payment pertained to a contract of work and labour not involving any sale of goods. The assessee appealed to the Judge (Appeals) but did not succeed. The appellate authority also held the amount in question to be liable to sales tax. The assessee then applied in revision to the Judge (Revisions) who accepted the assessee's plea and held that the contract executed by the assessee did not involve sale of goods but was purely a work contract. The revising authority relied upon the decision of this court in M/s. Kays Construction Co. v. The Judge (Appeals) Sales Tax, Allahabad ([1962] 13 S.T.C. 302). That was also a case of a contract of building of railway coaches for the Northern Railway. The revising authority found that the agreements in the two cases were worded identical. In fact the revising authority found that originally it was one contract a part of which was executed by Kays Construction Co. and the other part was executed by the assessee. In Kays Construction Co. ([1962] 13 S.T.C. 302), this court held the contract to be of works relying upon two decisions of the Supreme Court in the State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd. ([1958] 9 S.T.C. 353) and in Carl Still G.m.b.H. v. State of Bihar and Others ([1961] 12 S.T.C. 449). The instant case is completely covered by the decision of this court in M/s. Kays Construction Co. ([1962] 13 S.T.C. 302). But the learned standing counsel contends that the case of M/s. Kays Construction Co. ([1962] 13 S.T.C. 302) is not correctly decided. For this submission, he has relied upon the decision of the Supreme Court in M/s. Patnaik and Co. v. State of Orissa ([1965] 16 S.T.C. 364; A.I.R. 1965 S.C. 1655) and a decision of this court in Commissioner of Sales Tax, U.P. v. Haji Abdul Majid and Sons ([1963] 14 S.T.C. 435) which has been approved by the Supreme Court in the case of M/s. Patnaik and Co. ([1965] 16 S.T.C. 364; A.I.R. 1965 S.C. 1655). In the case of M/s. Patnaik and Co. ([1965] 16 S.T.C. 364; A.I.R. 1965 S.C. 1655), the contract was for building bus bodies on chassis supplied by the Government of Orissa. On a consideration of the terms of the contract, the Supreme Court by a majority of two to one held the contract to be a contract of sale of bus bodies and not a contract of work of service. In that case the Supreme Court observed that the answer to the question must depend on a consideration of the contract and the real intention of the parties, which must be gathered by looking at the contract as a whole. Their Lordships then set out extensively the various terms of the contract and after analysing them, expressed the opinion that the contract was a contract for sale of completed bodies. The main reason behind this conclusion of the Supreme Court is contained in paragraph 18 of the judgment of Sikri, J., who delivered the majority judgment and the same may, with advantage, be reproduced : "The next point to be noticed is that under the contract the property in the bus body does not pass to the Government till the chassis with the bus body is delivered at the destination or destinations to be named by the controller except in the case contemplated in clause 6 of the agreement. That clause provides that if some work is not satisfactorily done and the body builder on receipt of a written order does not dismantle or replace such defective work or material at his own cost within seven days, the controller would be entitled to get the balance of the work done by another agency and recover the difference in cost from the body builder. The controller is entitled for this purpose to take delivery of the unfinished body. But even in this case the property in the unfinished body would not pass to the Government till the unfinished body is seized."
(3.) THE case of Haji Abdul Majid ([1963] 14 S.T.C. 435) is also a case relating to the contract of building bus bodies and there also this court after taking into consideration the terms of the contract to be a contract of sale of bodies. The learned counsel for the assessee, on the other hand, has placed reliance upon a more recent decision of the Supreme Court in State of Gujarat v. Kailash Engineering Co. ([1967] 19 S.T.C. 13; A.I.R. 1967 S.C. 547). That was also a case dealing with the contract of building railway coaches. In that case the Supreme Court after considering a large number of clauses of the contract came to the conclusion that the contract was a work contract involving building, erecting and furnishing of railway coaches on the underframes belonging to the railways. The main consideration which prevailed with their Lordships was that the property in the finished coaches passed to the railway administration automatically without any transfer on the part of the contractor. In fact, their Lordships came to the conclusion that the property in the coaches never vested in the assessee at all and continued to vest in the railway even when the coaches were in the process of manufacture. The case of M/s. Patnaik and Co. ([1965] 16 S.T.C. 364; A.I.R. 1965 S.C. 1655) was distinguished by their Lordships on the ground that in that case the property in the bus bodies remained vested in the assessee at all stages until it passed to the Government after paying the price thereof to the contractor. Whether the contract in the instant case is a contract of works or a contract of sale of goods, would depend upon the intention of the parties to be gathered from the terms of the contract. After having a close took at the contract I am of the opinion that the some is more akin to the contract in the case of Kailash Engineering Co. ([1967] 19 S.T.C. 13; A.I.R. 1967 S.C. 547). To begin with, I might reproduce the preamble of the agreement : "Whereas the contractors have agreed to build for the the North Eastern Railway 8 bogies first and third class coaches and 6 bogies janata tourist cars, in accordance with the specifications and drawings annexed hereto and marked as annexure A on IRS underframes to be supplied by the railways and the railways have agreed to give the work to the contractors on terms and conditions hereinafter mentioned and accepted by both the parties." It is significant to note that the contract of building coaches has been described as work and does not mention or envisage any contract of sale of coaches. The amount payable in respect of each coach as mentioned in clause 3 of the agreement shows that it is a lump sum amount for the entire work involving the cost of material, coast of construction, fittings, erection and polishing etc. There occurs in that clause the following paragraph which, to my mind, is material : "If after the date of submission of the tender, the Central or State Government imposes any sales tax on finished coaches (as distinct from the sales tax on its component parts) the said tax on finished coaches will be the responsibility of the railway. The sales tax actually payable at the time of the tender, i.e. on 18th December, 1956, will be the responsibility of the contractors and the railway will not be responsible to refund it to the contractors.";