Dr. B.P. Saraf, J.
1. By this reference under section 61(1) of the Bombay Sales Tax Act, 1959, made at the instance of the Revenue, the Maharashtra Sales Tax Tribunal has referred the following two questions of law to this Court for opinion :
'(i) Whether, on a proper construction of the agreement as a whole as embodied in the schedule to acceptance of tender dated December 28, 1963 and its general condition and special condition, the Tribunal was correct in law in holding that the transaction of building and supplying 'one twin screw steel motor launch' effected by the respondent to the Director-General of Supplies and Disposals, New Delhi for Rs. 12,10,000 and governed by its bill (copy annexed) is a works contract and not a sale of launch
(ii) If the answer to the aforesaid question is in the affirmative, whether the Tribunal was correct in law in holding that there was no sale of vessel so far as then constructed and materials in preparation, though the Tribunal accepted the respondent's submission that property in vessel as then constructed and property in the materials prepared and set apart for the construction of the launch was transferred from the respondent to the Director-General of Supplies and Disposals, New Delhi, against payments made in instalments under condition No. 22 of the special conditions attached to the agreement ?'
2. The assessee, M/s. Mazgaon Docks Limited, is a company owned by the Government of India. During the period April 1, 1968 to March 31, 1969, it supplied one inshore minesweeper to the Indian Navy at the cost of Rs. 42,50,000 and one twin screw steel motor launch to the Director-General of Supplies and Disposals, New Delhi, at a cost of Rs. 12,10,000. The Sales Tax Officer held these transactions to be transactions of sale of vessels subject to levy of sales tax under the Bombay Sales Tax Act, 1959 ('the Act'). While doing so, the Sales Tax Officer, rejected the claim of the assessee that the above transactions were indivisible works contract not involving sale of goods. Against the above order of the Sales Tax Officer, the assessee appealed to the Assistant Commissioner of Sales Tax, who rejected the contention of the assessee and confirmed the order of the Sales Tax Officer. The assessee went in further appeal to the Tribunal. So far as the supply of inshore minesweeper to Indian Navy is concerned, it was conceded before the Tribunal both by the Revenue and the assessee that no formal contract for supply of the same having been entered into between the parties, the question whether supply of inshore minesweeper to Indian Navy at the cost of Rs. 42,50,000 would amount to works contract or sale of goods would have to be decided after ascertaining the terms of the contract with reference to the draft agreement, relevant correspondence and the minutes of the meetings between the representatives of different ministries of the Government of India and the representatives of the assessee-company. Hence, the Tribunal remanded the controversy in regard to the said supply to the Assistant Commissioner of Sales Tax to enable him to decide the issue afresh. The only controversy that survived before the Tribunal for consideration was whether supply of motor launch 'Kaveretti' to the Director-General of Supplies and Disposals, New Delhi, was a transaction of sale or an indivisible works contract. The Tribunal, on consideration of the terms and conditions of the contract, and the decisions of the Supreme Court and High Courts on the subject, accepted the contention of the assessee that the supply of motor launch by the assessee to the Director-General of Supplies and Disposals, New Delhi, was an indivisible works contract not amounting to sale of goods. Hence, this reference at the instance of the Revenue.
3. Ms. Anklesaria, learned counsel for the Revenue, submitted before us that from the perusal of the terms and conditions of the tender it would be quite clear that the transaction in question is a pure and simple transaction of sale of the motor launch, and not an indivisible works contract. Our attention was drawn to a number of clauses of the contract to show that what was stipulated was supply of motor launch constructed as per specifications of the purchaser, i.e., the Director General of Supplies and Disposals, New Delhi. It was pointed out to us that the contract was for supply of ship and the assessee was to deliver the ship afloat at Bombay harbour. Reliance was placed on the decision of the House of Lords in Reid v. Macbeth & Grey [1904] AC 223, Mc Dougall v. Aeromarine of Emsworth Ltd. [1958] 3 All ER 431 and Sir James Laing Sons Limited v. Barclay, Curie Co. Ltd. [1907] AC 35. It was further submitted that English authorities on interpretation of different sections of English Sale of Goods Act, 1893, deserve full consideration. Reliance was also placed in support of this contention on the decision of the Supreme Court in Consolidated Coffee Ltd. v. Coffee Board reported in : [1980]3SCR625 . Our attention was also drawn to some of the provisions of the Sale of Goods Act, 1930, particularly sections 21, 22 and 24 thereof, and the decisions of the Supreme Court in State of Gujarat v. Kailash Engineering Co. (Pvt.) Ltd. [1967] 19 STC 13, Carl Still G. m. b. H. v. State of Bihar [1961] 12 STC 449(bih), Chandra Bhan Gosain v. Stare of Orissa [1963] 14 STC 766(ori) and a decision of this Court in Mckenzies Limited v. State of Bombay .
4. The above submission of Ms. Anklesaria was vehemently opposed by Mr. R. V. Patel, learned counsel appearing for the assessee. According to him, though the contract was for the construction of ship which was a movable property in its completed form, in substance, it was a contract for work and labour and not a contract for sale of the ship. Reliance was placed by the learned counsel in support of this contention on some of the clauses of the 'terms and conditions of the tender' and on the 'special conditions of the contract' particularly clauses 19, 21 and 22 thereof. Relying on clauses 21 and 22, it was contended that payment was to be made by the Director-General of Supplies and Disposals, New Delhi, for the work done and not for supply of ship, in instalment depending on the various stages of completion of the work. Great stress was laid on clause 22 of the special conditions of the contract, which provides that 'upon payment of the first instalment of the contract price, the vessel so far as then constructed and all machineries and materials either wholly or partially constructed or in preparation and set apart from time (sic) for the purpose of the contract shall become and shall, with all additions thereto, respectively continue to be the property of the purchaser subject to the purposes of the contract, but the purchaser shall not be liable for any loss or damage by the fire, stress of weather or otherwise.'
5. We have carefully considered the above submissions. Before we deal with the rival submissions of the counsel for the parties, we deem it expedient to set out briefly the relevant facts of the case and some of the clauses of the 'terms and conditions of the tender' and 'special conditions of the contract' which have been referred to and relied upon by the counsel for the parties in support of their respective contentions.
The assessee, M/s. Mazgaon Docks Ltd., submitted a tender for building and supplying one twin screw steel motor launch to the Director-General of Supplies and Disposals, for a sum of Rs. 12,10,000. This tender was accepted by the Director-General of Supplies and Disposals. In the schedule of acceptance of the tender, it is stated in clause 6 that the cost of the motor launch would be debatable to the head :
'62-C-A. Capital outlay on shipping and tankers-A-I-Purchases of boats for M&A; Islands ...........'
Clause 11 specifies the place of delivery. It provides :
'Delivery afloat at Bombay harbour.'
Clause 19 contains special instructions. The following system of payment has been set out in sub-clause (a) thereof :
'19. Special instructions -
(a) System of payment -
Stage payments will be made at the following stipulated intervals :
(1) When keel is laid 15%(2) When vessel is framed 15%(3) When hull is welded 15%(4) When launched 20%(5) When vessel is completed andaccepted after final inspectionand/or trial expiry of 25%(6) After expiry of six monthsguarantee period 10% Provided that the contractor gives the purchaser 14 days notice before any payment is likely to become due and the amount of the work done.
On payment of each instalment the portion of the work which has been completed and for which payment has been made shall be at once deemed to be the property of the purchaser but in the event of it being found not to be in proper condition for any reasons at any time, the deficiency shall be made good by the contractor. The decision of the inspector in this respect will be final and conclusive.'
Sub-clause (d) makes it clear that, -
'The price is exclusive of any State sales tax and/or other taxes of a like or similar nature. All such taxes if payable or levied on the selling price will be borne by the purchaser.'
Clause 20 contains the description of the articles ordered, specifications, etc. It reads :
'20. Description of articles ordered : ----------------------------------------------------------------------Item Description of Acc. Quantity Rate per Total CostNo. goods Unit Unit (in figuresand words)----------------------------------------------------------------------No. SR 6/2144-M/I/3200----------------------------------------------------------------------1. Building and supplying No 1 No. 12,10.000 12,10,000one twin screw steelmotor launchLength overall 93'-6'breadth (moulded) 18'-0'depth 10'-0'. Draft loaded5'-0' of all weldedconstruction. The launch willbe fitted with-6 cylinder.M.A.N./KIRLOSKAR marinediesel engines, type was17.5/22 each developing 190B.H.P. at 900 R.P.M. which isnow being manufactured by M/s.KIRLOSKAR Oil Engines Ltd.,Poona as per specification datedNovember 16, 1962, given below anddrawing No. P/368/2 dated November20, 1962.No. SR 6/2144-M/I/3200 dated December 28. 1963.----------------------------------------------------------------------...........'
This description is followed by specifications of the vessel. It is provided in clear terms at the end of the specifications that -
'The vessel should be manufactured as per final specifications agreed and under the supervision of the indenter or his nominee.'
The acceptance of the tender is also subject to the general conditions of contract in form No. D.G.S. & D. 68. In addition to the general conditions, special conditions, applicable to contracts for sea and river-craft, are also applicable to the contract in question. In case of variance between the general conditions and special conditions, the latter has overriding effect. Clause 21 of the special conditions deals with the system of payment. It, however, begins with the expression 'Unless otherwise agreed in writing between the purchaser and the contractor, payment shall be made by .......' In the present case, system of payment has been set out in clause 19 of the schedule of acceptance of tender which has already been set out above. It is therefore not necessary to reproduce clause 21. It is, however, necessary to reproduce clause 22 because much reliance has been placed by the counsel for the assessee on this clause in support of his contention that the contract in question is not a contract of sale but a works contract. It reads as follows :
'22. Ownership of materials on payment of first instalment :
Upon payment of the first instalment of the contract price, the vessel so far as then constructed and all machinery and materials either wholly or partially constructed or in preparation and set apart from time (sic) for the purpose of the contract shall become and shall, with all additions thereto, respectively continue to be the property of the purchaser subject to the purposes of the contract, but the purchaser shall not be liable for any loss or damage by theft, fire, stress of weather or otherwise howsoever. Upon the due completion of contract all such materials which have not been actually used for the purpose of contract shall become the property of and be relinquished to the contractor.'
It may also be expedient to refer to clauses 12 and 20 of the special conditions applicable to contracts governing supplies of sea and river craft which deal with trials by the Inspector and taking over of the vessel. Clause 12 which provides for trial by the Inspector reads as follows :
'Trials by Inspector. - The contractor shall, at his own expense and risk in all respects, within the time within which the vessel is to be completed cause the working of the machinery and the general powers and capabilities of any vessels to be tested in the presence of the Inspector by speed and other trials in the manner provided for in the specification. At the conclusion of these trials the boilers and machinery are to be opened up by and at the expense of the contractor for the purpose of examination as required by the Inspector.
The place and manner of the abovementioned trials are to be approved for by the Inspector. The fuel to be used on such trials together with all stores tools and other articles necessary on such trials shall be supplied by and at the expense of the contractor. Until the requirements have been complied with and until the vessel is certified in writing by the inspector to have been in all respects, constructed, fitted and completed in strict accordance with the said specification and drawings of the contract, and to be capable of performing the work specified, the vessel will not be considered by the purchaser to be fully and perfectly completed as aforesaid.'
Clause 20 provides for taking over of the work. It reads :
'Taking over.- When all performance tests called for by the specification have been successfully carried out and other terms of the contract complied with the work shall be accepted and taken over within one month of its being ready for service and the inspector shall forthwith issue a taking over certificate.
...........'
6. The controversy for our determination is whether on a proper construction of the above terms and conditions, the contract is a contract of sale of vessel or a works contract. The distinction between a contract of sale and a contract for work and labour has been well brought out in the following passage in para 603 of the Halsbury's Laws of England (Fourth Edition), Volume 41 :
'........ A contract of sale is a contract the main object of which is the transfer of the property in, and the delivery of the possession of, a chattel as such to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel as such, the contract is one for work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale. Neither the ownership of the materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining in the circumstances of a particular case whether the contract is in substance one for work and labour or one for the sale of a chattel.'
This passage has been quoted with approval by the Supreme Court in a number of cases.
7. Despite the clear legal position, difficulties do arise in distinguishing between the two types of contracts. As observed by the Supreme Court in Union of India v. Central India Machinery . [1977] 40 STC 246 :
'....... Under section 4 of the Sale of Goods Act, 1930, also, in the definition of the term 'sale' stress is laid on the element of transfer of property in the goods. According to the Roman jurists, also, the purport of a contract of sale is that the seller divests himself of all proprietary right in the thing sold in favour of the buyer. It is this requisite which often distinguishes a contract of sale of goods from a contract for work and services. Even so, the difficulty of distinguishing between these two types of contracts is an age-old one. It was much debated even by the Roman jurists (see Inst. III, 24, 4, and De Zaluete, The Roman Law of Sale, pp. 15, 16). Difficulty has also been felt in England and other common law jurisdictions to the effect of a contract to make a chattel and deliver it when made. Generally, such a contract is one of sale of chattel, but not always. Jurists have differed much and striven much about the test for distinguishing between these two types of contracts. Since each contract presents its own features and imponderables it has not been possible to devise an infallible test of universal application ......'
8. To the same effect are the following observations of the Supreme Court in Sentinel Rolling Shutters & Engineering Company Pvt., Ltd. v. Commissioner of Sales Tax [1978] 42 STC 409 :
'....... the question whether a particular contract is a contract for sale or for work and labour is always a difficult question and it is not surprising to find the taxing authorities divided on it. The difficulty, however, lies not in the formulation of the tests for determining when a contract can be said to be a contract for sale or a contract for work and labour, but in the application of the tests to the facts of the case before the court. The distinction between a contract for sale and a contract for work and labour has been pointed out by this Court in a number of decisions and some tests have also been indicated by this Court, but it is necessary to point out that these tests are not exhaustive and do not lay down any rigid or inflexible rule applicable alike to all transactions. They do not give any magic formula by the application of which we can say in every case whether a contract is a contract for sale or a contract for work and labour. They merely focus on one or the other aspect of the transaction and afford some guidance in determining the question, but basically and primarily, whether a particular contract is one for sale of goods or for work and labour depends upon the main object of the parties gathered from the terms of the contract, the circumstances of the transaction and the custom of the trade.'
9. It is thus clear that there is no standard formula by which one can distinguish a contract of sale from a contract for work and labour. There may be many common features in both types of contracts, some neutral in particular context, and yet certain clinching terms in a given case may fortify a conclusion one way or the other. It will depend upon the facts and circumstances of each case. (See State of Gujarat v. Variety Body Builders : AIR1976SC2108 )
10. The various tests laid down by the courts from time to time, therefore, merely afford guidelines for determining the true nature of the contract. One of the important tests is to find out whether the contract is primarily a contract for supply of materials at a price agreed to between the parties for the materials so supplied and the work or service rendered is incidental to the execution of the contract, if so, the contract is one for sale of materials and the sale proceeds would be exigible to tax. The question whether the contract is for sale of goods or for executing works is largely one of fact, depending upon the terms of the contract, nature of the obligations to be discharged thereunder and the surrounding circumstances. It is the true intention and result of the contract that is decisive. If the intention and result of the contract is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract of sale. In the case of contract of sale, the thing produced as a whole has individual existences the sole property of the party who produced it, some time before delivery, and the property therein passes only under the contract relating there to the other party for price. In other words, to constitute a sale, there must be an agreement express or implied relating to the sale of goods and completion of the agreement by passing of title in the very goods contracted to be sold.
11. Reference may be made in this connection to the decision of the Supreme Court in Patnaik and Company v. State of Orissa [1965] 16 STC 364 (ori). In that case the assessees entered into an agreement with the State of Orissa for the construction of bus bodies on the chassis supplied by the Governor. The agreement provided, inter alia, that the assessees were responsible for the safe custody of the chassis from the date of their receipt from the Governor till their delivery to the Governor and that they had to insure their premises including the chassis against fire, theft, damage and riot at their own cost. The assessees had to construct the bus bodies in the most substantial and workmanlike manner, both as regards materials and otherwise in every respect in strict accordance with the specifications and should deliver the bodies to the Governor on or before the dates specified in the agreement. The assessees had to guarantee the durability of the body for two years from the date of delivery. The agreement also provided that the work should throughout the stipulated period of the contract be carried on with all due diligence, that the assessees were liable to pay to the Governor a certain sum as liquidated damages for every day that the work remained unfinished after the date fixed, that all works under the contract should be open to inspection by the Controller or officers authorised by him in that behalf, that they had the right to stop any work which had been executed badly or with materials of inferior quality and that on receipt of a written order the assessees had to dismantle or replace such defective work or material at their own cost. The assessees were entitled to 50 per cent. of the cost of body-building at the time of delivery and the rest one month thereafter. The question was whether the contract was a contract for work or a contract for sale of goods. The Supreme Court held that the contract as a whole was a contract for sale of goods (bus bodies) and the assessees were liable to pay sales tax on the amount received by them from the State of Orissa for the construction of the said bus bodies.
12. The above decision was followed by the Supreme Court in T. V. Sundram lyengar & Sons v. State of Madras [1975] 35 STC 24(mad). In this case also, the Supreme Court was concerned with the question whether the construction of the bus bodies and the supply of the same by the assessees to their customers was in pursuance of a contract for sale as distinguished from a contract for work and labour. The salient features of the dealings between the assessees and their customers were that the property in the material used by the assessees in constructing the bus bodies never passed to their customers during the course of their construction. It was only when the complete bus with the body fitted to the chassis was delivered to the customer. There was nothing to prevent the assessee from removing a plank, or other material after fixing it to the chassis and using it for a different bus body. The Supreme Court observed :
'........ The present is also not the case wherein the assessee undertakes to construct some building or set up a factory plant wherein the material used can be said to become the property of the other party by invoking the theory of accretion. It is no doubt true that the bus bodies supplied by the assessees were not ready-made and had, if necessary, to be constructed bit by bit and plank by plank, according to specifications, but that fact would not make any material not ready-made and had, if necessary, to be constructed bit by bit and plank by plank, according to specifications, but that fact would not make any material difference ..... ....'
It was accordingly held that the supply of bus bodies by the assessees after fitting them to the chassis supplied by the customers amounted to sale of goods.
13. Similar controversy again came up before the Supreme Court in Union of India v. Central India Machinery . [1977] 40 STC 246. In that case, the assessee-company entered into a contract with the Union of India through the Railway Board for the manufacture and supply of wagons to the railways for a price which was fixed taking the wagon as a unit. The contract was governed by the general conditions of contract in so far as they were not inconsistent with the special conditions attached as an annexure to a letter of the Railway Board. The standard condition regarding payment of the price provided that as soon as a vehicle had been completed the company would get it examined by the Inspecting Officer and submit to the purchaser an 'on account' bill for 90 per cent. of the value of the vehicle and within 14 days of the receipt of such bill together with the certificate of the Inspecting Officer, the purchaser would pay 90 per cent. of the bill, and on such payment, the vehicle would become the property of the purchaser. The balance of 10 per cent. was to be paid after delivery of the vehicle. The special conditions of contract provided, inter alia, that 'on account' payment up to 90 per cent of the value of the 'steel and other materials' procured by the company for the order would be made against such materials on production of a certificate from the officer of the Inspection and Liaison Organisation and on furnishing the necessary indemnity bond to the paying authority. 'On account' payment was not, however, permissible against steel procured by the company from a source other than the floating stock held by the railways, except when an offer to procure it from that source was refused. The company was to be supplied with wheel sets and axle-boxes free of cost f.o.r. against a proper undertaking for their safe custody. The assessee-company was obliged to hold as trustee for Government 'any raw materials for the execution of the contract' procured with the assistance of Government either by issue from Government stock or purchase under arrangement made or permit or licence and to use such materials economically and solely for the purpose of the contract against which they were issued and not to dispose of them without the permission of the Government. One of the clauses in the indemnity bond provided that the company should hold at its works the stores and articles of the railways in respect of which advance might be made to the company. The special conditions also provided that 'on account' payment was part of the 'full contract price' for each completed wagon and that the Government had the pre-emptive right to purchase all surplus or unserviceable materials from the company on its being paid such price as the Government might fix with due regard to the condition of the materials. The clause relating to sales tax provided that if and when State and inter-State sales tax on the stock or order became payable under law such payments would be reimbursed by the Railway Board, but no sales tax on materials including steel or components would be reimbursed by the Railway Board. On a consideration of the terms and conditions of the contract, the High Court took the view that the contract was a contract for the manufacture and sale of wagons to the Union of India by the assessee-company and, as such, sales tax was payable on the transactions. On appeal to the Supreme Court, it was contended for the assessee company that since the raw materials and components used in the manufacture of wagons under the terms of the contract belonged to the Railway Board, the wagons produced had, at the time of its completion and delivery, no individual existence as the sole property of the assessee-company and therefore the contract was a contract for work and labour and not a contract for sale of goods. The Supreme Court did not accept this contention. It was observed that in deciding the question whether the contract was a works contract or a contract for sale of goods the substance of the documents constituting the contract and not merely the form which had to be looked into. The Supreme Court held that the terms and conditions of the contract, read as a whole, indubitably led to the conclusion that the property in the materials procured or purchased by the assessee-company against 90 per cent. value of which advance was taken from the railways, did not before their use in the construction of the wagons pass to the railways. With the exception of a relatively small proportion of the components supplied by the railways, the entire wagon including the material at the time of its completion for delivery was the property of the assessee-company. As the bulk of the materials used in the construction of the wagons belonged to the assessee company, which sold the wagons for a price, the contract was held by the Supreme Court to be a contract for the sale of wagons and not a works contract.
14. We may now apply the principles laid down in the above cases to the facts of the contract in the instant case to determine whether it is a contract of sale of vessel or a contract for work and labour.
15. The description of the article ordered is specified in clause 20 of the schedule of acceptance of tender as 'building and supplying one twin screw steel motor launch'. The quantity ordered is described 'one' and the rate per unit is 'Rs. 12,10,000'. Thus the contract is for supply of one unit of motor launch built as per specifications contained in the contract for a price of Rs. 12,10,000. Evidently, the object of the work undertaken by the assessee is the transfer of the property in, and the delivery of the possession of the motor launch ('vessel') to the Director-General of Supplies and Disposals for a price of Rs. 12,10,000. The place of delivery is Bombay harbour. It is to be delivered afloat at Bombay harbour. The contract has thus all the essential attributes of a contract of sale of a motor launch. The agreement is for sale of motor launch manufactured by the assessee as per specifications contained in the agreement for a price. The property in the said motor launch passed to the purchaser on delivery of same afloat at Bombay harbour. It is, therefore, clear that it is a contract for sale of motor launch and not a works contract.
16. It may be appropriate at this stage to deal with the argument of the counsel for the assessee based on clause 19 of the schedule of acceptance of tender which deals with the system of payment and clause 22 of the special conditions which provides for vesting of ownership of materials in the purchaser on payment of first instalment. It was urged that the effect of payment at stipulated intervals even before the vessel is completed and accepted by the purchaser and the vesting of ownership of materials in the purchaser at the stage of construction of the ship clearly goes to show that it was not a contract for the sale of the ship. To appreciate this contention of the assessee, it may be useful, at the cost of repetition, to extract the relevant portions of the two clauses;
'19. Special instructions :-
(a) System of payment :-
Stage payments will be made at the following stipulated intervals :
(1) When keel is laid 15%(2) When vessel is framed 15%(3) When hull is welded 15%(4) When launched 20%(5) When vessel is completed andaccepted after finalinspection and/or trialexpiry of 25%(6) After expiry of six monthsguarantee period 10% Provided that the contractor gives the purchaser 14 days notice before any payment is likely to become due and the amount of the work done.
On payment of each instalment of the portion of the work which has been completed and for which payment has been made shall be at once deemed to be the property of the purchaser but in the event of it being found not to be in proper condition for any reasons at any time, the deficiency shall be made good by the contractor. The decision of the inspector in this respect will be final and conclusive.
(b) ..............'
'22. Ownership of materials on payment of first instalment :
Upon payment of the first instalment of the contract price, the vessel so far as then constructed and all machinery and materials either wholly or partially constructed or in preparation and set apart from time to time for the purpose of the contract shah become and shall, with all additions thereto, respectively continue to be the property of the purchaser subject to the purposes of the contract, but the purchaser shall not be liable for any loss or damage by theft, fire, stress of weather or otherwise howsoever. Upon the due completion of contract, all such materials which have not been actually used for the purpose of contract shall become the property of and be relinquished to the contractor.'
17. We have given our careful consideration to the above submission. We, however, do not find any merit in the same. It is well-settled that the true nature of the contract cannot depend on the mode of payment of the amount provided in the contract. The payment of the amount due under the contract may be spread over the entire period of the execution of the contract with a view either to put the manufacturer or contractor in possession of the funds for the execution of the contract or to secure him against any risk of non-payment by the customer. That cannot have any bearing on the determination of the question whether the contract is one for sale or for work and labour. [See Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Soles Tax : [1979]1SCR644 ]
18. Equally untenable is the contention of the learned counsel of the assessee that the effect of clause 22 of the special conditions vesting the materials in the purchaser, Director-General of Supplies and Disposals, is that those materials themselves must be taken to have been sold. This clause in our opinion, is merely intended by the parties to form a security. But what is sold is a complete motor launch to be delivered afloat at Bombay harbour. The materials in question could not be regarded as appropriated to the contract or sold under the Sale of Goods Act, 1930.
19. We are supported in our conclusion by the decision of the House of Lords in Reid v. Macbeth & Grey [1904] AC 223. In that case, a firm of ship builders contracted to build a ship for a firm of ship-owners, to be classed 100 Al at Lloyd's and to be constructed under the superintendence of the ship-owners. The contract contained this clause : '(4) The vessel as she is constructed, and all her engines, boilers, and machinery, and all materials from time to time intended for her or them, whether in the building-yard, workshop, river or elsewhere, shall immediately as the same proceeds to become the property of the purchasers, and shall not be within the ownership, control or disposition of the builders, but the builders shall at all times have a lien thereon for their unpaid purchase-money'. Before the ship was completed the ship-builders became bankrupt. At the date of the bankruptcy there were lying at railway stations a quantity of iron and steel plates at the orders of the ship-builders. These plates were claimed by the trustee in the ship-builders' sequestration, and also by the ship-owners. The plates had been passed by Lloyd's surveyor at the makers' works, and they were each numbered by the makers with the number of the vessel and with marks showing the position which each plate was to occupy in the vessel. On these facts, the House of Lords held that the contract was for the purchase of a 'complete ship,' and the materials in question could not be regarded as appropriated to the contract or sold under the Sale of Goods Act, 1893.
The following observations of the Earl of Halsbury L.C. in the above decision are pertinent for our purpose :
'...... In my view in this contract there is no sale at all except the sale of a complete ship .... those sections upon which reliance has been placed, namely, sections 4 and 5, lack every element of sale of the materials in question. It is an abuse of language to speak of these sections as a sale of the things to which they refer. My own view of those sections is that they were intended by the parties to form a security - I dare say it was an ineffectual attempt by the parties to form a security; but that which is sold is a complete ship.'
20. To the same effect is the decision of the House of Lords in Sir James Laing & Sons Limited v. Barclay, Curie & Co. Limited [1907] AC 35. In that case, the respondents, a Glasgow firm of ship-builders, agreed to build two ships for an Italian firm, according to certain specifications and under the superintendence of an agent appointed by the Italian firm, for a certain amount payable by instalments at specified stages of construction; but delivery of the ships was not to be considered to be completed till they had passed trials at Greenock and off the Italian coast. Before the ships were fully constructed, but after several instalments had been paid, the appellants, an English firm of ship builders, arrested the ships in Scotland for a debt alleged to be due to them by the Italian company, but on a petition to the First Division of the Court of Session the arrestments were recalled. This decision of the First Division was affirmed by the House of Lords and it was held that no intention was shown in the contract to make delivery of or to pass the property in the ships before they were completed, and that the arrestments were properly recalled.
21. Reference may also be gainfully made to a decision of Queen's Bench Division in McDougall v. Aeromarine of Emsworth Ltd. [1958] 3 All ER 431 which is also a case of ship-building contract. In this case, by a contract which was in a standard form sponsored by the Ship and Boat Builders National Federation it was agreed that the defendants should build a yacht for the plaintiff to specification. Clause 8 of the contract provided that 'the said craft together with all the materials, equipment fittings and machinery purchased by the (defendants) specifically for the construction thereof whether in their building yard workshops, water or elsewhere shall become the absolute property of the (plaintiff) upon the first instalment, being paid thereunder .........' The first instalment was paid on November 12, 1956 and subsequent instalments were paid as they became due. The trial took place on June 3, 1957. The plaintiff then refused, however, to accept delivery of the yacht objecting to the state of the seams of the topsides and gaps between planks. The court held that clause 8 of the contract did not deprive the plaintiff of the right to reject the yacht and if, in the circumstances of this contract, the clause passed the property in any materials to the purchaser, it passed only a defeasible title so that on a lawful rejection of the yacht the plaintiff could divest himself of any property therein.
22. The position that emerges from the above decisions is that where it appears to be the intention of the parties to a contract for the building of a ship that the vessel is not to be delivered and finally accepted until after an official trial off a foreign coast, and until after conditions of tile contract have been fulfilled as to speed, consumption of coal, capacity, etc., the in the ship does does not pass to the purchaser while the vessel remains uncompleted, although the contract contains stipulations for the price to be paid by instalments at certain periods of construction.
23. Counsel for the Revenue relied on the decision of the Supreme Court in Consolidated Coffee Ltd. v. Coffee Board : [1980]3SCR625 in support of her contention that the ratio of the decisions on interpretation of different clauses of the English Sale of Goods Act should be applied to cases under the Indian Sale of Goods Act. We find merit in the above contention because of the similarity in the provisions of the English and the Indian Sales of Goods Acts. In our opinion, there can be no controversy in this regard in view of the decision of the Supreme Court in Consolidated Coffee Ltd. v. Coffee Board : [1980]3SCR625 where it is held :
'............... It is well-known that our Sale of Goods Act, 1930, is based upon and is largely a reproduction of the English Sale of Goods Act, 1893, and in principle as well as in most details the law of sale of goods in both the countries is now the same and, therefore, the English authorities on interpretation of different sections, although not technically binding in India, would have great persuasive value.'
24. Clauses similar to clause 22 of the special condition in the present case also came up for consideration before the Supreme Court in a number of cases. In Firm of M/s. Peare Lal Hari Singh v. State of Punjab [1958] 9 STC 412, clause 33 of the general conditions of contract issued by the Government was before the Supreme Court. It read :
'All stores and materials brought to the site shall become and remain the property of Government and shall not be removed off the site without the prior written approval of the G.E. But whenever the works are finally completed, the contractor shall at his own expense forthwith remove from the site all surplus stores and materials originally supplied by him and upon such removal, the same shall revest in and become the property of the contractor.'
It was argued that the true effect of this provision vesting the materials in the Government was that those materials must be taken to have been sold to it. Repelling this argument, the Supreme Court observed (at page 425) :
'......... Terms such as these and those in rule 33 quoted above are usually inserted in building contracts with the object of ensuring that materials of the right sort are used in the construction and not with the intention of purchasing them. If rule 33 is to be construed as operating by way of sale of materials to the Government when they are brought on the site, it must follow that the surplus materials remaining after the completion of the work must be held to have been resold by the Government to the contractor, and that is not contended for.'
It was there held that rule 33 of the general conditions of contract issued by the Government did not have the effect of converting what is a lumpsum contract for construction of a building into a contract for the sale of materials used therein.
25. In Carl Still G. m. b. H. v. State of Bihar : [1962]2SCR81 , following clause appeared in the contract :
'15. (ii) All materials and plant brought by the contractor upon the site under the German and Indian sections in connection with the construction of the coke oven and by-products plant shall immediately they are brought upon the site become the owner's property and the same shall not on any account whatsoever be removed or taken away by tile contractor or by any other person without the owner's prior authority in writing. Such of them as during the progress of the works will be rejected by the owner in accordance with the terms agreed upon between the contractor and the owner in this respect shall on such rejection, cease to be the owner's property ....... The owner shall not be liable for any loss or damage which may happen to or in respect of such materials and plant by the same being lost, stolen or injured or destroyed by fire, tempest or otherwise for which the contractor will be liable ........ The owner agrees that after the coke oven and by-products plants have been constructed according to the agreed terms, the contractor will be entitled to remove from the site their tools, tackles, machines, packing materials, protection roof and other materials as are surplus to the requirements of the normal operation of the coke oven and by-products plant provided that no claim for increased cost is made in respect of anything so removed.'
It was contended that the above clause in effect amounted to sale of the materials to the owner when they were brought on the site. The Supreme Court referred to its earlier decision in Firm of M/s. Peare Lal Hari Singh's case [1958] 9 STC 412 and compared the above clause with clause 33 in that case and held at page 457) :
'...... In the present case, clause 15 is even clearer that no sale of materials, as such, was intended, because it expressly provides that if they were destroyed by fire, tempest or otherwise, the loss would fall not on the owner, which must be the result if the property is taken to have been absolutely transferred to it, but on the contractor.'
26. In our opinion, the ratio of the above decisions is squarely applicable to the construction of clause 22 of the special conditions in the present case. Applying the same, we are of the clear opinion that the contract in the present case is a contract for the purchase of a complete motor launch and the materials in question cannot be regarded as appropriated to the contract or sold under the Sale of Goods Act, 1930. No intention was shown in the contract to make delivery of or to pass the property in the motor launch before it was completed. Clearly, the contract was a contract for sale of the complete motor launch afloat at Bombay harbour.
27. In view of the foregoing discussion, we are of the clear opinion that the Tribunal was not correct in holding that the transaction of building and supplying 'one twin screw steel motor launch' by the assessee to the Director General of Supplies and Disposals, New Delhi for Rs. 12,10,000 was a works contract and not a contract for sale of the launch. We, therefore, answer question No. I in the negative, i.e., in favour of the Revenue and against the assessee. In view of the above answer to question No. 1, question No. 2 does not survive and hence need not be answered.
28. This reference is disposed of accordingly. In the facts and circumstances of the case, there shall be no order as to costs.
29. Reference disposed of accordingly.