Substance over form in contract classification: manufacture using customer-owned materials was treated as a works contract, not a taxable sale.

The true nature of a contract depends on its substance and surrounding circumstances, not merely its label. Where railway coaches were manufactured for the Railway Board using materials that belonged to the Railway before use, and the assessee was paid for the manufacturing service, the arrangement was treated as a pure works contract. The Court noted that the Railway had booked capacity, supplied key components in part, advanced most of the material value, and treated procured materials as its property under indemnity arrangements. The difference between contract price and material cost represented service charges only, so the turnover was not liable to sales tax under the Central Sales Tax Act.

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Issues: Whether the supply of railway coaches manufactured for the Railway Board under the terms of the contract was a sale liable to sales tax under the Central Sales Tax Act, or a pure works contract not exigible to tax.

Analysis: The contract was construed in the light of its terms and the surrounding circumstances. The Railway booked the assessee's capacity, supplied the wheelsets and underframes free of cost in part of the contracts, advanced 90% of the value of materials on certificate, and treated the materials procured for the coaches as the property of the Railway before use under the indemnity bond. The order described the arrangement as one for manufacture and supply, but the Court held that this wording did not alter the real nature of the transaction. Where all material used in construction belonged to the Railway and the assessee was remunerated for the services rendered in manufacture, the difference between the contract price and material cost represented only service charges.

Conclusion: The transaction was a pure works contract and not a sale of the coaches; the turnover was therefore not liable to sales tax.

Final Conclusion: The appeal was rejected because the contractual arrangement did not create a taxable sale but only a works contract in respect of the railway coaches.

Ratio Decidendi: The true nature of a transaction depends on the substance of the contract and surrounding circumstances, and where the materials used for construction belong to the customer before use, the arrangement is a works contract rather than a sale.

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