Sale versus works contract in ship-building: completed vessel contracts were treated as sales and made liable to sales tax.

Ship-building contracts were treated as sales, not works contracts, because the builder supplied the materials, machinery, equipment and labour, constructed a completed vessel for an agreed price, and intended property to pass only on completion and delivery. Phased payments were characterised as instalments of the contract price rather than separate payments for materials. Clauses on title, risk, insurance, rejection, default and delivery confirmed that the vessel was to pass to the buyer only when completed in a deliverable state. Applying the distinction between sale and works contract and the rules on intention and passing of property in specific goods, the transactions were held exigible to sales tax.

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Issues: Whether the contracts for construction and supply of ships were sales exigible to sales tax or works contracts not liable to sales tax.

Analysis: The contracts were examined as a whole to ascertain the true intention of the parties and the substance of the transaction. The builder supplied all materials, machinery, equipment and labour from its own resources, constructed a completed vessel for an ascertained price, and delivered it only after successful trials and acceptance by the buyer. The phased payments were treated as instalments towards the contract price and not as separate payments for materials. The clauses dealing with title, risk, insurance, default, rejection and delivery showed that the vessel was intended to pass to the buyer only when completed and delivered in a deliverable state. Applying the principles governing the distinction between sale and works contract, including the rules under Chapter III of the Sale of Goods Act concerning intention and passing of property in specific goods, the transaction was held to be one of sale.

Conclusion: The contracts were sales and not works contracts, and the transactions were exigible to sales tax.

Final Conclusion: The appeals failed because the ship-building contracts were treated as contracts for sale of vessels rather than contracts for work and labour.

Ratio Decidendi: Where the builder manufactures a completed chattel from its own materials for an agreed price and property is intended to pass only on completion and delivery, the contract is a sale and not a works contract, even if the buyer supervises construction and payments are made in stages.

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