2000 (7) TMI 864 - SC - VAT / Sales Tax

Manufacture and supply contracts for ships are sales, not works contracts, and attract sales tax on delivery

Hindustan Shipyard Ltd. Versus State of Andhra Pradesh

SC held that contracts for manufacture and supply of ships constituted sales, not mere works contracts, and were subject to sales tax. The Court found the ... Liability to payment of sales tax - transactions involved in manufacture and supply of ships - works contract Or sale - Manufacture and supply of ships - 'works contract' as defined in clause (t) of section 2 - exigible to sales tax - whether the transactions involved in manufacture and supply of ships by the appellant to its customers are a 'sale' as defined in clause (n) of section 2 of the Andhra Pradesh General Sales Tax Act, 1957 ('the Act') as held by the High Court or 'works contract' as defined in clause (t) of section 2 of the Act - HELD THAT:- A full reading of the contract shows that the chattel comes into existence as a chattel in a deliverable state by investment of components and labour by the seller and property in chattel passes to the buyer on delivery of chattel being accepted by the buyer. Article 15 apparently speaks of property in vessel passing to the buyer with the payment of first instalment of price but we are not to be guided by the face value of the language employed; we have to ascertain intention of the parties. The property in machines, equipments, engine, etc., purchased by the seller is not agreed upon to pass to the buyer. The delivery of the ship must be preceded by trial run or runs to the satisfaction of the owner. All the machinery, materials, equipment, appurtenances, spare parts and outfit required for the construction of the vessel are to be purchased by the builder out of its own funds. Neither any of the said things nor the hull is provided by the owner and in none of these the property vests in the owner. It is not a case where the builder is utilising in building the ship, the machinery, equipment, spares and material, etc., belonging to the owner, whosoever might have paid for the same. The builder has thereafter to exert and invest its own skill and labour to build the ship. Not only the owner does not supply or make available any of the said things or the hull of the ship the owner does not also pay for any of the said things or the hull separately. The recitals of the contract may also be read in the light of the few provisions of Chapter III of the Sale of Goods Act. In a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Sections 20 to 24 contain rules for ascertaining the intention of the parties in this regard. When something remains to be done on the date of the contract to bring the specific goods in a deliverable state the property does not pass until such thing is done and brought to the notice of the buyer. The risk in such case remains with the seller so long as the property therein is not transferred to the buyer though the delivery may be delayed. Thus, we are of the opinion that the High Court and the Tribunal have not erred in taking the view which they have done. The contracts in question involve sale of the respective vessels within the meaning of clause (n) of the Andhra Pradesh General Sales Tax Act, 1957 and are not merely works contract as defined in clause (t) thereof. The transactions have rightly been held exigible to sales tax. Appeals liable to be dismissed. Issues Involved:1. Whether the transactions involved in the manufacture and supply of ships by the appellant to its customers are a 'sale' as defined in clause (n) of section 2 of the Andhra Pradesh General Sales Tax Act, 1957, or a 'works contract' as defined in clause (t) of section 2 of the Act.Issue-wise Detailed Analysis:1. Nature of Transactions: Sale or Works ContractThe primary issue in these appeals is whether the transactions involving the manufacture and supply of ships by the appellant constitute a 'sale' or a 'works contract' under the Andhra Pradesh General Sales Tax Act, 1957. The appellant, M/s. Hindustan Shipyard Limited, argued that the transactions were works contracts and hence not liable to sales tax. The assessing authority and the Commissioner (Appeals) held that the transactions were sales and thus taxable. The Sales Tax Appellate Tribunal divided the contracts into two groups, following a previous High Court decision that similar contracts were works contracts. However, for the remaining contracts, the Tribunal applied a later decision which classified such transactions as sales.2. Definitions and Legal Tests for DistinctionThe definitions of 'sale' and 'works contract' under clauses (n) and (t) of section 2 of the Act were crucial. The court noted that the distinction between a contract of sale and a works contract is complex and has been the subject of several judicial decisions. The intention of the parties, determined by the overall terms and conditions of the contract, is key. The court referenced several legal principles and tests from previous cases and authoritative texts to determine whether the primary object of the contract was the transfer of property in goods or the provision of work and labour.3. Analysis of Contract TermsThe court examined the terms of the contract between the appellant and the Great Eastern Shipping Co. Ltd., which was representative of the contracts in question. Key points included:- The appellant (builder) agreed to build and deliver ships to the customer (owner) for a fixed price.- The builder provided all materials and labour.- Payment was phased, with significant portions paid before the ship was fully built and delivered.- The property in the vessel was said to pass to the owner upon payment of the first instalment, but this was subject to the builder's lien for unpaid portions and the builder's responsibility for risks until delivery.4. Judicial Precedents and PrinciplesThe court reviewed several precedents, including decisions in Patnaik and Company v. State of Orissa, Sentinel Rolling Shutters & Engineering Company Pvt. Ltd. v. Commissioner of Sales Tax, and Union of India v. Central India Machinery Manufacturing Co. Ltd. These cases highlighted the importance of the substance of the contract over its form, the ownership of materials, and the intention of the parties. The principles deduced included:- The main object of the contract determines whether it is a sale or a works contract.- If the property in goods passes to the buyer upon completion and delivery, it is a sale.- The involvement of the buyer's supervision or specifications does not necessarily change the nature of the contract.5. Application to Current CaseApplying these principles, the court concluded that the contracts in question were for the sale of ships. The ships were built to order, with the builder providing all materials and labour. The phased payments were seen as advance payments towards the purchase price. The property in the ships passed to the buyer upon delivery and acceptance, not progressively with each payment. The court found that the contracts involved the transfer of property in goods (ships) for a price, fitting the definition of a sale under the Act.ConclusionThe court upheld the decisions of the High Court and the Tribunal, ruling that the transactions were sales and therefore subject to sales tax. The appeals were dismissed, and costs were to be borne as incurred. The contracts were determined to involve the sale of vessels within the meaning of clause (n) of the Andhra Pradesh General Sales Tax Act, 1957, and not merely works contracts as defined in clause (t).