Ship-building contract character depends on the contract's main object, not stage payments or security clauses.

A ship-building agreement to construct and supply a completed twin screw steel motor launch for a fixed price was treated as a contract of sale, not an indivisible works contract. The court held that the true character of the bargain must be determined from its main object, surrounding terms, and the parties' intention. Stage-wise payment clauses and interim vesting of materials in the purchaser were treated only as security arrangements and did not alter the essential nature of the transaction. Construction in stages, by itself, does not convert a contract for supply of a completed vessel into a works contract.

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Issues: Whether the agreement for building and supplying one twin screw steel motor launch was a contract of sale or an indivisible works contract.

Analysis: The contract, read as a whole, showed that the assessee undertook to build and supply one completed motor launch for a fixed price, with delivery afloat at Bombay harbour. The stage-wise payment clauses and the clause providing for vesting of materials in the purchaser on payment of instalments were treated as security arrangements and not as decisive of the nature of the bargain. The true nature of the transaction had to be determined from the main object of the contract, the surrounding terms, and the intention of the parties, and in a ship-building contract the fact that construction is carried out in stages does not by itself convert the arrangement into a works contract. The materials and work done before completion were not regarded as separately sold under the Sale of Goods Act.

Conclusion: The transaction was a contract for sale of the completed motor launch and not a works contract, and the answer to the reference was against the assessee and in favour of the Revenue.

Ratio Decidendi: In determining whether a ship-building agreement is a sale or a works contract, the decisive test is the substance and main object of the contract; stage payments and interim vesting clauses used as security do not by themselves convert a contract for supply of a completed vessel into a works contract.

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