Substance over labels in ship contracts: completed vessel agreements were treated as sales, not works contracts, for tax purposes.

The nature of a ship-building contract for sales tax purposes is determined by the substance of the agreement, including title, risk, payment structure, and contractual clauses, rather than by labels. Where the vessel was built for a fixed price, payments were linked to construction stages, and title and risk passed only on delivery, the agreement showed a completed sale of the finished article. Clauses on marking materials, insurance, and unused materials were treated as protective and not as transferring ownership during construction. The contracts were therefore sales and not works contracts under the Andhra Pradesh General Sales Tax Act, 1957, and the challenge to that classification failed.

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Issues: Whether the contracts for construction and delivery of ships were contracts of sale or works contracts under the Andhra Pradesh General Sales Tax Act, 1957.

Analysis: The nature of the transaction had to be determined by the substance of the agreement and the relevant contractual clauses, not by labels. Under section 2(n) of the Andhra Pradesh General Sales Tax Act, 1957, sale requires transfer of property in goods, while section 2(t) brings within works contracts agreements for building, manufacture and related activities. The contract terms showed that the vessel was built for a fixed price, the owner's payments were linked to stages of construction, title and risk passed only on delivery, and the insurance and refund clauses indicated that ownership did not pass on the first instalment. The clauses relating to marking of materials and ownership of unused materials were treated as protective provisions, not as transferring title during construction. On the facts, the agreements were analogous to the made-to-measure category where the finished vessel was supplied as a completed article.

Conclusion: The contracts were sales and not works contracts, and the Tribunal's view rejecting the claim for works-contract treatment was upheld.

Final Conclusion: The revisions failed because the contractual terms established taxable sales of ships rather than works contracts.

Ratio Decidendi: The nature of a contract for purposes of sales tax is determined by its substance and the allocation of title and risk; where property in the completed article passes only on delivery and the agreement shows a completed sale rather than construction for another's materials, the transaction is a sale and not a works contract.

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