Holding

The contracts are sales of goods within the meaning of Section 2(n) of the Andhra Pradesh General Sales Tax Act, 1957 and are liable to sales tax.

Summary

Hindustan Shipyard Ltd., a public sector shipbuilder, challenged the assessment of sales tax on contracts for building ships, arguing that the contracts were works contracts under Section 2(t) of the Andhra Pradesh General Sales Tax Act, 1957. The State of Andhra Pradesh contended that the contracts were sales of goods under Section 2(n) and therefore liable to tax. The Supreme Court examined the terms of the contracts, noting that the builder supplied all materials, performed the labour, and that title and risk passed to the buyer only upon delivery of a completed, sea‑ready vessel. Applying the principles laid down in Union of India v. CIMMCO and other precedents, the Court held that the substance of the agreements was the sale of a completed ship, not merely a work contract. Consequently, the contracts were deemed taxable sales and the appeals were dismissed.

Issues considered

The contracts for building ships are to be classified as a "sale" under Section 2(n) of the A.P. General Sales Tax Act, 1957 or as a "works contract" under Section 2(t).
Whether sales tax is exigible on such contracts.

Legislation cited

Andhra Pradesh General Sales Tax Act, 1957s. 2(n), s. 2(t)
Sale of Goods Act, 1930s. 20, s. 21, s. 22, s. 23, s. 24

Subjects

sales taxcontract of saleworks contractshipbuildingproperty transfertaxabilitypublic sector undertakingAndhra Pradesh General Sales Tax ActSale of Goods Act

Judgment

A MIS HINDU STAN SHIPYARD LTD.
v.
STATE OF ANDHRA PRADESH

JULY 20, 2000

B [S.C. RAJENDRA BABU AND R.C. LAHOTI JJ.]

Sales Tax:

A.P. General Sales Tax Act, 1957-Sections 2 (n) and (t): Sale or works
C contract-Distinction of-No straight jacket formula available-Intention of
parties to be culled out on an overall reading of the terms and conditions
of a contract-Individual recital or inference flowing from any term or
condition not to be read in isolation-But an overview of the transaction to
be determined-Sale of Goods Act, 1930, Sections 20 to 24.
D
Appellant manufacturing ships for an ascertained price-Plans and
specifications for the ships to be provided by the buyer-All materials and
components used belong to the appellant-Work to progress under supervision
of the surveyor and representative of the buyer-Payment on percentage
basis commensurating with the progress of the work-Delivery to be made
E after successful trial, and on satisfaction of buyer-Appellant to obtain
insurance cover in joint names-Jn case ofany damage to ship before delivery,
loss to be borne by the appellant-If appellant commits default, buyer is
entitled to get possession of the vessel in the existing state and get it
completed elsewhere-Extra cost, if borne, to be paid by the appellant-
F Property in the vessel vesting in the buyer with the payment offirst instalment
and also entitled to mortgage his interest in vessel-But is subject to lien of
the appellant for the unpaid portion of the price-On the aforesaid terms and
conditions, held, contract to be of sale and not a works contract-Further,
transaction exigible to sales tax.

G Appellant was engaged in the activity of building ships for different ship
owners. Assessing authority held the transactions regarding building of ships
as transaction of sale liable to payment of sales tax by the appellant under
section 2(n) of A.P. General Sales Tax Act. Tribunal held such contract as
works contract as defined under Section 2(t) of the Act. High Court held the
transaction to be a sale and dismissed the revision. Hence, this appeal.
H 592
HINDUSTAN SHIPYARD LTD. v. STATE 593
Dismissing these appeals, the Court A
HELD: 1.1. The distinction between a contract of sale and a works
contract is very difficult. No straight-jacket formula is available. It is all a
question of determining the intention of the parties by culling out the same
on an overall reading of the several terms and conditions of a contract. An
individual recital or the inference flowing from any term or condition uf the B
contract is not to be read in isolation but an overview of the contract wherefrom
the nature of the transaction covered thereby has to be determined. The
recitals of the contract may also be read in the light of the few provisivns of
Chapter III of The Sale of Goods Act. [597-G; 613-F, G]

State of Gujarat v. Variety Body Builder, (1976) 38 STC 176, relied on.
c
2.1. A full reading of the contract shows that the vessel comes into
existence as a vessel in a deliverable state by investment of components and
labour by the seller and property in vessel passes to the buyer on delivery of
vessel being accepted by the buyer. Therefore, the contracts in question D
involves sale of the vessels within the meaning of clause (n) of the Andhra Pradesn
General Sales Tax Act, I 957 and are not merely works contract as defined in
clause (t) and the transactions are exigible to sales tax. [611-B; 614-B]

Union of India v. The Central India Machinery Manufacturing Co. ltd.
and Ors. (1977) 40 STC 246 and Patnaik & Company v. The State ofOrissa, E
( 1965) 16 STC 364, followed.

> The State of Gujarat v. Kai/ash Engineering Co. (Pvt) ltd., (I 967) 19
STC 13; Sentinel Rolling Shutters & Engineering Company Pvt. ltd. v. The
Commissioner of Sales Tax. (1978) 42 STC 409 and Hindustan Aeronautics
limited v. The State of Orissa, (1984) 55 STC 327, relied on. F
Hindustan Shipyard limited, Visakhapatnam v. The Commercial Tax
Officer, Visakhapatnam, (1970) 1 Andhra Weekly Reporter 197 and P.S. &
Co. v. State of Andhra Pradesh, (1984) 56 STC 283, referred to.

Clay v. Yates, (1856) I H&N 73, cited. G
Halsbury's laws of England Fourth Edition, Vol. 41, Para 603;
Benjamin ·.1· Sales of goods (Fourth Edition) and Pollock & Mulla on Sale of
Good~ Act 1990, fifth edition, referred to.

2.2. In the instant case, the contract is for sale of a completely H
594 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A manufactured ship to be delivered after successful trials, to the satisfaction
of the buyer for an ascertained price. The plans and specifications for the
ship are to be provided by the customer and the work has to progress under
the supervision of the classified surveyor and representative of the buyer but
the components used in building ship, all belong to the appellant, the builder
has thereafter to exert and invest its own skill and labour to build the ship.
B The price fixed is of the vessel completely built up but the payment is in a
phased manner, at certain percentages commensurate with the progress of
the work and all payment at the specified percentage which go towards the
payment of the contract price. Thus, the property in vessel which starts
passing gradually to the buyer proportionately with the percentage of payments
C made and passes fully with the payment of last instalment on delivery of vessel
having been accepted. [610-E-F; 611-G, HJ

2.3. Though a clause in the contract deed states the property in vessel
passing to the buyer with the payment of first instalment of price but one is
not to be guided by the face value of the language employed; one has to
D ascertain intention of the parties. [611-B, Cf

2.4. The payments made by buyer are not towards any components but
towards the vessel which is yet to come into existence. The built up vessel, if
the contract may fail, is available to be sold to someone else by the seller. The
comparative importance is more of the hull, machine, equipments engine etc.
E than that of the labour. Thus, the materials used are not insignificant or
secondary or have been used just incidental to the skill and labour bestowed.
(612-C, DJ

2.5. The property in the vessel vesting in the owner simultaneously with
the payment of the first instalment and the owner also becomes entitled to
F mortgage his interest in the vessel to the extent of the payments made by
him. However, it is subject to the lien of the builder for the unpaid portion of
the price. [612-F-G)

2.6. lfthe builder may commit a default in fulfilling his obligations under
the contact the owner may take possession of the vessel in the state in which
G the vessel is and have the remaining building of the vessel completed
elsewhere out of the price remaining unpaid and the deficiency, if any, shall
be made good by the builder. [612-H; 613-A)

2.7 An insurance cover is to be obtained by the builder, the policy or
policies being taken out in the joint names of the builder and the owner. The
H loss or damage, if any, occasioned to the vessel before delivery to the owner is
HINDUSTAN SHIPYARD LTD. v. STATE [R.C. LAHOTI, J.) 595
to be suffered by the builder which would not have been so ifthe property in A
the vessel had already stood passed to the owner. It is the obligation of the
builder to make the loss or destruction good for which purpose the builder
may reimburse itself by claim under the policy. (613-A, BJ

Reidv. Macbeth, (1904) A.C. 223, referred to.
B
Benjamin, Sales ofgoods 4th Edition, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 487-492 of
1998.

From the Judgment and Order dated 23.12.96 of the Andhra Pradesh C
High Court in T.R.C. Nos. 138-139, 148-150 and 154of1989.

Harish N. Salve, T.L.V. Iyer, A.V. Rangam, Buddy A. Ranganadhan, A.
Sarveswara Rao and Ms. A. Subhashini for the Appellant.

K. Ram Kumar, B. Sridhar and Y. Subba Rao for the Respondent. D
The Judgment of the Court was delivered by

R.C. LAHOTI, J. The question arising for decision in these appeals is
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 E
of the Andhra Pradesh General Sales Tax Act, 1957 (hereinafter 'the Act', for
short) as held by the High Court or a 'works contract' as defined in clause
(t) of Section 2 of the Act and hence not exigible to sales-tax as contended
by the assessee-appellant.

Mis. Hindustan Shipyard Limited, the appellant before us, is a public F
sector undertaking. It is engaged in the activity of building ships for different
ship owners under the orders placed by them and as evidenced by the
contracts entered into between them.

The facts in brief. Between the assessment years 1974-75 and 1983-84 G
(both years inclusive) there were 18 ships involved and formed subject matter
of different assessments. The Assessing Authority and the Commissioner
(Appeals) held all the transactions in question as transactions of sale liable
to payment of sales-tax by the appellant. Several tax appeals preferred by the
appellant were disposed of by the Sales Tax Appellate Tribunal, Andhra
Pradesh, Hyderabad by a common order dated 19th July, 1989. It appears that H
596 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A earlier also transactions regarding building of ships by this very assessee
have been a subject of controversy travelling upto the High Court of Andhra
Pradesh and disposed of by a Division Bench by its order dated 27th January,
1969 reported as Hindustan Shipyard Limited, Visakhapatnam v. The
Commercial Tax Officer, Visakhapatnam (1970) 1 Andhra Weekly Reporter
197. The High Court having examined several clauses of the contract dated
B 12.4.1965 entered into between the appellant and its customers concluded that
the building of the ships under the contract under scrutiny was works contract
and not sale. This decision was heavily relied on by the appellant before the
Tribunal. The Tribunal has analysed the terms and conditions of all the
contracts forming subject matter of appeals before it and thereafter divided
C the contracts into two groups. The Tribunal noticed that the contracts relating
to 10 ships before it incorporated recitals identical or similar to the contract
dated 12.4.1965 involved before the High Court in 1970 (I) Andhra Weekly
Reporter 197. As to such contracts the Tribunal held that it was bound to
follow the Division Bench decision of the High Court more so when the
Department had not pursued its challenge to the correctness of the findings
D of fact and the principles laid down therein by approaching the Supreme
Court. Such contracts were held to be works contract following the above
said decision. This time also the Department has not pursued the matter
further. Therefore as to the transactions involving 10 ships the order of the
Tribunal has become final.
E
The Tribunal has then noted in its impugned order that after the decision
of the High Court dated 27th January, 1969 there was a decision of a three-
Judges Bench of the Supreme Court delivered on 6th April 1977 reported as
Union of India v. The Central India Machinery Manufacturing Co. Ltd.
(CIMMCO) & Ors., (1977) (40) STC 246, wherein the relevant law was dealt
F with and the tests for determining the distinction between a contract of sale
and a works contract were laid down. The decision in CIMMCO's case was
followed by the High Court of Andhra Pradesh in P.S. & Co. v. State of
Andhra Pradesh, (1984) 56 STC 283 dealing with exigibility to sales-tax ofa
transaction involved in construction and supply of harbour ferry. Having
G followed the law laid down by the Supreme Court in the case of CIMMCO
and several other decisions and having also considered the earlier Division
Bench decision of the High Court of Andhra Pradesh in the case of this
assessee, the Division Bench held in PS & Co. 's case the transaction before
it to be a sale and not merely a contract for work and labour. This being the
latest decision of the jurisdiction High Court placed before the Tribunal, for
H the transactions relating to remaining 8 ships before it, the Tribunal applied
HINDUSTAN SHIPYARD LTD. v. STATE [R.C. LAHOTI, J.) 597
the ratio of P.S. & Co. 's case and held the transactions to be those of sales A
liable to sales-tax and dismissed appeals filed by the appellant. The appellant
feeling aggrieved by the decision of the Tribunal to the extent to which the
transactions were held to be sales, filed tax revision cases before the High
Court. The decision in 1970 (I) Andhra Weekly Reporter 197 was once again
heavily relied on by the appellant before the High Court. The High Court B
examined the contention of the appellant, scrutinised the terms and conditions
of the contracts entered into by the appellant with the several ship owners
and then held that the relevant terms and clauses led to an irresistible
inference of sales having taken place and such a situation was governed by
the Division Bench decision in P.S. & Co. 's case (supra). Accordingly, the
revisions filed by the appellant have been dismissed. The aggrieved appellant C
has come up to this Court by filing these petitions for special leave to appeal.

Clauses (n) and (t) of Section 2 of the Act respectively define sale and
works contract as under :-

'Sale' with all its grammatical variations and cognate expressions D
means every transfer of the property in goods (Whether as such goods
or in any other form in pursuance of a contract or otherwise) by one
person to another in the course of trade or business, for cash or for
deferred payment or for any other valuable consideration or in the
supply or distribution of goods by a society (including a co-operative
E
society), club, firm or association to its members, but does not include
a mortgage, hypothecation or pledge of, or a charge on goods.

xxx xxx xxx xxx xxx

'"Works Contract' includes any agreement for carrying out for cash
or for deferred payment or for any other valuable consideration, the
F
building construction, manufacture, processing, fabrication, erection,
installation, fitting out, improvement, modification, repair or
commissioning of any movable or immovable property."

The distinction between a contract of sale and a works contract is not G
free from difficulty and has been subject matter of several judicial decisions.
No straight-jacket formula can be made available nor can such quick-witted
tests devised as would be infallible. It is all a question of determining the
intention of the parties by culling out the same on an overall reading of the
several terms and conditions of a contract. In State ofGujarat v. Variety Body
Builders, ( 1976) 38 STC 176 t.'lis Court observed that there is no standard H
598 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A formula by which one can distinguish a contract of sale from a contract for
work and labour. There may be many common features in both the contracts,
some neutral in a particular contract, and yet certain clinching terms in a given
case may fortify a conclusion one way or the other. It will depend upon the
facts and circumstances of each case. The question is not always easy and
has for all times vexed jurists all over.
B
We would straightaway proceed to notice the relevant recitals of the
contracts in question. During the course of hearing Shri T.L. V. Iyer, the
learned senior counsel for the appellant submitted that in the case at hand
there are different contracts relating to 8 ships. The terms and conditions of
C these several contracts are more or less similar to each other though not the
same and it will suffice if the terms and conditions of one contract, viz. the
one entered into between the appellant and the Great Eastern Shipping Co.
Ltd. dated 3rd Fe'Jruary, 1971 are taken into consideration. This contract
relates to construction of four motor vessels of "Jag Darshan" type. The
relevant recitals and terms and conditions of the contract are summarised and
D wherever necessary reproduced, as under:-

I. The appellant is called the 'Builder' and the customer - the Great
Eastern Shipping Co. Ltd. - is called the 'Owner'.

2. The Preamble to the contract speaks of the Builder having agreed
E to build, launch, fit, equip, test and complete in all respects four
vessels at its Shipyard and after completion and successful trials in
all respects deliver them alongside safe berth at Visakhapatnam from
which supplies could be conveniently loaded and the crew embarked
and the owner having agreed to accept delivery from the Builder of
the said· four vessels upon the terms and conditions hereinafter set
F
forth.

(3) The vessels shall have Builder's hull numbers 171002-3-4-7
respectively and shall be constructed, fitted and completed in strict
accordance with the plans and specifications forming part of the
G contract.

(4) The Builders shall arrange for assignment of a representative/s
called the Classific:ation Surveyor to the vessel from Lloyds Register
of Shipping throughout the construction. The plans and drawings,
materials and workmanship shall be subject to instructions and tests
H by the Classification Surveyor for which the facilities shall be furnished
HINDUSTAN SHIPYARD LTD. v. STATE [R.C. LAHOTI, J.] 599

by the Builder without any charge to the owner. A
(5) The Builder shall furnish all labour, machinery, materials,
equipments, appurtenances, spare parts and outfits required for the
construction of the vessel to make it completely ready.

(6) The total price of the vessel is fixed at Rs. 5,50,00,000 per vessel B
which shall be called the contract price to be paid in the following
manner:-

"(a) 5% of the Contract Price upon signing this Contract.

(b) I 0% of the Contract Price upon Builder producing adequate
documentary evidence to the Owner confirming that the Builder C
has placed order for main engine and steel requirement.

(c) I 0% of the Contract Price upon keel laying of the vessel.

(d) 15% of the Contract Price upon Builder submitting its certificate
to the Owner that 50% by weight of the steel structure of the D
vessel's hull has been erected. (Panels placed on berth)

(e) 15% of the Contract Price upon launching of the vessel.
(f) 10% of the Contract Price upon Builder submitting its certificate
to the Owner that the main engine has been lowered in position
on board the vessel. E
(g) 15% of the Contract Price upon satisfactory completion of the
dock trials.

(h) 20% of the Contract Price upon delivery of the vessels."

(7) The contract, vide Article 3, makes provision for payment of F
liquidated damages at the prescribed scale by reference to the period
of delay for delayed delivery and also makes a similar provision for
payment of bonus by the owner to the Builder for advanced delivery.

(8) The owner has the right to appoint at its expense one or more
rnperintendents who will be allowed to inspect regularly the building G
of the vessel and also the machinery and all accessories and
workmanship during the work in progress.

(9) If owner may suggest any changes and alteration in the plans and
drawings the same shall be carried out by the Builder subject to
mutual agreement arrived at in writing between the owner and the H

r
600 SUPREME COURT REPORTS [2000) SUPP. I S.C.R.

'A Builder regarding additional debits and credits involved.

(I 0) Before the vessel being delivered there shall be trial runs intimation
whereof shall be given by thirty working days advance notice in
writing and all expenses in connection with the trial runs of the vessel
are to be borne by the Builder. Prior to the trial runs the vessel shall
B be dry-docked and the bottom shall be painted as per the specifications.
Dry-dockeing and painting shall be at the expenses of the Builder. The
required quantity of the fuel oil, lubricating oils and greases shall be
provided by the owner but paid for by the Builder.

( 11) Clause 5 of Article 6 provides method of acceptance or rejection
c as under:-

"If after successfully completed technical trial test procedures
according to the Specifications no legitimate complaints are made
concerning the c:ompletion or correct functioning of the vessel
according to this Contract, the Drawings and Specifications, the Owner
D shall accept the vessel and confirm the acceptance in writing."

(I 2) If any defects become evident they shall be made good by the
Builder at his own expense. The owner may demand a new set of trial
which shall be conducted by the Builder on the same terms and
conditions as applicable to the first trial and paid for by the Builder.
E
After the first or second trial runs, as the case may be, the owner may
accept or reject the vessel by serving notice in writing within seven
days and stating the reasons for rejection.

( 13) Vi de Article 7, there are t11e different dates appointed for the four
F vessels by which the Builder agrees to deliver the respective vessels.
Simultaneously with the delivery the owner has to fulfil its obligation
for payment as stipulated. Thereupon protocol of delivery shall be
signed. All the documents relating to the vessel have to be delivered
by the Builder to the owner upon the acceptance of the vessel by the
owner.
G
(14) Clause 5 of Article 7, dealing with 'title and risk', reads as under:-

"Title and risk of the Vessel shall pass to the Owner upon acceptance
when delivery of the Vessel is effected, as stated above, it being
expressly understood that, until such delivery is effected, the Vessel
H and equipment thereof, is at the entire risk of the Builder, including,
HINDUSTAN SHIPYARD LTD. v. STATE [R.C. LAHOTI, J.] 601
but not limited to, risks of war, insurrection and seizure by Government A
or Authorities, whether Indian or foreign, and whether at war or at
peace."

( 15) There is warranty of quality to remain valid for a period of 12
calendar months from the date of actual delivery of the vessel.
B
(16) Vide Article l l, for a certain period of delay and default on the
part of the owner the same is liable to the compensated by payment ·
of interest. Delay and default beyond a certain time entitles the Builder
to rescind the contract whereupon the Builder shall refund to the
owner all the instalments already paid by the owner to the Builder
without any interest thereon. In this Article nothing is said about the C
vessel which implies that the vessel continues to remain with the
Builder.

(17) Article 15 entitled 'property in the vessel' reads as under:-

"Article 15 Property in the vessel : Without prejudice to Article D
17 hereof, the vessel as constructed and her engines, boilers and
machinery and all materials from time to time intended for her or
appropriated to the Contract whether in the building berth, fitting
out basin, workshop or elsewhere shall immediately after payment
of the first instalment on account of vessel as the work proceeds, E
become the property of the Owner and such property shall be
conspicuously marked with the hull number or with other
appropriate markings for identification, as belonging to vessel/
Owner as its property and shall not be within the ownership or
disposition of the Builder. Until the vessel is completed and
delivered the Builder, shall not use or permit to be used any such F
part/s, material/s, equipment and machinery so allocated to the
vessel for any other vessel. The Owner to the extent of payment
made by him will have a right to mortgage his interest in materials
mentioned above to Indian Government, Lender and/or Shipping
Development Fund Committee for loans taken by Owner and G
formalities as required by Lender/Owner shall be completed by
the Builder. But the Builder at all times shall have a lien on the
above-mentioned property for any unpaid portion of the price.
All materials and other things appropriated but not used for the
purpose of this Contract shall after completion of the vessel
become the property of Builder." H
602 SUPREME COURT REPORTS [2000) SUPP. I S.C.R.

A (18) Vide Article 16, in the event of the Builder defaulting in the
construction of the vessel, the owner may at his option and after due
notice:-

" ......... take possession of the vessel in her then state and of all
engines, boilers and machinery and all materials intended for her
B as before mentioned and to complete the vessel, engines, boilers
and machinery. For this purpose the Owner shall have power to
enter into any contract with other Builders or manufacturers, and
to use the Yard or Yards; Workshops, Machinery and tools of the
Builders or such other Builders or manufacturers with whom the
c Builders may have entered Sub-contracts, and costs directly
incurred by the Owners by the exercise of any of the powers
vested under this clause shall be deducted from the contracted
price then remaining unpaid is sufficient, and if not sufficient,
shall be made good by the Builders."

D ( 19) Article 17 provides that the vessel shall be at the risk and expense
of the Builder until handed over and accepted by the owner and until
then so far the interest of the owner is concerned the Builder shall
keep her insured at its own cost for all Builder's risks under a policy
or policies taken out in the joint names of the Builder and the owner.
The same clause further provides :-
E
"If, before delivery to the Owner, the Vessel (including the engines,
boilers, appurtenances or materials in~ended for her) hull sustain
damage not amounting to total or constructive or compromised
total loss, this Contract shall not be invalidated in any way. But
such damage shall be made good by the Builder as speedily as
F may be reasonably expected having regard to all the circumstances
to the satisfaction of the Classification Society and the reasonable
satisfaction of the Owner's authorised representative or
representatives. The Insurance moneys recoverable in respect of
such damage shall be applied by the Builder to such reinstatement
G of the Vessel. The Owner shall not on account of the said damage
or repair be entitled to object to the Vessel, engines, boilers,
material or equipment or to make any claim for any alleged
consequential loss or depreciation.

If due to any cause the Vessel before delivery to the Owner shall
H be destroyed or lost or so damaged as to become or to be
HINDUSTAN SHIPYARD LTD. v. STATE [R.C. LAHOTI, J.] 603

deemed to become at any time a total or constructive, arranged A
or compromised total loss the Builder shall refund to the Owner
the instalments of the Contract Price if any; plus interest at the
rate of 5 per cent per annum from the date of payment of monies
by the Owner to the Builder out of monies payable by the
Underwriters under the insurance effected with them in terms of B
this Contract. Every amount of the instalment, shall be endorsed
on the policy/policies and such endorsement shall be sufficient
authority to the Underwriters, to pay to the Owner the amount
of such instalments plus interest. On payment of such instalments
by the Underwriters to the Owner, the Owner shall have no
further right or claim on the Builder in respect of this Contract C
and the Contract in respect of the particular Vessel or Vessels
shall be deemed to have ended in all respects. The remaining
amounts received from the Underwriters shall be retained by the
Builder.

The decision of the Underwriters as to whether the Vessel is a D
total or constructive, arranged or compromised total loss shall be
binding upon the parties to this Agreement.

Even if the recovery of the claim for loss, damage or destruction
of the ship cannot be made from the insurers in terms of insurance
policies either because the risks are not insured or for any reason E
whatsoever the Builder shall refund to the Owner the amounts of
instalments paid by the Owner together with interest at the rate
of 5 per cent per annum from the dates of payments of monies
by the Owner to the Builder."

We will shortly revert back to analysing the above-said terms and F
conditions of the contract and in between try to fTud out the tests which
would enable determination of the nature of the transactions covered by such
contracts. The distinction between contract of sale and contract for work and
labour has been so stated in Halsbury's Laws of England (Fourth Edition,
Vol.41, para 603) : G
"Contract of sale distinguished from contract for work and labour.
A contract of sale of goods must be distinguished from a contract
for work and labour. The distinction is often a fine one. A contract
of sale is a contract the main object of which is the transfer of
the property in, and the delivery of the possession of, a chattel H
604 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A as such to the buyer. Where the main object of work undertaken
by the payee of the price is not the transfer of a chattel as such,
the contract is one for work and labour. The test is whether or
not the work and labour bestowed end in anything that can
properly become the subject of sale. Neither the ownership of the
materials, nor the value of the skill and labour as compared with
B the value of the materials, is conclusive, although such matters
may be taken into consideration in determining in the
circumstances of a particular case whether the contract is in
substance one for work and labour or one for the sale of a
chattel."
c In Benjamin's Sale of Goods (Fourth Edition) it is stated that it is
sometimes extremely difficult to decide whether a particular agreement is more
popularly described as a contract of sale of goods, or a contract for the
performance of work or services to which the supply of materials or some
other goods is incidental. The learned author sums up the test for distinction
D in the following words (vide para 1.042) :-

"Where the parties have not settled the question by the form of
their contract, the decision whether the bargain is one for the
performance of work or the sale of a chattel must be made by the
court. It is now well established that the court does so by having
E regard to "the substance" of the contract - a test which assumes that
every contract must be in substance one or the other. This is a
legitimate inquiry where the supply of the goods and the performance
of the work ar1:, to some extent at least, separate elements in the
bargain; but it breaks down in the case where all the work goes into
F the making of the goods to be supplied, so that the two are inseparable.
This point has unfortunately not been appreciated. In the former type
of contract, the determination of "the substance" is a matter of degree,
involving an assessment of the relative importance of the two elements;
but in the latter type the designation of the contract as one of work
or sale must depend upon either an arbitrary formula or a superficial
G impression."

The same learned author discusses the following types of contracts :-

"1. Chattel to he ajf1Xed to land or another chattel. Where work is
to be done on the land of the employer or on a chattel belonging to
H him, which involves the use or affixing of materials belonging to the
HINDUSTAN SHIPYARD LTD. v. STATE [R.C. LAHOTI, J.) 605
person employed, the contract will ordinarily be one for work and A
materials, the property in the latter passing to the employer by accession
and not under any contract of sale.

2. Materials supplied wholly or principally by employer. Where an
article is to be manufactured, and all the materials are supplied by the
person for whom the work is to be done, it is obvious that there can B
be no sale unless there is a specific transfer of the materials followed
by a repurchase of the product. Where each party provides some of
the materials or components, the task of the court is to determine
which of them has supplied the "principal materials"; it then follows
that the materials supplied by the other vest by accession in the C
owner of the principal materials.

3. Services independent of creation or furnishing of product. Where
work or skill is involved over and above what goes into the making
of the goods delivered, it is possible and often correct to view the
contract as "substantially" one for work or services. A doctor or D
veterinary surgeon who supplies medicines does so as an incident to
a contract for professional services, which include diagnosis and
advice over and above any work in the making up of the medicine.
In contrast, a chemist who makes up a prescription sells it, since his·
work and skill goes entirely into the product - it is simply a component
reflected in the price of the goods. E
4. Work wholly a component of article produced The most difficult
type of contract remains to be discussed. In this case the whole of
the work or skill involved goes into the creation of the product which
is ultimately delivered in performance of the contract: for example, a F
contract to make a suit of clothing or to build a ship. The work or skill
is here a component - perhaps the most important - of the thing
produced, but is a component and nothing more. It is not logical to
ask whether in such a case the parties contracted primarily or
substantially for the performance of work or for the transfer of a
chattel: they contracted for both. In Clay v. Yates Pollock C.B. G
suggested that the court should ask whether it was the work or the
materials supplied that was of the essence of the contract, a question
to be determined by comparing the importance, though not perhaps
necessarily the value, of the two items."

Pollock & Mulla on Sale of Goods Act (1990, Fifth Edition, at page 53) H
606 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A Jay down the test for distinction as under:-
"Generally a contract to make a chattel and deliver it, when made, is
a contract of sale, but not always. The test would seem to be whether
the thing to be delivered has any individual existence before delivery
as the sole prope:rty of the party who is to deliver it."
B
The learned authors have thereafter noted by way of illustrations several
decided cases to notice how the principle has played with several courts in
its actual application and then drawn the following deduction from the decided
cases:-

c "It will be observed that in the cases where there is no sale there is
never a moment when the thing produced is as a whole the maker's
absolute property, notwithstanding that part, or even the whole, of
the materials may have been his property, whereas in the other case
he might, if he found it possible and profitable, and if not restrained
by patent, copyright or any other similar branch of laws, make in
D duplicate or in greater numbers chattels of the kind ordered, appropriate
one at his will to fulfil the special contract, and sell the others to other
person (s)."

A number of authorities were cited at the Bar during the course of
E hearing. It would suffice for our purpose to notice only a few of them, namely,
Patnaik and Company v. The State of Orissa, ( 1965) 16 STC 364; The State
of Gujarat v. Kai/ash Engineering Co. (Pvt.) Ltd., (1967) 19 STC 13; State
ofGujarat (Commissioner a/Sales Tax, Ahmedabad) v. Variety Body Builders,
(1976) 38 STC 176; Union of India v. The Central India Machinery
Manufacturing Co. Ltd. and Ors. (1977) 40 STC 246; Sentinel Rolling Shutters
F & Engineering Company Pvt. Ltd. v. The Commissioner of Sales Tax, (1978)
42 STC 409 and Hindustan Aeronautics limited v. The State of Orissa, (1984)
55 STC 327.

The principles deducible from the several decided cases may be summed
up as under:
G
I. It is difficult to lay down any rule or inflexible rule applicable alike
to all transactions so as to distinguish between a contract for sale and
a contract for work and labour.

2. Transfer of property of goods for a price is the linchpin of the
H definition of s~!::. Whether a particular contract is one of sale of
HINDUSTAN SHIPYARD L.TD. v. STATE [R.C. LAHOTI, J.] 607

goods or for work and labour depends upon the main object of the A
parties found out from an overview of the· terms of the contract, the
circumstances of the transactions and the custom of the trade. It is
the substance of the contract document/s, and not merely the form,
which has to be looked into. The Court may form an opinion that the
contract is one whose main object is transfer of property in a chattel B
as a chattel to the buyer, though some work may be required to be
done under the contract as ancillary or incidental to the sale, then it
is a sale. If the primary object of the contract is the carrying out of
work by bestowal of labour and services and materials are incidentally
used in execution of such work then the contract is one for work and
labour. C
3. If the thing to be delivered has any individual existence before the
delivery as the sole property of the party who is to deliver it, then it
is a sale. If A may transfer property for a price in a thing in which B
had no previous property then the contract is a contract for sale. On
the other hand where the main object of work undertaken by the D
payee of the price is not the transfer of a chattel qua chattel, the
contract is one for work and labour.

( 4) The bulk of material used in construction belongs to the
manufacturer who sells the end product for a price, then it is a strong
pointer to a conclusion that the contract is in substance one for the E
sale of goods and not one for work and labour. However, the test is
not decisive. It is not the bulk of the material alone but the relative
importance of the material qua the work, skill and labour of the payee
which have to be weighed. If the major component of the end product
is the material consumed in producing the chattel to be delivered and F
the skill and labour are employed for converting the main components
into the end products, the skill and labour are only incidentally used
and hence the delivery of the end product by the seller to the buyer
would constitute a sale. On the other hand if the main object of the
contract is to avail the skill and labour of the seller though some
material or components may be incidentally used during the process G
of the end product being brought into existence by the investment of
skill and labour of the supplier, the transaction would be a contract
for work and labour.

There may be three categories of contracts: (i) The contract may be for
work to be done for remuneration and for supply of materials used in the H
608 SUPREME COURT REPORTS [2000) SUPP. I S.C.R.

A execution of the work for a price; (ii) It may be a contract for work in which
the use of the materials is accessory or incidental to the execution of the
work; and (iii) It may be a contract for supply of goods where some work is
required to be done as incidental to the sale. The first contract is a composite
contract consisting of two contracts one of which is for the sale of goods
and the other is for work and labour. The second is clearly a contract for work
B and labour not involving sale of goods. The third is a contract for sale where
the goods are sold as chattels and the work done is merely incidental to the
sale.

Two simple illustrations may be given to demonstrate applicability of
C the above-said principles. A customer goes to a tailoring shop accompanied
by a suit length in his hands and entrusts the same to the tailor for stitching
a suit for him as per his measurements. The tailor by devoting his skill and
labour stitches the suit and delivers the same to the customer. In this process
the tailor utilises lining, buttons and threads of his own. The transaction
would remain a contract for work and labour. The stitched suit delivered by
D the tailor to the customer is not a sale. It would not make any difference if
the customer would have selected a piece of cloth of his own choice for a
price to be paid or paid and having purchased the suit length left it with the
tailor for being stitched into a suit. The property in the suit length had passed
to the customer and physical possession over the suit length by the tailor
E thereafter was merely that of a bailee entrusted with the suit length. However,
if the tailor promises to stitch and deliver the suit for a price agreed upon,
investing his own cloth and stitching materials such as lining, buttons and
threads, and utilising his own skill and labour then though the customer might
have chosen the piece of cloth as per his own liking as to the texture, colour
and quality and given his own instructions in the matter of style, the
F transaction would remain a contract for sale of goods, that is, a stitched suit
piece in as much as the object of the contract was to transfer property iµ the
stitched suit piece alongwith delivery of the suit by the tailor to the customer,
all investments, whether of material or of skill and labour having been made
by the tailor incidental to the fulfilment of the contract. Yet another illustration
G is provided by Benjamin (ibid, para 1.046). A doctor or veterinary surgeon
who supplies medicines does so as an incident to a contract for professional
services, which include diagnosis and advice over and above any work in the
making up of the medicine. In contrast, a chemist who makes up a prescription
sells it, since his work and skill goes entirely into the product - it is simply
a component reflected in the price of the goods. Benjamin concludes - "Where
H work or skill is invn!v~d over and above what goes into the making of the
HINDUSTAN SHIPYARD LTD. v. STA TE [R.C. LAHOTI, J.] 609
goods delivered, it is possible and often correct to view the contract as A
'substantially' one for work or services." In our opinion a reverse case would
be one of sale. Benjamin gives yet another illustration. A meal supplied to a
customer in a restaurant is a sale of goods, the element of service being
subsidiary; but a meal supplied to a lodger or a resident hotel guest is part
of a contract for services.
B
Patnaik & Co. 's case (supra) is a Constitution Bench decision. The
appellant entered into a contract with the State of Orissa for the construction
of bus bodies on the chassis supplied by the State. On an interpretation of
the terms of the contract this Court by a majority of 4: I concluded that the
bus body built by the appellant passed to the Government as moveable. It C
did not make any difference that the process of manufacture was supervised
by purchaser. The contract was held to be a contract for sale of goods.

In Sentinel Rolling Shutters & Engineering Company's case (supra),
the assessee carried on business as engineers, contractors, manufacturers
and fabricators. It entered into a contract for fabrication, supply, erection and D
installation of two rolling shutters in two sheds belonging to the customer
for a price which was inclusive of charges for "erection at site". Once the
goods were delivered, rejection claim were not to be entertained. All masonry
works required before and/or after erection was to be carried out by the
assessee. Payments were to be made on overall measurements to be checked
by the customer after installation. This Court held that the erection and E
installation of rolling shutters was as much the fundamental part of the
contract as the fabrication and supply. The contract was held to be a contract
for work and labour and not a contract for sale.

In ClMMCO 's case (supra) this Court emphasised the need of looking
into the substance and not merely the format of the contract. Reading the F
terms and conditions of the contract before it as a whole this Court concluded
that the property in the materials procured or purchased by the company
against 90% bill of which advance was taken from the railways did not, before
their use in the construction of the wagons, pass to the railways. With an
exception of a relatively small portion of the components supplied by the G
railways, the entire wagon including the material at the time of its completion
and delivery was the property of the company. It was held that the wagons
were sold for a price and the contract was a contract for the sale of wagons
and not a work contract.

In Kai/ash Engineering Co. (Pvt.) Ltd. 's case (supra) and Variety Body H
610 SUPREME COURT REPORTS [2000) SUPP. I S.C.R.

A Builder's case (sup;a), bodies were built for the railways on the underframes
supplied by the railways. Upon analysing the terms and conditions of the
contract this Court concluded that the assessee was not the owner of the
ready coaches and the property in the bodies vested in the railways even
during the process of construction and therefore the transaction was a works
B contract not involving any sale.

In Hindustan Aeronautics Ltd. 's case, the assessee HAL was to
manufacture MIG engines on behalf of the Government of India for which the
latter had obtained a licence from the U.S.S.R .. For the imports made from
U.S.S.R., all payments under the agreement were made by HAL on behalf of
C the Government of India. The materials imported by HAL, stocks and stores,
work-in-progress etc., were the property of the Air Force. The bills drawn by
HAL against the Government of India indicated a break-up of the material
cost, labour cost and sundry direct charges and further profit at a percentage.
This Court held that at no point of time before the delivery of MIG engines
HAL was the owner of the property, either in the equipment or in the spares
D or in the aircrafts and as such there could not have been any transfer of
property from HAL to the Government of India. The transaction was held to
be a works contract.

Reverting back to the facts of the contract under consideration before
E us, a few prominent features of the transaction are clearly deducible from the
several terms and conditions and recitals of the contract. The contract is for
sale of a completely manufactured ship to be delivered after successful trials
in all respects and to the satisfaction of the buyer. It is a contract for sale
of 'made to order' goods, that is, ship for an ascertained price. Although the
plans and specifications for the ship are to be provided by the customer and
F the work has to progress under the supervision of the classification surveyor
and representative of the buyer, but the components used in building ship,
all belong to the appellant The price fixed is of the vessel completely built
up although the payment is in a phased manner or, in other words, at certain
percentages commensurate with the progress of the work. The payment of
G 15% of the price is to be made on satisfactory completion of the dock trials,
that is when the vessel is ready to be delivered and strictly speaking excepting
the delivery nothing substantial remains to be done. 20% of the price is to
be paid upon delivery of the vessel. Thus 65% of the price paid before the
trials is intended to finance the builder and to share a part of the burden
involved in the investments made by the builder towards building the ship.
H It is a sort of an advance payment of price. The 'title and risk clause' quoted
HINDUSTAN SHIPYARD LTD. v. STATE [R.C. LAHOTI, J.] 611

as sub-para 14 above is to be found in 6 out of 8 contracts in question. So A
far as these 6 contracts are concerned they leave no manner of doubt that
property in goods passes from seller to the buyer only on the ship having
been built fully and delivered to the buyer. In all the contracts the ultimate
conclusion would remain the same. The ship at the time of delivery has to
be a completely built up ship and also seaworthy whereupon only the owner B
may accept the delivery. 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 C
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 D
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 E
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. All the things so made available by the builder
are fastened to the hull belonging to the builder and become part of it so as
to make a vessel. What the owner pays to the builder in instalments and in F
a phased manner are all payments at the si;ecified percentage which go
towards the payment of the contract price i.e. the price appointed for the
vessel as a whole. 65 per cent payment of the price is up to the stage of the
main engine having been lowered in position on board the vessel i.e. the
stage by which the building of the vessel is complete. 15 per cent payment G
is to be done on satisfactory completion of the trial and 20 per cent upon
delivery of the vessel. Giving maximum benefit in the matter of construction
and interpretation of this clause in favour of the appellant it can be said that
it is the property in vessel which starts passing gradually to the buyer
proportionately with the percentage of payments made and passes fully with
the payment of last instalment on delivery of vessel having been accepted. H

}
612 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A Jn Reid v. Macbeth, [ 1904] A.C. 223 where a contract for the construction
of a ship provided that "the vessel, as she is constructed and all materials
from time to time intended for her [wherever situated] shall immediately as the
same proceeds become the property of the purchasers," the House of Lords
held as a matter of construction that various iron and steel plates lying in
railway stations, which had been passed by the Lloyd's surveryor and which
B had been marked with their proposed position in the ship, were still the
property of the seller as they had not yet become part of the ship's structure.
(see Benjamin, ibid, para 5.093).

The marking of hull number on machines, equipments etc. achieves the
C object of the same being kept available for use in the ship concerned so as
not to hamper the progress of work for want of material or the available
material having been utilised for construction of some other ship. Such of the
things as are left unused automatically revert back to the seller. In fact, except
on paper, they were not at all appropriated by the buyer. The payments made
by buyer are not towards any components but towards the vessel which is
D yet to come in existence. The built up vessel, if the contract may fail, is
available to be sold to some one else by the seller. The comparative importance
is more of the hull, machine, equipments, engine, etc. then that of the labour.

E
Present one is not a case where the materials used are insignificant or
secondary or have been used just incidental to the skill and labour bestowed.

In the event of the owner committing a default in honouring the schedule
-
of payment and the belated payment accompanied by payment of interest not
wiping out the default of the owner, the vessel continues with the builder and
the builder may rescind the contract. All that the builder is required to do is
to refund the instalments already paid by the owner to the builder without
F any interest thereon.

Clauses 15, 16 and 17 of the contract confuse the issue to some extent
because of the phraseology employed in drafting these clauses. Article 15
provides the property in the vessel vesting in the owner simultaneously with
G the payment of the first instalment and the ownership or disposition of the
builder ceasing therewith. The owner also becomes entitled to mortgage his
interest in the vessel to the extent of the payments made by him. However,
the same clause goes on to say that such passing of the property is subject
to Article 17 of the contract and also subject to the lien of the builder for the
unpaid portion of the price. If the builder may commit a default in fulfilling
H his obligations under the contract the owner may take possession of the
HINDUSTAN SHIPYARD LTD. v. STATE (R.C. LAHOTI, J.] 613

vessel in the state in which she is and have the remaining building of the A
vessel completed elsewhere out of the price remaining unpaid and the
deficiency, if any, shall be made good by the builder. Vide Article 17, the
insurance cover is to be obtained by the builder, the policy or policies being
taken out in the joint names of the builder and the owner. What is pertinent
to note is that the loss or damage, if any, occasioned to the vessel before B
delivery to the owner is to be suffered by the builder which would not have
been so if the property in the vessel had already stood passed to the owner.
It is the obligation of the builder to make the loss or destruction good for
which purpose the builder may reimburse itself by claim under the policy. In
the event of destruction of the vessel the loss though responsibility of the
builder may be partly or fully satisfied to the owner by refunding the amount C
of the instalments of the contract price plus interest at the rate of 5 per cent
per annum for which purpose the builder has to make necessary endorsements
on the policy and the owner may directly receive payments from the insurer.
This clause also shows that interest of the owner is only to the extent of the
percentage of the contract price paid by the owner to the builder. Else the loss D
has to be borne by the builder. The High Court has observed, and in our
opinion rightly, that Article 15 is a piece of artistic drafting. Though it is said
that the things mentioned therein become the property of the owner
simultaneously with the first payment of the instalment, other clauses of the
. contract generally, and Articles I6 and 17 immediately, go to show that for
all practical purposes the property in the vessel, continues to remain with the E
builder and passes to the owner only (i) on satisfactory completion of the
work, (ii) the vessel coming into existence in a deliverable state, and (iii)
satisfaction of the owner as to the vessel being seaworthy also having been
built up to the satisfaction of the owner in accordance with the terms and
conditions of the contract. It is not the meaning of an individual recital or the
inference flowing from any term or condition of the contract read in isolation F
but an overview of the contract wherefrom the nature of the transaction
covered thereby has to be determined.

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 G
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 H
1
614 SUPREME COURT REPORTS (2000) SUPP. I S.C.R.

A risk in such case remains with the seller so long as the property therein is
not transferred to the buy<~r though the delivery may be delayed.

For all the foregoing reasons 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
B 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.

The appeals are devoid of merit. They are held liable to be dismissed
C and are dismissed accordingly. In view of purely legal controversy arising for
decision it is directed that the costs shall be borne as incurred.

NJ. Appeals dismissed.