PATIIAIK AND CO Vs. STATE OF ORISSA

JUDGEMENT

(1.) Whether a contract is one for execution of work or for performance of service, or is a contract for sale of goods must depend upon the intention of the parties gathered from the terms of the contract viewed in the light of surrounding circumstances. If the contract is one for work or for performance of service, the mere circumstance that the party doing the work or performing the service uses goods or materials belonging to him in the execution of the contract will not be of any importance in determining whether the contract is one for sale of goods. It is common ground that under the scheme of the Sales Tax Acts enacted by State Legislatures, if in its true nature the contract is one for performance of service or for work, consideration paid is not taxable, for the States have authority under the Constitution by Schedule VII to legislate on the topics of tax on salt or purchase of goods (other than newspapers) and have no power to tax remuneration received under contracts for work or service. The primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in the person performing work or rendering service no property in the thing produced as a whole notwithstanding that a part or even the whole of the materials used by him may have been his property. In the case of a contract for sale, there is in the first instance a chattel which belongs exclusively to a party and under the contract property therein passes for money consideration. As observed in Halsbury's Laws of England (Third Edition), Vol. 34, pp. 6-7, Para 3:

(2.) To determine the liability of the appellants to pay tax under the Orissa Sales Tax Act on the consideration received by them under the terms of the contract, the true intention of the parties must be determined. The agreement which is the subject-matter of the dispute between the parties is executed on behalf of the Governor of Orissa and the appellants, for constructing "bus bodies" on the chassis supplied by the Governor of Orissa. In the second paragraph of the preamble it is recited that the Governor had accepted the quotation and had decided to place orders for construction of "bus bodies" on the chassis supplied by the Governor at the rates specified therein. The third paragraph recites that the appellants had agreed to construct "bus bodies" at the rate quoted and on the terms and conditions recited therein. The agreement then proceeds to set out the conditions of the contract. By the first condition the appellants are made responsible for safe custody of the chassis from the date of receipt there of from the Governor till delivery and are bound to insure their premises including the chassis against fire, theft, damage and riot at their own cost. By that condition the appellants are made "responsible for the chassis and materials supplied" to them and have undertaken to indemnify the Governor for any loss or damage to the said material. The clause also provides that the completed "bus bodies" shall be delivered to the Governor on or before the dates specified in the agreement. By cl. 2 it is stipulated that the "bus bodies" shall be constructed in the most substantial and workman like manner, both as regards materials and otherwise in every respect in strict accordance with the specifications in Sch. 'B' of the agreement. Clause 3 provides for payment for additional work as may be directed by Transport Controller under an order in writing to that effect. By cl. 4 it is provided that the appellants shall guarantee the durability of the body for two years from the date of delivery and if any imperfection or defective material becomes apparent within the period of guarantee the appellants shall rectify the defects at their own cost.

(3.) These four clauses do not indicate any clear intention as to the nature of the contract:they are consistent with the contract being one for sale of "bus bodies" belonging to the appellants as well as to a contract for building bus bodies on chassis supplied. Liability imposed by the contract requiring the appellants to indemnify the Governor for loss or damage to the chassis supplied and liability to carry out the work in the most substantial and workmanlike manner and to guarantee durability of the bodies are consistent with the contract being one of sale or of work and service. Clause 3 also does not indicate any definite intention. If the contract is one for sale of a "bus body", the agreement to pay extra payment for additional work to be done thereon is not also indicative of any definite intention. But by cls. 5 and 6 of the contract a definite intention that the contract is one for work and not sale is, in my judgment, indicated. By the fifth clause it is, inter alia, provided that the work shall throughout the stipulated period of the contract be carried out with all due diligence, time being deemed to be of the essence of the contract, and that the appellants shall be liable to pay to the Governor as liquidated damages an amount equal to 50 per cent of the estimated cost of the whole work as shown in the contract for every day that the work remains unfinished after the date fixed. In a contract for sale of goods such a covenant is unusual. If a party to a contract fails to carry out his part within the period specified, unless the other party waives the breach the contract may be deemed to be broken. The other party is ordinarily not concerned with the method or manner of producing the chattel agreed to be sold, if the specifications relating thereto are otherwise complied with. Imposition of an obligation to carry out the work with due diligence is indicative of the contract being one for work. This inference is strengthened by the proviso to cl. 5 which imposes liability upon the appellants to pay damages until the defects detected on inspection are rectified. By the first part of cl. 6, all work under or in the course of execution or executed in pursuance of the contract shall at all times be open to inspection by the Controller or officers authorised by him in that behalf and that they shall have the right to stop by a written order any work which in the opinion of the Controller has been executed with unsound, imperfect, unskillful or bad workmanship or with materials of inferior quality. The appellants on receipt of a written order are obliged to dismantle or replace such defective work or material at their own cost. If the appellants fail to comply with the order within seven days from the date of receipt of the order, the Controller is free to get the work remaining to be done by any other agency and is entitled to recover the difference in cost from the appellants, and for this purpose the Controller is at liberty to enter upon the premises of the appellants and take delivery of the unfinished vehicles. It is clear from the terms of cl. 6 that throughout the process of construction the appellants are under the supervision of the Controller, and it is open to the Controller to stop any work which is in progress and to call upon the appellants to rectify the work by dismantling or replacing the defective work. If the appellants fail to carry out the order of the Controller it is open to the Controller to take possession of the unfinished work and get the same done through any other agency and to recover the difference in cost from the appellants. The Controller is also given liberty to enter upon the premises of the appellants and to take over the premises of the appellants and to take over the unfinished vehicles. A party agreeing to purchase goods of certain specifications or description is entitled to insist that the specifications or the description shall be strictly carried out, but he has ordinarily no right to supervise the production of the goods. Again the right which is conferred upon the Controller to take away the unfinished vehicles and to get them completed by some other agency is wholly inconsistent with the contract being one for purchasing an article belonging to the appellants. What one may ask would be the authority of the Controller under a contract of sale to take away unfinished vehicles from the person who owns them, have the work completed by another person and then to claim the right to recover the difference in cost Paragraph deals with the right to recover the consideration agreed to be paid to the appellants and the time at which it is to be paid. Paragraph 8 deals with the place at which the completed vehicles with bodies built thereon are to be delivered and till the date of the delivery the risk is with the appellants. Paragraph 9 deals with the settlement of any dispute which may arise between the parties on any question relating to the meaning of the specifications and drawings or as to the quality of the workmanship or materials used in the work. Paragraph 10 deals with the jurisdiction of Courts in the event of a dispute between the parties. Paragraphs 7 to 10 are in their content neutral and may be consistent with the agreement being either one for sale or for work or service.