HINDUSTAN SHIPYARD LTD Vs. C T O VIZAG

JUDGEMENT

(1.) The question that has to be considered in these two writ petitions is whether the contracts between the petitioners Hindustan Shipyard Ltd,, Visakhapatnam and the Shipping Corporation of India Ltd.,to build certain number of ships either come within the purview of works contract or is if a sale of ships. If it is the former, the.State of Andhra Pradesh cannot levy any sales tax under the Andhra Pradesh General Sales-tax Act, hereinafter called the Act; but if it is the latter, then the tax is exigible. The petitioner is a concern ot the Government of India in the public sector under the control and guidance of the Ministry of Transport and shipping, Government of India The business of the petitioner is to construct ships for ship owners under the contracts entered into between them as and when orders are placed. It is averred that they had never been assessed to sales tax previously, that for the first time the Commercial Tax Officer, Visakhapatnam, without giving sufficient opportunity to state the objections to his proposed assessment, assessed the shipyard to a provisional tax of Rs. 8,94,442/- for the year 1967-68 on the basis of a turnover of Rs.2,75,21,309/- relating to the ship construction work under taken by the petitioner during the previous year 1966-67 which is the subject matter of W P. No 2988 of 1967. Subsequently for the year 1968-69,the Commercial Tax Officer issued a notice on 10-5-1968 proposing to assees the petitioner on a net turnover of Rs 4,77,04,069/- (which includes Rs. 4,65.37,314/- representing the cost of construction of ships) to a tax of Rs. 15,55.114/- payable at Rs. 1,30,000/- per month and asked the petitioner to file objections if any on 16-5-1968 in his office at 10-00 A. M. On the due date the petitioner company filed its objections and also brought to his notice that W. P. No- 2988 of 1967 was pending. But the respondent inspite of the objections assessed the petitioner on the disputed turnover of Rs. 4,65,37,314/- (which, according to the petitioners, is not taxable) and issued a demand notice for payment of tax. Sri D. Narasaraju contends that the Sale-tax Officer has no jurisdiction to levy any tax firstly because the petitioners are not selling a ship but are constructing a ship from out of the materials owned by the owners for whom they are building. In other words, the contract provides for the supply of material and the technical know-how etc. and is in fact a 'works contract' within the meaning of the Act and not a sale of a ship Secondly he contends that the petitioner is not carrying on a business and is not a 'dealer' within the meaning of the Act. Thirdly under the contract even if it is a sale which is denied, it is not the sale of a ship within the state of Andhra Pradesh inasmuch as the contract envisages the construction and delivery of the ship in a sea in any Indian port; and as the ports and the territorial waters of high seas are outside the taxable territory of Andhra Pradesh, it has no jurisdiction and the Central legislature alone has the jurisdiction over the territories. At the end of the arguments of the learned counsel for the petitioners, Sri P Ramachandra Reddy, the Principal Government Pleader, had raised a preliminary objection that these writs are not to be entertained as the petitioner can have the remedy under the Act and agitate the several contentions before the hierarchy of tribunals . We do not think that constitutional questions such as the one raised before us could be properly left to be determined by the hierarchy of tribunals, though it cannot be denied that those questions are raised before us for the first time. Even so, once the matter has been fully argued and also when the Sales Tax authorities concerned did not even consider vis-a-vis the terms of the contract as to whether the contract is one for the sale of a ship or for the building of a ship coming under the term 'works contract', we do not think it proper to reject the petitions merely on the ground that the petititioner could agitate the questions before the authorities constituted uader the Act. The question involved is one of proper exercise of Jurisdiction, but no attempt was made by the Sales Tax Officer,to go into the jurisdictional facts which confer a jurisdiction the sales-tax authorities. This Court can entertain a petition and if it is a case which is dependent upon a finding to be given by the sales tax authorities on the materials to be placed or evidence adduced before it, we could direct it to do so. But if it is a matter which can be disposed of on facts which are not in controversy, this Court has got the discretion to consider and determine the questions before it. For these reasons we do not consider the preliminary objection as a valid one.

(2.) The determination of the main question would depend upon the terms of the contract. The terms of the contract in both the writ petitions are identical except for the variations in respect of the particulars of the ships to be built and the specifications pertaining to them. We therefore take the terms of the contract enterted into on 12th April, 1965 and concerned in W. P. No.2457 of 1968, It is an agreement between the petitioner company who are termed, a the'builders'and the Shipping Corporation of India, who are termed as the 'owners'. In clause (1) it is agreed that the builders shall build, launch, complete and deliver to the owners subject to the conditions specified thereafter. Then follow the specification of the ships and the various requirements which the ships are to fulfil It is also stated that 'if from inadvertance anything has been omitted from the specifications that is necessary to make the vessel complete in hull, engines, machinery, boilers and equipment, the same shall be deemed to be included therein and shall be supplied by the Builders within the contract price hereinafter referred to. The vessels shall comply with the rules, regulations and requirements which have been mentioned therein. Under clause (2), the price has been fixed for each of the vessels; payment of which has to be made at certain stages of the contract and the progress of the work: namely (i) 5 per cent upon placing of the firm order by the Owners with the Builders for the vessel; (ii) 5 per cent upon ordering of materials for the vessel by the Builders; (iii) 15 per cent upon keel laying of the vessel; (iv) 45 per cent upon launching of the vessel; and (v) 30 percent upon delivery of the vessel Clause (3) gives liberty to the owners to require alterations or additional work to be made or incorporated in the vessel or heriengine, biolers or machinery, provided they do so by writing and express their willingness to pay extra cost, if any. Clause (4) deals with the default in payment. Clause (5) deals with delivery of the vessel which has to be made at Bnmbay or Calcutta, or any Indian Port as may be mutually agreed, after complete,satisfactory fulfilment of the trials at Visakhapatnam as provided in that clause. Clause (6) deals with default in delivery, which confers a right upon the Owners to take possession in the event of the Builders making default in the prosecution of construction of the vessel etc., or in the event of the Builders, from any cause going into or taking steps to go in to liquidation. It farther mentions that the Owners have the power "to take possesion of the vessel, engines, boilers and machinery and all materials intended for her as before mentioned and to complete the vessel, engines, boilers and machinery and for this purpose the Owners 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 and to use the yard or with whom the Builders may have entered into Sub-contracts..................... ........." Clause (7) provides for inspection and approval by the Owners or their agens etc., as to the material and workmanship "The owners further have the liberty to appoint any such number of Engineers, Deck Officers and crew in respect of the vessel as they may require to be in constant attendance at the Builders' shipyard or shops throughout the construction of the vessel and such Engineers and Deck Officers and Crew shall be given every facility for keep ing themselves in close touch with the work in progress...............The Builders shall supply to the Owners all drawings and particulars as mentioned in the specifications, and any other drawings or particulars as may be required by the Owners for their approval or record". Clause (8) deals with the quality and workmanship under which the owners or their agents etc., have a right to test or reject any work or material which they may disapprove either in point of strongh, quality, workmanship or otherwise for which the Builders shall not be entitled to the payment of any instalment of the contracted price in respect of the vessel unless the work shall be certified as having been completed according to the contract by the Owners' Surveyors. Clause (9) deals with insurance under which the policy has to be taken in the joint names of the Builders and the Owners. The most important clause is clause (10) dealing with the property in the vessel and it is necessary to set it out in extenso:

(3.) This clause and the clauses which we have referred to above make it abundantly clear that the Builders have to carry oa the construction of the vessels according to the specifications; that they have to do so under the supervision of the Owners; that they have to comply with the directions given from time to time by the owners; remove or replace any parts or change the design as directed by them, to allow their Crew to daily inspect the work that is being done and to mark each part, from the time the first instalment is paid, conspicuously with the name of the Owner's as it became the property of the Owners and was not within the ownership or disposition of the Builders, The emphasis under clause (10) about the ownership of the vessel as and when constructed including its engines, boilers and machinery and all materials from time to time intended or appropriated to the contract whether in the building yard, fitting out basin, workshop or elsewhere determines the nature of the contract. The materials and other things appropriated, but not used for the purposes of the contract shall, after completion of the vessels, revert to and become the property of the owners and this ean only be, if they had belonged to the owners during the construction. The right which the Builders have under the agreement over the property in the vessel and its engines etc., further confirms that the property in them is vested in the Owners. It is, therefore, clear that what the Builders have to do under the contract is to complete a ship from out of the materials belonging to the Owners, under their supervision, according to their requirements, the building skill, the technical know-how and the manual labour being supplied by the Builders. The definition of 'works confact' under section 2 (t) of the Act would apply to such contracts. The 'Works contract' has been defined to mean any agreement for carrying out for cash, or for deferred payment, or for other valuable consideration, the con. struction, fitting out, improvement or repair of any building, road, bridge or other immovable property or the fitting out, improvement or repair of any movable property. The agreement does not therefore deal with the sale of ships but only with the construction and is therefore a 'works contract'. The latest decision of the Supreme Court in State of Gujarat v. Kailash Engineering Co. (Pvt) Ltd relating to the construction of coach bodies and railway wagons is one which would support our conclusion. In that case the western Railway, Administration had entered into a contract with the coach builders and one of the terms thereof was that as soon as the plant and materials were brought on the site, where the coaches were to be constructed the ownership in them would vest in the Railway. Notwithstanding this, the Sales-tax Tri. bunal held that the ownership in those materials never passed to the Railway because of the indication given by another clause, which provided that on re. moval of contractor or on rescission of contract, the Railway Authorities would be entitled to take possession and retain all materials, tools, implements machinery and buildings- The High Court disagreed with the Tribunal, hold, ing that it was a works contract. Their Lordships of the Supreme Court held at p 15 that "the terms of the contract showed that as soon the materials were taken by the respondent to the site of construction of the coaches, the owner, ship in those materials vested in the Railway and all that the respondent had to do was to carry out the work of erecting and furnishing the coach bodies When the coach bodies were ready, the property in them vested in the Rail way automatically without any further transfer of rights in it to the Railway In fact the ownership in the ready coach bodies did not vest in the respondent at all............the materials for building the coach bodies had to be obtained by the respondent and brought to the site of construction, but the provision that the ownership in those materials were brought to the site clearly indicatedthat the respondent, in purchasing those materials, was acting more or less in the capacity of an agent for effect of vesting of their ownership in the Railway was that if they were destroyed or damaged, the risk had to be borne by tht Railway, even though the Railway might have been entitled to reimburse it. self, because those material sand goods were in the custody of the respondent on behalf of the Railway". The decision in Patnaih & Company v. State of Orissa was distinguished on the facts of that case. Bhargava, J., summed up the matter thus at P. 17: "In the contract before us, as we have already mentioned in the preceding paragraph, the unfinisned bodies of the coaches were from the earliest stage treated as the property of the Railway, and there was no question of owersnip of the unfinished body passing to the Railway only after its seizure by it as was the case in the other contract in which the property in the unfinished body did not pass to the Government till the unfinished body was seized". In the writ which we are presently dealing, the ownership in the unfinished vessels-in fact every part of that vessel belonged to the Owners; So much so, the owners had a right to take possession of the unflnishid ship with all its materials, if the Building did not proceed with the work properly and could have the same completed by other Builders or manufacturers in the same shipyard, which can only be if the property in the goods belonged to them. As in the case of State of Gujarat v. Kailash Engineering Co (Pvt.) Ltd. the terms of the contract led to the irresistible conclusion that the property in the ready ship was that of the owners or to put it in a different way, the Builders were not the owners of the completed ship till it was delivered to the owners. In our view, the building of the ships under the contract is a works contract" which did not involve a sale. In the result we do not think it neces. sary to deal with the other two contentions raised by the learned counsel for the petitioners. The writ petitions are allowed with costs in W.P. No. 2998/67 and the assessment order are accordingly quashed. Advocate's fee Rs. 100/- (Rupees One hundred only), M. K. R. Writ petitionns allowed.