UNION OF INDIA versus CENTRAL INDIA MACHINERY MANUFACTURING CO. LTD. & OTHERS

Citation: [1977] 3 S.C.R. 437 · Decided: 06-04-1977 · Supreme Court of India · Bench: V.R. KRISHNA IYER · Disposal: Dismissed

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Judgment (excerpt)

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' 
437 
UNION OF INDIA 
A 
v. 
CENTRAL INDIA MACHINERY MANUFACTURING CO. 
LTD. & OTHERS 
April 6, 1977 
[V. R. KRISHNA IYER, R. S. SARKARIA AND JASWANT SINGH, JJ.J 
E 
Rajasthan Sales Tax Act, 1954-Section 2(0)-Defi11ition of sale-Sale of 
Goods Act, s. 64(a)-Distinction between contract of sale and work contract-
Manufacturing and supplying wagons to Railways-Whether sale or work con~ 
tract-Tests to be applied-Interpretation of 
contract-When external 
aid 
pennissible. 
The appellant and respondent No. 1 company entered into a contract 
for the manufacture and 
supply of wagons. 
By the 
correspondence ex-
changed~ the number of wagons to be supplied and the pric'!. of wagon of 
·each type ·was indicated. It was 
provided that the 
contract would 
be 
governed by the Standard Conditions in so far as they are not inconsistent 
with the correspondence exchanged betw~en the parties. Under the Standard 
cond\tions, _90 per cent· of the payment had to be ·made against the Com4 
pany submitting the bill to the 
purchaser together with the 
completion 
certificate and on payment of such 90 per cent price the vehicle in question 
would become the property of the purchaser. The balance of 10 per cent 
was to be treated as security for tl.te due fulfilment of the contract. The 
balance was to be received on the receipt of certificate from the purchaser 
to the effect that the actual delivery of the vehicle was taken and that the 
delivery was made in due time. One of the clauses provided that where 
any raw materials for the execution of the contract are procured with the 
assistance of the appellant the company would hold the said materials as 
trustee for Government and use such materials economically and solely for 
the purpose of the contract against which they are issued .and not 
dispose 
them of without -the permission of the Government and 
return, if required 
by the purchaser. all surplus or unserviceable materials that might be left 
after the completion of the contract or its termination for any reason what-
soever on his being paid such price as Government might fix 
with due 
regard to the condition of the material. Clause IO further provided 
that 
if and when the State and inter-State Sales Tax on the stock on order be-
comes payable under law such payments would be reimbursed by the Rail-
way Board. The Railway Board, however, is not to be· made liable for 
the payment of Sales Tax paid under misapprehension of la\V. 
No sales 
tax on 1naterials including steel and components would be reimbursed by 
the Railway Board. That the 
stores and 
articles shall be such as arc 
required for the execution of the contract and the advance made by the 
Railways is without prejudice. to the provisions· of the contract and is subject 
to inspection and reiection of the stores. 
That the said articles and mate-
rials shall at all times be open to inspection of any officer auLhorised by 
the Railwavs. 
There are 3 
categories of 
materials, 
the 
first 
category 
admittedly was the property .of the Railways; 
the second category is 
the 
material procured by the Company against 90 per cent advance; 
and the 
third category was at all times material of the Company. Paragraph 3 of the 
Jetter exchanged between the parties fixed 
the 
period 
of 
delivery. Para 
4 provided for doing the packing of axle boxes by the Railway for which 
no packing charges were to be recovered from the Company. Section 2(o) 
of the Rnjasthan Sales Tax Act, 1954 defines sale as any 
transfer of pro-
perty in goods for cash or for deferred payment or for any other valuable 
consideration. 
The appellant relied on the following circumstances : 
Under the Special Conditions read with the indemnity bond th~ property 
in the raw materials purchased by the Company for the construction of the 
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438 
SUPREME COURT REPOKTS 
(1977) 3 s.c.R. 
wagons passed to the Railway Board as soon as the latter advanced 90 per 
cent of the value of such material: which thereafter is held by the Company 
merely as an 
agent or trustee for the Board. Condition No. 5 obligates 
the contractor to hold "as trustee for Government" and ra\v materials for 
the execution of the contract procured with the assistance of Government 
and further requires the contractor to use such materials economically nnd 
solely for the purpose of the contract against which they are' issued and not 
to dispose them of without the permission of the Govcrn

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