Shah, J.— The appellants John Mowlem & Company Ltd. who carry on business as contractors and construction engineers are a Company registered in the United Kingdom with a branch office at New Delhi. Under a contract with the Electricity Department of the Government of Madras relating to a Hydro-Electric Project known as the Machkund Project, the appellants undertook to construct tunnels, surge shafts and pipe tunnels etc. Treating the appellants as “dealer”, the Sales Tax Officer, Jeypore assessed tax under Section 12(5) of the Orissa Sales Tax Act on the turnover of the appellants for the quarters ending on June 30, 1950 to December 31, 1951. The High Court of Orissa by order dated September 29, 1958, set aside the order of assessment holding that remuneration received by the appellants under a works contract was not exigible to sales tax under the Orissa Sales Tax Act. But, before the High Court decided the reference the Sales Tax Authorities also brought to tax the remuneration received under the contract for four more quarters. Those assessment proceedings were carried in appeal to the Sales Tax Tribunal of the State of Orissa. The Tribunal set aside the assessment of tax levied on the remuneration received by the appellants under the contract insofar as it related to construction work. But in the view of the Tribunal, the contract was a composite contract relating to construction, and to sale by the appellants to the State of Madras of certain plant, machinery and materials and that eight instalments of price Rs 1,00,000 received in each of the four quarters ending on June 30, 1950 to March 31, 1951 and Rs 50,000 in each of the four quarters ending on June 30, 1951 to March 31, 1952 for the plant, machinery and material supplied by the appellants to the State were taxable under the Orissa Sales Tax Act. At the instance of the appellants the Sales Tax Tribunal referred to the High Court of Orissa under Section 24(1) of the Orissa Sales Tax Act, 1947, the following three questions:
“1. Whether in view of the decision of the High Court of Orissa in SJC No. 2 of 1965 dated 29th September 1958, it is open to the Sales Tax Tribunal, Orissa, to hold that any part of the contract for tunnel holing by M/s John Mowlem & Co. Ltd., with the Government of Madras (Now Andhra Pradesh) is liable for sales tax?
2. Whether the contract entered into with M/s John Mowlem & Co. Ltd., by the Government of Madras (Now Andhra Pradesh) for tunnel holing is in the nature of a contract of agency where the goods are Government property from the inception, and there is no passing of title in them, at any time, from the company to the Government?
3. Whether the contract for tunnel holing between M/s John Mowlem & Co. Ltd., and the Government of Madras (Now Andhra Pradesh) is not composite and indivisible, but contains a separate and distinct contract for the supply of material viz. plant as such, and the value of the plant being liable for sales tax?”
The High Court recorded affirmative answers on the first and the third questions and an answer in the negative on the second question. With special leave, the appellants have preferred these eight appeals.
2. The appellants challenge their liability to be assessed to sales tax in respect of the amount of Rs 6 lakhs received by them under the terms of the contract for what the Tribunal has called “supply of materials by the appellants to the State”. The first question referred to the High Court was answered in the affirmative and no serious argument has been raised by counsel for the appellants challenging the correctness of the answer. The third question is easy of solution. Under the terms of the contract, the appellants were not only to carry out the works contract, but also to procure certain plant, machinery and equipment for use in the execution of the works contract. The agreement, it is true, relates to a “target estimate” of Rs 80,40,543 “which is calculated to cover the work in the specifications”, and represents an estimate based on the appellants' “knowledge and experience of the reasonable and probable cost under efficient management”, and is “adjustable in accordance with the alterations to the specification or to the quantities, and with variations in labour rates and cost of materials”. But the contract also contains an arrangement under which the appellants were to procure certain plant, machinery, equipment and small tools, details whereof are to be found in Appendix ‘B' Part II under the heading “To be supplied by the contractor”. The plant, machinery and equipment so procured were to be utilised by the appellants in carrying out the works contract, and in respect thereof an arrangement independent of the execution of the works contract was agreed upon by the parties to the contract. The convenants relating to this arrangement could not therefore be deemed to form part of the works contract, and property in the plant, machinery and equipment could not pass to the State of Madras as part of the execution of the works contract. As pointed out by this Court in the State of Madras v. Cannon Dunkerley & Co. (Madras) Ltd. (1959) SCR 379 in a works contract, the agreement between the parties is that the contractor should construct the works according to the specifications contained in the agreement, and in consideration therefor receive payment as provided therein, and in such an agreement there is neither a contract to sell the materials used in the construction, nor does properly pass therein as moveables. As the works contract related to the construction work relating to the Machkund Project and for the purpose of facilitating the execution of that work the appellants had undertaken to procure, certain machinery, title whereof was not to pass as part of the execution of the works contract, the High Court was right in holding that there was a severable contract relating to the plant, machinery and equipment from the works contract.
3. Answer to the second question depends upon the true interpretation of the terms of the contract. Under the terms of the contract the Government of Madras are described as ‘the purchaser' and the appellants as ‘the contractor'. Use of an expression devised to avoid repetition such as ‘the purchaser' for the Government of Madras has little significance in interpreting the contract. By the first paragraph the appellants were to supply all materials, labour, construction equipment, and supervision necessary to perform the specific work and the State of Madras were to furnish certain plant, equipment and machinery “as indicated in Appendix ‘B' to be utilised by the contractor”. Appendix ‘B' which is headed “Plant List” is in two parts: Items 1 to 15 under the caption “Items under supply by purchaser free of charge” and Items 18 to 44 in the second part under the caption “Items to be supplied by contractors”. The second part of Appendix ‘B' consists of items of machinery to be procured in India of the aggregate value of Rs 2,85,267 and the rest of the aggregate value of Rs 8,97,948 from the United Kingdom. By para 8 it is agreed that:
“(a) The purchaser, through his agent, the Chief Accounting Officer of the High Commissioner for India, will pay on presentation, the proforma invoices covering the items of plant or equipment which are being purchased in England for the work.
The Chief Accounting Officer will be guided by the Plant List, Appendix ‘B' to this contract, with the instructions that the Appendix List is not final or complete, and that deviation for items required for the contract and within the general intention of the list are to be accepted.
The proforma invoices will be certified by the company's auditors that they have examined the records of purchase of plant and machinery covered by the invoices and certify that the rates are reasonable and not in excess of the prevailing rates before being presented to the Chief Accounting Officer for payment. The contractor will place his formal order when the proforma invoices are met, and the final accounting for plant and its passing into the hands of the purchaser will take place on delivery at the site the invoices to be rendered by the contractor for final adjustment of the advances to India will be checked and countersigned by the Director General of India Stores Department. The contractors will remain responsible for transportation and insurance as far as the site.
(b) The purchaser, through its agent, the Chief Accounting Officer to the High Commissioner for India, will make an advance to the contractor of Rs 2 lakhs to cover salaries including travelling.”
By para 9 which bears the caption “prime cost” it is agreed that the contractor shall be reimbursed for all proper and necessary costs incurred in accomplishing the work and that the prime costs shall include the items specified therein. In the sub-heading in the specification under the “Final Agreement” are included the items “all cost of plant, machinery, and equipment and small tools, including the cost of freight, insurance delivery to the site and its repairs and maintenance on the site”, and “the salaries or portions thereof, of such staff in the Head Office in England or Branch Office in India as may be employed in connection with the works”. Then follow other items of which the expenses are to be borne by the contractor. By para 10 under the heading “Plant” it is agreed that “All plant, machinery, small tools, equipment and stores shall be invoiced and paid for at the net cost chargeable to the contractor, and all trade or special discounts allowed to the contractor in connection with such purchases shall be credited to the purchaser”, that “A purchasing commission of 2½ per cent of the net price shall be allowed to the contractor's Head Office in England or Branch Office in India to cover the cost of purchase of new or second hand plant, machinery, equipment or stores, purchased outside the Madras Presidency,” and that “All plant, machinery, equipment, small tools and stores supplied to the works from contractor's stocks shall be invoiced at the correct market value”. Under the heading “Injury to the works, persons and property” in para 10-A, it is stipulated that any money received by the contractor under or by virtue of any such insurance shall be held by the contractor upon trust for the purchaser and shall be applied or dealt with by the contractor in such manner as the purchaser may from time to time direct. Appended to this agreement is a statement relating to “Accountancy Procedure”. The material part of para 1 is as follows:
“The contractor will present to the Chief Accounting Officer of the High Commissioner for India, London, who acts as Agent to the purchaser, the proforma invoice, covering the items of plant and equipment which are required to be purchased in England, after having them certified by the Director-General, India Stores Department, London.
The Chief Accounting Officer will pay the contractor on the proforma invoices, and the contractor will open a separate bank account ... to be called the ‘Madras Account' into which these sums will be paid. As soon as the money is received the contractor will place formal orders for the plant and equipment, He will pay the suppliers from the funds made available in the Madras Account, and will give the purchaser credit for any cash discounts received. He will also be responsible for arranging the transportation and insurance of the plant and equipment to the site. The invoices to be rendered by the contractor in India will be checked and countersigned by the contractor's Auditors.
The purchaser, through its agent the Chief Accounting Officer, will make an advance to the contractor of Rs 2 lakhs, and this sum will also be credited to the same Madras Account with the bank. This sum will cover the following expenditure:
(i) Salaries, travelling expenses, kit allowances, insurance etc. of personnel despatched to the project.
(ii) The salaries of the London clerical and technical staff of the contractor to the extent they are employed on the project. The staff involved will keep monthly time records and will charge the appropriate percentage of their salary.
(iii) The salaries or portions of salaries, requested by the staff on the project to be paid in London.
(iv) Insurance and freight charges.
(v) Withdrawals on account of anticipated initial profit.
(vi) The 2½% purchasing commission on all new or second-hand plant, machinery, equipment, or stores purchased by the contractors London Office.
(vii) All other items of prime cost properly chargeable to the project.”
The “Accountancy Procedure” also contains directions relating to replenishment of the advance of Rs 2 lakhs and the manner in which the expenses are to be incurred. In para 2 it is directed that the New Delhi Office of the contractor will provide supervision over the project as well as over purchasing goods, directing insurances etc., and will prepare monthly accounts with supporting vouchers of all sums paid out on behalf of the project including proportions of salaries and 2½ per cent purchasing commission. The remaining directions are not material.
4. The effect of paras 8, 9, 10 and the Accountancy Procedure is that the State of Madras had under the terms of the contract agreed to make available Rs 2 lakhs which were to be replenished as and when expenses were incurred out of that amount for purposes mentioned in para 9 of the contract, and in the Accountancy Procedure, that the appellants were to purchase the plant and machinery after approval by the Chief Accounting Officer of the High Commissioner for India and funds were provided; that the appellants were to receive a commission of 2½% and all trade discounts were to be accounted for by the appellants to the State, and that the appellants were to be reimbursed for all necessary costs incurred in accomplishing the work, and were to hold money received from the insurers in trust for the Government of the State of Madras. The contract does not provide that the appellants were to sell the machinery described in Appendix ‘B' Part II to the State of Madras, and the covenants of the contract are consistent only with the appellants being purchasing agents for the State of Madras.
5. Barman, J., who delivered the principal judgment of the High Court was of the view that a contract of sale of the plant, machinery and equipment could be inferred from the existence of three covenants: (1) that the contractors were to remain responsible for transportation and insurance till the plant reached the site of the Machkund Dam as provided in clause 8(a) of the agreement; (2) that under the agreement the contractors were to effect insurance in the joint names of the Government and the contractors, and that showed that they had insurable interest in the goods; and (3) that no customs duty was included in the “target estimates” and if the State of Madras was obliged to pay any duty on equipment or materials provided for the contractor such payment would be accounted for separately in addition to the “final target”, indicating thereby that the State of Madras was not liable to pay customs duty. Narasimham, C.J, agreed with Barman, J., He observed that the first two grounds in the judgment of Barman, J., justified the raising of the inference that there was a sale of plant and machinery, but the third ground was inconclusive.
6. We are unable to agree with the learned Judges of the High Court. A covenant in the contract whereby the appellants undertook to deliver goods purchased by them on behalf of the State at the site where they were required by the latter is not inconsistent with the relation between them being of agent and principal, and a stipulation that the appellants “will remain responsible for transportation and insurance as far as the site” also does not detract from the overwhelming indications furnished by the other terms of the contract. The stipulation that goods purchased will be insured in the joint names of the Government of the State of Madras and the appellants is susceptible of no positive inference in favour of either case, and the learned Chief Justice was right in observing that the term about the contractor's liability to pay customs duty, if any, was inconclusive. It is not possible to raise an inference from the clause “the final accounting for the plant, and its passing into the hands of the purchaser will take place” in para 8 of the contract that till it was delivered at the site of the Machkund Dam, the appellants were the owners of the plant. The clause deals merely with the obligations undertaken by the appellants for “transportation and insurance” of the plant, and not with the passing of property in the plant from the appellants to the State of Madras.
7. The appeals are therefore allowed and the answer recorded by the High Court on the second question is discharged, and substituted by an answer in the affirmative. The appellants would be entitled to their costs in these appeals in this Court and in the High Court. One hearing fee.