C. B. Gosain vs State of Orissa

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 41 to 49 of 1962

Decision Date: 5 April 1963

Coram: A.K. Sarkar, S.K. Das, M. Hidayatullah

In the matter titled C. B. Gosain versus State of Orissa, the Supreme Court of India delivered a judgment on the 5th of April, 1963. The bench for this decision comprised Justice A. K. Sarkar, Justice S. K. Das and Justice M. Hidayatullah. The petitioner, C. B. Gosain, had entered into a contract with a company for the manufacture and supply of bricks in accordance with specifications set out in the agreement. The contract stipulated that the company would provide land free of charge to enable the petitioner to obtain earth required for brick production. The central question before the Court was whether the bricks supplied under this contract were liable to sales tax under the Orissa Sales Tax Act, 1947. The Court examined whether the transfer of bricks represented a sale of goods or merely the provision of labour and materials. It held that the supplies constituted a sale of goods and therefore attracted sales tax. The Court reasoned that the earth supplied by the company became the property of the petitioner, and the bricks manufactured thereafter also became his property; consequently the bricks were sold to the company as chattels, and the contract was not limited to labour or work done. Earlier authorities such as P. A. Raju Chettiar v. State of Madras (1955) 6 S.T.C. 131, Clay v. Yates (1856) 1 H & N. 73, Robinson v. Graves (1935) 1 K.B. 579, Grafton v. Armitage (1845) 880, C. B. 336 and J. Marcel (Furriers) Ltd. v. Tapper (1953) 1 All. E.R. 15 were cited and distinguished. The Court clarified that the essence of a contract determines whether it is one of sale of goods or one of work done and materials found; the presence of skill and labour does not, by itself, negate the character of a sale when the objective remains the delivery of goods as chattels.

The case was heard under the civil appellate jurisdiction of the Supreme Court, specifically Civil Appeals Nos. 41 to 49 of 1962, by special leave from the judgment and order dated 23 July 1959 of the Orissa High Court in O. J. C. No. 33 of 1959. Counsel for the appellant was represented by legal practitioners specializing in appellate advocacy, while the respondents were represented by the Attorney‑General for India and counsel experienced in representing the State. The judgment was pronounced on 5 April 1963, and the opinion of the Court was delivered by Justice A. K. Sarkar.

SARKAR J. observed that the appellant had entered into a written agreement with Hindusthan Steel Private Ltd. for the manufacture and supply of bricks at Rourkela in Orissa. Under the terms of that agreement the appellant produced large quantities of bricks, delivered them to the company and obtained payment for the material supplied. The State of Orissa then issued a assessment of sales tax under the Orissa Sales Tax Act, 1947, on the basis that the supplies constituted sales of goods. The appellant argued that the contract was limited to the provision of labour and the performance of work involving material that was found on the site, and that no sale of goods had taken place that could attract tax. Consequently the appellant filed a petition in the Orissa High Court seeking a writ of mandamus to restrain the State from assessing or levying the tax. The High Court dismissed the petition on preliminary grounds, and the appellant thereafter appealed to the Supreme Court. The Court noted that the statute defined a taxable sale as “any transfer of property in goods for cash or deferred payment or other valuable consideration.” The critical question therefore was whether the contract created a transfer of property in the bricks from the appellant to the company for consideration. The State contended that the bricks were fashioned from earth that originally belonged to the company, and that, because the earth remained the company’s property, the bricks too remained its property and no transfer of ownership occurred. This argument relied on a clause in the contract which provided that “land will be given free,” a provision that the State said was intended merely to make earth available to the appellant for brick‑making. The Court rejected that view, holding that the clause could not be interpreted as evidence that the earth continued to belong to the company. Instead, the Court inferred that the phrase “land will be given” meant that the ownership of the earth to be excavated for brick production was to be transferred to the appellant. It was therefore presumed that the appellant’s quoted price for the bricks incorporated the benefit of receiving the earth at no cost. Moreover, the Court emphasized that what the appellant supplied to the company was not raw earth but finished bricks, which were a distinct material. It would be unreasonable to assume that the company retained ownership of the earth after it had been transformed into bricks, a completely different thing.

The Court further examined other provisions of the contract that demonstrated the bricks were the appellant’s property until delivery. One clause stipulated that the bricks would remain at the appellant’s risk until they were delivered to the company, a condition that could only apply if the appellant held title to the bricks. Another clause prohibited the appellant from selling the bricks to any other party without first obtaining the company’s permission, implying that, absent such a restriction, the appellant would have been free to dispose of the bricks to third parties. These contractual terms, the Court concluded, clearly indicated that ownership of the bricks passed to the appellant at the time of manufacture and that the contract was therefore a contract for the sale of bricks, not merely for labour or the provision of material. Consequently, the transfer of property in the bricks satisfied the statutory definition of a taxable sale.

The Court observed that the appellant would be unable to sell the bricks unless he possessed legal ownership of them, and therefore the issue of ownership was central to determining whether a sale had occurred. It examined the tender document submitted by the appellant, which, upon acceptance, gave rise to the contract, and noted that the tender contained the clause, “we hereby tender for the supply to the Hindusthan Steel Private Ltd. of the materials described in the undermentioned memorandum.” The memorandum that accompanied the tender expressly identified the material to be supplied as bricks and further set out the quantities to be delivered as well as the rate at which the materials were to be supplied. These explicit statements, the Court held, plainly indicate that the contract was intended to be a contract for the sale of bricks. Consequently, if the agreement was indeed a contract for sale, the ownership of the bricks must have vested in the appellant at the time of contract formation and subsequently passed from him to the Company upon performance. The Court pointed to another clause in the contract which provided that, should the bricks be stacked in the manner specified, seventy‑five percent of the value of the bricks at the kiln site would be measured and paid, while the remaining twenty‑five percent would be payable only after all the bricks had been delivered, and that only full bricks finally delivered would be taken into account for payment. This provision, the Court noted, reinforced the conclusion that a transfer of property for consideration was contemplated, further supporting the view that a sale was intended. Before moving on, the Court referred to the decision in P. A. Raju Chettiar v. The State of Madras, which the appellant’s counsel had cited, and explained why that precedent was not applicable. In the cited case, a merchant supplied silver to workmen for the purpose of manufacturing utensils, and the workmen returned the finished utensils to the merchant. The court in that case held that no sale of the silver had occurred because the silver’s weight was debited to the workmen on delivery and credited back when the utensils were transferred, and the price of the silver was never debited or credited to either party; the workmen received only remuneration for their labour. Hence, under those facts the property in the silver never passed to the workmen. The present case, however, involved different facts, and the Court reiterated that, for the reasons previously discussed, the property in the earth supplied by the Company transferred to the appellant, and subsequently the property in the bricks derived from that earth transferred from the appellant to the Company. The appellant’s counsel emphasized that the contract never employed the word “sale” in connection with the bricks, arguing that this omission demonstrated the absence of a sale. The Court rejected that argument, observing that the mere use of the term “sale” is not a prerequisite for a transaction to be classified as a sale. The Court concluded that the contractual terms provided sufficient evidence of a transfer of ownership of the bricks for valuable consideration, and therefore a sale had occurred despite the absence of the word “sale” in the agreement. The appellant also contended that even if the earth used to make the bricks had been transferred to him under the contract, the arrangement might still fall under a contract for work done and materials found rather than a contract for the sale of goods; the Court noted this argument for further consideration in the subsequent analysis.

The appellant’s counsel argued that the agreement was not a contract for the sale of goods but rather a contract for work done and for materials that would be found. Illustrative cases were cited, including Clay v. Yates, where the contract involved printing a book and the printer was required to procure the paper and other materials, and Robinson v. Graves, in which an artist was engaged to paint a portrait and was required to supply paint and canvas. In those authorities the court examined the nature of the contract by asking what the essence of the agreement was: whether the parties intended that a chattel be produced and transferred for a price. That test has been adopted in general to distinguish contracts for the sale of goods from contracts for labour and materials, as discussed in Benjamin on Sales (eighth edition, page 161) and in Halsbury’s Laws of England (third edition, volume 34, page 6). Although the test can sometimes be difficult to apply, the present case presented no such difficulty. The intention of the parties, as shown by the terms of the agreement, was that the Company would receive the bricks that the appellant would manufacture and deliver. Consequently, the contract was for the transfer of chattels as chattels. The essential purpose of the agreement was the delivery of the bricks, even though the bricks had to be produced according to certain specifications. It would be unreasonable to treat the manufacturing process as the essence of the contract and view the delivery of the bricks as merely ancillary, as was held in Robinson v. Graves where the supply of paint and canvas was considered ancillary to the painting contract.

The fact that the bricks had to be made to specified standards, requiring the appellant to apply skill and labour, did not alter the essential character of the contract. The core objective remained the delivery of the bricks themselves. This follows the established principle that a tailor’s or a shoemaker’s claim is for the price of the goods delivered, not for the labour expended in manufacturing them, as reiterated in Grafton v. Armitage and J. Marcel (Furriers) Ltd. v. Tapper. Accordingly, the present agreement must be regarded as a contract for the sale of goods. The respondent then raised a preliminary objection to the appeal, asserting that

Before moving the High Court under Article 226 for the writ, the appellant had first filed appeals against the assessment orders before the Sales Tax Appellate Tribunal. Those appeals did not succeed, and the appellant’s subsequent application for an order from the Tribunal to refer the question of law raised in the present appeal to the High Court was likewise rejected by the High Court. Consequently, the appeal was deemed to have been concluded by the last order of the High Court.

Nevertheless, it appears that this Court had earlier granted leave to appeal from the High Court’s order that refused to issue the writ, even though the appeal to the Tribunal had not yet been dismissed. The appellant therefore had the option of appealing the High Court’s order that declined to direct a reference of the question of law. Instead, the appellant elected to pursue the appeal against that order within the writ petition, a course that would have produced the same relief. Both of these avenues of relief were available to the appellant, and under the circumstances neither can be said to have been barred by the other.

Having examined the merits of the case, the Court found that the appellant’s arguments did not succeed. Accordingly, the appeal was dismissed and the appellant was ordered to pay costs. The appeal was therefore dismissed with costs.