HINDUSTAN AERONAUTICS LTD, | "THE STATE OF ORISSA’ | December 16, 1983
VD. TULZAPURKAR, R. S. PATHAK’ AND’ SABYASACHI. Moxuanzil, JJ.)
a ”
Central Sales Tax Act, 1956 ret with the Central Sales ‘Tax (Orissa) Rules,
- ” 1957—-Sales tax leviable on transaction of sale and not of works contract—Whether a@ transaction is contract for sale or contract for works depends. upon main object of
” "the parties in the circumstances of the transaction and. no fixed. yrule ts applicale.
After. the Government of. U. g. s. R,, under an agreement, grantéd & licence to the Government*of India for manufacturing and assembling of aircrafts, both
- the Governments signed a protocol in the matter of manufacturing of MIG aircrafts’ ’ . ‘ in India. The Government of India in their turn entrusted the manufacture of thé said aircrafts to the appellant, M/s Hindustan Aeronautics Ltd., (H.A.L. for short). .The Government of India ‘informed H.A.L. that the materials imported by H.ALL. for ‘this purpose and other equipment etc. were the property of Government of India. . For: the implementation of. the entrustment HLA.L., had . three divisions namely, Koraput (in the State of Orissa), Nasik (in the State of Maharashtra) and Hyderabad (in the State of Andhra Pradesh). . The H.A.L, manufactured MIG aircraft engiftes at Koraput (Orissa) and sent some of them to its Nasik Division | for being, fitted’ to the MIG aircrafts to be supplied to the Government of India and some to the Indian Air Force directly as per instructions from: the Ministry of Defence. The H.A.L. received payments from Government of India or Indian
. Air Force for the manufacturing programme: In respect of payments so received, ‘the Sales Tax Officer, Koraput I Circle of the State of Origsa levied. central sales » tax on the ground that the transactions were inter-State sales. The Assistant Commissioner of Sales Tax while confirming the order of the Sales Tax Officer observed that H.A.L. had charged some ‘percentage of profit i in the invoices sent ‘to - the Government of India for the MIG engines as in a commercial transaction in case of ~ sale, which gave a clear indication that this was a case of transaction of sale and not of agericy. In appeal the Sales Tax Tribunal negatived the contention of H.A.L. that the transaction was a works contract and nota sale. Hence this appeal. — ~ Allowing’ the abpeal, cart
HELD : ~ The transaction is nota contrac for sale but a contract for r work and labour. [275 DI
There is no rigid oF + inflexible rule applicable alike to all transactions which ‘
_can indicate distinction ‘between a contract for sale and contract for.work ands labour. - Whether a particular contract was one of sale or for work ‘and labour depended upon the main object of the parties in the citcumstances of the. trans-
- actions. Ina contract for sale, the main object of the parties is to transfter property .
in and delivery of possession of a chattel as a chattel to the buyer. The.primary
*-
68 So SUPREME COURT REPORTS, (1984) 2 s.cx.
difference between a contract for work or service and a contract for. sale of goods ids that in the former there i is in the person performing or rendering service no pro- perty in the thing produced as a whole notwithstanding that a part or even the whole material used by him may have been his property. In the case of a contract. for sale, the thing produced as a whole has individual existence as the sole property of the party who produced it some time before delivery and thé property therein passes only under the contract: relating .thererto to the other party for price. -
', [275 E-F: 276 F-G]
Mis Hindustan Aeronautics hid Vv State of Karnataka, [1984] 2 S.C.R. 248 -
. referred to. . ’
{n the instant case, taking into consideration the correspondence and circumstances under which this cntrustment had to be understood, there was no transfer of property in the MIG Aero Engines by H.A.L. to the Government of India. The materials and equipments sent by the Government of U.S.S.R. and the-MIG Aero Engines assembled by H.A.L. from such materials belonged to the Government of India‘at all material times. The Appellant had no ownership in the materials
. which were all supulied by the Governmentof USSR noréin the finished products - and no question of sales tax.on the impugned transaction could arise. Even on the indigenous materials procured or manufactured by the’ appellant i in the process of fitting in and assembling, the ‘appellant had no disposing power as the appellant was never the owner of these materials. . The H-A.L, only performed the job entrus-_ ted’ to them for and on behalf of the Government and all incidental steps naturally entering into contract, procurement, payment of price and billing and invoices had to be done in that light. The transfer of the Aircrafts to the Nasik * Division was for the purpose of completion of the job and the making of the invoices was a matter-of accounting and carrying out the job of entrustment’{275 G-H; 276 A-B; 275 B; 276 E]: © a
~ .
Covi APPELLATE Sunisprertow : Civil Appeal No. 1658 of 1982, a : an
Appeal ‘by Special. leave from the Judgment and Order, dated the 3ist December, 1981 of the Member, Sales Tax Tribunal, Orissa, Cuttack in Second Appeal No. 29(C) of 1978-79... -
S.T. Desai, YS. Murty & C.S.S. Rao for the Appellant.
V.S. Desai and R.K, Mehta for the Respondent.
- The Judgment of the Court was delivered by
- SABYASACHI MUKHARII, J. This is an appeal by special leave from the order dated 31st December, 1981 passed by the Sales Tax Tritunal, Orissa. The ‘appellant’ who was the assessee ‘under the Centra] Sales
Tax Act, 1956'went up in appeal against the confirming orders of Assistant Conimissioner in ‘respect of the assessment years 1974-75, x i-
Ye .
w
1975-76. and. 1976-77. The Sales Tax Officer, Koraput J Circle, - a
'°, HINDUSTAN AERONAUTICS v. ORISSA (S: Mukharji, J.) 269
Jeypore had made the orders under Rule 12(3) of the Central Sales Tax (Grissa) Rules, 1957 making démands of Rs. 1,21,38,586.00 for the year 1974-75, Rs. 1,29,64,637.00 for the. year 1975-76 and Rs, 1,37,72,652.00 for the year 1976-77. The appellant is a dealer regis- tered under section 7(1) of the Central Sales Tax Act, 1956 under |
Koraput J Circle in the State of Orissa. a .
* M/s Hindustan Aeronautics Limited (hereinafter referred to as ‘H.A.L.’) of which appellant is a division was established cn 1st Octo-
~. ber, 1964, The objective. of formation of the H.A.L. was to carry on’ in India and elsewhere, the business, inter alia, in aercplanes including. - manufacture, assembling, buying and selling etc. of the same. In _its division at Sunabeda, manufacture of MIG. engines for MIG aircrafts requited- for-defence and overhauling of aero engines of Indian Air Force were undertaken. - Some of the MIG engines manu- factured by it were sent to Nasik Division of H.A.L. and some to .
Indian Air Force as ‘per instructions from the Ministry of Defence. The appellant received payments from Government of India or Indian - Air Force for the manufacturing programme, In respect of payments so received, the Sales Tax Officer, Koraput I Circle levied Central. Sales Tax on the ‘ground that the transactions were ir ‘crstaté sales. This was disputed by the appellant according to whom the latter was only an agent of the Government.of India. . In the alternative it was contended that the transactions were nothing but works contract and as 5 such not exigible to Central Sales Tax.
. ; © 7 ‘
" Being aggrieved by the decision of the Tax Authorities as men- tioned hereinbefore, the appellant had gone. up in appeal before the Tribunal. The Tax Authorities had negatived both the contentions of the appellant. As common ‘question of law-on similar facts was* raised, the same was disposed of by one order by the Tribunal, Before the Tribunal, only one ground namely, that the transaction represented works contract was urged.
~
_ It is necessary at this stage to understand the background in which the manufacture of MIG engines were undertaken by H.A.L. In this conne’tion it is material to refer. to the letter dated 22nd Sep-. tember, 1970 to the Chairman of the’ appellant company for and on behalf of the President of India by the Joint Secretary to the Government of India, Ministry of Defence, Department of Defence Preduc-
‘tion. As the said letter is important, it is necessary to tt out the letter : tN ®.
7,
.
- 210 ” - + SUPREME COURT REPORTS 1984) 28.0.8)
' “Secret :
oo oo, Annexure “A's eh _ EXTRACT OF. . ae - 25. "No. 11(298)/69/1/DP/Contracts a oo -- Government of India, Hg a , Ministry of Defence, - , mT Department of Defence Production, . New Delhi. the 22nd September, 1970. .
*. The Chairnian, , , , ( Hindustan: Aeronautics. Ltd., a Indian Express Building. - Vidhana Veedhi, ‘Bangalore-J,
é
. ». - i “Sub: Manufacture - of - MIG-21 M Aircraft “and other ey, equipment in India. ne oe. 7 oY Dee Sirs : + “On behalf of the President of India, T have to state that”
an "Agreement ” was signed on 30th October, 1969 (copy
_already, forwarded to’ you)” between the Government, cf. _ "India ; and the Government of Union of Soviet Socialist, Re a ; publics for the manufacture under licence, oS :
. e
; 2, The imaivufacture of: the said Equipment as defined . @ in the above said Agreement is hereby entrusted to Hindustan TN “Aeronautics Lintited, Bangalore in terms of the said Agtcement. Under this entrustment the responsibility for the: proper implementation of thé Agreement shall be exclusively - -- that of Hindustan ‘Aeronautics Limited except that the ‘Government inay from time to time advise the Company . “about the programme of manufacture of. the said Equip- - ; ment. .
“3. All payments, falling due under the said Agreement ‘to the Government of the Union of Soviet Socialist Republics. - ‘shall be made by. Hindustan Aeronautics Limited, Bangalore ~ OBR _ on behalf of the Government. . ;
4. This entrustment shall remain in force tll itis revoked ~
‘or “altered by the President of, India. a Sos ot
. "HINDUSTAN AERONAUTICS ¥. ORISSA s. Mukai J) 271-
5. The Government of the Union of Soviet. Socialist Republics is being informed of. this entrustment and they © — are being requested to cooperate and deal directly with Hindus-
-tan Aeronautics Limited, and do. all’ things. necessary .
for the effective operation of the said ‘Agreement. according to the terms thereof.” =
There was another letter regarding the deter mination of premium under Emergency Risks ‘(Goods) Insurance. Act, - 1962. The said letter on‘ behalf of the Government of J India stated, inter, alia, as
, “follows : vs
"That the materials imported by H.A.L. for manufacture/
: assembly ‘of Aircraft/Engines/Helicopter/other equipment and also goods, stocks and stores work-in-progress etc, for which ‘on account’ payments have beens made and are being made by DCDA(AF) are ‘the property of LA.F. and that the items . manufactured out of the categories of materials stated-above , are to be supplied only to the Indian Air Force or.as.authorised by Government of India... The materials therefore belong | *
‘to the: Government of India.”
¥ it-may be mentioned as appearing from the order of the Sales
_ Tax Tribunal that there was an agreément between: Government of
-US.S:R. and the Government of India on 29th August, 1962 whereby - Government of U.S.S.R. had granted a licence to tlie Government. °- .of India for manufacture of special equipment ‘and: assembling of — aircrafts. Thereafter both the Governments signed ‘a: protocol on-
‘29th September, 1964 in the matter of manufacturing of MIG aircrafts - in India. Government of India in their” turn by the secret letter | dated 22nd September, 1970 mentioned herein before entrusted the manufacture of the’said aircrafts to H.A.L., Bangalore. In‘pursuancg- of the said éntrustments H.A.L. undertook the work of assembling and manufacturing of MIG engines. For the implementation ‘of the
_entrustment H.A.L. has ‘three divisions namely Koraput (in the.
State of Orissa), Nasik (in the State of Maharashtra) and Hyderabad
(in the State of Andhra Pradesh). At Koraput and Hyderabad, .
engines which are electronic equipments were respectively manu- — factured and the MIG aircrafts were finally assembled at ‘Nasik for’
. delivery to: the Government of India, 2 =
In this background, the question that arose before the Tribunal : ; was whether the contract between the Union’ of India and the appellant
A: c D ;
272 SUPREME COURT REPORTS . “1986 28.0R.:
for manufacture and supply of MIG engines v was a contract of sale as
. contended by the Revenue or a works contract as submitted’ by ‘the assessee, There is no consolidated document on record to show
- the térms.of contract between’ the ‘Union’ of India and the appellant.
Both sides for. this purpose relied upon some correspondence and -invoices which are on record:' Mention in this connection may be made to a communication which is in the form of a corrigendum .to the Ministry’s letter regarding ‘on account’? payments to H.ALL. . for MIG Aircrafts, the letter dated 28th July, 1970 from the Under Secretary to the Government’ of India, Ministry of Defence, to the Chief Accounts Officer, High Commission for India ig U.K, and the Chief Accounts Officer, Embassy of India in Washington on the subject of “Procurement of bought out items against the requirements | of LA.E. for Ist and 2nd line servicing”, which dealt with the procedure sanctioned by the Government of India for the purpose of “avoiding two customers viz. Hindustan Aeronautics Limited and _the Indian Air Force going to. the same supplier abroad for the same items”, the letter dated 20th December, 1971, from the Under Secretary: to the Government of India, Raksha Mantralaya, Raksha Utpadan - Vibhag, -written to the General Manager of the Nasik Division of the appellant, the letter of 28th April, 1969 on the subject of “On Account’ payments to H.A.L. for LA.F. manufacturing programmes ~ of H.A.L. Nasik, Koraput and Hyderabad”; letter dated 8th Decem-' ber, 1972 from Under Secretary to the Government of India, Ministry *
. of Defence on “pricing of H.A.L. manufactured aircraft and margin profit etc.” and the invoice dated 19th. March, 1976.
" Reliance was also placed on behalf of the Revenue before us,.on the order of the Assistant Commissioner of Sales Tax for the assessment years 1974-75 and 1975-76, wherein he had referred to a statement ©
“furnished. with a copy of the claim against price proposal for 6 F2S details engines as accepted by the Government by their letter dated
“ 4th June, 1976, .That claim is against price proposal for 6 F2S details engines accepted by the Government. Their break ‘up is as fcllows:— “Importéd materials. — os Rs. 48,39,454,08 Indigenous material and MCH-Freight etc, Rs. “2,64,925.79
- Total material cost Rs. 51,04,579.27 Labour, cost: oe Rs. 2,96,480.60 ‘Sundry direct charges. - "~ Rs, 12,87,865.89
Total Rs, 56,58,724.36
+
'' HINDUSTAN AERONAUTICS ¥. ORISSA (s. Mukharji, J. ) 273
Profit @15% on HAL’s effort Rs. 2, 47, 909. 00
_ Rs. 69,06,533 .36 or
- | - Rs, 69,06,533.00 ry
. The Break up of HAL’s effort also indicated as follows:—
“Freight 2° Rs. 66,320.41 Material Overhead * |, "Rs. 1,03,067.55 Ind, materials | . Rs. 96,536.03
Rs. 7,64,925,79
Labour cost.” : RS. 2,96,480,00 Training cost & other expenses - Rs. 6,000.00
. Tooling expenditure a ORs. 1,50,000,00 - Last test expenses” | ORs. 8,34,342.65 Insurance freight =. ~~. , Rs, 1,00,347.67 Total HAL’s effort °. ; | Rs. 16, 52,096.71 18% profit on HAL’s effort Rs. 2, 47,814.90"
_ The Assistant Commissioner had observed that after the engines
‘were despatched to, Nasik Division to be fitted in’ the Aircrafts, the bill used to be drawn by H.A.L. and the debit-was raised against the -
’ Government of India. After sanction of the price, the payment was ~ made. The Assistant Commissioner had further observed: that it’ appeared from this letter that six MIG engines were delivered by - H-A.L. to LA.F.,. the cost of which was. Rs. 69,06,530.00. He had further observed that it was significant to note that the sanction had been accorded for payment towards the cost of 6 engines delivered — to. LA.F. According to the. Assistant Commissioner, the argument * advanced on behalf of the assessee that the delivery was made to Nasik Division which was a branch of H.A.L. appeared to be inconsistent — with the sanction order. He had further observed that MIG engines ; weré delivered to Nasik Division, whereas the invoice was raised and
‘payment received from the Government of India. ‘The: purpose of
‘+
40° SUPREME couRT REPORTS. i984] 2 S.C.R.
giving physical delivery, according to. the Assistant Commissioner, of the MIG engines to Nasik Division was for the purpose of. fitting in °° '. the Aircrafts. In thatevént, according to the Assistant Commissioner,
Nasik Division became the custodian or the trustees of the MIG engines for which the Brice had already been paid to HA.L. The
Assistant Commissioner concluded that the property in the engines passed to the Government of India and not to H.A.L., Nasik Divisicn. | He had further observed that‘the break up .of the cost was towards, * the material cost, labour cost and sundry direct. charges. The tctal cost came to Rs. 68,58,724. 36, The further break up of the total
. cost of Rs. 68,58,724.36 was imported materials, indigenous material . '- and MCH freight etc., labour cost and sundry direct charges. - Appa- rently the cost’ of the material. both imported as. well as procured. locally had: -been charged in the bill. According to the Assistant
_,Commissioner, further profit ‘of 15 % had been charged on "H. A.L?s
¥
=
"effort which | ineluded freight, material overhead, indigenous material, _. Jabour cost, training cost and other expenses, tooling expenditure, . _ last-test expenses, insurance and freight. The total cost of these items , * > as per the bill stood at Rs. 16 152,096.71. J 5 °% of this had beén charged “towards the profit. The Assistant Commissioner had further. observed that profit was charged as in a commercial transaction in case of sale. Commission was allowed in case of agency transaction between the ’ Principal and .the Agent. . But in the supply of MIG engines, a profit had.been charged, The- Assistant Commissioner concluded that this gave a Clear indication that this was a case of transaction of sale and - not cf agency. “Weare unable to accept this reasoning of the Assistant _ * . Commissioner. ‘According. to us the procedure indicated in the break’
_up has to be understood in the background of the entire transactiori between the parties. The pricing procedure had to be. judged in the light of the entire facts and circumstances especiallyin-the background © that the entire transaction was entrusted to H.A.L. Bangalore in terms of the agreement between the Governmerit of India and the Government, of 'U.S.S.R- for the manufacture on ‘behalf of. ’ “the Government of India of MIG engines for which licences had been gtanted by the Government of U.S.S.R. to the Government of India. The letter dated 22nd September, 1970 set out hereinbefore indicated clearly that under the entrustment the responsibility for the” ‘proper implementation of the aregement would’ be -exclusively that of the appellant except that the Government might from time to- time advise the Company about the programme of manufacture ‘of the equipments.: The various correspondence referred to hereinbefore, in our opinion, lead to the irresistible conclusion. that the property in the aircrafts
= as well as in’ the equipments and spares used in.them were always in _ toe od ne 7 i s
~ HENDUSTAN ABRONAUTICS y. _ ORISSA (S. Mukharji J. ye 275
-
‘the . Government. Thesé were "procured for and on bebalf of the
Government of India in pursuance of the agreement with the Governinent ‘of India. and. US.S.R. The entrustment of jobs on behalf. of the Government and ‘the incidental necessary. works to be _ done in these connections had to be performed by. the appellant.
_ In this background, the. pricing, the invoice, the transacticns have to be understood. ; ; ©
~ We fave referred to the several correspondence which, according
_ to us, indicate that the property in ‘the aircrafts, in the equipments — and the materials had always been with the Govefnment. The mate-
» tials imported under the licence of procured indigenously for the. _ manufacture were always and had’ always remained the property of the Government. The: appellant: hat ne property, in any part.
‘thereof, and had no tight to dispose of or disposal over thése materials and spares, These had to be regulated by the prcdceure envisaged in the agreement between the parties; “Thé test by ‘which these transactions should be judged in deciding whether this was a works contract
" or a contract “of sale of any part of the materia} bas -becn cmphasised .
in several decisions of this Ccurt. Scme of these principles have been
: reiterated in the decision of M/s Hindustan Aeronautics Ltd. vs. State of Karnataka ii Civil Appeol Nos. 1386-91 (NT) of 1977 of this Court.) .
As emphasised by this Court, there is no rigid or inflexible’ rule applicabl e alike to all transactions which can indicete distincticn be t- ween a contract for sale and a contract for werk and lab8ur, But the tests indicated in the several decisions ‘of this Court merely focused on one or the other aspect’ of the transaction and afforded some guidance in determining thé questicn, but basically and primarily,
' whether a.particular contract was one of sale-or for work and labour - depended tipon the main object of the parties in the circumstances
, of the transactions. In a contract fer sale, the main object ef the parties is to transfer property in and delivery of possession cfa chattel
_as a chattel to the buyer. It has-to be emphasised, taking | into consideration the correspondence and circumstances undtt--which this entrustment had to be understood that at no point of time befcre the . delivery of MIG engines, H.A:L. was the owner of the. property either . in the equipment or in the spares‘or.in the aircrafts and as such there
_cotld not have ‘been tr ansfer of any property. from H.A.L. to. the
Government of India. - The H.A.L. only perfcimed the jeb entrusted to them for and on behalf of the Government and all incidental steps
(1) [1984] 2 S.C.R. 248.
<-
|, SUPREME COURT REPORTS. _—>=—[1984] 2.0...
A ° _ naturally entering into contract, procurement, payment of price end ° billing and invoices had to be done in that light. There was no transfer of property in the MIG Aero Engines by H.A.L. to the Government
» of India. The materials and equipments sent by the Government
_ of US.S.R. and the MIG Aero Engines assembled by H.A.L. from
* ,such niaterials belonged to the Government of Indja at all material
B times. The appellant had no ownership in the materials which were all supplied by the Government of U.S.S.R. nor in the finished products . .
and no question of sales tax on the impugned transaction could arise. . Even. on the indigenous materials procured or manufactured by the . appellant in. the process of fitting in‘and assembling, the appellant had no disposing. power, as the appellant was never the owner of these -
Cc a - . materials.
The paymenta required in the work of ‘manufacture of MIG- 21M Aircrafts and other equipments in India” were to be made as indicated in the letter dated 22nd September, 1970 by the appellant on behalf of the “Government of India”.
dD The. entire correspondence ‘and, the nature of the’ instructions from time to time issued by the Government indicated that the function of H.A.L. was the implementation of the said entrustment.
; “There cannot be any question, in-our opinion, of any sales tax in respect of Aero-Engines transferred to the Nasik Division of H.A.L. E __. for installing fhe same in Aircrafts, . [t was the transfer of the Aircrafts to the Nasik: Division for the purpose of completion of the job and the making of the invoices was a matter of accounting and carrying - out’ the job of entrustment. As had been emphasised by this Court, that 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 FF performing or rendering service no property in the thing produced as a whole notwithstanding that a part or even the whole: of material:
used by him may have been his property.. In the case of a contract for.sale, the thing produced as a whole has individual existence as the .
sole property of the party who produced it some time before delivery
_ and the property therein passes only under the contract relating thereto
G to the other party: for price. ‘This cannot be said to be in respect of any of the items involved in these transactions, These transactions were carried out in implementation’ of the entrustment job for the manufacture by H.A.L. and all payments and actions taken in this behalf were on behalf of the Government of India.
We are therefore of the opinion that the Tribunal was in error,
¥.
HINDUSTAN ABRONAUTICS ¥. ORISSA (S. Mukharji, J.) - 277 -
_in concluding that there was sale involved in these transactions. It _ is not necessary for us in this connection to refer to the principles in detail which the Court should accept in deciding in each particular case the nature of the transactions. hese principles have - been- . reiterated in the decision of this Court in the case of MIs Hindustan
Aeronautics Limited v. State of Karnataka."
In the above view of the matter, the ‘appeal is allowed, The assessments are set aside. Necessary adjustments and refund, if necessary, of the tax paid should be done accordingly. In the facts and circumstances, parties will bear their respective costs throughout.
HSK. _ appeal allowed.
~~ (i) 11984] 2 SCR. 248. |