Case: Hindustan Aeronautics Limited Vs. State Of Karnataka

in supplying these spare parts and material, the contractor would be free to procure or obtain these spares and materials either by manufacturing or by purchase from the market local or foreign, these goods to be identified and would be treated by the operation of the contract to be the goods of the owner of the planes. It is true as was emphasised that in order to be given out on loan by the â€˜ownerâ€™ to the contractor, the â€˜ownerâ€™ must have property in the spares an materials in question. But the â€˜ownerâ€™, i.e. the Government, in our opinion, in the context of 1951 agreement, and it is indisputable that the transactions in this case were done on the basis of the agreement of 1951, became the owner of the property the moment the goods were identified and there was delay or inability on the part of the Government in supplying spares and materials. It was emphasised that not a consolidated price was contemplated but what was contemplated was separate price for the materials. Indeed the invoices relied upon by the parties in the specific works orders indicated those were charged for separately. The basis for this has been explained in the affidavit of Shri Krishna Murthy mentioned hereinbefore, The affidavit was before the authorities below as also before the High Court of Karnataka and there is no dispute as to the correctness of the statements made in the affidavit.24. In the case of Commissioner of Commercial Taxes v. Hindustan Aeronautics Ltd. ((1972) 2 SCR 927 : (1972) 1 SCC 395 : 29 STC 438) , this Court construed the correspondence between Railway Board and the respondent assessee, which correspondence to our opinion has a ring of similarity to the terms and conditions of the present transaction, for the manufacture and supply of railway coaches, and the indemnity bond in respect of the contract. It was held by this Court that the answer to the question whether a contract is a works contract or a contract of sale depends upon the construction of the terms of the contract in the light of surrounding circumstances. It was held that when all the materials used in the construction of a coach belonged to the Railways there could not be any sale of the coach itself. It was a pure works contract, and the difference between the price of a coach and the cost of materials being only the cost of service rendered by the assessee. This Court emphasised that whether the wheelsets and underframes were supplied free of cost or not made no essential difference. The material and wage escalator and adjustments regarding final price mentioned in the contract were neutral factors. The facts which should be emphasised in transaction in question with which we are concerned, are that the transactions related to the entrustment of the maintenance of the airplanes of the I.A.F. These had to be kept ready for all times to meet all situations. All avoidable and conceivable delays were planned to be eliminated and in the background of this second factor, it is further to be emphasised that for the bulk of the materials, the Government undertook to supply the spares and materials and it is only in those cases where these materials could not be supplied or provided for by the Government or there was delay, that it was stipulated that these could be procured or manufactured by the contractor within the prices sanctioned by the Government, and after being procured or manufactured by the contractor, these could not be used for any purpose except in the execution of the jobs entrusted to the contractor. The contractor had no disposing power or property in these spares and materials. The fact that these materials were separately placed (sic priced) at cost plus 10 per cent profit was to ensure quick and proper execution of the works and were like the Railway Coachesâ€™ case ((1972) 2 SCR 927 : (1972) 1 SCC 395 : 29 STC 438) neutral factors. This conclusion is strengthened by the expression we have extracted from the 1951 contract itself.25. It is manifest in the instant case from the terms of the contracts and transactions, as in the Railway Coaches case ((1972) 2 SCR 927 : (1972) 1 SCC 395 : 29 STC 438) and as was emphasised by Sikri, C.J. that the property in the materials which are used in the execution of the jobs entrusted to the contractor in this case became the property of the Government before it was used. It is also manifest that there was no possibility of any other materials to be used for the construction as would be manifest from the affidavit and the correspondence and the invoices, and works orders in these transactions. Emphasis was placed before the Tribunal as well as before the High Court of Karnataka on the case of State of Gujarat V. Variety Body Builders (38 STC 176 : (1976) 3 SCC 500 : 1976 SCC (Tax) 338) where the court was concerned with the â€˜bus bodiesâ€™. In the â€˜bus bodiesâ€™ case, the assessee contractor had continued to have the ownership rights and it was held that the â€˜bus bodyâ€™ had to be transferred from the contractor to the other party as a result of contract for sale but in the instant case it is manifest that the specified spares and, materials were not the properties of the Contractor, in the sense that the contractor never had any ownership over these. The conclusion arrived at by us is in consonance with the principles laid down by this Court in the case of Ram Singh & Sons Engineering Works v. V.S.T. (43 STC 195 : (1979) 1 SCC 487 : 1979 SCC (Tax) 71)26. For the reasons aforesaid, we are of the opinion that the High Court of Karnataka was not right in its conclusion on the taxability of the turnover of the spare parts and materials supplied in execution of appellantâ€™s job works.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]13. It is well settled that the different between contract of service and contract for sale of goods, is, that in the former, there is in the persons performing work or rendering service no property in the things produced as a whole notwithstanding that a part or even the whole of materials used by him had 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 produce it some time before delivery and the property therein passed only under the contract relating thereto to the other party for price. It is necessary, therefore, in every case for the courts to find out whether in essence there was any agreement to work for a stipulated consideration. If that was so, it would not be a sale because even if some sale may be extracted that would not affect the true position. Merely showing in the bills or invoices, it was contended on behalf of the appellant, the value of materials used in the job would not render the contract as one of sale. The nature and type of the transactions are important and determinative factors. What is necessary to find out, in our opinion, is that dominant object.It cannot be said as general proposition that in every case of works contract, there is necessarily implied the sale of the component parts which go to make up the repair. That question would naturally depend upon the facts and circumstances of each case. Mere passing of property in an article or commodity during the course of performance of the transaction in question does not under the transaction to transaction of sale. Even in a contract purely of works or service, it is possible that articles may have to be used by the person executing the work, and property in such articles or materials may pass to the other party. that would not necessarily convert the contract into one of sale of those materials. In every case, the court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it. It may in some cases be that even while entering into the contract of work or even service, parties might enter into separate agreements, one of work and service and the other of sale and purchase of materials to be used in the course of executing the work or performing the service. But, then in such cases the transaction would not be one and indivisible, but would fall into two separate agreements, one of work or service and the other of sale.In the instant case it is indisputable as we have referred to the "1951 contract" and the substance of the invoices and, it is not disputed that the other works orders were on the basis of the principles agreed by the 1951 agreement set out hereinbefore, that the transactions were as a result of composite contracts involving the execution of works viz. overhauling, repairing, servicing and in one year assembling, air force planes, entrusted to the appellant. The question is, whether this composite contract was divisible into one exclusively for work and labour and another for sale of materials. The fact that there is supply of materials for the purpose of execution of the work contracts undertaken by the appellant cannot be disputed. But the question then arises whether that can be taken as pursuant to a distinct contract with a view to execute the workis true, as was emphasised on behalf of the respondent and has been emphasised by the Tribunal as well as the Karnataka High Court, that it cannot be said that parties did not contemplate and apply their minds to the question of spare parts and other materials necessary for the execution of the works. It was emphasised on behalf of the respondent and on this aspect the question of the High Court of Karnataka as well as the decision of the Tribunal were relied upon to stress the point that the price separately provided as (sic was) cost plus 10 per cent. The bills and the invoices were also made separately indicating the prices involved in these transactions. But it is important to emphasised that Clause 1 of the contract was to accomplish for the owner the servicing and maintenance of the Headquarters Training Command, I.A.F. Communication Flight, and works required on visitingaccording to the standard as specified hereunder as thesewere necessary to be kept in readiness and that as there should be no delay in getting the materials, the contract in detail provided that the works would be carried out by the contractor and payment to be made by the owner at cost plus 10 per cent profit or at the contractorâ€™s standard fixed rates. The additional work that would be required as specified in Clause 1 in the differentwas also to be charged as in Clause 2(a). Regarding spares and materials, the idea was that the owner would provide to the contractor all the necessary spares and materials except expandable materials, such as paints, dopes, cleaning rage etc. and it may be mentioned that these were necessary tools in carrying out the works entrusted to theexpressions following thereafter in Clause 3 are, in our opinion, significant and indicative of the real intention of the parties. These expressions are "All items provisioned by the contractor will be the property of the owner, and will be issued on Contract Loan. The expression "Contract Loan" is not an expression of art. It has no generally accepted meaning in dictionary, legal or otherwise, as such. There is no definition or meaning of this expression provided in the contract between the parties or in the correspondence between the parties in connection with the execution of the works. But in our opinion, these expressions indicate that the â€˜provisionsâ€™ which would be required for carrying out the contracts, which could not be anticipated before the beginning or in execution of the contracts will be the property of the owner i.e. that though gathered and procured or manufactured by the contractor, the contractor will have no property in the said goods or spares or materials and would not be able to either dispose of or deal with those but these will be treated for the purpose of this contract to be the property of the owner and, then the contract stipulates that on fictional basis these will be lend out to the contractor for being used in the execution of the jobs entrusted to theis true as was emphasised that in order to be given out on loan by the â€˜ownerâ€™ to the contractor, the â€˜ownerâ€™ must have property in the spares an materials in question. But the â€˜ownerâ€™, i.e. the Government, in our opinion, in the context of 1951 agreement, and it is indisputable that the transactions in this case were done on the basis of the agreement of 1951, became the owner of the property the moment the goods were identified and there was delay or inability on the part of the Government in supplying spares and materials. It was emphasised that not a consolidated price was contemplated but what was contemplated was separate price for the materials. Indeed the invoices relied upon by the parties in the specific works orders indicated those were charged for separately. The basis for this has been explained in the affidavit of Shri Krishna Murthy mentioned hereinbefore, The affidavit was before the authorities below as also before the High Court of Karnataka and there is no dispute as to the correctness of the statements made in the affidavit.It is manifest in the instant case from the terms of the contracts and transactions, as in the Railway Coaches case ((1972) 2 SCR 927   : (1972) 1 SCC 395   : 29 STC 438)   and as was emphasised by Sikri, C.J. that the property in the materials which are used in the execution of the jobs entrusted to the contractor in this case became the property of the Government before it was used. It is also manifest that there was no possibility of any other materials to be used for the construction as would be manifest from the affidavit and the correspondence and the invoices, and works orders in these transactions. Emphasis was placed before the Tribunal as well as before the High Court of Karnataka on the case of State of Gujarat V. Variety Body Builders (38 STC 176   : (1976) 3 SCC 500   : 1976 SCC (Tax) 338) where the court was concerned with the â€˜bus bodiesâ€™. In the â€˜bus bodiesâ€™ case, the assessee contractor had continued to have the ownership rights and it was held that the â€˜bus bodyâ€™ had to be transferred from the contractor to the other party as a result of contract for sale but in the instant case it is manifest that the specified spares and, materials were not the properties of the Contractor, in the sense that the contractor never had any ownership over these. The conclusion arrived at by us is in consonance with the principles laid down by this Court in the case of Ram Singh & Sons Engineering Works v. V.S.T. (43 STC 195   : (1979) 1 SCC 487   : 1979 SCC (Tax)For the reasons aforesaid, we are of the opinion that the High Court of Karnataka was not right in its conclusion on the taxability of the turnover of the spare parts and materials supplied in execution of appellantâ€™s job works.