Case: Hindustan Aeronautics Limited Vs. State Of Karnataka

By the impugned judgment, the High Court of Karnataka had dismissed several writ petitions against several orders being S.T.R.Ps. Nos. 28, 27 and 29 of 1975 under the Karnataka Sales Tax Act, for the years63 respectively and also three others namely, S.T.R.Ps. Nos. 25, 26 and 24 of 1975, under the Central Sales Tax act for the corresponding years respectively, at the instance of the present appellant. These involved common questions of law and facts and were disposed of by a common judgment. We also propose to do the same. As stated, one of the questions was about the taxability of the turnover in respect of the sales made in the canteen of the appellant company. This question is not before us. Before the Tribunal, the two following questions relevant for appeals before us were agitated,Whether the turnover apportioned from the job works undertaken by the appellant related to the sales of materials by the appellant to the Indian Air Force or other private parties, as the case may be, and as such whether these were taxable as held by the lower appellate authority.(ii) Whether, in the case of job works undertaken from the private parties mainly on quotation onthe sales tax authorities were right in apportioning a portion of the turnover as attributable towards sales of materials.In order to appreciate the controversy in these appeals, it is necessary to state certain facts. The appellant is a manufacturer of spare parts and accessories of various aircrafts and has also established facilities for assembling, serving, repairing, overhauling of aircrafts, their instruments and accessories. The sales tax authorities sought to subject to tax that portion of the total turnover of the appellant for the relevant years in question which was equivalent to the money value of the spare parts to the aircrafts which the appellant supplied to the Indian Air Force as a result of their use in the process of repairing, servicing and overhauling of the aircrafts, their instruments and accessories which were sent to the appellant for the aforesaid purposes during the relevant years in question.3. At the outset, it is important to emphasise that the jobs done by the appellant were servicing, assembling, repairing and overhauling â€˜Air Force planesâ€™ entrusted to the appellant. In the second appeal being Civil Appeal No. 1387 (NT) of 1977, the main job done was assembling; sales tax was levied in respect of the turnover for doing the same job. These works were done on the basis of contracts or job orders issued from time to time. While no contract directly concerning the repairing, servicing and overhauling of a specified aircraft, instrument or accessory in which the spare parts had been used in the execution of service contracts was on record, there is, however, a specimen contract that was entered into between the appellant and I.A.F. being agreement dated June 23, 1951, hereinafter referred to as "1951 contract". The agreement is described as "Contract for the flight servicing and maintenance of the H.Q. Training Command, I. A.F. Communication Flight". The agreement was between Hindustan Aircraft Limited, described in the agreement as the â€˜contractorâ€™ and the President of India, described in the agreement as the â€˜ownerâ€™. It may be mentioned that the Hindustan Aircraft Limited has later on become the appellant i.e. M/s. Hindustan Aircraft Limited. As the contentions of the parties in these appeals centered on the question whether the contracts in question, the income of which has been subjected to sales tax, were works contracts only or were agreements to sell spare parts, it would be relevant to refer in detail to some of the clauses of the "1951 contract".4. The agreement states that the â€˜contractorâ€™ agrees to accomplish for the â€˜ownerâ€™ the serving and maintenance of the H.Q. Training Command, I.A.F. Communication Flight, and works required on visiting aircrafts, to the standard as specified in the said agreement at Bangalore or at any other place required by the â€˜ownerâ€™. Then the specifications according to which the works had to be done were mentioned thereafter. The agreement also provides that the works would be carried out by the contractor, and payment made by the owner "at cost plus 10 per cent profit basis " or at the contractorâ€™s standard fixed rates, where applicable.(b) of Clause 1, items (a), (b) and (c), authorized by Air Headquarters should also be charged for separately as per(a) of Clause 2 of the agreement.5. As the question of the price of the spares and materials is involved, it is necessary to set out Clause 3 which deals with spares and materials:Generally, the owner will provide the contractor with all the necessary spares and materials (other than expendable materials such as paints, dopes, cleaning rags etc.). Where, however, there is delay in the supply of essential items, the contractor will provide those wherever possible either by purchase or manufacture, within an expenditure authorised by the ownerâ€™s Deputy Financial Adviser at the contractorâ€™s request from time to time. All items provisioned by the contractor will be the property of the owner, and will be issued on contract loan. The owner agrees to pay the contractor for provision of spares at the followingfor items manufactured by the contractorcost plus 10 per cent.(b) for items purchased from indigenous and overseas sourcesactual invoice price plus all other charges the contractor is called upon to pay, such as packing and shipping etc. plus 5 per cent.Regarding technical advice and publications, Clause 4 of the 1951 agreement stipulated that all relevant service publications and manuals would be made available on loan to the contractor through I.A.F. Liaison Officer attached to the contractorâ€™s factory. Regarding delivery, it was provided by Clause 5 that subject to the ownerâ€™s compliance with Clause 3, the contractor would keep ready for flight as many of the available planes as possible.7. Clause 6 of 1951 agreement deals with terms of payment and stipulated that the contractor would submit to the owner monthly bills as per Clause 2(a) supported by cost analysis showing, inter alia, of certain details and the details are set out in different7 of the 1951 agreement dealt with indemnity for loss or damages which is not relevant for our purposed. Clause 8 dealt with right to cancel the agreement. Clauses 9 and 10 provided for â€˜inspectionâ€™. Clause 11 prohibited the contractor, the appellant, from in any way assigning or transferring any rights or benefits under the agreement except with the previous consent of the owner in writing. Clauses 12, 13 and 14 are also not relevant for our purpose.8. We may mention that reliance was also placed on behalf of the appellant on an affidavit by one Shri S. Krishna Murthy who was the Sales Officer of the Overhaul Division of the appellant company and which affidavit had been filed before the Sales Tax Tribunal in Mysore, Bangalore. In the said affidavit, he had described the nature of the works done by the appellant in connection with repairs and had mentioned that two types of works were done; one was overhaul of aircrafts, accessories and equipment thereof, and the other known as fixed quotation basis. It is not necessary to refer to the said affidavit in detail. He had mentioned in the said affidavit the procedure for preparing the bills and had stated that after the works were competed, a final inspection of the repairs done was checked by the Works Inspection Department, whereafter delivery orders were prepared and thereafter he described how bills were prepared thus :After the work is completed, a final inspection of the repair done is checked by the Works Inspection Department, whereafter a delivery order is prepared and the billing section prepares the bill. As it is required by the Defence audit purposes, the labour charges and material charges are shown which is worked out on cost plus 10 per cent basis.In the case of private aircraft owners and other airlines for a similar contract for repairs, we give a fixed price quotation unlike in the case of repairs to Defence aircraft which by virtue of the contract is on cost plus 10 per cent basis, wherein a break up had to be given as aforementioned for purposed of Defence audit.9. The sales tax authorities sought to tax that portion of the total turnover of the appellant for the relevant years in question which was equivalent to the money value of the spare parts of the aircrafts which it has supplied to the Indian Air Force as a result of their use in the process of repairing, serving and overhauling of the aircrafts, their instruments and accessories which were sent to the appellant for the said purpose during the relevant years in question. The works undertaken and executed by the appellant in assembling, repairing, serving and overhauling were on cost plus 10 per cent profit basis as well on fixed inclusive quotation basis. The appellant with regard to the latter types of contracts succeeded before the Appellate Tribunal who held such contracts to be exclusively works contract. The controversy before the High Court and before us in these appeals is only with regard to the first category of contracts, which the Appellate Tribunal held to be composite contracts. The appellant contended that so far as the supply of spare parts to the Indian Air Force during the relevant period was concerned, there had been no sale of the spare parts to the I.A.F., for that spare parts in question were used during the course of and in the process of execution of the works contract relating to the serving, repairing and overhauling of the aircrafts, their instruments and accessories and that there was no sale contract as such in pursuance whereof, the spare parts in question could be said to have been to the I.A.F. The Tribunal had negatived the contention of the appellant and the appellant had gone up in revision before the High Court. The High Court was of the view that whether the supply of the spare parts by the appellant would amount to sale or not would depend on the fact as to whether there was a sale contract between the appellant and the I.A.F. in that regard. The High Court was the view that, in the light of certain documents which we would also incidentally note, it could not be said that supply of spare parts and other materials was not in contemplation of the contracting parties and the spare parts in question became the property of the owner i.e. I.A.F. only by way of accretion to the aircrafts for being used in the process of executing the contract and not as a result of the agreement between the contracting parties. The High Court referred to certain decisions and came to the conclusion that in the present case what was sought to be brought within the purview of Sales Tax Act was the cost to the vendees of the spare parts supplied by the appellant. In such a case, the High Court was of the view that the stage at which the property therein passed to the owner was not material. What was material was as to whether the goods in question were the property of the assessee before the same became the property of the President of India under the contracts.10. Dealing with the contention of the parties, the High Court was of the view that in providing separately the basis of payment of spare parts in the contracts, the intention of the parties was clear and unambiguous i.e. the parties clearly agreed to the sale of spare parts according to the contract, the intention of the parties was clear and unambiguous i.e. the parties clearly agreed to the sale of spare parts according to the contract. Certain invoices were placed on record, namely, the invoice dated February 28, 1962 being Invoice No.which indicated separately the labour charges being Rs. 26, 837.69 and materials and spares used by the appellant as per schedule attached as Rs. 32, 187.92; reference was also made to another invoice dated March 31, 1962 which had also mentioned separately labour charges as well as the costs of the materials and spares. To the same effect was another invoice dated February 28, 1962. The Tribunal was of the view that these invoices supported the conclusion that the labour charges had been separately itemised from the price of the spare parts and whenever any spare parts had been provided by the I.A.F. authorities, the price thereof had been deducted indicating that the spare parts (sic were) supplied by the appellant. For the aforesaid reasons as indicated in the judgment of the High Court, the High Court was of the view that sale of spare parts was clearly in contemplation of the parties and the documents in question constituted composite contracts, one relating to the remuneration for the services rendered and the other for the sale of goods. In that view of the matter, the High Court was of the view that the Tribunal was right right in dismissing the appeals of the appellant on the particular turnover of the appellant.

Court's reasoning:
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.