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267 A

HINDUSTAN AERONAUTICS LTD ..

v. '

THE STATE OF ORISSA

December 16, 1983

(V.I). TULZAPURKAR; R.S.

)'ATHAK. AND SABYASACHI MUKHARJI, JJ.]

Central S11les Tax ACt, 1956 rebd with the Central Sales .Tax (OisSo) Rules, -1957-Sales tax levfab/e on transactiOii of sale .and not of works contraci-; Whether a transaction is contract for sale or Contract for works deflends_ upon main object of the partieS in the circrtmstancCs of (he transactiOn and. 110 fixed .rule is.OP_Plic'ale.

After.the Government of.u.S.S.R .. under an agteenient, granti4 a licence to the Government'bf India -for manufaCturing and esserilbling of aircrafts, both the Governments signed a proto001 in the mii.tter of mii'nufacturing of MIG aircrafts . in_ India. The Government, of India in their tum entrusted. the mnufacture of ihci said aircrafts to the appellant, M/s Hindi.istan Aeroriautics Ltd., (H.A.L. for short) .. The GoVernmeilt of India 1infonned H.A.L. that the niaterialS imported by H.A.L. for 'this purpose arid other f:quipri1e:i1t etc .. w.ere the property of Government of India: .. Fof the imPlemen41t.on of. the entnlstment H.~.L .. had. _three diViSions namely, Koraput .(in the State of Otissa), Nasik (in the State of Maharsh tra) and Hyderabad (in the State of Andhra Prad.csh). ·,; The H.A.L. manufactured MIG aircraft engi!tes at Koraput.(Orissa) and se"nt-SOme of thm to its Nasik Division for being. fitted to the MIG aircrafts to be supplied Jo the Govcmnl.ent of India and some to the IndianAi~ For~ direGtly as pf:r instructions from, tht Ministry of Defence. The H.A.L. :ceceived payments from Governmeilt .of India or Indian Air Force for the manufacturing programme:. Jn respect" of payments so received, -th6 Sales Tax Officer, Kora put I Circleof the State of OriSsa levied. ccfitral .sales tax on the ground that the lransactions were inter-State sales. The Assistant Commissioner of Sales. Tax while confirming the order of the Sales Tax Officer obserVed. that"H.A.L. J:i3d charged some prceniageof profit in the invoices sent to. the.

Governmeiit of India for the MtG engines as in a commercial transactio.n ill tase of sale which gave a clear indication tha"t .this was a c8.se _of transaCtio~ of sale and not f agellcy. Ih ppeal the Sales T3x Tribunal negativecf the contention. ofH.A.L. that the .. transaction was a works contract and nof. a sa'l.e.

Herice' this appeal.

Alloing' the appeal,

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HELD : ·· The transaction. is not"a Con'tract for sale but a contract for work and Jabour. (275 DI ·

There is no rigid or inflexible rule applicable aHke to all traaCtioD.s which can indicate distiriction between a contract for sale and contr3ct for.work' and.- labour-. - Whether a particular. contract was on'e of sale or for Work and labour

depended upon the main object of the parties in the ii"cumStance&- of the. trS:ns- actioRs. I11 a contract.for Sale, the main objt _of the parties is, to transfter proPerty. 'in and deliVery of possession of a chattel as a cha-ttel, tO the buYer ... Th~.primary

difference between a contract for work or service and a contract for sale of goods is that :n the formr there is in. the person performing or rendring srvice no pro- A perty in. the 1hirg produced as a whole notwithstanding that a part or even the whole material used by him may have been Qis property. In the case of a cOntract for le, the thing poduced as a whole" haS individul existence as the sole property of the part'y who prod.uced it some time before delivery and the prop"ity 'therein passes only under the contract relating .thcrerto to the other party for pricC. ·

[275 E-F: 276 F-0]

Mis Hindustan Aeronautic~· Ltd v State of Karuatakti, [1984] 2 .S.C.R. -248. referred to.

In the instant case, taking into consideratiop the correspondence and circun1sta11ccs under which this cntfustment 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 n1aterials and equipments sCnt by the GOven1mcnt of u.S.s.R. and the MIG Aero Engines asseinbled by H.A.L. fron1 such materials belonged to the Government of India 'at all material ti1nes.

The Appellant had no ownership in the materials whkh were all supulied by the Gcivern1nent-0f USSR. norAi.n the finished products , and no question of sales tax-on the i1npugncd transaction could arise. Even on

the indigenous materialS procured or manufactured by theappe1lnt in the process of fitting in and assernblin.g, the-appellant had no disposing poWer <is the appellant was never the owner of these materials .. The H .A.L. only performed the job cntrus- . ted to the1n for and on behalf of the Government and all incidental steps naturally entering into contract,' procurement, pay1ncnt of price and , billing and invoices had to .be done -in that ligh.t.

The transfer of the Aircrafts to the Nasik DiVision was for the purpose of completion Of the job ahd the niaking of the invoices" "'as a matter.of accounting and carrying out the job of entrustinent"'(275 0-H;- 276 A-B;

275 B; 216 .E] . •

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C1v1L .APPELLATE JuRISDICTION: Civil Appeal No. 1658 of 1982. . , ii Appeal by Special. leave fro1i1. the Judgment and Order. dated the 31st December, 1981 of the Member, Sales Tax Tribunal, Orissa,

Cuttack in Second Appal No. 29(C) of i978-79. ·

A S.T. Desai, Y.S. Murty & C.S.S. Rao for the Appellant.

V.S. Desai and R.K. Mehta for the Respondcni. •

The Judgment of the Court was delivered by

 SABYASACHI MUKHARJI, J. This is an appeal by special leave from the order dated 31st December, 1981 passed by the Sales Tax Tritunal, 'i- Orissa. The appellant who ivas the assessee un.der the .Central Sales Tax Act, 1956 went up in appeal against the confirming orders of Assistant Commissioner in respect of the assessment years 1974-75, 1975-76. and 1976-77. The Sales Tax Officer, Koraput l Circle, ·• ..

HINDUSTAN AERONAUTICS v. ORlSSA (S: Mukharji, J.) . 269

Jeypore had made the orders under Rule 12(3) of the Central Sales A Tax (0, issa) Rules, 1957 making demands of Rs. 1,21,38,586.00 for the year 1974-75, Rs. 1,29,64,637.00 for the. year 1975-76 and R, s. l,37,72,652.00 for the year 1976-77. The appellant is a dealer registered under section 7(1) of the Central Sales Tax Act, 1956 under Koraput I Circle in.the State of Orissa. . ,. .

, B M/s Hindustan Aeronautics Limited (hereinafter r<femd to' as 'H.A.L.') of which appellant is a division was established en !st Octo- .. ber, 1964. The objective.of formation of the H.A..L. wa~ to carry on

in India and elsewhere,. the business, inter alia, in aercplanes including manufacture, assembling, buying and selling etc. of the same. ln . its division at Sunabeda, manufacture of MIG engines for MIG aircrafts required for-defence and overhauling of .aero engines of IUdian Air Force were undertaken. Some of the .MIG engines manufactured by it were sent to NaSik Division of H.A.L. and some to • Indian Air Fore' as 'per instructi.ons from the. Ministry of Defence.

The appellant received payments from Gov.ernment 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 •crstate sales.

This was disputed by the appellant according to. whom the latter was only an a, gent of the Government, of India .. In the alternative it was contended that the transaction~ were nothing but works cqntract and as such not exigible to Central Sales Tax . .,

Bing aggrieved by the dcision of the Tax Authorities as mentioned hereinbefore, the appellant had gone. up in appea'l before the Tribunal. The Tax Authorities had negatived both the contentions of !he 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 transation rpresented works contract was urged ..

It is necessary at this stage to understand the background !n which the manufacture .of MIG engines were undertaken by H.A.L.

In this conne'Ction it is material to refer to the ietter dated 22nd September, 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 Prcduc• tion. As the said letter is important, it is necessary to st out the letter :

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210 SUPREME COURT REPORts [J984J 2 s.c.1c

"5iecl'.et " . ·

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The Ch.airnfan,

Annexuri? ·"A"•

EXTRACT OF

No. J 1(2?.8)/69/1/DP/Conlracls Government of India, Minislr 1 of Defence,

Department of Defenc~ Prod, uction, New Delhi. the 22nd September, 1970.

( Hindu, stan Aeronautics Ltd.,

 C . Indian Express Building, Vidhana Veedhi, Bangalore-I.

.. -F

. '

' Sup, ~Manufacture of MlG,21 M A, ircraft and other equipment in India ..

Dear Sir,

On behalf of the President bf India, I have to state that' an Agreement was siged on 30th October, .J969 (copy . already. forwarded to ·. youfbetwecn the Government. of. Irtdia and the Government of Union of Soviet Socialist Rcpublid for tke manufacture under licence. . . . . ti . : . 2. The mai1ufacture of-the said Equipment as defined

i;~ the above said Agreement is hereby ei1trustcd to Hindustan .. . . . . .

Aeronautics Limited, Bangalore in terms of the said Agree:

ment. Under this entrustment the responsibility for the proper implementation of the Agreement shall be exclusively that of Hindusian Aeronautics Limited except that the '.Government inay from time lo time advise the C.ompany . about the program111e of manufacture of. the said Equip- 1nent..

3 .. All payments.falling due under the saisi Agreement io the Government of.the Union of Soviet Socialist epublics shall be made by Hindustan Aeronautics Limited, Bangalore on behalf of the Government . •

4. This entrustment shall remain in force till it is revoked or altered by the President of India. . ...

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. HIND~STAN AERONAUTICS v .. ORISSA (S. Muk!ic.rji, J.) 271. . . -

5. The Government of the Union of Soviet. Socialist A Republics is being informed. of this entrustment and they are being requested to COO]Jerate and deal diJ'ectly with Hindus- . tan. Aeronautics Lin; iited, , and do .. all thigs necessary for the effective operation of the said 'Agreement according to the terms thereof." . .

There was another letter regarding' tlie dete; mination of premium under Emergency Risks (Goods) Insurance Act,· 1962. The said. letter on behalf or' the Government of India stated, inter afia, as follows : , · •

''That th~ 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 ade and are being made by DCDA(AF) are the property of I.A.F. and that the item; manufactured out of the catgories of 'materials stated above arc to be supplied only to the Indian Air Force or.as authorise.d by Government of India .. The materials therefore belong . to the Governll)cnt of Iridia." .

It may be mentioned as appearii1g from the order of the Sales Tax Tribunal that there was an agreement 'between . Government of

 U.S.S, R. and the Government of India .on 29th August, 1962 whereby E Government of U.S.S.R. had. granted a licence to tlie Government . of India for manufacture of special equipment and asseinbling of

aircrafts. Thereafter both the Government~ signed .a proiocol 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 i2nd September, 1970 mentioned herein before entrusted the .

F .manufacture of the sajd aircrafts io H.A.L., Bangalore. In:pursuanc, i:

of t]\e said entrustment: H.A.L. undertook the work of assembling and manufacturing 'of MIG engines. For the impleinent<ltio.n of the . . entrustmerit H.A.L. has three divisions namely Koraput (in th~ .

Stat" of Orissa), Nasik (in the State of Maharashtra) and Hyderabad G (in the Sfate of Andhra Pradesh). At Koraput and Hydei; abad, engines which are eiectronic equipments were . respectively manufactured and the MIG aircrafts were finally assembled at Nasik for .delivery tcdhe Government f India, ;

In this backgr; und, the question that aioe before the Tribunal H was whether the contract between the Union of India and the appellant

for manufacture.and supply of MIG engines 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 terms of contract between the

0 Union of India and the appellant. Both sides for. this purpose relied upon some correspondence and invoices which are on record.· Mention in this conn'ection may be made to a communication which is in th• form of a corrigendum . to the Ministry's letter regarding 'on account' payments to H.A.L. for MIG Aircrafts, the letter dated 28th July, 1970 from the Under Secretary to the Government" of India, Mjnistr,, of Defence, to the Chief Accounts Officer, High Commission for India i~ U, K. and the Chief Acconts Officer, Embassy of. India in Washington on the subject of "Procurement of bought out items against th~ requirements of I.AR for !st and 2nd line servicing", which dealt with th~ pro cedure sanctioned by the Government of India for the purpose of

"avoiding two customers viz. Hindustan Aeronautics Limit<d and the Indian Air Force going.to. the same supplier abroad for the same items", the letterdated20th December, 1971, from the Under Secretary to the Government of , India, Rakslia Mantralaya, Raksha Utpadan Vibhag, .written to the .General Manager of the Nasik Division of the appellant, the Jetter of 28th April, 1969 on the.subject of "On ..

Accom).t' payments to H.A.L. for I.A.F. m'iinufacturing programmes of H.A.I.:. Nasik~ Koraput and Hyderabad"; letter dated 8th December, 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 :'I the order of the Assistant Commiisioner of Sales Tax for the assessment years 1974-75 and 1975~76, wherein he had referred to a statement F • - 'furnished. with a copy of the claim against price proposal for 6 F2S

details engines as accepted by the Government by their letter dated j ., 4th June, 1976. That claim is against price proposal for 6 F2S details engines ccepted by the Governmeni.Tbeir break up i~ as fellows:-

"Imported materials.

Rs. 48,39,454.08

Indigenous material and. MCH-Freight etc. Rs. 2,64,925. 79

Total material cost

Labour. cost ·

Sundry direct charges

Total •

Rs. 51,04,579.27

Rs. 2;96,480.60

Rs. 12,87,865 :89

Rs. 56,58,724.36

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HINDUSTAN A~RONAUTICS v. ORISSA (S: Mukharji, J.) 273 . . .

Pront@ 1_5 % on HAL's effort Rs. 2,47,809 .00

Rs. 69,06,533.36 or Rs. 69,06,533. 00

The Break up of fIAL's effort also indicated as follows:-

"Freight

Material Overhead •

Ind. materials

Labour cost

rrai ning cost & other expenses

• Tooling expenditure

Last test expenses

Insurance freight ..

Total HAL's effort

15 % profit on HAL's effort

Rs. 66,320.41

Rs.

J ,03,067. 55

Rs. 96,536.03

Rs. ?,64,925. 79

Rs. 2,96,480. 00

Rs. 6,000 .. 00

Rs. 1,50,000.00 ·

Rs. 8,34,342. 65

Rs. 1,00,347. 67

Rs. 16,52,096. 71

Rs. 2,47,8\4.PO"

 The Assitant 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 sanctio_n of the price, the payment_ was made. The Assistant Commissioner had further observed that it appeared from this letter that six MIG engies' were. deliveml by H.A.L. to I.A.F.,. the cost of which was Rs. 69,06,530.00. He had further observed that it was significant to note th'at the sanction.had been accorded for payment towards the cost of 6 engines delivered to. I.A.F. According to the Assistant .Commissioner, the aument 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 rngines were delivered to Nasik Division whereas the invoice was raised and payment received from the. Govrnment of Inia. TQe purpose of

A giving physical delivery, according to .tfie .Assistant <:; ommisioner, of the MIG engines to Nasik Division was for the purpose of fitting in the Aircrafts. In thatevent, accoding to the Assistant Comrriissiciner, . Nlsik Divisfon became the custodian or the trustees of the. MIG engines. for which the price had already been paiti to H, A.Ic. The Assistant Commissioner concluded that the property in the engines B. passed to the Government ofindia and not'to H.A.L., Nasik Divisicn.

He had further obse.fved that' the break up .of the cost was towards, the material co.st, labo11r cost and sundry direct.charges .. The total cost came to Rs. 08,58,724.36. The .further break up of the total cqst of Rs. 68;58,724.36was imported materials, indigenous material and MCHfreight etc., labour cost an<l sundry direct charges.· Appa- C rently tlie cost of .the material. both imported as. well as procured . locally had been charged in the, bill. According to the Assisfant . Commissioner, further profit -of 15 % had been charged on' H.A.L'.'.s . effort which)neluded freight, material overhead, indigenous material, . labour cost, trajning cost a11d other expnses, tooling expehditure, last.test expenses, insurance and freight. The total cost of'these items.

D · as per the bill stood at Rs. 16,52,096.71. J 5 % of this had been charged

towards the profit. The Assistant Commissioner had further obs.erved that profi.t was charged as in a cori1; nercia\. trai1saction in case of sale: . Commission was allwed in case of agecy transaction between the.

Principal and the Agent; .. But in the supply•ofMIG engines, a profit had .been cl1arged; The Assistant Coi:nmissioner concluded that this • E .gave a clear indication that this was a case of transaction of sale and. not of agenc!f. We are .unable to accept this reasoning of the Assistant Commis.sioner. According to us the procedure indicated in.the break . up has to be understhod in the background of the entire transactiori between the parties. The pricing procedure had to be: judged in the light <;>fthe entire facts and circumstances especiallyinthe background F !hat the. entire transaction was entrusted to ll, . .A,.L. Bangalore in terms of the agreement between the Government of India and the Government. of U$.S.R: for the manufacture on •behalf of the Government ofindia of MIG engines forwhich licences had been granted by the Government of U.s:s.R. t~ the Government c:if India . . 'J:'he .letter dated 22nd .September, 1970 set out herein before indicated

. G 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 fioin time to time advise the Company about the P.rogramme of manufacture 'of the equipments.

The various correspondence referred to .hereinbefore, in our opinion~ H !ad co the ifresistible conclusion that the property in the aircrnfts as well as in the e.quipments and spares used in.them were always in .

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Hl'NDUSTAN AERONAUTICS v. ORTSSA (S. Mukharji, J.) 275

• the Governnient. These were procured for and bn behalf of the .

A ' Government of India in pursuance ofthe agreement with the

Government of India and U.S.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 invoke, lhetratisacJicns have to be understood. ' . . B

' . . . . ' We have 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 ti1e. Government. The i:nate- ' rials ifnported under the licence of procured indigenously for the. manufacture were alway~ and )lad alway$ remained the property

. C of the Government, The appellant hail nc property, in ar.v part thereof, and had no right to dispose of or disposal over these materials and spares, These had to be regulated. by the prcdceure envisaged in. the agreement between the parties: The test by '_which these transactions should be judged in deciding whether this was a works cc

0 ntract or a contract "of sa.le of any part of the material hcs""bm1 cmphasisrd.

D in .several decisions of this Ccurt. S®ie of these principles lrnve b<e_n reiterated in the decision of M/s Hindustan Aeronautics Ltd. s. Sta/e of Karnataka iri Civil Appeol Nos. 1386-91 (NT) of J 977 of this Ccurt:" >

As emphasis; d by this Court, ther<\ is no rigid or inflexib!eruie applicable alike to all. transactions which , can indicote distinc1ic.i-. b< t-

. E ween a contract for sale and a contract for wcrk and laMur. But the tests indicated in the several isions f thi; Couri merely fccused on one or the other aspect" of the transaction and affmded some guidance in detefmining the qustiqn, but l:asic'alJy. -and prhl]a.ri!y, whether a., particular contract was one of sale -or for work and labour. ,' depe.nded upciri .the main object of tl1e parties in the cirrnmetan"s

of the transastions, In a contract fer sale, the main object cf the parties is to transfer property in and delivecy of possession. cf.a r.lrn!, tel . as a chattel to the buyer. It has to be. emphasised, taking _into consideration the corresponilence and circuinsiances under .. which this entrustment had to be undesto6d that at no point of tim<' before the delivery of MIG engines, HA:L. was tl1e owner of the. propertyeither . in the equipment or in the sparesor .in ihe aircrafts and as such _there . coald not have 'been transfer of any property frcm H.A.L. to. the Government-of fodia.· The H.A.L. only pcrfcrmcd the jcb entrusted to them for and. on behalf of the Government and all incidental steps

(!) [1984] 2 S.C.R. 248.

276 . SUPREME CoURT REPORTS. [1984] 2 s.c.R.

11aturaily entering into contract, procureme1it, payment nf pri'e 2nd billing and. invokes had to be done in that light. There was no tram fer 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. frcD1 • such niaterials belonged to the Government of India at all material .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 appel!ant was never the owner of these . materials. . . .

The payments required in the work of ''manufacture of MIG- 21M Aircrafis 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 Jnda;.

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 o.f the said entrustment.

"There cannot be any question, in our opinion, of any sales tax

i~ respect of Aero-Engines transferred to the Nasik Division -of H.A.L. for installing t11e same in Aircrafts .. It was the transfer of the Aircrafts to the Nasik Division for the purpose of completion of the job and the making of tl].e invoices was a matter of accounting and carrying . ounhe 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 performing or rendering srvice no _property in' the thing produced as a whole notwithstanding that a part !Jr "even the whole of material . used by him may have been his property .. Jn the case of a contract for sale, the tiring produced as a whole has individual existence as th> . sole property of the party who produced fr so""me time before delivery and the property there.in passe~ only under the contract relating thereto to the other partyfor 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 m this behalf were on behalf of the Government of India.

We arc therefore of th.e opinion that the Tribunal was _in error_

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HINDUSTAN AERONAUTICS y. ORISSA (S. Mukhai}i, J.) 277 .. . in concluding that there was sale involv.ed in these transactions. It is not necessary for us in this connection to refer to the principles in detail which the Court should cept in deciding in each particular .case the nature or' the transactions. 'Fhese principles have : been reiterated in the dedsion of this Cour( in the case. of M/s Hindustan

Aponautics Limited v. State o/Karnataka.lll

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 cirumstances, parties will bear 'their respective costs throughout.

H.S.K. appeal allowed .

(1) [i984J 2 S.C.R.. 248.

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