HINDUSTAN AERONAUTICS LIMITED v. STATE OF KARNATAKA

Citation: [1984] 2 S.C.R. 248

Court: Supreme Court of India

Bench: V.D. TULZAPURKAR, R.S. PATHAK, SABYASACHI MUKHERJI

Case summary

As the question of the price ofthe spares and materiats is involved. By t~e impugned judgment, the High Court of Karnataka had dismissed several Writ "Petitions against se-veral orders being S.

Judgment text

I A· 248 , HINDUSTAN AERONAUTICS LIMITED v. STATE OF KARNATAKA B December 16, 1983 [V,O. TUtZAPURKAR, ~· S. PATHAK AND SABYASACHI MUKHARJI, JJ. ] Sales Tax Law-Karnataka Sales Tax Act-Exfgibility to tax-Contracts for servicing reassembling l. A,F Planes which includes supply of materials by the "contractor" if the ·~owner" did not supply them, and only if the owners Dy. Financial c Advisor authorises them-Whether the contracts in question were sales contract or were part ofone contract ofexecuting the works contracts no! attracting Sales Tax. The appellant is a manufacturer of spare parts and accessories of various aircrafts ·and has also established facilities for assembling, servicing, repairing. • overhauling of aircrafts, their instruments and accessories. The job done by the appellants were servicing, assembling, repairing and overhauling "Airforce planes'; D entrusted to them. These work·s were done on the basis of contracts or job orders issued from time to time.

While on ·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 was an agreement dated 23rd June 1951 described as "contract for the flight servicing and maintenance of the H. Q. Training Command I. A. F Communication Flight, "wherein the President of India has been described as the "Gwner" and the appellant as the contractor. The agreement provided that the works would be carried out by the contractor and payment made by the owrier "at cost plus 10% profit basis or at the contractor's standard fixed rates, where applicable. Under clause 3, the owner will provide the contractor with all the nece5sary spares and m1terials (other than expendable materials such as paints; dopes, cleaning rages etc. ) and where however there was delay in the supply of the essential items.

the contractor will provide those whenever possible by purchase or manufacture within expenditure authorised by the owner's Deputy F inancial Adviser. at the contractor's F request from· time to time. 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 th~ air-crafts which it had supplied to the Indian Air Force as a result of their use in the process of repairing, servicing and overhauling of the aircrafts, their instrum~nts and accessories which were sent to the G appellant for the said purpose. The App::llate Tribunal and the High Court held these to ba composite contracts. The High Court was of the view that sale of spa. re p:uts 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.

Hence the appeals by speeialleave. ' Allowing the appeal, the Court ~ HELD : 1:1 It is well settled that· the difference between contract of fiJNDUSTAN AERONAUTICS l', KARNATAKA 249· . d ntract for sale of goods, is, that in the former, there is in the 'person . :. . --~ nn co . . t . th a.. : A ~:' ~···· . work or rcndcrmg scrvtce no proper y m e tmng. s produced as a pcrformJOS 'th'itanding that a part or even the whole of materials used by bim h0to ootw• f (, I . w his property. In the case o a contract or sa e, the thtng produced as luld ~~~ individual exic;tence as the sole property of the party who produced it a who. e a~fore delivery and the property therein passed only under the contnct som~ ttmtoh reto to the other party for price. {257 D-E] • relaung c · · . B . It is necessary, therefore, i,. n every case for the courts to find out whether 1 2 . · ce there was any agreement to work for a stipulated consideration.

If 1 ~ ~~ so it would not be a sale because ·even if some sale may be extractc:d \'\ would 'not affect the true po! iition Merely showing in the bills or invoices, ~\a \'aluc of materials used in the job would not render the contract as one of sales. r 'r: natur" nmJ type of the transaction~ are important and ueterminaiivc facror. \V:at is ncet. -ssary to find out, is the dominant oltject • [257 F-OJ I I c t t :J A contract of sale of goods must be distinguished from a contract for ~ votk Rnd labour. The distinction is oft~n a fine on. :. A contract of s. 1le is a . · 1 contrnct whose main object is the transfer of the property in, and the delivery · of the possession of, a chattcln"i n chattel to the: buyer. Where howev~:r the main object of work undertaken by the payee of tho price was not the transfer of chattel q11o rhatttl, the contract is one of work nnd JnbourJ The test.

is, whether or not tbe work and labour bestowed end in anything that can properly ba:ome the subject D ofi;tle; neithl! r the owocrship of the matcrmiSy nor Jhc: value of the skill and labour r~ lS comp:1red with the vnluc of the materials, is conclushc, although such matt~rs · m1y be ~ken into con~idcration in determining, in the drcumst:tnces of a particular c:ts;, wh. :ther the contr. tct was in sub~tnncc one for worlc and labour and one for the sale of ,. ch:! tld. [:!. 58 O·H ; 2. 59 A-BJ • 2:(. The tc~L• intlicatc:d in ! oeVcral decisions of thi:; Court to distinguish E b. •l"«n a cootmct r. ,r sale and n contract for work and la bour were not e:thauslive and diJ oor luy ~uwn nny rigid or inn~~ible rule applic;t ble alike to ail transactions. ! ~'~ dll. l not give any mngic furmula by the applieltion of which one could StJY ~every C'lc;c wherher a contract was o contr. lct fur "Sale or a contract for work and I' ~ ! ~hour.

The-se: merely focu~sctl on one: or th-e other aspect of the tranSaction and 1 ~ l ~rdc:d some KUiJance in determining th! auc. stioo, but basically and prim:lrily. · ~her • P:•rticular ~ontr. tct w;,-; one for sale of goods nr for work and labour F ! be ~ upon lh-: m:un oh}l"Ct of th~ flarti\.. 'i sath. :red from th(" terms ofthe contract, f," Clf'CUin~b~ ur th" tmnsuction. o; anJ the cu~tom of the trade. [. 259 C·DJ · Ofs:l~~~J R. ul/imr S hlllltrs & F:ngill~:rfnK Compiln~· Pvr. Lr. l. v. Th~ Cum,:j${i)t/" . ! 41 ' ll. ~. ~aid Tat Cul·rs 409; r~f~red to. . ' -2 1 .. ( L'tlnt~ th! c:tunot b. : said U') a g. :ncrat propthi! ion that in cv~ry C3. Sc: of works G n:•~e Up :/r'$ . ~"'~aril)' impl~c:d the sal~ of the componcnl parts \\h~h go to 1 Cltcl. lm b,.. ~ ~~a. tr, That 4U'-"~tlpn wouiJ natur. 1lly d~pcnd upon the r~cts and 1 0 lluril\i th~; stion docs not reader .. , It . _,,on to be I ' "·~ It 1 . CiUl!! llctlun of iille. E\'~rt in a cvnlrucl purely of works or t~ Pos~tbt.. tl .

. • lb.. -ort, and .. ~ urtrc1~.! <> m;ty h~vc to 1>1: use..! by the peNOn cxe v. Gannnn /Jmtkerlf}' &. Co. , }. fat! ra. , Ltd, 9 S. :1les Tax Cases 353 [1959} S. C. R. 379: Rollinson v. Grov~. t, [t935J 1 K. B . S79; referred to. 2:3 Whether a gh•cn transaction is a works contract pure and ~imple or it im;ol\'eS sale of good-t al5o i~ of course a mi~ed queo::tion nf law and fact depending upon the fact$ of each ca. ,e. Tt is tnte, that it cannot he c;! lid that parti~ did not D · contemplate and apply tlu::ir minds to the question of spare rnrts and other m:lteria& necec;~1ry for the execution of the work~. (262 P-H] · · 3:1 The High Court of Kamatakn was not right in its condLJ pare r~u1~ nnd materinl4i sup()lied in execution of appellant'~ job works. {Y. 6 DJ • 3:2 rt i . [263 fl 3:3 "The exJ're. ~sion .. contract loan..

is·not an e:- JlO~ O( or dcaJ With tho Tribunal ·G J as w-~11 as the Karnataka High Court, that it cannot be said that pa,rties did not contemplate and apply their mi1id~ to . the question . of spare parts and other m~terials necessa~·y for the execution of the works. ft. was emphasised on behalf of tl,e respondent and on this · .. · aspect tl1e decision of the High Court: of Karnataka as well as the . ' {1) fl935J 1 K. B. 579. -HINDUSTAN . AERON~UTics 'V. KARNATAKA (S. Mtikharji, J. ). -263 • · " r • • ' • ' ' decision of the T~ibunal were relied upon to stress the point that . . A· th~. price s~parately provid~d- as cost plus ·10 %. The -bills and the· : . • . j. .. invo. ices were also ma. de separat~ly . inqicating the prices _involved in ' + . the~e transa~tions. But it is i_mportant to emphasise ~hat cl~use 1:of • . the contract was to accomplish for the O\vner · the servtcmg and maintenance of. the Headquarters Training· Corpmand tA. F. Communication Flight, and works .

requi~ed· on visiting aircrafts, . acc)rding to the standard·as speciti~d- hereunder as thes~ aLr~planes . w~r~ n'! cessary to be kept in readin~ss. and that as there ~hbuld be· no .. delay· in getting the materials, the contract in· detail provided that the· · l w~rks would. be carried out, by the. contractor ~nd 'payment to he ' m1de by t'he o~ner at cost plus 10% ·pr~fit ~~ at the contra~tor's -: . sta-ndard 6x:·rates: Th·e additional work that would. be. required . as C sp~cified in clal)se 1 in the. dj_fferent sub- ods to be identified 'and would be treated by the operaticn of the contract to be the goods of th(! owner of the planes. It is true as was • emphasised that in order to be given out on loan by the 'owner' t9 . E . ·the contractor, the 'owner' must have property in the spares ar. d materials. in. ,question. But . the 'owner', 'i. e. . the Government, in our opinion, in the context of 1951 a. greement, and it is indisputable · . that. tbe transactions in this case were.

done on the basis of the agre~- ~ent of 195L became. tl1e owner of, the property the moment the gobds were identified and there was delay or inability on the p this Court construed the (1) [1972] 2 S. C. ~. 927, • • HINDUSTAN AERONAUTICS 1'. KA~NATAKA (S. Mukharji, J. ) 26'5 . . . ~ .. ·• . '\ corr~spondence be. tween Railway Board and the r~spondent assessee: . l •• • ,.. • . • • A. which ·correspondence to our opinion has a ring of similarity to the terms and condrtions of the present transaction, for the manl:lfacture and supply of railway coaches, and the indemnity bond in respect . of the contract. It. was held by this Court t}! at the ~answer ·to the question whether a contract is a wo'rks contract or a contract ·of sale · depen. ds upqn the construction of the terms of t~e contract in t~e B light of surrounding circumstances. ·n . was held that when all the materials used i~ the construction of a co~ch belonged to the Railways there could no. t be any sale of the coach itself.

It was a pure wo! ~s ~ontract, and the difference between the pdce of a coach ·and the . · cost of material_s being only the cost of service rendered by the assessee. · 111 This· Court erp. phasised ·that whether the wheelsets arid underframes w:! re 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 transactions in_ qudtion with which ""e are concerned, th.. 1t the. transactions related to the entrustment of the · maintenance of the airplanes of the-I. A. F. These l1ad ·to be kept ready for all titnes·to meet all situations. All avoidable ·and c~nceiv~ . . ' . . able delays were· planned to be eliminated and. in the background of this second factor, it is further•to be emphasised tpat for the b}llk of the materials,· . the Governmen~ ·undertook to supply .

the spares ·and materials and it is only in those cases w~ere these materials could not be supplied or . provi. ded for· by the Government or there wai · E delay, that. it was stipulated that these could be procitred . or manufactllred · hy· the contractor within th~ p~ices sanctioned by the Govern~· ' ment, and afte. r being procured or manufactured· by the contractor, f "r these could not be used for any purpose except in the execution:· of t\le jobs entrusted to the contractor. the contractor had no· disposing, power or property iJi these spares and 1nateriuls. The fact that these · mat~rials were separately placed at cost plus 10°/o profit -were to ens. ure . )c quick and proper execution of the works a. nd were like the raiiV:,ay . coaches' cast: neutral factors. This conc1usion is strengtheneq by the expressions we· have. extracted from the 1951 Contract itse]f. It is manifest in the instant case from· the terms of the contracts .

and transactions, as in the railway·coaches' case 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 th~ ~ontractor in this. case became .. . (1) 38 Sales Tax cases p.. 176. H (2) 43_ Sales Tax Cases p. 195. .. . 266~ SUPREME couRT REPoius [1984] 2 s. c. R. . . ' . ' the p,roperty. ofthe Govern~1entbefore it was used. It is'aJso manifest·. . t,hat there was 1~0 possibility of ~ny other materialS to be used for the construction as- would be ma~ifest . from . the affidavit mid the corres· ,I - • • ~ pondence' and the invoice~ and works orders -in these-transactions.. - Emphasis was pfaced before the Tribunal as well as befor~ the High Court of l<. arnataka on the -case . of state . of Gujarat v. Variety- Buifd. . 01 B. . ings \Yhere the cou. rt :was·concerned with the 'bus bedies'. _ ln. the 'bus . bodies' case, the assessee contractor had cori6nued. to have the owner· _ship rights.

and it was held th~t'·the 'qus bcdy' had to \)~ transferred . . from the contraCtor to the ·other party as 'a result o{qmtract fc'r sale . . but~·in the. instant case'_it is manifest that the specified spares and . . . . . . . . materials :were not the properties of tlie contra. ctc. r, in th~- sense that c the contractor never bad any ownership -over these. . The conclusicn: .. j . -~ arrived at by us is in-consoncnce with the principleS'iaid down by thi's _~ .. Court in· the case of Ram Singh & Sons Engineering Works v. Com· .. . missioner of Sales· Tax, u. p,<zl . - •· For the reasons aforesaid, we are. of the opin;on that the Hjgh D Cou. rt·of K~rnataka was 'not. right ~n jts conclusion· on the taxability. of.. th~ turnover of the spares· parts and materials ·supplied in execution ofappdlant's job works. As a result except for the item oh canteen sales whi~h is not . in dispute befole us, these appeals are allcwed. - '. . . . . - , .

The necessary adJUStments 111 the asessments shou1d be_ made. ·. In. the facts• arid circumstances of these cases, -the·parties will bear their E · · O\Yn costs througho-ut. - • · · S. R. . -Appeal- allo}ved. • • . I (1. ) 38 Sales Tax Cases 176, . (2) 43 ·Sai~s Tax Cases t95.