HINDUSTAN AERONAUTICS LTD. v. THE STATE OF ORISSA

Citation: [1984] 2 S.C.R. 267

Court: Supreme Court of India

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

Case summary

question of law on similar facts was· raised, the same was disposed of by one order by the Tribunal.

Judgment text

267 HINDUSTAN AERONAUTICS LTD.. v. ' THE STATE OF ORISSA· December 16, 1983 0 (V. I). TULZAPURKAR; R. S. )'ATHAK. AND SABYASACHI MUKHARJI, JJ. ] ·Central S11les Tax ACt, 1956 rebd with the Central Sales . Tax· (O~isSo) Rules, -1957-Sales tax levfab/e on transactiOii ofsale . 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 m~nufacture of ihci said aircrafts to the appellant, M/s Hindi. istan Aeroriautics Ltd. , (H. A. L. for 1 short).. The GoVernmeilt of India infonned 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 Mahar~sh 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 th~m to its Nasik Division l for being. fitted· to the MIG aircrafts to be supplied Jo the Govcmnl. ent of India and some to the Indian·Ai~ 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, Koraput I Circle- of 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 ·p~rceniageof profit in the invoices sent ·to. the. Governmeiit of India for the MtG engines as in a· commercial transactio. n ill tase of . F 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. \ ... Allo~ing' the appeal, .. 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 tra·~aCtioD. 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 obj~t _of the parties is,to transfter proPerty. 'in and deliVery of possession of a chattel as a cha-ttel, tO the buYe·r... Th~. primary •· difference between a contract for work or service and a contract for sale of goods is that :n the form~r there is in. the person performing or rend~ring s~rvice no pro- A perty in. the ·1hir~g 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 p~oduced as a whole" haS individu~l 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· circun1s- ·,.

1ii ta11ccs 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 the·appe1l~nt in the process of fitting in and assernblin. g, the-appellant had· no disposing poWer , • EXTRACT OF No. J1(2?. 8)/69/1/DP/Conlracls Government of India, Minislr1 of Defence, B. Department of Defenc~ Prod,uction, New Delhi. the 22nd September, 1970. •'. The Ch. airnfan, ( Hindu,stan Aeronautics Ltd. , · C · .

Indian Express Building, Vidhana Veedhi, ·Bangalore-I. ' 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 sig~ed 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 -F j. 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 G· ·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 . H ·or altered by the President ofIndia. . · ... .. . ' . . HIND~STAN AERONAUTICS v.. ORISSA (S. Muk! ic. rji, J. ) 271. . . ~ - 5. The Government of the Union of Soviet. Socialist 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 thi~gs necessary for the effective operation of the said 'Agreement according to the terms thereof. " · . . . B There was another letter regarding'tlie dete;·mination of premium under Emergency Risks (Goods) Insurance Act,· 1962. The said. letter on· behalf or' the· Governmen·t 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 ofthe cat~gories 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 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 . . 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 fthe entire facts and circumstances especiallyin·the background ! 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 ofMIG 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 hereinbefore 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 ofmanufacture 'of the equipments. The various correspondence referred to . hereinbefore, in our opinion~ ! ~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 . • • Hl'NDUSTAN AERONAUTICS v. ORTSSA (S. Mukharji, J. ) 275 • the Governnient. These were ·procured ·for and bn behalf of the . ' 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, lhe·tratisacJicns have· to be understood. ' . · . · ~ ' . . . . ' 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 . -~. 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 trans- 0 actions should be judged in deciding whether this was a works ccntract or a contract "of sa. le of any part of the material hcs""bm1 cmphasisrd. in . several decisions of this Ccurt. S®ie of these principles lrnve b As emphasis;d by this Court, ther . 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 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 m this behalf were on behalf of the Government of India. We arc therefore of th. e opinion that the Tribunal was _in error_ • ' 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 cir~umstances, parties will bear'their respective costs throughout. H. S. K. appeal allowed. • - \ -- ' (1) [i984J 2 S. C. R.. 248.