PETITIONER:
HINDUSTAN AERONAUTICS LTD.
Vs.
RESPONDENT:
THE STATE OF ORISSA
DATE OF JUDGMENT16/12/1983
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
TULZAPURKAR, V.D.
PATHAK, R.S.
CITATION:
1984 AIR 753 1984 SCR (2) 267
1984 SCC (2) 16 1983 SCALE (2)1101
CITATOR INFO :
R 1989 SC 962 (25)
ACT:
Central Sales Tax Act, 1956 read with the Central Sales
Tax (Orissa) Rules, 1957-Sales tax leviable on transaction
of sale and not of works contract-Whether a transaction is
contract for sale or contract for works depends upon main
object of the parties in the circumstances of the
transaction and no fixed rule is applicable.
HEADNOTE:
After the Government of U.S.S.R., under an agreement,
granted a licence to the Government of India for
manufacturing and assembling of aircrafts, both the
Governments signed a protocol in the matter of manufacturing
of MIG aircrafts in India. The Government of India in their
turn entrusted the manufacture of the said aircrafts to the
appellant, M/s Hindustan Aeronautics Ltd., (H.A.L. for
short). The Government of India informed H.A.L. that the
materials imported by H.A.L. for this purpose and other
equipment etc. were the property of Government of India. For
the implementation of the entrustment H.A.L. had three
divisions namely, Koraput (in the State of Orissa), Nasik
(in the State of Maharashtra) and Hyderabad (in the State of
Andhra Pradesh). The H.A.L. manufactured MIG aircraft
engines at Koraput (Orissa) and sent some of them to its
Nasik Division for being fitted to the MIG aircrafts to be
supplied to the Government of India and some to the Indian
Air Force directly as per instructions from the Ministry of
Defence. The H.A.L. received payments from Government of
India or Indian Air Force for the manufacturing programme.
In respect of payments so received, the Sales Tax Officer,
Koraput I Circle of the State of Orissa levied central sales
tax on the ground that the transactions were inter-State
sales. The Assistant Commissioner of Sales Tax while
confirming the order of the Sales Tax Officer observed that
H.A.L. had charged some percentage of profit in the invoices
sent to the Government of India for the MIG engines as in a
commercial transaction in case of sale which gave a clear
indication that this was a case of transaction of sale and
not of agency. In appeal the Sales Tax Tribunal negatived
the contention of H.A.L. that the transaction was a works
contract and not a sale. Hence this appeal.
Allowing the appeal,
^
HELD: The transaction is not a contract for sale but a
contract for work and labour. [275 D]
There is no rigid or inflexible rule applicable alike
to all transactions which can indicate distinction between a
contract for sale and contract for work and labour. Whether
a particular contract was one of sale or for work and labour
depended upon the main object of the parties in the
circumstances of the transactions. In a contract for sale,
the main object of the parties is to transfer property in
and delivery of possession of a chattel as a chattel to the
buyer. The primary
268
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 service no property in
the thing produced as a whole notwithstanding that a part or
even the whole material used by him may have 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 produced it some time before
delivery and the property therein passes only under the
contract relating thereto to the other party for price. [275
E-F: 276 F-G]
M/s Hindustan Aeronautics Ltd v State of Karnataka,
[1984] 2 S.C.R. 248 referred to.
In the instant case, taking into consideration the
correspondence and circumstances under which this
entrustment 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 materials and equipments sent by the
Government of U.S.S.R. and the MIG Aero Engines assembled by
H.A.L. from such materials 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 appellant was never
the owner of these materials. The H.A.L. only performed the
job entrusted to them for and on behalf of the Government
and all incidental steps naturally entering into contract,
procurement, payment of price and billing and invoices had
to be done in that light. The transfer of the Aircrafts to
the Nasik Division was for the purpose of completion of the
job and the making of the invoices was a matter of
accounting and carrying out the job of entrustment [275 G-H;
276 A-B; 275 B; 276 E]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1658 of
1982.
Appeal by Special leave from the Judgment and Order
dated the 31st December, 1981 of the Member, Sales Tax
Tribunal, Orissa, Cuttack in Second Appeal No. 29(C) of
1978-79.
S.T. Desai, Y.S. Murty & C.S.S. Rao for the Appellant.
V.S. Desai and R.K. Mehta for the Respondent.
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 Tribunal, Orissa. The appellant who was the
assessee under 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 1
Circle,
269
Jeypore had made the orders under Rule 12(3) of the Central
Sales Tax (Orissa) 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 Rs. 1,37,72,652.00 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.
M/s Hindustan Aeronautics Limited (hereinafter referred
to as `H.A.L.’ of which appellant is a division was
established on 1st October, 1964. The objective of formation
of the H.A.L. was to carry on in India and elsewhere, the
business, inter alia, in aeroplanes including manufacture,
assembling, buying and selling etc. of the same. In its
division at Sunabeda, manufacture of MIG engines for MIG
aircrafts required for-defence and overhauling of aero
engines of Indian 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 Force as per instructions from
the Ministry of Defence. The appellant received payments
from Government 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 interstate
sales. This was disputed by the appellant according to whom
the latter was only an agent of the Government of India. In
the alternative it was contended that the transactions were
nothing but works contract and as such not exigible to
Central Sales Tax.
Being aggrieved by the decision of the Tax Authorities
as mentioned hereinbefore, the appellant had gone up in
appeal before the Tribunal. The Tax Authorities had
negatived both the contentions of the 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 transaction
represented works contract was urged.
It is necessary at this stage to understand the
background in which the manufacture of MIG engines were
undertaken by H.A.L. In this connection it is material to
refer to the letter 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
Production. As the said letter is important, it is necessary
to set out the letter :
270
“Secret
Annexure “A”
EXTRACT OF
No. 11(228)/69/1/DP/Contracts
Government of India,
Ministry of Defence,
Department of Defence Production,
New Delhi.
the 22nd September, 1970.
The Chairman,
Hindustan Aeronautics Ltd.,
Indian Express Building,
Vidhana Veedhi, Bangalore-1.
Sub : - Manufacture of MIG-21 M Aircraft and
other equipment in India.
Dear Sir,
On behalf of the President of India, I have to
state that an Agreement was signed on 30th October,
1969 (copy already forwarded to you) between the
Government of India and the Government of Union of
Soviet Socialist Republics for the manufacture under
licence.
2. The manufacture of the said Equipment as
defined in the above said Agreement is hereby entrusted
to Hindustan Aeronautics Limited, Bangalore in terms of
the said Agreement. Under this entrustment the
responsibility for the proper implementation of the
Agreement shall be exclusively that of Hindustan
Aeronautics Limited except that the Government may from
time to time advise the Company about the programme of
manufacture of the said Equipment.
3. All payments falling due under the said
Agreement to the Government of the Union of Soviet
Socialist Republics 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.
271
5. The Government of the Union of Soviet
Socialist Republics is being informed of this
entrustment and they are being requested to cooperate
and deal directly with Hindustan Aeronautics Limited,
and do all things necessary for the effective operation
of the said Agreement according to the terms thereof.”
There was another letter regarding the determination of
premium under Emergency Risks (Goods) Insurance Act, 1962.
The said letter on behalf of the Government of India stated,
inter alia, as follows:
“That the 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 been made and are
being made by DCDA(AF) are the property of I.A.F. and
that the items manufactured out of the categories of
materials stated above are to be supplied only to the
Indian Air Force or as authorised by Government of
India. The materials therefore belong to the Government
of India.”
It may be mentioned as appearing 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 the Government of India for manufacture of
special equipment and assembling of aircrafts. Thereafter
both the Governments signed a protocol 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 22nd September, 1970 mentioned herein before
entrusted the manufacture of the said aircrafts to H.A.L.,
Bangalore. In pursuance of the said entrustment, H.A.L.
undertook the work of assembling and manufacturing of MIG
engines. For the implementation of the entrustment H.A.L.
has three divisions namely Koraput (in the State of Orissa),
Nasik (in the State of Maharashtra) and Hyderabad (in the
State of Andhra Pradesh). At Koraput and Hyderabad, engines
which are electronic equipments were respectively
manufactured and the MIG aircrafts were finally assembled at
Nasik for delivery to the Government of India.
In this background, the question that arose before the
Tribunal was whether the contract between the Union of India
and the appellant
272
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 Union of
India and the appellant. Both sides for this purpose relied
upon some correspondence and invoices which are on record.
Mention in this connection may be made to a communication
which is in the 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, Ministry of Defence,
to the Chief Accounts Officer, High Commission for India in
U.K. and the Chief Accounts Officer, Embassy of India in
Washington on the subject of “Procurement of bought out
items against the requirements of I.A.F. for 1st and 2nd
line servicing”, which dealt with the procedure sanctioned
by the Government of India for the purpose of “avoiding two
customers viz. Hindustan Aeronautics Limited and the Indian
Air Force going to the same supplier abroad for the same
items”, the letter dated 20th December, 1971, from the Under
Secretary to the Government of India, Raksha Mantralaya,
Raksha Utpadan Vibhag, written to the General Manager of the
Nasik Division of the appellant, the letter of 28th April,
1969 on the subject of “On Account’ payments to H.A.L. for
I.A.F. manufacturing programmes of H.A.L. 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 the order of the Assistant Commissioner of
Sales Tax for the assessment years 1974-75 and 1975-76,
wherein he had referred to a statement furnished with a copy
of the claim against price proposal for 6 F2S details
engines as accepted by the Government by their letter dated
4th June, 1976. That claim is against price proposal for 6
F2S details engines accepted by the Government. Their break
up is as follows:-
“Imported materials. Rs. 48,39,454.08
Indigenous material and
MCH-Freight etc. Rs. 2,64,925.79
—————-
Total material cost Rs. 51,04,579.27
Labour cost Rs. 2,96,480.60
Sundry direct charges Rs. 12,87,865.89
—————-
Total Rs. 56,58,724.36
273
Profit @ 15% on HAL’s effort Rs. 2,47,809.00
—————-
Rs. 69,06,533.36
or
Rs. 69,06,533.00
The Break up of HAL’s effort also indicated as
follows:-
“Freight Rs. 66,320.41
Material Overhead Rs. 1,03,067.55
Ind. materials Rs. 96,536.03
—————-
Rs. 2,64,925.79
Labour cost Rs. 2,96,480.00
Training cost & other expenses Rs. 6,000.00
Tooling expenditure Rs. 1,50,000.00
Last test expenses Rs. 8,34,342.65
Insurance freight Rs. 1,00,347.67
—————-
Total HAL’s effort Rs. 16,52,096.71
15% profit on HAL’s effort Rs. 2,47,814.00″
The Assistant 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
sanction of the price, the payment was made. The Assistant
Commissioner had further observed that it appeared from this
letter that six MIG engines were delivered 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 that the
sanction had been accorded for payment towards the cost of 6
engines delivered to I.A.F. According to the Assistant
Commissioner, the argument 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 engines
were delivered to Nasik Division whereas the invoice was
raised and payment received from the Government of India.
The purpose of
274
giving physical delivery, according to the Assistant
Commissioner, of the MIG engines to Nasik Division was for
the purpose of fitting in the Aircrafts. In that event,
according to the Assistant Commissioner, Nasik Division
became the custodian or the trustees of the MIG engines for
which the price had already been paid to H.A.L. The
Assistant Commissioner concluded that the property in the
engines passed to the Government of India and not to H.A.L.,
Nasik Division. He had further observed that the break up of
the cost was towards the material cost, labour cost and
sundry direct charges. The total cost came to Rs.
68,58,724.36. The further break up of the total cost of Rs.
68,58,724.36 was imported materials, indigenous material and
MCH freight etc., labour cost and sundry direct charges.
Apparently the cost of the material both imported as well as
procured locally had been charged in the bill. According to
the Assistant Commissioner, further profit of 15% had been
charged on H.A.L.’s effort which included freight, material
overhead, indigenous material, labour cost, training cost
and other expenses, tooling expenditure, last test expenses,
insurance and freight. The total cost of these items as per
the bill stood at Rs. 16,52,096.71. 15% of this had been
charged towards the profit. The Assistant Commissioner had
further observed that profit was charged as in a commercial
transaction in case of sale. Commission was allowed in case
of agency transaction between the Principal and the Agent.
But in the supply of MIG engines, a profit had been charged.
The Assistant Commissioner concluded that this gave a clear
indication that this was a case of transaction of sale and
not of agency. We are unable to accept this reasoning of the
Assistant Commissioner. According to us the procedure
indicated in the break up has to be understood in the
background of the entire transaction between the parties.
The pricing procedure had to be judged in the light of the
entire facts and circumstances especially in the background
that the entire transaction was entrusted to H.A.L.
Bangalore in terms of the agreement between the Government
of India and the Government of U.S.S.R. for the manufacture
on behalf of the Government of India of MIG engines for
which licences had been granted by the Government of
U.S.S.R. to the Government of India. The letter dated 22nd
September, 1970 set out hereinbefore indicated clearly that
under the entrustment the responsibility for the proper
implementation of the areement would be exclusively that of
the appellant except that the Government might from time to
time advise the Company about the programme of manufacture
of the equipments. The various correspondence referred to
hereinbefore, in our opinion, lead to the irresistible
conclusion that the property in the aircrafts as well as in
the equipments and spares used in them were always in
275
the Government. These were procured for and on behalf of the
Government of India in pursuance of the 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 invoice, the
transactions 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 the Government. The materials imported under the
licence or procured indigenously for the manufacture were
always and had always remained the property of the
Government. The appellant had no property, in any part
thereof, and had no right to dispose of or disposal over
these materials and spares. These had to be regulated by the
procedure envisaged in the agreement between the parties.
The test by which these transactions should be judged in
deciding whether this was a works contract or a contract of
sale of any part of the material has been emphasised in
several decisions of this Court. Some of these principles
have been reiterated in the decision of M/s Hindustan
Aeronautics Ltd. vs. State of Karnataka in Civil Appeal Nos.
1386-91 (NT) of 1977 of this Court.(1)
As emphasised by this Court, there is no rigid or
inflexible rule applicable alike to all transactions which
can indicate distinction between a contract for sale and a
contract for work and labour. But the tests indicated in the
several decisions of this Court merely focused on one or the
other aspect of the transaction and afforded some guidance
in determining the question, but basically and primarily,
whether a particular contract was one of sale or for work
and labour depended upon the main object of the parties in
the circumstances of the transactions. In a contract for
sale, the main object of the parties is to transfer property
in and delivery of possession of a chattel as a chattel to
the buyer. It has to be emphasised, taking into
consideration the correspondence and circumstances under
which this entrustment had to be understood that at no point
of time before the delivery of MIG engines, H.A.L. was the
owner of the property either in the equipment or in the
spares or in the aircrafts and as such there could not have
been transfer of any property from H.A.L. to the Government
of India. The H.A.L. only performed the job entrusted to
them for and on behalf of the Government and all incidental
steps
276
naturally entering into contract, procurement, payment of
price and billing and invoices had to be done in that light.
There was no transfer 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. from such materials
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 appellant was never the owner of
these materials.
The payments required in the work of “manufacture of
MIG21M Aircrafts 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 India”.
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
of the said entrustment.
There cannot be any question, in our opinion, of any
sales tax in respect of Aero-Engines transferred to the
Nasik Division of H.A.L. for installing the 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 the invoices was a matter of accounting and
carrying out the 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 service no property in the thing
produced as a whole notwithstanding that a part or even the
whole of material used by him may have 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 produced it some time before delivery and the
property therein passes 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 in this behalf
were on behalf of the Government of India.
We are therefore of the opinion that the Tribunal was
in error
277
in concluding that there was sale involved in these
transactions. It is not necessary for us in this connection
to refer to the principles in detail which the Court should
accept in deciding in each particular case the nature of the
transactions. These principles have been reiterated in the
decision of this Court in the case of M/s Hindustan
Aeronautics Limited v. State of Karnataka.(1).
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 circumstances, parties will
bear their respective costs throughout.
H.S.K. appeal allowed.
278