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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

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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

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    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,

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    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),

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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

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    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

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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

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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