HINDUSTAN AERONAUTICS LIMITED v. STATE OF KARNATAKA

I A· 248 ,

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 "con- c tractor" if the ·~owner" did not supply them, and only if the owners Dy. Financial Advisor authorises them-Whether the contracts in question were sales contract or were part ofone contract of executing 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 ·c ontract 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 F expenditure authorised by the owner's D eputy inancial Adviser. at the contractor's request from· time to time.

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..: work or rcndcrmg scrvtce no proper y m e tmng.s produced as a A pcrformJOS 'th'itanding that a part or even the whole of materials used by bim wh0 to ootw• his property. In the case o f a contract (,or sa Ie, 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 · · . . It is necessary, therefore, i,.n every case for the courts to find out whether B 12 · 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 ~ 1votk Rnd labour. The distinction is oft~n a fine on.:. A contract of s.1le is a . · 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 of i;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 ' ~hour. The-se: merely focu~sctl on one: or th-e other aspect of the tranSaction and I ~ ! 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 of the contract, f," Clf'CUin~b~ ur th" tmnsuction.o; anJ the cu~tom of the trade. [.259 C·DJ · Of s:l~~~J R.ul/imr S hlllltrs & F:ngill~:rfnK Compiln~· Pvr. Lr.l. v. Th~ Cum,:j$${i)t/" . ! ' ll.~. 41 ~aid Tat Cul·rs 409; r~f~red to. . ' -2 1 ..( L'tlnt~ th! c:tunot b.: said a g.:ncrat propthi!ion that in cv~ry C3.Sc: of works n:•~e Up 1 :/r'$ U') .~"'~aril)' impl~c:d the sal~ of the componcnl parts \\h~h go to Cltcl.lm1 b,..~ ~~a. tr, That 4U'-"~tlpn wouiJ natur.1lly d~pcnd upon the r~cts and G 0 lluril\i th~; <r.lch ca-.u. Ml!r~ passina of pr0pcrr)l in an nrtidc or commodity IJ)c t,..n........~l'lUI';e of Nrfurman~-e .., It . _,,on to be I or the tr:&n~ctinn In qut>stion docs not reader ' "·~ It 11 . CiUl!!llctlun of iille. E\'~rt in a cvnlrucl purely of works or t~ Pos~tbt.. tl . 1 . • lb.. -ort, and .. ~ urtrc 1~.!<> m;ty h~vc to 1>1: use..! by the peNOn cxe<:utme · 1 Yfoi41J 001Pror:en_y .In liuch urticl~ or mat.:ria.bi may p:.ss to the other part)'. H nccenanly cotw~n &.he: contr.Kt inlo one: of sulo of~ m:ucriah .

SUPREMI! COURT RBPOR TS . [19841 2 s.c.n.: :· 250· . Jn every case, the Court would nave .to find .out wh~t ~as. the pri~arl~ obj~ct of . . A the transnction nnd the intention of the partres parttes while enrcnng 1nto It. It may in some ~scs be that even while entering into the contract of work or even j service, parties might enter into separate. agreements, on~ of work and service and ) the other of sale and purchase of matcnals to be used m the course of eltecut.ing the work or performing the service: · But, then in such cases the transaction would not be one and indivisible, but would fall into two sc~arate ngree~e.nls, one of l ' work or service and the other of safe. In order to constitute a sale, Jt rs necessary B· that there should be an agreement between the parties for the purpose of trans-- ferring title to goods, which of course pre-supposed capacity to contrnct, ·thet it mu~t be su)"lported by money c~nsideration that a~ a result of tran~action; tht property must actnaHy pass in the goods. Unless all these clements were pre'lent, there would he no sale. [260 C-H]

Stale of Hlmadml Prad~sll &: Others v . A.(.(Odart 1/tJtt'ls rtf lnclia l.td. 29 C -' • Sales Ta;lt Cases 474; State of Madm.<> 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<;ion on the ta~ability of the lumcwer of the ">pare r~u1~ nnd materinl4i sup()lied in execution of appellant'~ job works. {Y.6 DJ

• 3:2 rt i<s clear from clauc;e :l thnt it wa~ the expenditure to he incurred for providing th~ materials for the jobs lo he done were suhject to the apj'\rovaland ~nctlon of the Go\'ernmenr. The expr~o;iun" "All item.; prMMoni'd by the contractor l&'l/f ht the property of the owner and will he issued on ~mtlrart /oaR.•• · are ~ignifiettnt Rnd indicative of the Te3 l intention of the p:1rtie<>. [263 fl

3:3 "The exJ're.~sion ..contract loan.. is· not an e:-<~res.,.iM or nrt. It h~" no ·eeoer:1lly accemed mc:tninH in dictiunary, legal or otherwi~. a~ such. Thtrc f~ no meaning ur th~ e.'<l"'r~~io.n rrovidl.'tl In the contl.lct ~tween the p:trlies·N • Jn Ihe corre".f'Onden~ hetween the }1artit'\ In connection with the cxccutioJT the or woria. Out ·these e'<prec;~ion!l indicate that the •provisions' which woul!.i r..: _requirec~ fc~r c-.trr~·in' out the contract~. which could not he nnticirated beftlre the begmnmg or m execution or the contracts wilt be the property of the (wmer i .~. that thou.sh ~thered and procured or manur~~ctured hy the contractor, the G·· con!ractor w1ll h.:.ve n~ pro~rty In the ··m !d goodo; or spares or matcriu1~ and wouTJ not bo u{\Jc to Clther dl'>JlO~ O( or dcaJ With tho<;e but tne;:e will 1Je trenfcd f\1r Chc rur~~c or thi~ cont':"ct to be ll~e prorerty or the owner and, then the contr.l~r ~tlpul.1ted that on. flct•onaf ba'll~ the~e will he lent out to the ~nntrnctor fM Nill~ u~Jtd Jn the ellecution o~ tho joh~ entrusted to the contr:Jctor. [2.63 G-H; 1~ AJ , . ~ l:j4 · Tite idea \li\• that the moment the~ ~Pare~ ond m:ltcrials w~:"re ~uirt\l . ob• entru'itcd to the app 11 t V u)f t11c • c: un &Ulu. i t her~ wu delay •Ill supplyi · 11 g th~ ~plrt parts and matcnab, the commctor wouhl bo r~ to procu;o or obtain th~ srattS

HINDUSTAN AERONAUTICS V. KARNATAKA (S. Mukharji, J,) 251

and materials either by manufacturing or by purchase from the market ·local or A foreign, these goods to. be identified and would be treated by the operation of the contract to be the goods of the owner of the planes. · lt is true that in order to be given out on loan by the 'owner' to the contractor, the owner must have property iti ·the spares and. materials in question. .But the 'owner' i.e. the Government in the context of 1951 agreement, and ifis indisputable that the transactions in this case were done on the basis of the agreement of 1951, became the owner of the property ·the moment· the .goo~s were identified and. there was. delay or inability on the part ·of the government in supplyh1g spares and materials. [264 C-F] B In the instant case, the property in the materials which arc used in the execution ~· of the jobs entrusted to the contractor became the property of the Govcnm1cnt before if was used. Further there was no possibility of any other materials to be used for the contract. [265 H ; 266 AJ

Commissioner of Commercial Taxes, Mysare v. Hindustun Aeronautics Ltd, c {1972j 2 SCR 927; Ram Singh & Sons .l:;ilgineerillg Works v Commissioner of Sales Tax, U.P. 43 Sales Tax Cases 195; followed. .

State .ofGujarat v Variety Buildings, 38 Sales Tax Cases 176 distinguished.

CIVIL APPELLATE JURISDICTION : Civil App~al Nos. 1386-91 of 1977 . D Appeals by Special leave ·Petitions from the Judgment and Order dated 1st Dc(;embcr, 1976 of the Karnataka High Court in S.T.R.P. Nos. 24-29 of 1975.) ·6- _S.T. Desai,S.J. Chandran & Mr(J. A.K. Verma for the Appellant. E. SS. Javali and Swaraj Kauslwl for the Respondent.

The Judgment of the Court was delivered by.:

SAUYASACHI Mu~HARJI, J. These appeals by . special leave are from the judgment and decision of the High Court of Karnataka · F· .).- dated lsi December, 1976 involving the questions of assessabilitv of the · appellant Sales Tax, Central as well as State. While granting leave, this Court exCluded the question whether the sales effected in the canteen b" the appellant were assessable to Sales Tax. By t~e impugned judgment, the High Court of Karnataka had dismissed several Writ "Petitions against se-veral orders being S.T.R.Ps. Nos. 28, 27 and 29 G· of 1985 under the Karnataka"Sales Tax Act, for the year 1960-61,· ~ 1961-62. and 1962-63 respectively and also three others namely; S.T.R. Ps. Nos. 25, 26 and 24 of 1975, under the Central Salex Tax Act for the corresponding years respectively, at the instance of the present appellant; These involved common· questions of Ia w and facts. and H were disposed of by a common ju~]gm~nt. We also propose to do t11e

252 SUPREM-E COURT REPORTS [1984] 2 S.C.R.

A same. As stated, one of the questions was about the taxability of the turn-over in respect of the sales made in the canteen of the appellant company. This question is not before U?~ Before the Tribunal, the two following questions relevant for appeals before us were agitated, namely;

8 (i) Whether the turnover apportioned from the job "(Orks undertaken by the appellant related to the sales of materials by the appellant to the Indian Air Force or other private parties, as the case may be, and as such whether these were taxable as held by the ower appel- . '

c late authority. ·1 (ii) Whether, in the case of job works u!ldertaken from the_ private parties_ mainly on quotation on inclusive- price-basis, the Sales Tax authorities were right in apportioning a portion of the turnover as attributable towards sales of materials. D In order to appreciate the controversy in these appeals, it is necessary to state certain facts. The appe1lant is a manufacturer of spare parts and accessories of various aircrafts and has also established facilities for assembling,~rvicing~ repairing, overhauling of aircrafts, thcif instruments and accessories.. The Sales Tax authorities sought to subject 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 to the aircrafts which the appellant supplied to the Indian Air Force as a result of their use in the process of repair· -~ ing, 'servicing and overhauling of the aircrafts, their- instruments and accessories whic;h were sent to the appellant for the aforesaid purposes during the relevant years in question. .. At the outset, 1t is important to emphasise that the jobs done by the appellant were servicing, assen-ibling, repairing and overhauling 'Airforce PJanes' entrusted to the appellant. In the second appeal being Civil Appeal No. 1387 (NT) of 1977, the main job done was assembling; sales tax was levied in respect of the turnover for doing "' ·the same job. These works were done on the basis of contracts or job

H orders issued from time to time . .,While no contract directJy con- cerning the repairing, servicing and overhauling of a specified aircraft, instrument or accessary in which th~ spare parts bad been used in the execution of service contracts was on record, ther~ is, however, a -· specimen contract that was entered into between the appellant and

HINDUSTAN AERONAUTICS 11. KARNATAKA (S. J.fukharji, J.) 253

J.A.F. being agreement dated 23rd June, 1951, hereinafter referred A . to as '1951 Contract'. The agreement is described as ''Contract for the flight servicing and maintenance of the H.Q. Training Co11.1rnand I.A.F. Communication Flight". The agreement was between Hindus- tan Aircraft Limited, . described in the agreement as . the .'Qontractor' and the President of India, described in the agreeme~t as the 'Owner'. It may be mentioned that the Hindustan Aircraft Limited has later B on become the appellant i.e. Mis Hindustan Aeronautics Limited. As the contentions of th~ parties in these appeals centered on the ...'· question whether the contracts in question, the income of whicli has been subjected to sales tax, were works contracts only or were agree- ments to sell spare parts, it would be relevant to refer in detail to some of the clauses ofthe "1951 Contract". c The agreement states that the 'contractor' agrees to accomplish for th~ 'owner' the servicing and maintenance of the -H . Q .. Training Command, I.A.F. Communication Flight, and works required on visiting aircrafts, to the standard as specified in the said agreement at Bangalore or at any other place required by the 'owner'. Then D the sp~cifications according to which the works had to be done were mentioned thereafter. The agreement also provides that the works wou:d be carried out by the contractor, and payment made by the owner "at Cost plus 10% profit basis" orat the contractor's standard fixed rates, where applicable. Sub~clause (b) of clause 2 provides that any additional works to those specified in clause I, items· (a), E (b) and (c), authorised by Air Headquarters should also be charged for separately as per -sub-clause (a) of clause 2 of the agreement.

As the question of the price of the spares and materiats is involved. it is necessary to set out clause 3 which deals with spares and mate~ rials: • F "Generally, the owner will provide the contractor with ·all the necessary spares and materials (other than expendable ·materials such as paints, dopes, cleaning rages etc.). Where, • how~ver, there is delay in the supply of essential items, the contractor will provide those wherever possible either by purchase or ma_nufacture, within an expenditure authorised by the owner's Deputy Financial Adviser at the Contractor's request from time to time._ AIJ items provisioned by the· contractor will be the property of the owner, and wHI be issued on fontract Loan. The ~wner agrees to pay the contractor for provision of spares at the following rates :-- '

.. 254 SUPREME COURT REPORTS [1984] 2 s.c.tt. .. (a) for iter~s manufactured by the contractor-Cost plus 10%.

(b) for items purchased from jndigcnous and overseas sources-actual irwoice price plus all other charges the contractor is called upon to pay, such as packing and sh'ipping etc. plus 5 %·" 8 Regarding Technical advice and publications, dause 4 of the 1951 agreement stipulated that all rclevant service publications and . inanuals would. be made available on loan to the contractor through I.A.F. Liai~on Officer attached to the contractor's Factory. Regarding d~livery, it was provided by clause 5 that subject to the owner's ·com- ·c pliance with clause 3, the contractor would keep ready for flight as many of the available planes as possible.

Clause 6 of 1951 agreement deals with terms of payment and s~ipulated that the contractor would submit to the owner monthly bills as per clause 2(a) supportecl, by cost analysis showing; inter alia, ·D of certain d~tails and the details are set out in different sub-clause me1,1tioned in clause 6 of the agreement. The other incidental pro- visions of dausc 6 are not relevant for the controversy in question. Clause 7 of the 1951 agteemenl dealt with indemnity for loss or damage which is not relevant for our purposes. Clause 8 dealt with right to can. eel the agreement, 'Clauses 9 and IO P!Ovided for 'inspectjcm". Clause E 11 prohibited the contractor, the appellant, from in any way assigning or transfering any rights or bene.fits under the agreement except ·with the previous consent of the owner in writing. Clauses 1~, 13 and 14 are a!so not relevant for our purpose.

We may mention that· reliance was also placed on behalf of the F appellant on an affidavit by one Shri S. Krishna Munhy who was the Sales Officer of the Overhaul .Division of the Appellant Company and which affidavh had been filed before the Sales-Tax Tribunal in Mysore, Bangalore. I~ the said affidavit, he had described the nature of the works done by the appellant in connection with repairs and had mentioned that two types of works were done; one was overhaul G ~f Aircrafts, accessories and equipmcnts thereof, and the other known as fixed quotation basis. It is not necessary to refer to the said · affidavit in detail. He had mentioned ·in the said affidavit the pro- cedllre for preparing the bills and had stated that after the works were completed, a final inspection of the repairs done W(:lS checked by the Works inspection Department, whereafter deliver)' orders we-re prepared and thereafter he <;iescribed how bills -we~ prepared thus :

HINDUSTAN AERONAUTICS r. KARNATAKA (S. Mukharji, J) 251.

" After the work is completed, a final _Inspection of the repair done is checked by the W0rks Inspection Department, whereafter a delivery order· is prepared and the billing section pre pares the bill . As it is required by the Defence Audit purposes, the labour charges and material charges arc shown w~ich is worked out on cost plus JO% basis. B Jn the case of private Aircraft owners ·a nd . other airlines for a similar contract for repairs, we give a fixed price quota- · . tion unlike in the. case of repairs to Defence Aircral't which ' by virtue of the contract is on cost plus 10 % basis, wh_crein ·

;- a · break up had to -be given as afore111entioned for purposes of defence audit." c 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 the aitcrafts which it had supplied to the Ind~an Air. Force as a result of their use in the process of repairing, servicing and over- D· hauling of the aircrafts, theiJ;. instruments"' and accessories which were sent to the appellant for the said purpose du~ing the relevant years in question.. The works under~aken and executed by the appe1Jant in assembling, repairing, servicing and overhauling were on ' cost plus 10 % profit basis as weli as on fixed inclusive ·quotation basis. The appellant with regard to the latter types. of contracts succeeded before the Appellate Tribunal who held such contra~ts to be ex<;:lusively works -contract. ·· The controversy before the High Court and before

, ~ . ·' us in these appeals is only with regard to ·the :first category of con- tracts, which the Appellate Tribunal held . to be composite contracts. The appellant contended that so far as ~he supply of spare parts to the Indian Air Force during the relevant period was .concerned, there had been no sa.Ie of the spare p~rts to the l.A .F., for that spa·re .. parts in ·question were used during the · course of a nd in the process of execution of the works contracts relating to the servicing, repairing and overhaulipg of the airc~afts, their instruments and accessories and that there was no sale contracts as such in pursuance whereof the spat:e parts in question could be said_to have beep. sold to th; G I. A.F. The Tribu~al .had negatives the contention of the appellant • and the appellant had gone up in revision before the -High Court. q"hc High Court was of the view that whether the suppJy of the spare parts by the appellant would amount to . sale or not wouJd depend · on the ~act as to whether there was a sale contract between tJ1e· appellant H and the I.A.F. in that regard. The High Court was of the viewthat I

256 SUPRBME COURT REPORTS (1984] 2 S.C.R.

A in the light of certain documents which we would also incidenatlly note, it could not be said that supply of spare parts and other materials .was not in contemplation of the contracting parties and the spare parts in question became the proper~y of the owner i.e. I.A.F. only by way of accretion to the aircrafts for being used in tqe process of executing the contracts and not as a res-ult of the agrement between .B the C;Jntracting parties. The High Court referred to certain decision and came to the conclusion that in the present case what was sought to be brought within the purview of Sales Tax Act was the cost to the vendees of the spare_ parts supulied by tpe appelJant. In such a case, th~ High Court was of the view that the stage at which the property therein passed to the owner was pot material. What was c material was as to whether the -goods in question were the property of the assessee before the same became the property of the President of India under the contracts.

D~aling with the contention of the parties, the High Court was of the view that in providing sepaFately the basis of payment of spare parts in the contracts, the intention of the parties was c1ear and un- ambiguous i.e. the parties clearly agreed to the sale of spare parts according to the contract. Certain invoices were placed on record, namely, the Invoice dated 28.2.1962 being Invoice No. HT2/CAT.B/F-1 · which illdicated separately the labour charges being Rs. 26,837.69 and materials and spares used by the appellant as per schedule attached as Rs. 321,187.92, referen.ce was. also made ,.to another Invoice dated 31.3.1962 which had a1so mentioned separately labour charges as w~ll as th~ costs of the matedals and spar~; To the same effect was another Invoice dated 28-2-1962. The Tribunal was of the view that these Invoices supported the conclusion that ·the labour charges . ' had been separately itemised from ·the price of the spare parts and whenever any spare parts had been provided by the I.A.F. authorities, the price the"reof had been deduct~d indicating that the spare parts supplied by the appellant. For the aforesaid reasons as indicated in the judgment of the High Court, the High Court was of the view that sale of spare parts was clearly in contemplation of the parties and the documen'ts in question constituted composite contracts, one relating ·to the remuneration for the service's rendered and the other for the sale of goods. In that view of the matter, the High Court was of the view that the Tribunal was right in dismissing the appeals of the appellant on the particular turnover of the appellant.

H The question before u·s, is, therefore, whether the payments made for spare _parts in executing the contracts in q':lestion were also •

mNDUSTAN AERONAUTICS \', KARNATAKA (S. Mukharji, J.) 257

sales contracts or were part of one contract of executing the works contracts.

On ·behalf of the appellant, it was urged before us referring to the terms of the contracts which .are more or less in the form ·or "1951 contract" mentioned before that the contracts in question manifested the clear intention that in substance and reality these were agreements to carry out works of assembling, repairs, servicing and overhauling of the aircrafts being the property of the Indian Air Force. We must emphasise thfit the· property in such planes was and had all along continued to remain with the Air Force. Relevant contracts and the whole ttansactions bweteen ·the parties indicate that the materials used in the process of such assembling, repairs, servicing c and overhauling were either supplied by the Indian Air Force or were of the appellant, the bulk was supp1ied by the Goyt. · The ques- tion therefore is, was it the intention to do the works undertal<en as one job or not. Counsel on behalf of ~he appe11ant contended that that was the intention and there was no intention whatever to pass any -property in any chattel qua clwctel. D It is well settled that the difference between contract of service and contract for sale of goods, is, that in the former, -there is in the ' person performing work or rendering service no property in the things I. produced as a whole notwithstanding that a part or even the whole -""\ of materials used by him had beeri his property. In the cas~ of a E ·COntract for sale, the thing produced as a whole has individual exis- tence as the sole property of the party who ·produced it some time before delivery and the property therein passe.d only under the contract relating thereto to the o~her party for price. It is necessary, therefore, in every case for the c<;mrts to find out whether in essence there • was any agreement to work for a stipulated consideration. If that was so, it would not be a sale because even if some sale may be extracted that would not affect the true position. Merely showing in the bills or invoice, it was contended on behalf of the appellant, the value 'of ' materials used in the job would not render the contract as one of sale. The nature and type of the transactions are important and determinat-. ive factors. What is necessary to find out, in our opinion, is tbe dominant object.

It was urged before us that contract of sale is one whose main object was to transfer property in and the delivery of the possession of a chattel to the buyer. If the principa1 object of works undertaken by the party was a transfer of a chattJe qua chattel, the contract wouJd

258 . SUPRID.-113 COURT REPOltTS . · [198412 s.c.R.

A be .fvr sale. It is necessary to find out whether the contract was prima.rily a contract for supply of n~atcrials at a price agreed to betv,:een the parties and the work or service rende~ed is only inc.idental to the execution of ·the contract. Mere transfer of property in goods used · in the performance of a· contract was not sufficient. To constitute a sale, there must be an agreemen.t expressed or implied relating to the B sale of goods and the performance of the agreement .by passing.of title .in those very .goods .

. On behalf ·of the respondent, counsel contended that the spare parts in question had been supplied by the appellant against payment· of price in pursuance of specific stipulations in the contracts. H~. c therefore, urged that the transactions. constituted s~ile which was liable· to tax. It \11as highlighted that the appellant manufactun:d and did business in the sale of materiaJs in question. The fact that the appellant was a dealer in the spare parts supplied to the l.A.F. and other parties, is undisputed. It was emphasised that the .appellant suppli~d the spare parts in question to l .A.F. against payment .of price 'r D and it was submitted that it was not the case of the appellant nor there WaS any material OQ record, to suggest that the spare parts in· question were eithe_r manufactured or supplied as· being incidental to the work of servicing and mait~tenance entrusted to· the appellan·t or were loaned to the I.A.F. It was urged on behalf of the revenue ~ that the correspondence on record and bills and · invoices clearly E demonstrated the intention of the parties to incorporate a separate agreement for the sale of spare parts b~ the appellant in the agreement. According to counsel, the contract of 195~ consisted of two separate agreements. The parties had consciously treated the works and the rl•" \ supply of materiais, separately and our attention was drawn to the ·clauses dealing with the s(!.me. It was urge~ .that the contract con- F tained separate stipulation for the work and for the supply of spare parts. It was also emphasised that the appellant ~as a regular manu- ...)... facturer of the spare parts involved in the case of supply to the l.A.F. • As has been clearly stated in. the Hals~uris Laws of England, Third "Edition, Volume 34, a contract of sale of goods niust be dis- tinguished from a confi'~ct for work and ·labour. The. distinction is often a fine one. A contract of sale is a contract whose main object is the transfer of the property in, and the 'delivery of the possession of, a chattel as a chattel to the buyer.. Where however the main object of work undertaken by the payee of the price was not the .transfe~ of cha~tel qua chattel, ~he contract ~s one of work and · labour. The

HINDHSTAN AERONAUTICS 1'. KARNATAKA (S. Mukharji, J.)- 259

test, is, whether or not the work.and labour be~towed end ·in anyihig that can properly become the subject of sale neither the ownership of the materials, nor. the value of the skill and labour as compared with the value of the materials, is ·conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract was in substance one f?r work a_nd labour and one for the .sale of a chattel.

In the case of Sentinel Rolling Shutters & Engineering Company P1•t. Ltd. v. The Commissioner of Sales Tax, (1) this Court reiterated .that tests indicated in several decisions of this Court to distinguish between a contract for sales and a contract for work and labour _were not exhaustive and did not lay down any rigid or inflexible rule appli- c cable alike to all transactions. These did not give any magic formula by the application of which one could say· in every case whether a contract was a contract for sale or a contract for work and labour. . These merely focused on one or the other aspect of the transactjon and afforded some .guidance in determining the question, but basically and primarily, whether a particular con.tract was one for sale of goods or for work and labour d~pended upon the main object of the parties gathered from the terms of the contract, the circumstances of the transactions and the custom of the trade. In that case, the assessee who was carrying on business as engineers, conttactors, manufac~ turers and fabricators had entered into a contract with a company for fabrication, supply, erection and install~tion of two rolling shutters in two sheds belonging to that company for a price which was inclusive of charges for "erection at site". The contract provided, among others, that the delivery of the goods was to be ex-works and once the de1ivery was effected, rejection claims would not be rntertained. All masonry works required before or after erection were to be carried out by the company at its own cost. Payments were to be made· 0n F ·overall m~asurements which should be checked by the company before installation. The actual transportation charges were to be in addition to the ·price stipulated in the contract arid the terms of payment provided "25 per cent advance, 65 per cent against delivery and remaining after completion of erection and handing over of the shutters to the satisfaction" of the company. The assessee had submitted the G bi1I to the company after completion of the fabrication of the rolling shutters, but before they were erected and installed ·at the premises , ·of the company. On the question whether the contract was a contract for sale or a contract for work and labour, the High Court had held,

(1) 42 Sales Tax Cases P. 409.

p. 260

... agreeing with the Sales Tax Tribunal, that the contract was a divisible contract, which essentially consisted of two contracts, one for the supply of ro11ing shutters for money and the other for service and hibour and that ,., the amount payable at the stage of delivery represented the sale price of rolling shutters and it was liable to sales ta:x. On appeal, by special leave, this Court held that the contract was one B single and indivisible contract and the erection a·nd insta11ation of the rolling shutters was as much a fundamental part of thc.contract as the fabrication and supply. The contract was clearly and indisputably . a contract for work and labour and not a contract t"'.Jr sale. .' 'lit ' Tt cannot be said 'lS a general proposition tbat in every case of c works contract, there is necessariiy implied the sale of the component parts which go to make up the repair. That question would naturally depend upon the facts and circumstances of each case. Mere passing of property in an article or commodity during the course of perfor- mance of the transaction in question does not render the transaction to be transaction of sale. Even in a co.ntract purely of works or service, it is possible that articles may have to be used by the person executing the work, and property in such articles or materials may pass to the other party. That would not necessarHy convert the contract' into one of sale of those materials. In every case, the Court would have to li..'ld out wh~t was the primary object of the transaction and the intention of the parties while entering into it, lt may in some cases be that even while entering into the contract of work or even s~rvice-, partie'; might enter into sepa~atc agreements, one of work and sep;ice and the other of sale and purchase of materials to be used in the cours~ of executing the work or performing the service. But, -' ' then in such c1ses the transaction would not be one and indivisible, but would fall into two separate agreements. one of work or sevcrie and the other of sale. These principles can be deduced from the de~ision of this Court in The State of Himachal Pradesh and Others v. Associated Hotels of India Ltd. 111 In the decisi...)n in the case of The. State of Mc.flres v.- Gannon Dunkerley & Co. (Madras) Ltd}21 this Cour.t had stated that according to the law, both of Eng~and and of India, in order to constitute a sale, it is necessary that there should be an agreement betw•!en 1he parties for the purpose of transferring title to goods, which of course pre-supposed capacity to contract, that , it must be supported by money consideration that as a result of trans- action. the propctty must actually pass in the gnods. Untess all

H (1) 29 Sales Tax Cases p. 47 4. (2) 9 Sales Tax Cases p. 353-(1959) SCR p. 379.

HINDUSTAN AERONAUTICS V, KARNATAKA (S. Mukharji, J.) 261

these elements wer~ present, there would be no sale. A . In the instant case ~t is mdisputable as we have referred. to the "1951 Contract" and the substance of the invoices antJ, it is not disputed that the other works orders were on the basis of the principles agreed by the 1951 agreement set out hereinbefore, that the transactions were as a result of composite contracts involving the execution of · B works viz. overhauling, repairing, servicing and in one year assemb- ling, air force planes; entrusted to the appellant. The question, is, whether this composite contract was divisible into one exclusively for work and labour and another for sale of materials. The fact that there is supply of materials for the purpose of execution of the work ,. contracts undertaken by the appellant cannot be disputed. But the c question then arises whether that can be' taken as pursua"nt to a distinct contract with a view to execute the work underrtaken. In ihfs ccnnec- tion we have already mentioned the principles enunciated by the statement of Halsbury's Laws of England, Tliird Edition Volume 34 1 . pages 6 ;:lnd 7 para 3. · D It would be appropr,iateJ in our opinion, because it clearly enun- ciates the principles, to refer to the statement of law in Benjamin~s Treatise on the Law of Sale of Personal Property with reference to the French Code and Civi I Law, Cll where the learned Editer has deduced the principles that would be applicable in deciding the controversy ). before us. These principles are :-· E

"1. A contract whereby a chattel is to be made and affixed by the workman to land or· to another cbatte] before the property therein is to pass, is not a contract of sale, but a co1~tract for work, labour and materials, for the contract does not contemplate the delivery of a chattel as sue~. F

2Copy pinpoint2. When a chattel is to be made an ultimately delivered by a workman to his employer, the question whether the contract is one of sale or of a bailment for work to be done depends upon whether ·previously to the completion of tl1e chattel the property in its materials was vested in the workman G or in his employer. If the intention and result of the contract is to transfer for a price property in ·which the trans- ~ '· feree had no previous property then the contract is a contract \ of sale. H (1) Eighth Edn. [1950] pp. 167-168.

'

262 SUPREME COUR,T RBPORTS [1984) 2 S.C.R.

· A Where, however, the passing of property is merely ancillary to the contract for the performance of work such a contract does not thereby become a contract of sale.

3Copy pinpoint3. Accordingly

B (i) Where the t'mployer delivers to a workman either ·all or the principal materials of a chattel on which the workman agrees to do work, there is a ballment by the emplover, and a contract for work and labour, or for work. labou~. Clnd materials (as t he case may be), by the workman. c .. Materials . add~d by the workman, on being affixed to or blended with the emp\oyer's materials, thereupon vest in the employer hy accession. and not under any contract of !<ale. "r'

D (ii) Where the workman supplies either all or the principal materials. the contract is a contract for sale of the completed chattel, an·\1' any materials s'uppl1ed. by the employer when · added to the workman's materials vest in the workman h\ accession . · ~ .l., E \

The learned Editor has emphasised that where passing of property was merely- ancillary to the contract for t11e purpMe of the \vork, such a contract does not lhereby become a contra~t for sale. This principle can also be deduced from the observations of the decision of Robinson v. Graves.11 1 F Whether a given transaction is a works contract pure and simple or it involves sale of goods also is of course a mixed question of law and fact dep~ndi ng upon the facts .of each ca$e.wri have note-d in the -)

is insta nt case the . contacts in question. Tt true, as was emphasised on b~half of the respondent and has been emphasi::ed by tht> 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~terial s 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 H . {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 sp~cified in clal)se 1 in the.dj_fferent sub-<;1~uses wa.s also to be ch~r-~ed as in Q1ause· 2(a). ·Regarding. spares· and ·ll)aterials, the idea· was that· th-~ owner would provide to the. cci.ntractor a11 the necessary. spares and mate~ials except expendable materials, such as paint~,. dqpes, cleaning rages etc. -and ii may be mentioned that these were necessary tools in. carrying 'out' the works entrt_Isted to the appe1lant. It a)so stiputat~d in ·order _to e~snre that there ·should be ·no delay. (n keeping · -the air-planes ready at a·ll times, that in cases of delay 1n supply of nnterials, the· contra~tor 'would provide those from wherever- possible, • eith~r by purcliase·or mantifactu_re but the expenditure to be incurred · for the same should 'be ~uthorised by the. owner's Deputy FinanCial ·. · Advis~r .at the c~ntractor's request from· t~mc. to time. Therefore it E . emphasises that it ·:was' the ~xpenditure limited ·not' only fo~ the jobs ' ·to b3 don~ but expenditure to be incurred for· proviqing the materials -. ··{ for the jobs to be ·done were subject to.. the 'approv_al ~and sanction I of the Government. · The expressions following thereafter in clause .'J ar:. jn C?ur opinion·, signific~nt and indicative of the rca1 inte~tion 9f th'! parties. These expressions are "All. items provisioned. by the . contr~ct~r. ivill be the p~opcrty _of the owner. and. will be- issued en .Cmz(ract. !JJan.'.' (Emphasis ; . supplied). . · ... Th~ expression "Contract Loan~' is not an expression of art. lt has no generally accepted mean ing iri dictionery, legal or otherwise, as such. There.is no definition or meaning of this expression provided . G .in the contract between the -parties or in th~ correspondence between ... th~ parties in· connection· with the execution of the works. But in our opiriion.--tltes~ expressions indicate that t}:!e 'provisions'' -which would b:=. required for car.r:ying out the' contracts, which' could n'ot. be anti~· .. cipated b:fore ·t_he. beginning ~r inexecu~ion of the contracts wil(be·, H the :prop'!rty of tne· owner' i.e.' that though ·g~thered and procur~d or . . .

·. ~

~264 . SUPREME COURT REPORTS · [1984] 2 S.C.R.

A . f, · mimt1factured by the contractor, . . the contractor . will have no proputy t~e said goods or spares or materials an~ would not·be able .. in to .etth~r .. disp::lse of or deal with those but these will be treated· for the· purpose of there contracts to be the property of the owner and, then the contract stipulates ~hat on fictional basis these wil1 ·be lent out to the ~ontractC!f· for b~ing used in the execution of the jobs entrusted to· the contraclcr. B . .. · It was. urged· before . us. that the· contracto~ . in .this app~llant is also a dealer and . manufacturer of- these spares and . case the·

matuial~,' to ·emphasiss that these materials were pot prepared cr ., ·produced or procured by the contractor on ad~hoe: basis for the. pur- l 111

pose ofexecution of the jobs ent!mted to the contractor. This position c is indisputably true. :But it has also to . be emphasised that' wh,at spare parts or materials that would be required· were not identified, Jl goods and it was submitted .that these would be treated to be the goods of the owner, and given on 'Centrad Loan'. I~ appears to us that the idea was that the moment these spares and materials were require.d To~· the jobs entrusted to the appellant. and there was delay D. in. supplying these spare parts and materials, the ~ontractor would . be free ·to. procure or obtain these. spares and materials either by m~nufacturing or by purchase from the market local or foreign;. these ge>ods to be identified 'and would be treated by the operaticn of the is contract to be the goods of th(! owner of the planes. It 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<H1 F of the governmel).t in supplying spares and materials. It ·was empha- sis~d that not a consolidated price was contemplateq but what was - contemplated was separate price for the material~. Indeed .the invoices r~lied upon bY fhe parties in the specific works orders indicated those w~re· charged f9r separately. The basrs "for this has be~n explained in· the affidavit of Shri Krjshna. Murthy mentioned hereinbefore. The G afnd~wit was before the authorities below as also befon;: the High Court ~f Karnataka ··and. there ·is no dispute as to the ccrreGtness of the statements made in the said affidavi~:

~·In the. case .of Commissioner df ~ominerci{ll Taxes, Mysore; .H Bangalore vs.· Hin.dustan Aerona,utics ·Ltd.,u> 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 wheel sets 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 . . ·and .c~nceiv~ . for all titnes·to meet all situations. All avoidable '

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 manufac- tllred · 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 like the raiiV:,ay were . 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. ' . ' A the p,roperty .of the 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 on Court of l<.arnataka the -case .of state .of Gujarat v. Variety- Buifd . . B. .ings 01 \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: .. .-~ arrived at by us is in -consoncnce with the principleS'iaid down by thi's j

_ ~ ..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 execution in 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.