HINDUSTAN AERONAUTICS LTD .. v. THE STATE OF ORISSA·

The Judgment of the Court was delivered by G · SABYASACHI MUKHARJI, J. This is an appeal by special leave from the order dated 31st December, 1981 passed by the Sales Tax Tritunal, 'i- Orissa. The· appellant who ivas the assessee ·un.der the .Central Sales Tax Act, 1956 went up in appeal against the confirming orders of H. Assistant Commissioner in respect of the assessment years 1974-75, 1975-76. and 1976-77. The Sales Tax Officer, Koraput l Circle,

HINDUSTAN AERONAUTICS v. ORlSSA (S: Mukharji, J.) . 269

Jeypore had made the orders under Rule 12(3) of the Central Sales A Tax (0,issa) 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 R,s. l,37,72,652.00 for the year 1976-77. The appellant is a dealer regis- tered under section 7(1) of the Central Sales Tax Act, 1956 under Koraput I Circle in.the State of Orissa. . ,. . ,B · M/s Hindustan Aeronautics Limited (hereinafter r<femd to' as 'H.A.L.') of which appellant is a division was established en !st Octo- .. ber, 1964. The objective.of formation of the H.A..L. wa~ to carry on· in India and elsewhere,. the business, inter alia, in aercplanes including manufacture, assembling, buying and selling etc. of the same. ln . its division at Sunabeda, manufacture of MIG engines for MIG c aircrafts required· for-defence and overhauling of .aero engines of IUdian Air Force were undertaken. Some of the .MIG engines manu- factured by it were sent to NaSik Division of H.A.L. and some to • Indian Air Fore' as 'per instructi.ons from the. Ministry of Defence. The appellant received payments from Gov.ernment of India or Indian Air Force for the manufacturing programme. In respect of payments D so received, the Sales Tax Officer, Koraput I Circle levied Central· Sales Tax on the 'ground that the ·transactions were ir •crstate sales. This was disputed by the appellant according to. whom the latter was only an a,gent of the Government,of India .. In the alternative it wa·s l contended that the transaction~ were nothing but works cqntract and as such not exigible to Central Sales Tax . E ., B~ing aggrieved by the d~cision of the Tax Authorities as men- tioned hereinbefore, the appellant had gone. up in appea'l before the Tribunal. The Tax Authorities had negatived both the contentions of !he appellant. As common.question of law on similar facts was· F raised, the same was disposed of by one order by the Tribunal. Before · the Tribunal, only one ground namely, that the transa~tion r~presented works contract was urged ..

It is necessary at this stage to understand the background !n which the manufacture .of MIG engines were undertaken by H.A.L. G In this conne'Ction it is ·material to refer to the ietter dated 22nd Sep- tember, 1970 to the Chairman of the appellant company .for and on behalf of the President of India by the Joint Secretary to the Govern- ment of India, ·Ministry of Defence, Department of Defence Prcduc• · tion. As the said letter is important, it is necessary to s~t out the H letter : •. ' I

210 SUPREME COURT REPORts· [J984J 2 s.c.1c

"5iecl'.et " . · Annexuri? ·"A"• • >, EXTRACT OF •

No. J 1(2?.8)/69/1/DP/Conlracls Government of India, Minislr 1 of Defence, B. Department of Defenc~ Prod,uction, New Delhi. the 22nd September, 1970. • '. The Ch.airnfan, ( Hindu,stan Aeronautics Ltd., · C· .Indian Express Building, Vidhana Veedhi, ·Bangalore-I.

' Sup·, ~Manufacture of· MlG,21 M A,ircraft and other equipment in India .

Dear Sir,

On behalf of the President bf India, I have to state that' an· Agreement· was sig~ed on 30th October, .J969 (copy . already. forwarded to ·. youfbetwecn the Government. of. · Irtdia and the Government of Union of Soviet Socialist Rc- publid for tke. manufacture . under licence. . . ti . : . 2. The mai1ufacture of-the said Equipment as ·defined ~· ..i;~ .the above said. Agreement . is hereby . ei1trustcd to Hindustan . .' Aeronautics Limited, Bangalore in terms of the said Agree: .. ment. Under this entrustment the responsibility for the -F proper implementation of the Agreement shall be exclusively j. that of Hindusian Aeronautics Limited except that the · '.Government inay from time lo time advise the C.ompany . . ' about the program111e of manufacture of. the said Equip- · 1nent..

G· 3.. All payments.falling due under the saisi Agreement · io the Government of.the Union of Soviet Socialist ~epublics shall be made by Hindustan Aeronautics Limited, Bangalore on behalf of the Government . • 4. This entrustment shall remain in force till it is revoked .H ·or altered by the President of India. . · ... ..

.' . . . HIND~STAN . AERONAUTICS v.. ORISSA (S. Muk!ic.rji, J.) -~ 271.

5. The Government of the Union of Soviet. Socialist A Republics is being informed. of this · entrustment and they are being requested to COO]Jerate and deal diJ'ectly with Hindus- . tan. Aeronautics Lin;iited, ,and do .. all thi~gs necessary for the effective operation of the said 'Agreement according to the terms thereof." · .. .B There was another letter regarding' tlie dete;·mination of premium under Emergency Risks (Goods) Insurance Act,· 1962. The said. letter on· behalf or' the· Governmen·t of India stated, inter afia, as follows : · , · · • ''That th~ materials imported by H.A.L. for manufacture/ c assembly 'of Aircraft/Engines/Helicopter/other equipment and also goods, stocks and stores work-in-progress etc. for which 'on account' payments: have beens ~ade and are being made by DCDA(AF) are ·the property of I.A.F. and that the item; manufactured out of the cat~gories of 'materials stated above arc to be supplied only to the Indian Air Force or.as authorise.d by Government of India .. The materials therefore belong . · to the· Governll)cnt of Iridia." · .

It may be mentioned as appearii1g from the order of the Sales Tax Tribunal that there was an agreement 'between . Government of · U.S.S,R. and the Government of India .on 29th August, 1962 whereby E Government of U.S.S.R. had. granted a licence to tlie Government · . of India for manufacture of special equipment· and· asseinbling of ' aircrafts. Thereafter both the Government~ signed .a proiocol on ·29th September, .1964 in the matter of manufacturing of MIG aircrafts . in .India. Government of India 'in their" turn by the secret letter · dated i2nd September, 1970 mentioned herein before entrusted the . F .manufacture of the· sajd aircrafts io H.A.L., Bangalore. In:pursuanc,i: of t]\e said entrustment: H.A.L. undertook the work of assembling and manufacturing 'of MIG engines. For the impleinent<ltio.n ·of the . · . entrustmerit H.A.L. has three divisions namely Koraput (in th~ . Stat" of Orissa), Nasik (in the State of Maharashtra) and Hyderabad · G (in the Sfate of Andhra Pradesh). ·At Koraput and Hydei;abad, engines which ·are eiectronic equipments· were . respectively manu- factured and the MIG aircrafts were finally assembled at Nasik for· .delivery tcdhe Government ~f India, ;

In this backgr;und, the question that aio~e before the Tribunal H was whether the contract between the Union of India and the appellant

272 SUPREME COURT REPORTS [1984] 2 s.c.R.

A for manufacture.and supply of MIG engines was a contract of sale as 1 contended by the Revenue or a works contract as submitted· by the assessee. There is no consolidated document on ·record to show ~ 0

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 conn'ection may be made to a communication which is in th• 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, Mjnistr,, of Defence, to the Chief Accounts Officer, High Commission for India i~ U,K. and the Chief Acco~nts Officer, Embassy of. India in Washington on the c subject of "Procurement of bought out items against th~ requirements of I.AR for !st and 2nd line servicing", which dealt with th~ pro· cedure sanctioned by the Government of India for the purpose of "avoiding two customers viz. Hindustan Aeronautics Limit<d and the Indian Air Force going.to. the same supplier abroad for the same ·items", the letterdated·20th December, 1971, from the Under Secretary· D to the Government of ,India, Rakslia Mantralaya, Raksha Utpadan Vibhag, .written to the .General Manager of the Nasik Division of the appellant, the Jetter of 28th April, 1969 on the.subject of "On .. Accom).t' payments to H.A.L. for I.A.F. m'iinufacturing programmes · of H.A.I.:. Nasik~ Koraput and Hyderabad"; letter dated 8th Decem- ber, 1972 from Under Secretary to the Government of India, Ministry E 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 :'I the order of the Assistant Commiisioner of Sales Tax for the assessment years 1974-75 and 1975~76, wherein he had referred to a statement F • - 'furnished. with a copy of the claim against price proposal for 6 F2S details engines as accepted by the Government by their letter dated j ., 4th June, 1976. ·That claim is against price proposal for 6 F2S details engines ~ccepted by the Governmeni.Tbeir break ·up i~ as fellows:- "Imported materials. Rs. 48,39,454.08 Indigenous material and. MCH-Freight etc. Rs. 2,64,925. 79 G Total material cost Rs. 51,04,579.27 Labour. cost · Rs. 2;96,480.60 ·Sundry direct charges Rs. 12,87,865 :89 H • Total Rs. 56,58,724.36

HINDUSTAN A~RONAUTICS . . v. . ORISSA (S: Mukharji, J.) 273

Pront@ 1_5 % on HAL's effort Rs. 2,47,809 .00 A Rs. 69,06,533.36 or Rs. 69,06,533. 00

The Break up of fIAL's effort also indicated as follows:- B "Freight Rs. 66,320.41

Material Overhead • Rs. J,03,067. 55

Ind. materials Rs. 96,536.03 f_ c Rs. ?,64,925. 79

Labour cost Rs. 2,96,480. 00

rrai ning cost & other expenses Rs. 6,000 ..00

• Tooling expenditure Rs. 1,50,000.00 · D

Last test expenses· Rs. 8,34,342. 65 Insurance freight Rs. 1,00,347. 67 ' ~- .. E Total HAL's effort Rs. 16,52,096. 71 15 % profit on HAL's effort Rs. 2,47,8\4.PO"

· The Assi~tant 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 F Government of India. After sanctio_n of the price, the payment_ was made. The Assistant Commissioner had further observed· that it· appeared from this letter that six MIG engi~es' were. deliveml 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 th'at the sanction.had been accorded for payment towards the cost of 6 engines delivered G to. I.A.F. According to the Assistant .Commissioner, the a~ument 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 rngines were delivered to Nasik Division whereas the invoice was raised and H ·payment received from the. Gov~rnment of In~ia. TQe purpose of

• .. 274 SUPREME COURT REPORTS [i984] 2 s.c.R.

A giving physical delivery, according to .tfie .Assistant <:;ommis~ioner, of the MIG engines to Nasik Division was for the purpose of fitting in the Aircrafts. In thatevent, acco~ding to the Assistant Comrriissiciner, . Nlsik Divisfon became the custodian or the trustees of the. MIG engines. for which the price had already been paiti to H,A.Ic. The · Assistant Commissioner concluded that the property ·in the engines B. passed to the Government ofindia and not'to H.A.L., Nasik Divisicn. He had further obse.fved that' the break up .of the cost was towards, the material co.st, labo11r cost and sundry direct.charges .. The total cost came to Rs. 08,58,724.36. The .further break up of the total cqst of Rs. 68;58,724.36~was imported materials, indigenous material and MCHfreight etc., labour cost an<l sundry direct charges.· Appa- C rently tlie cost of .the material. both imported as. well as procured . locally had· ·been charged in the, bill. According to the Assisfant .Commissioner, further profit -of 15 % had been charged on' H.A.L'.'.s . effort which)neluded freight, material overhead, indigenous material, . labour cost, trajning cost a11d other exp~nses, tooling expehditure, last.test expenses, insurance and freight. The total cost of'these items. D · · as per the bill stood at Rs. 16,52,096.71. J 5%of this· had been charged ·towards the profit. The Assistant Commissioner had further obs.erved that profi.t was charged as in a cori1;nercia\. trai1saction in case of sale: .Commission was all~wed in case of age~cy transaction between the. Principal and the Agent;.. But in the supply•ofMIG engines, a profit had .been cl1arged; The Assistant Coi:nmissioner concluded that this • E .gave a clear indication that this was a case of transaction of sale and. not of agenc!f. ·We are .unable to accept this reasoning of the Assistant · Commis.sioner. ·According to us the procedure indicated in.the break· ~· . up has to be understhod· in the background of the entire transactiori ' between the parties. The pricing procedure had to be: judged in the light <;>fthe entire facts and circumstances especiallyin·the background F !hat the. entire ·transaction was entrusted to ll,..A,.L. Bangalore in terms of the agreement between the Government of India and the Government. of U$.S.R: for the manufacture on •behalf of · the Government ofindia of MIG engines forwhich licences had been · granted by the Government of U.s:s.R. t~ the Government c:if India . .'J:'he .letter dated 22nd .September, 1970 set out hereinbefore indicated .G · clearly that under the entrustment the responsibility for the · proper · implementation of the aregement would.' be ·.exclusively that of the appellant except that the Government might fioin time to time advise the Company about the P.rogramme of manufacture 'of the equipments. The various correspondence referred to .hereinbefore, in our opinion~ H !~ad co the ifresistible conclusion that the property in the aircrnfts · as well as in· the e.quipments and spares used in.them were always in .

Hl'NDUSTAN AERONAUTICS v. ORTSSA (S. Mukharji, J.) 275

• the Governnient. These were ·procured ·for and bn behalf of the . A ' Government of India in pursuance ofthe agreement with the Government· of India and U.S.S.R. The entrustment of jobs on behalf of the Government and ·the incidental necessary works to. be done in these connections had to. be performed by the appellant. In this background .. the.pricing, the invoke, lhe·tratisacJicns have· to be understood. ' . · . ·~ B ' . . .. '

We have· referred to the several correspondence. which, according to us, indicate that the property in ·the aircrafts,· in the equipments and the materials had always been with ti1e. Government. The i:nate- ' rials ifnported under the licence of procured indigenously for the. -~. manufacture were alway~ and )lad alway$ remained the property . C ~'. of the Government, The· appellant hail nc property, in ar.v part · ·thereof, and had no· right to dispose of or ·disposal over these materials and spares, These had to be regulated. by the prcdceure envisaged .·. in. the agreement between the parties: ·The test by '_which these trans- cc actions should be judged in deciding whether this was a works ntract 0

or a contract "of sa.le of any part of the material hcs""bm1 cmphasisrd. D in .several decisions of this Ccurt. S®ie of these principles lrnve b<e_n · reiterated· in the decision of M/s Hindustan Aeronautics ·Ltd. ~s·. Sta/e · of Karnataka iri Civil Appeol Nos. 1386-91 (NT) of J977 of this Ccurt:" >

As emphasis;d by this Court, ther<\ is no rigid or inflexib!e·ruie applicable alike to all. transactions which ,can indicote distinc1ic.i-. b< t- .E

1. ween a contract for sale and a contract for wcrk and laMur. But the tests indicated in the several ~isions ~f thi; Couri merely fccused r· on one or the other aspect" of the transaction and affmded some

..,, guidance in detefmining the qu~stiqn, but l:asic'alJy. -and prhl]a.ri!y, whether a.,particular contract was one of sale -or for ·work and labour. ,' depe.nded upciri .the main object of tl1e parties in the cirrnmetan«s of the transastions, In a contract fer sale, the main object cf the parties is to transfer property in and delivecy of possession. cf.a r.lrn!,tel F

. as a chattel to the buyer. It has to be. emphasised, taking _into con- sideration the corresponilence and circuinsiances under .. which this entrustment had to be unde~sto6d that at no point of tim<' before the delivery of MIG engines, HA:L. was tl1e owner of the. property·either . G in the ·equipment or in the spares·or .in ihe aircrafts and as such _there . coald not have 'been transfer of any property frcm H.A.L. to. the Government-of fodia.· The H.A.L. only pcrfcrmcd the jcb entrusted to them for and. on behalf of the Government and all incidental ·steps H (!) [1984] 2 S.C.R. 248.

276 . SUPREME CoURT REPORTS. [1984] 2 s.c.R. • A 11aturaily entering into contract, procureme1it, payment nf pri'e 2nd billing and. invokes had to be done in that light. There was no tram fer 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. frcD1 • such niaterials belonged to the Government of India at all material B .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

c had no disposing power as the appel!ant was never the owner of these • .. . materials. . . . The payments required in the work of ''manufacture of MIG- 21M Aircrafis 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 Jnd~a·;. D 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 o.f the said entrustment.

"There cannot be any question, in our opinion, of any sales tax i~ respect of Aero-Engines transferred to the Nasik Division -of H.A.L. E for installing t11e 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 tl].e invoices ·was a matter of accounting and carrying . ounhe 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 s~rvice no _property in' the thing produced as a whole notwithstanding that a part !Jr "even the whole· of material . used by him may have been his property .. Jn the case of ·a contract ' for sale, the tiring produced as a whole has individual existence as th> . sole property of the party who produced fr so""me time before delivery and the property there.in passe~ only under the contract relating thereto to the other party·for price. This cannot be said to be in respect of any of the items involved in these transactions, These transactions were carried out in implementation· of the entrustment job for the manufacture by H.A.L. and all ·payments and actions taken m this behalf were on behalf of the Government of India. H We arc therefore of th.e opinion that the Tribunal was _in error_

' HINDUSTAN AERONAUTICS y. ORISSA (S. Mukhai}i, J.) .. . in concluding that there was sale involv.ed in these transactions. It 277

A is not necessary for us in this connection to refer to the· principles in detail which the Court should ~cept in deciding in each particular .case the nature or' the transactions. 'Fhese ·principles have : been reiterated in the dedsion of this Cour( in the case. of M/s Hindustan Aponautics Limited v. State o/Karnataka.lll B • In the above view of the matter, the appeal is allowed,. The assessments are set aside. Necessary adjustments and refund, if necessary, .of the tax paid should be done accordingly, In the facts and cir~umstances, parties will bear 'their respective costs throughout.

c H.S.K. appeal allowed.

(1) [i984J 2 S.C.R.. 248.