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1983 (12) TMI 260 - SC - VAT and Sales TaxWhether the contract between the Union of India and the appellant 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? Held that - Appeal allowed. In the case of a contract for sale the thing produced as 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. Therefore the Tribunal was in error in concluding that there was sale involved in these transactions.
Issues Involved:
1. Whether the contract between the Union of India and the appellant for the manufacture and supply of MIG engines was a contract of sale or a works contract. 2. Whether the appellant, Hindustan Aeronautics Limited (H.A.L.), was liable to pay Central sales tax on the transactions in question. Issue-wise Detailed Analysis: 1. Nature of the Contract: Sale or Works Contract The primary issue was to determine whether the contract between the Union of India and H.A.L. for the manufacture and supply of MIG engines was a contract of sale or a works contract. The appellant contended that the transactions were works contracts and not exigible to Central sales tax. The Sales Tax Officer, however, levied Central sales tax on the ground that the transactions were inter-State sales. The court examined the background in which the manufacture of MIG engines was undertaken by H.A.L. and referred to the letter dated 22nd September, 1970, from the Ministry of Defence to the Chairman of H.A.L. This letter indicated that the manufacture of MIG-21 aircraft and other equipment was entrusted to H.A.L. by the Government of India, and the responsibility for the proper implementation of the agreement was exclusively that of H.A.L., except for occasional advice from the Government. The court noted that there was no consolidated document on record to show the terms of the contract between the Union of India and H.A.L., and both sides relied on various correspondence and invoices. The Assistant Commissioner of Sales Tax had observed that the break-up of costs and the inclusion of profit in the bill indicated a commercial transaction of sale. However, the court disagreed with this reasoning. The court emphasized that the entire transaction was entrusted to H.A.L. for the manufacture of MIG engines on behalf of the Government of India, in terms of the agreement between the Government of India and the Government of U.S.S.R. The materials and equipment used in the manufacture were always the property of the Government of India, and H.A.L. had no ownership or disposing power over these materials. The court concluded that there was no transfer of property from H.A.L. to the Government of India, and the transactions were works contracts. 2. Liability to Pay Central Sales Tax The court held that since the transactions were works contracts and not sales, H.A.L. was not liable to pay Central sales tax on the impugned transactions. The court noted that the materials and equipment used in the manufacture of MIG engines were always the property of the Government of India, and H.A.L. only performed the job entrusted to them for and on behalf of the Government. The court referred to the principles laid down in previous decisions, including Hindustan Aeronautics Ltd. v. State of Karnataka, to emphasize that the primary difference between a contract for work or service and a contract for sale of goods is that in the former, the person performing the service has no property in the thing produced as a whole. The court concluded that the Tribunal was in error in holding that there was a sale involved in these transactions. The assessments were set aside, and necessary adjustments and refunds, if required, were to be made accordingly. The court allowed the appeal and directed that the parties bear their respective costs throughout.
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