TMI Blog1995 (8) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... , the main objects of the company, among other things, relate to "manufacture of missiles in India or elsewhere either independently or in collaboration with others and for the said purpose to manufacture, assemble, fit up, repair, convert, overhaul, maintain and deal or undertake sales promotion in the following devices, apparatus and equipment as also all components, fittings, tools and implements, accessories and materials used or required in connection therewith". The Government of India entered into an agreement with a Free French Company-Societe Nationale Industrielle Aero Spatiale (SNIAS) for manufacture in India certain military equipment, for the purpose of which the foreign company agreed to place the technical know-how at the disposal of the Government of India. The French company also agreed to supply the required equipment and raw materials. All the rights, accruing to the Government of India under the said agreement were assigned in favour of the appellant-company. In pursuance of this assignment the appellantcompany manufactured the equipment and delivered to the Ministry of Defence, and debited the price thereof to the "on account" of Government of India, and the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and the French company for the manufacture of the equipment. According to clause 1 of the agreement the licenser, i.e., Societe Nationale Industrielle Aero Spatiale has granted licence to the licensee, i.e., the President of India, "a full, sole, and exclusive licence and authority to use and exercise the said system and to reproduce, manufacture, get manufactured the said system in the territory of India in accordance with the provisions of the agreement. By clause 17, the licensee agreed to pay the licenser a total sum of 7 million Francs for manufacture and sale of the said system, supply of technical documents. By letter dated March 18, 1971 the Government of India entrusted to the appellant-company the manufacture of the equipment and other rights and obligations. In the said letter the Government of India also entrusted to the company with the sale and disposal of the system, etc., on behalf of the President of India in terms of the said agreement. The Government of India by their letter dated August 30, 1976, directed the Director of Emergency Risk Insurance Scheme to examine materials held by the appellantcompany as the goods held by the appellant-company are required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... custody. It is also one of the special conditions that the stores and articles of the railway kept at site should be covered by proper indemnity. The "on account" payment was part of the "full contract price" for each completed wagon and the Government reserved the pre-emptive right to purchase all surplus or unserviceable materials from the company. On a consideration of the terms and conditions of the contract, the High Court took a view that the contract was a contract for sale of wagons and not works contract. 7.. In the said case, the Supreme Court found that the terms and conditions of the contract, read as a whole, indubitably led to the conclusion that the property in the materials was procured or purchased by the company against 90 per cent of the value of which advance was taken from the railways. With the exception of a relatively small proportion of the components supplied by the railways, the entire wagon including the material at the time of its completion for delivery was the property of the company. As the bulk of the materials used in the construction of the wagons belonged to the company, which sold the wagons for a price, the contract was a contract for the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales tax was attracted. 10.. On appeal to the Supreme Court, by the company the decision of the Karnataka High Court was reversed. The Supreme Court while interpreting the agreement held "the expression all items provisioned will be the property of the Government and will be issued on contract loan" indicated that though gathered and processed or manufactured by the appellant, the appellant would have no property in those goods and would not be able to dispose of or deal with them but they would be treated as the property of the Government. The fact that those materials were separately placed at cost plus 10 per cent profit was to ensure quick and proper execution of the work and was a neutral factor. Therefore, the spare parts and materials were supplied by the appellant in the course of execution of works contracts, there was no sale thereof and their turnover was not exigible to sales tax. Further, the Supreme Court observed as follows: "It cannot be said as a general proposition that in every case of works contract, there is necessarily implied the sale of the component parts which go to make up the repair. That question would naturally depend upon the facts and circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement. The Government of India entrusted responsibility for proper implementation of the agreement was exclusively of HAL, except that the Government could from time to time advice HAL about the programme of manufacture. All payments falling due under the agreement to the Government of U.S.S.R. had to be made by HAL on behalf of the Government of India. The material imported by HAL for the manufacture as well as goods, stocks and stores, work-in-progress, etc., were the property of the Air Force and the items manufactured by HAL were to be supplied only to the Air Force or as authorised by the Government. Some of the engines manufactured by HAL in its division in Orissa were sent to Nasik Division where the MIG aircraft was finally assembled for delivery to the Government of India. After the engines were despatched to Nasik Division, the Orissa Division of HAL drew bills and raised debits against the Government of India. The bills indicated a break-up of the material cost, labour cost and sundry direct charges and further profit at a percentage. The sales tax authority held that the entrustment to HAL of the manufacture MIG engines amounted to a contract of sale and Central sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly parts are to be imported by the appellant-company from the French company and that there is no possibility of any other material to be used for manufacture of the instruments. It would thus be manifest from the correspondence and the invoices and the notification issued by the Government on the subject that the appellant-company is only an intermediary agent for fulfilling the contract entered into between the Government of India and the French company. The Government in reality was the owner of the goods. It is also to be noted that while manufacturing the equipment and instruments if any fabrication was required, even that process is required to be treated as ancillary to the main manufacturing and the same cannot be bisected for attracting the sales tax. 16.. In this regard, it is relevant to refer to Halsbury's Laws of England, Third Edition, Vol. 34, where in it is clearly stated that a contract of sale of goods must be distinguished from a contract 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e workman supplies either all or the principal materials, the contract is a contract for sale of the completed chattel, and any materials supplied by the employer when added to the workman s materials vest in the workman by accession." 18.. The learned counsel also relied on the decision rendered in Bharat Engineering and Foundry Works v. State of Madhya Pradesh [1984] 57 STC 296 (MP). The facts of the said case are different. In that case, the petitioner was a fabricator of iron and steel goods. It entered into various contracts with Bhilai Steel Plant (BSP). In the assessment proceedings, he showed sales of certain amount and also disclosed that he received certain amount as labour charges, which were said to have been received by him on the basis of that transaction relating to them were not contracts of sale of goods, but contract of work and labour. The Sales Tax Officer refused to accept the transaction as works contract and included in the turnover. On appeal the Deputy Commissioner held that in certain contracts material was supplied free of cost by the BSP for fabrication and in certain other cases, it was supplied on cost recovery basis. Therefore, the Deputy Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty who produced it some time before delivery and the property therein passes only under the contract relating thereto to other party for a price. 20.. Therefore, applying the abovesaid principles to the instant case, we find that the Government of India entrusted to the appellant-company to manufacture certain defence equipment on the basis of the agreement entered into between the Government of India and the French company. The entire raw material was supplied by the French company and the finished goods are to be sold on behalf of Government of India. The value of the supplies were adjusted against the advance received from Government of India. The interest accrued on the advance was not appropriated by the company. The goods imported under collaboration agreement vested with Government of India. Therefore, the cumulative effect of all the transactions would clearly indicate that the Government of India is the owner of the property and the property never passed on to the appellant-company. It was only an intermediary functionary to manufacture instruments, and effect sales on behalf of the Government of India. Hence, it has to be necessarily held a case of contract for work ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
