1995 (8) TMI 294 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the transaction constitutes a contract of work or a contract of sale.

Issue-Wise Detailed Analysis:

1. Nature of Transaction: Contract of Work or Contract of Sale
The core issue in this judgment is to determine whether the transactions between the appellant-company and the Government of India constitute a contract of work or a contract of sale. The appellant-company, a Government of India undertaking, was involved in manufacturing defense equipment under an agreement between the Government of India and a French company, Societe Nationale Industrielle Aero Spatiale (SNIAS). The assessing authority classified these transactions as inter-State sales and subjected them to tax under the Central Sales Tax Act, 1956, and A.P. General Sales Tax Act, 1957.

The first appellate authority ruled that the transactions were not sales but works carried out on behalf of the Government of India. However, the Deputy Commissioner revised this order, asserting that the transactions were indeed sales. The Sales Tax Appellate Tribunal, upon reviewing the documents and procedures, concluded that these transactions were works contracts.

2. Arguments by the State
The State contended that the transactions should be regarded as outright sales exigible to tax. The State's counsel argued that the agreement between the Government of India and the French company, which included clauses about the transfer of technical know-how and supply of equipment and raw materials, pointed to a sale. The counsel referred to various recitals in the agreement and annual reports of the appellant-company, which described the transactions as sales to the Government of India. The inclusion of profit in the price structure and the "Cost plus" basis of price determination were also cited as evidence of a sale.

3. Precedents and Legal Principles
The judgment references several Supreme Court cases to elucidate the distinction between a contract of sale and a works contract. In Union of India v. Central India Machinery Manufacturing Co. Ltd. [1977] 40 STC 246, the Supreme Court held that a contract for the manufacture and supply of wagons was a contract of sale, as the bulk of the materials used belonged to the manufacturer. Conversely, in Hindustan Aeronautics Ltd. v. State of Karnataka [1984] 55 STC 314, the Supreme Court ruled that the supply of spare parts during the execution of a works contract did not constitute a sale, as the materials were considered the property of the Government.

4. Analysis of the Present Case
The court applied the principles derived from these precedents to the present case. It was noted that the entire raw material was supplied by the French company, and the finished goods were sold on behalf of the Government of India. The value of supplies was adjusted against advances received from the Government, and the interest accrued on these advances was not appropriated by the appellant-company. The goods imported under the collaboration agreement vested with the Government of India, indicating that the appellant-company was merely an intermediary.

5. Conclusion
The court concluded that the transactions in question were contracts for work and labour, not contracts of sale. The cumulative effect of all transactions indicated that the Government of India retained ownership of the property, and the appellant-company acted only as an intermediary to manufacture and sell the instruments on behalf of the Government. Therefore, the order of the Tribunal was upheld, and the revision cases filed by the State were dismissed.

Final Judgment:
The revision cases are dismissed, and the order of the Tribunal is upheld, confirming that the transactions are contracts for work and labour, not contracts of sale. No costs were awarded.