2010 (3) TMI 1028 - HC - VAT and Sales Tax

Whether the Tribunal is justified in giving a finding that the transactions between the assessee-company and the Indian Air Force which is bilateral shall not be treated as sale or works contract for the purpose of taxation under the KST/CST Acts? Whether the assessee-company, being an independent legal entity registered under the Companies Act as a company is a separate entity by itself which is different from Ministry of Defence? Whether the Tribunal is right in considering the works contract executed by the assessee-company as inter-State works contract not eligible to levy of tax? whether the Tribunal is justified in holding that the sales effected by the assessee-company to the Indian Air Force cannot be construed as inter-State sales attracting the levy of tax under the CST Act? Held that - The assessing officer could not pass an order by examining the relevant records and the nature of transaction between the assessee and its customers in detail and similar handicap was there for the first appellate authority and so far as the order of the Tribunal is concerned, the Tribunal without considering the factual aspect relying upon certain decisions has given judgment which according to us requires to be set aside and the matter requires to be re-considered by the assessing officer by giving an opportunity to the respondent-assessee. The respondent-assessee is also permitted to produce all necessary documents before the assessing officer in order to claim exemption. Assessing officer, considering the nature of transaction between the assessee and the Defence Department and the transaction between the assessee and third parties and inter-State sale and so also sale transaction within the State shall take appropriate decision in accordance with law.

Summary

Issues Involved:
1. Whether the transactions between the assessee-company and the Indian Air Force should be treated as a sale or works contract for taxation purposes under the KST/CST Acts.
2. Whether the assessee-company, as an independent legal entity registered under the Companies Act, is separate from the Ministry of Defence.
3. Whether the works contract executed by the assessee-company qualifies as an inter-State works contract not eligible for tax levy.
4. Whether the sales effected by the assessee-company to the Indian Air Force can be construed as inter-State sales attracting the levy of tax under the CST Act.

Detailed Analysis:

1. Nature of Transactions:
The court examined whether the transactions between the assessee-company and the Indian Air Force should be considered as a sale or works contract. The assessee claimed that the transactions were not taxable as they were not bilateral sales or works contracts. The assessing authority, however, treated these transactions as local works contracts and levied tax under section 5B of the Karnataka Sales Tax Act. The court noted that the assessee-company had collected sales tax on spare parts sold to the Navy and Airforce, indicating that these transactions were treated as sales.

2. Separate Legal Entity:
The court considered whether the assessee-company, incorporated under the Indian Companies Act, 1956, is a separate legal entity from the Ministry of Defence. The respondent argued that the company and the Defence Department should be treated as one entity, given the complete control of the Defence Department over the company. The court acknowledged that HAL is a corporate body and a separate legal entity, but also noted the direct control of the Defence Department over its operations.

3. Inter-State Works Contract:
The court evaluated whether the works contract executed by the assessee-company can be considered an inter-State works contract, which would not be subject to tax. The intelligence report indicated that the work was carried out and completed at the Hindustan Aeronautics Limited workshop in Bangalore, suggesting that the transactions were not inter-State. The court found that the Tribunal had not adequately considered the nature of these transactions and their classification as inter-State sales or works contracts.

4. Inter-State Sales:
The court reviewed whether the sales to the Indian Air Force should be construed as inter-State sales attracting the levy of tax under the CST Act. The assessee contended that there were no bilateral transactions with the Defence Ministry, and thus, the sales should not be taxed as inter-State sales. The court noted that the Tribunal had not thoroughly examined the factual aspects of these transactions and had relied on certain judgments without detailed consideration.

Conclusion:
The court concluded that the matter requires reconsideration by the assessing officer. The Tribunal's decision to grant relief without a detailed examination of the facts was set aside. The assessing officer was directed to re-evaluate the nature of the transactions, considering the relationship between the assessee and the Defence Department, and the nature of sales to third parties and inter-State sales. The respondent-assessee was permitted to produce necessary documents to support their claim for exemption. The assessing officer was instructed to expedite the matter and dispose of it within six weeks.