Holding

The transaction is a works contract, not a contract of sale, and therefore not liable to Central Sales Tax.

Summary

The Supreme Court examined whether Hindustan Aeronautics Ltd.'s (HAL) manufacture of MIG engines for the Government of India constituted a contract of sale liable to Central Sales Tax or a works contract exempt from tax. The Government of India, under a licence from the USSR, entrusted HAL to assemble and fit the engines, with all materials remaining the property of the Government. HAL received payments on behalf of the Government and invoiced for its effort, but the Court found that no transfer of ownership in the engines ever occurred. Applying the "main object" test, the Court held that the primary purpose was to perform work for the Government, not to transfer property. Consequently, the transactions were classified as works contracts and not subject to Central Sales Tax. The Court set aside the tax assessments and ordered refunds where applicable.

Issues considered

Whether the manufacture and supply of MIG engines by HAL to the Government of India is a contract of sale within the meaning of the Central Sales Tax Act, 1956.
Whether the transaction should be treated as a works contract, thereby exempt from Central Sales Tax.
Whether any transfer of property in the engines occurred from HAL to the Government, affecting tax liability.
How the "main object" test should be applied to distinguish between a contract of sale and a works contract.

Legislation cited

Subjects

Central Sales Taxworks contractcontract of saletax exemptiongovernment contractproperty transferdefence procurementmain object test

Judgment

267 A

HINDUSTAN AERONAUTICS LTD ..
v. '
THE STATE OF ORISSA·
B
December 16, 1983
0

(V.I). TULZAPURKAR; R.S. )'ATHAK. AND SABYASACHI MUKHARJI, JJ.]

·Central S11les Tax ACt, 1956 rebd with the Central Sales .Tax· (O~isSo) Rules,
-1957-Sales tax levfab/e on transactiOii of sale .and not of works contraci-;Whether

-- · a transaction is contract for sale or Contract for works deflends_ upon main object of
·the partieS in the circrtmstancCs of (he transactiOn and. 110 fixed .rule is.OP_Plic'ale.

After.the Government of.u.S.S.R .. under an agteenient, granti4 a licence
c
to the Government'bf India -for manufaCturing and esserilbling of aircrafts, both·
· the Governments signed a proto001 in the mii.tter of mii'nufacturing of MIG aircrafts· .
in_ India. The Government, of India in their tum entrusted. the m~nufacture of
ihci said aircrafts to the appellant, M/s Hindi.istan Aeroriautics Ltd., (H.A.L. for
short) .. The GoVernmeilt of India 1 infonned H.A.L. that· the niaterialS imported D
by H.A.L. for 'this purpose arid other f:quipri1e:i1t etc ..w.ere the property of Govern-
ment of India: .. Fof· the imPlemen41t.on of. the entnlstment H.~.L.. had. _three
diViSions namely, Koraput .(in the State ~of Otissa), Nasik (in the State of Mahar~sh
tra) and Hyderabad (in the State of Andhra Prad.csh). ·,;The H.A.L. manufactured
MIG aircraft engi!tes at Koraput.(Orissa) and se"nt-SOme· of th~m to its Nasik Division
l for being. fitted· to the MIG aircrafts to be supplied Jo the Govcmnl.ent of India
and some to the Indian·Ai~ For~ direGtly as pf:r instructions from·,tht Ministry E
of Defence. The H.A.L. :ceceived payments from Governmeilt .of India or Indian
·--. Air Force for the manufacturing programme:. Jn respect" of payments so received,
-th6 Sales Tax Officer, Kora put I Circle- of the State of OriSsa levied. ccfitral .sales
tax on the ground that the lransactions were inter-State sales. The Assistant Com-
missioner of Sales. Tax while confirming the order of the Sales Tax Officer obserVed.
that"H.A.L. J:i3d charged some ·p~rceniageof profit in the invoices sent ·to. the.
Governmeiit of India for the MtG engines as in a· commercial transactio.n ill tase of .F
sale which gave a clear indication tha"t .this was ·a c8.se _of transaCtio~ of sale and
not ~f agellcy. Ih ~ppeal the Sales T3x Tribunal negativecf the contention. ofH.A.L.
that the. transaction was a works contract and nof. a sa'l.e·. Herice' this appeal.

Allo~ing' the appeal, .. ...
\

HELD : ·· The transaction. is not"a Con'tract for sale but a contract for· work
and Jabour. (275 DI · G
.• __,,. There is no rigid or inflexible rule applicable aHke to all tra·~aCtioD.s which ·
can indicate distiriction ·between a contract for sale and contr3ct for.work' and.-
labour-. - Whether a particular. contract was on'e of sale or for Work ·and labour
depended upon the main object of the parties in the ~ii"cumStance&- of the. trS:ns- ·
actioRs. I11 a contract.for Sale, the main obj~t _of the parties is,to transfter proPerty. H
'in and deliVery of possession of a chattel as a cha-ttel, tO the buYe·r ... Th~.primary

•·
268 SUPREME COURT REPORTS [1984] 2 S.C.R.

A difference between a contract for work or service and a contract for sale of goods
is that:n the form~r there is in. the person performing or rend~ring s~rvice no pro- A
perty in. the ·1hir~g produced as a whole notwithstanding that a part or even· the
whole material used by him may have been Qis property. In the case of a cOntract
for ~le·, the thing p~oduced as a whole" haS individu~l existence as the sole property
· of the part'y who prod.uced it some time before delivery and the· prop"ity 'therein
passes only under the contract· relating .thcrerto to the other party for pricC. ·
B [275 E-F: 276 F-0]

Mis Hindustan Aeronautic~· Ltd v State of Karuatakti, [1984] 2 .S.C.R. -248.
referred to. -.
. '

In the instant case, taking into consideratiop the correspondence and· circun1s- ·,.1ii
ta11ccs under which this cntfustment had to be understood, there was no transfer '.
of property in the MIG Aero Engines by H.A.L. to the Government of India. The
n1aterials and equipments sCnt by the GOven1mcnt of u.S.s.R. and the· MIG Aero
Engines asseinbled by H.A.L. fron1 such materials belonged to the Government
of India 'at all material ti1nes. The Appellant had no ownership in the materials
whkh were all supulied by the Gcivern1nent-0f USSR. norAi.n the finished products
, and no question of sales tax-on the i1npugncd transaction could arise. Even ·on
the indigenous materialS procured or manufactured by the·appe1l~nt in the process
of fitting in and assernblin.g, the-appellant had· no disposing poWer <is the appellant
D was never the owner of these materials.. The H .A.L. only p·erformed the job cntrus- .
ted· to the1n for and on behalf of the Government and all incidental steps naturally
entering into contract,·' procurement, pay1ncnt of price and ,billing and invoices
had to .be done -in that ligh.t. The transfer of the Aircrafts to the Nasik · DiVision
was for the purpose of completion Of the job ahd the niaking of the invoices" "'as
a matter.of accounting and carrying out· the job of entrustinent"'(275 0-H;- 276 A-B;
275 B; 216 .E] · .
E •
C1v1L .APPELLATE JuRISDICTION: Civil Appeal No. 1658 of 1982.
. ,ii
Appeal by Special. leave fro1i1. the Judgment and Order. dated ~
the 31st December, 1981 of the Member, Sales Tax Tribunal, Orissa,
Cuttack in Second App~al No. 29(C) of
i978-79. ·
F A
S.T. Desai, Y.S. Murty & C.S.S. Rao for the Appellant.

V.S. Desai and R.K. Mehta for the Respondcni. •

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_

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'
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.

•

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