COMMR. OF COMMERCIAL TAXES V. HINDUSTAN AERONAUTICS LTD. (1972) 1 SCC 395 : AIR 1972 SC 744
FACTS
Hindustan Aeronautics Ltd. (the assessee) delivered railway coaches model 407, 408, and 411 to the Railway Board.
The Commercial Tax Officer included the turnover from the supply of these coaches in the assessment for the year 1958-59.
The Sales Tax Officer rejected the contention that there was no sale involved and confirmed the assessment.
The Deputy Commissioner of Commercial Taxes and the Commissioner of Commercial Taxes also upheld the assessment.
The assessee appealed to the High Court of Mysore under Section 24(1) of the Mysore Sales Tax Act, read with Section 9(3) of the Central Sales Tax Act.
The High Court directed a report on certain points regarding the transactions between the assessee and the Railway Board.
The Commercial Tax Officer submitted a report indicating that the materials used for construction were procured with advances from the Railway Board and were property of the Railways before use.
The High Court allowed the appeal, setting aside the inclusion of turnover relating to the construction of railway coaches.
ISSUE
Whether the delivery of railway coaches model 407, 408, and 411 by Hindustan Aeronautics Ltd. to the Railway Board is liable to sales tax under the Central Sales Tax Act.
JUDGMENT
The High Court allowed the appeal and dismissed the assessment, holding that the transaction between Hindustan Aeronautics Ltd. and the Railway Board was a pure works contract and not a sale under the Central Sales Tax Act.
Legal analysis-
The property in the materials used for construction of the coaches belonged to the Railway Board before use, as stated in the indemnity bond.
The contract terms indicated that it was a works contract, with the Railway Board providing advances for materials and owning the materials before they were used.
The report by the Commercial Tax Officer confirmed that there was no possibility of other materials being used for construction.
The inclusion of certain natural factors like material and wage escalator adjustments further supported the conclusion that it was a works contract.
The court referenced a similar case (State of Gujarat v. Kailash Engineering Co.) to support its decision, emphasising that when all materials used belong to the client before use, there can be no sale of the end product.