1983 (12) TMI 259 - SC - VAT and Sales Tax

Supreme Court: Job Works Not Taxable as Sale

The Supreme Court held that the contracts in question were primarily for work and labor, not for the sale of spare parts. The turnover related to the ... Whether the turnover apportioned from the job works undertaken by the appellant related to the sales of materials by the appellant to the Indian Air Force or other private parties, as the case may be, and as such whether these were taxable as held by the lower appellate authority? Whether, in the case of job works undertaken from the private parties mainly on quotation on inclusive-price-basis, the sales tax authorities were right in apportioning a portion of the turnover as attributable towards sales of materials? Held that:- Appeal allowed .High Court of Karnataka was not right in its conclusion on the taxability of the turnover of the spare parts and materials supplied in execution of appellant's job works. As a result except for the item on canteen sales which is not in dispute before us, these appeals are allowed. The necessary adjustments in the assessments should be made. Issues Involved:1. Assessability of turnover apportioned from job works related to sales of materials to the Indian Air Force or private parties.2. Apportioning a portion of the turnover towards sales of materials in job works undertaken on an inclusive-price-basis.Detailed Analysis:Issue 1: Assessability of Turnover from Job Works Related to Sales of MaterialsThe appellant, a manufacturer of aircraft spare parts, was involved in assembling, servicing, repairing, and overhauling aircrafts for the Indian Air Force (I.A.F.) and private parties. The sales tax authorities aimed to tax the portion of the appellant's turnover equivalent to the value of spare parts supplied during the repair and servicing of aircrafts. The High Court of Karnataka dismissed the appellant's writ petitions, holding that the supply of spare parts constituted a sale. The High Court reasoned that the contracts included separate agreements for the sale of spare parts and the provision of services. The invoices showed separate charges for labor and materials, indicating a clear intention to sell spare parts.Issue 2: Apportioning Turnover Towards Sales of Materials in Inclusive-Price Job WorksThe appellant contended that there was no sale of spare parts to the I.A.F. as these were used during the execution of works contracts. The High Court disagreed, stating that the supply of spare parts was in contemplation of the contracting parties and became the property of the I.A.F. by accretion to the aircrafts. The High Court concluded that the transactions were composite contracts involving both the sale of goods and the provision of services.Supreme Court's Judgment:The Supreme Court examined whether the contracts were primarily for the sale of spare parts or for the provision of services. The Court emphasized that the distinction between a contract of sale and a contract for work and labor depends on the main object of the contract. If the primary objective is the transfer of a chattel, it is a contract of sale; if the objective is to perform work, it is a contract for work and labor.The Court referred to the '1951 contract' between the appellant and the I.A.F., which involved servicing and maintenance of aircrafts. The contract specified that the I.A.F. would provide necessary spares, and the appellant would procure or manufacture any delayed items. The contract stipulated that these items would be the property of the I.A.F. and issued on 'contract loan.'The Court noted that the appellant's invoices showed separate charges for labor and materials, but this was for defense audit purposes. The Court found that the primary object of the contracts was the provision of services, not the sale of spare parts. The materials used were either supplied by the I.A.F. or procured by the appellant but treated as the I.A.F.'s property.The Court distinguished the case from the 'bus bodies' case (State of Gujarat v. Variety Body Builders), where the contractor retained ownership of the bus bodies. In the present case, the appellant did not have ownership of the spare parts, which were treated as the I.A.F.'s property.Conclusion:The Supreme Court concluded that the High Court of Karnataka erred in its decision. The contracts were primarily for work and labor, not for the sale of spare parts. The turnover related to the supply of spare parts in the execution of job works was not taxable as a sale. The appeals were allowed, and necessary adjustments in assessments were directed. The parties were to bear their own costs.