The Supreme Court issued notices to the Karnataka government and the state’s departments of sales tax and value-added tax (VAT) in response to special leave petitions filed by Hindustan Aeronautics (HAL).

The division bench of Justice DK Jain and Justice CK Prasad also stayed the recovery of sales tax and VAT from HAL on manufacture, repair and overhaul of aircraft and other defence equipment.

The sales tax and VAT departments had raised demand of about Rs 1,500 crore against HAL on the ground that its supplies to the Central government were taxable sales. The authorities had also attached HAL’s bank accounts to recover these demands.

HAL’s counsel, Tarun Gulati, partner, Economic Law Practices, told that HAL’s services could not be defined as sales, as all the activities were controlled by the government. Arguing on behalf of HAL, senior counsel Harish Salve had said that the case needed serious consideration. The demands raised by the sales tax department were on defence equipment, which could not be traded as goods by HAL. In such circumstances, there could be no sales tax or VAT on such transactions, he contended.

The court was also informed of an earlier Supreme Court order, which held that the Central government merely entrusts the job of manufacture, repair, etc, to HAL. The parts and components imported and procured indigenously by HAL belongs to the government and thus there was no transfer of ownership by HAL to the government to make it susceptible to sales tax.

“The 1984 judgement of the Supreme Court is being followed throughout the country for over two-and-a-half decades,” Mr Gulati said. Also, there were orders in HAL’s favour in similar cases passed by the tribunals in Maharashtra, Orissa and Arunachal Pradesh, he added.

However, the sales tax and VAT departments in Karnataka had refused to follow the Supreme Court judgement on the grounds that there were changes in the pricing policy of the government.