The Supreme Court today directed the Defence Ministry and the Karnataka government to meet and resolve their dispute over Rs 1,519 crore sales tax on defence contracts executed by Hindustan Aeronautics Ltd (HAL).

A bench comprising Justices D K Jain and H L Dattu directed Secretary Defence (Production) and Chief Secretary of Karnataka to start talks to resolve the dispute.

The apex court further said the meeting should commence within two weeks and it be informed about the outcome at the next hearing on March 1, 2011. It also gave liberty to the two secretaries to call upon any relevant officer if required.

In June, the court had stayed Rs 1,500 crore tax demand made on HAL by Karnataka.

HAL has challenged the order of the Karnataka High Court directing the state-owned firm to deposit half of the Rs 1,519.31 crore demand raised by the state government in lieu of sales tax and VAT.

The High Court had also directed the state government to attach the bank account of HAL if it failed to submit 25 per cent of the sum.

The state government has directed the PSU to pay Rs 1,519.31 crore as VAT and sales tax under the Karnataka Sales Tax Act, 1957, and the Central Sales Tax Act, 1956, with respect to transactions between the PSU and the central government for defence equipment from 1994-95 to 2000-01.

The amount includes a penalty of about Rs 500 crore. HAL has contended that in an earlier judgement, the apex court had already ruled that contracts awarded to PSUs on behalf of the government and defence establishment were not liable to sales tax and VAT.

However, the issue has now been reopened by raising “illegal demands of sales tax” on transactions between the company and the government, HAL said.

“This action of Karnataka was patently illegal and contrary to law as there is no transfer in the ownership of the property in the defence goods from the petitioner to the government of India and the ownership remains with the government at all times,” said HAL in its petition.

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