The Supreme Court on Wednesday said that stay will continue on the Rs 1,500 crore tax demand made on Hindustan Aeronautics Ltd by Karnataka till a decision is taken on the issue of Value-Added Tax on defence contracts.

A bench comprising Justices D K Jain and H L Dattu hearing a petition filed by HAL said the state government can not claim any money from Hindustan Aeronautics and a stay granted earlier by it will continue till further orders. The court has scheduled a hearing in November for final disposal of HAL's plea.

The apex court's direction came over HAL's plea challenging the order of the Karnataka High Court directing the PSU 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 between 1994-95 to 2000-01.

The Rs 1,519 crore amount includes a penalty of approximately 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 filed by advocates Sashi Mathews and Tarun Gulati.

HAL had challenged the order of the state government before the High Court. However, the High Court, in an interim order, directed the PSU to deposit 50 per cent of the amount with the state government, which was challenged by HAL in the apex court.