SUPREME COURT OF INDIA
State of Andhra Pradesh
Vs
M/s. Kone Elevators (India) Limited.
Civil Appeal No. 6585 of 1999
(S.N.variava and Dr. A.R.Lakshmanan)
17/02/2005
S.H. KAPADIA, J.
1. The question involved in this civil appeal filed by the department is -
whether contracts entered into and executed by the assessee were contracts for
sale and not works-contract.
2. M/s. Kone Elevators (India) Ltd. (hereinafter referred to as 'the assessee')
is a unit of M/s. Kone Corporation, Finland who are one of the pioneers in the
manufacture of Hi-tech New Generation Elevators in the words. M/s. Kone
Corporation, Finland has its operations spread over 37 countries in the world.
The assessee herein is a registered dealer falling in the jurisdiction of the
Commercial Tax Officer, R.P. Road Circle, Secunderabad, having its head office
at 50, Vanagaram Road, Aynambakkam, Madras, with branches at Vijaywada and
Vizag. The assessee filed monthly returns in form A-2 for the months of April
and May, 1995. It was assessed by the said Commercial Tax Officer provisionally
for the period 1.4.1995 to 31.5.1995 and for the period from 1.6.1995 to
31.7.1995 under the Andhra Pradesh General Sales Tax Act,
1957 (hereinafter referred to for the sake of brevity as 'the 1957
Act'). The said two provisional assessments were made by the Commercial Tax
Officer vide orders dated 19.8.1995 and 5.9.1995 respectively. The assessee
claimed deductions of labour charges for composition of tax under section 5G
read with section 5F of the said Act saying that nature of the work undertaken
by it constituted 'works-contract' involving manufacture, supply, installation
and commissioning of elevators and lifts. The assessing authority however did
not allow the deduction sought for and passed the provisional assessment orders
giving rise to two appeals against the said assessment orders. By judgment and
order dated 9.10.1995, the Deputy Commissioner, Secunderabad Division Bench,
Hyderabad in turn dismissed the appeals filed by the assessee and thereby
confirmed the aforestated assessment orders. Both the lower authorities treated
the disputed turnover of the assessee as falling under Entry 82 of the First
Schedule to the said 1957 Act, which was objected to by the assessee by filing
two separate appeals bearing T.A. Nos. 676 and 677 of 1995 before the Sales Tax
Appellate Tribunal, Hyderabad. The point that arose before the Tribunal in the
aforestated two appeals, heard and disposed of jointly, was - whether the
transactions related to 'work-contract' or to 'sale' of lifts. By judgment and
order dated 22.12.1995, the said appeals bearing T.A. Nos. 676 and 677 of 1995
were allowed in favour of the assessee setting aside the impugned orders of the
lower authorities by holding that the disputed turnover related to the
manufacture, supply, fabrication and erection involved in the works-contract
and that the said transaction did not amount to a contract of sale. The
original assessing authority was accordingly directed to allow the deduction of
labour charges and to complete the assessment under section 5G read with
section 5F of the 1957 Act, as amended, without treating it under Entry 82 of
the first schedule to the Act. Aggrieved by the decision of the Tribunal dated
22.12.1995, the department preferred Tax Revision Case No. 129 of 1999 under
section 22(1) of the 1957 Act, to the High Court. By impugned judgment and
order dated 2.7.1999, the Tax Revision Case filed by the department was
dismissed. Hence, this civil appeal.
3. Shri Debojit Borkakati, learned counsel for the department submitted that
the main object of the contract in question was to sell the lifts and the works
done by the assessee for installation was incidental to the sale of lifts. It
was urged that the Legislature had classified the commodity 'lift' under Entry
82 of the first schedule to the Act keeping in mind that the word
'installation' was ancillary to the 'sale' of lifts. It was urged that the High
Court had erred in holding that the installation of the lift involved skill and
technical know-how, which was to be treated as works-contract.
4. Shri M.N. Rao, learned senior counsel for the assessee, on the other hand,
submitted that the assessee was engaged in the manufacture, supply, erection,
installation and commissioning of lifts by undertaking works-contract; that the
lifts/elevators as such cannot be delivered to the customer; that various
accessories and components were required to be taken to the sift where after
carrying out the civil work, lifts were installed and commissioned. It was
further urged that only after all the parts stood assembled at site, the lifts
came into being; that installation and commissioning of lifts involved skill
and only after installation and commissioning of the lifts, the ownership stood
transferred to the customer. Consequently, the assessee was entitled for
deduction of labour charges and was entitled to composition of tax under
section 5G of the said Act. It was urged that the assessing authority had erred
in treating the transaction as a sale assessable to tax under Entry 82 of the
first schedule to the said Act. It was further submitted on behalf of the
assessee that manufacture, supply, erection, installation and commissioning of
lift came under definition of the words 'works-contract' under section 2(1)(t)
of the said Act and, therefore, the tax leviable fell under section 5F of the
said Act. It was urged that lifts and elevators cannot be delivered like A/Cs
as standard units; that manufacture, supply, erection, installation and
commissioning of lifts involved skill and labour as well as technical know-how.
Reliance was placed, in support of above contentions, on various invoices
raised by the assessee for manufacture supply, erection, installation and
commissioning of lifts. Reliance was also placed on the copy of the contracts
entered into by the assessee. Reliance was also placed on Indian Standards
Institution's specifications and code of practice for installation of lifts and
elevators to show the amount of skill, labour and technical know-how involved
in the manufacture, supply, erection, installation and commissioning of lifts.
In the circumstances, it was submitted that no interference was called for in
this matter.
5. It can be treated as well settled that there is no standard formula by which
one can distinguish a 'contract for sale' from a 'works-contract'. The question
is largely one of fact depending upon the terms of the contract including the
nature of the obligations to be discharged there under and the surrounding
circumstances. If the intention is to transfer for a price a chattel in which
the transferee had no previous property, then the contract is a contract for
sale. Ultimately, the true effect of an accretion made pursuant to a contract
has to be judged not by artificial rules but from the intention of the parties
to the contract'. In a 'contract of sale', the main object is the transfer of
property and delivery of possession of the property, whereas the main object in
a 'contract for work' is not the transfer of the property but it is one for
work and labour. Another test often to be applied to is: when and how the
property of the dealer in such a transaction passes to the customer; is it by
transfer at the time of delivery of the finished article as a chattel or by
accession during the procession of work on fusion to the movable property of
the customer? If it is the former, it is a 'sale', if it is the latter, it is a
'works-contract'. Therefore, in judging whether the contract is for a 'sale' or
for 'work and labour', the essence of the contract or the reality of the
transaction as a whole has to be taken into consideration. The pre-dominant
object of the contract, the circumstances of the case and the custom of the
trade provides a guide in deciding whether transaction is a 'sale' or a
'works-contract'. Essentially, the question is of interpretation of the
'contract'. It is settled law that the substance and not the form of the
contract is material in determining the nature of transaction. No definite rule
can be formulated to determine the question as to whether a particular given
contract is a contract for sale of goods or is a works-contract. Ultimately,
the terms of a given contract would be determinative of the nature of the
transaction, whether it is a 'sale' or a 'works-contract. Therefore, this
question has to be ascertained on facts of each case, on proper construction of
terms and conditions of the contract between the parties.
6. Before proceeding further, an insight into the relevant provisions more
especially the definitions of 'sale' and 'works-contract' have to be noticed.
Section 2(1)(n) which defines 'sale' and section 2(1)(t) which defines the
'works-contract' are extracted hereunder:
"2(1)(n) 'Sale' with all its grammatical variations and cognate
expressions means every transfer of the property in goods (whether as such
goods or in any other form in pursuance of a contract or otherwise) by one
person to another in the course of trade or business, for cash, or for deferred
payment, or by any other valuable considerations or in the supply or
distribution of goods by a society (including a co-operative society), club,
firm or association to its members, but does not include a mortgage,
hypothecation or pledge of, or a charge on goods.
Explanation VI: Whenever any goods are supplied or used in the execution of a
works contract, there shall be deemed to be a transfer of property in such
goods, whether or not the value of the goods so supplied or used in the course
of execution of such works contract is shown separately and whether or not the
value of such goods or material can be separated from the contract for the
service and the work done.
2(1)(t) 'Works Contract' includes any agreement for carrying out for cash or
for deferred payment or for any other valuable consideration, the building
construction, manufacture, processing, fabrication, erection, installation,
fitting out, improvement, modification, repair or commissioning of any movable
or immovable property." *
7. We also quote hereinbelow Entry 82 of the First Schedule to the 1957 Act:
Sl. No Description of Goods Point of Levy Rate of Tax Effective from
82. Lifts, electrical or hydraulic (1082) At the point of first sale in the State 10 paise in the rupee 1.8.1986
16 paise in the rupee 1.4.1995
8. The bracketed words and the transactions brought within the purview of sale
by the aforestated Explanation-VI appended to section 2(1)(n) are meant to
cover-non-conventional sale transactions which are now specified in Clause
(29A) of Article 366 introduced by the Constitution 46th Amendment Act. Before
the inclusive definition of the 'tax on sale or purchase of goods' was
introduced by the 46th Amendment, the expression 'sale of goods' occurring in
Entry 48 of List II of the Government of India Act was interpreted by this
Court in the classical case of State of Madras vs. Gannon Dunkerley & Co.
(Madras) Ltd. reported in ) as a term of well-recognized legal import in
the general law and as mentioned in the Sale of Goods Act. The expression 'sale
of goods' in Entry 48 was described as 'nomen juris', its essential ingredients
being an agreement to sell movables for a price and property passing therein
pursuant to that agreement. It was held that in a building contract which is
composite and indivisible, there is no sale of goods as there could be no
agreement to sell materials as such and moreover, the property does not pass an
movables. In order to enlarge the concept of sale and to arm the State Legislatures
with power to tax the transactions simulating sales but not conforming to the
concept of sale under the Sale of Goods Act, clause (29A) was inserted in
Article 366 by the 46th Constitutional Amendment. The Andhra Pradesh State
Legislature fell in line with this amendment and changed the definition of
'sale' so as to bring within the tax net the transactions which are not stricto
sensu sales as per the law laid down in Gannon Dunkerley's case (supra). It is
important to note that the 1957 Act ordains that transfer of property in goods
for valuable consideration must be 'in the course of trade or business' (vide
section 2(1)(n). This is because the incidence of tax falls on a dealer who
'carries on the business of buying, selling, supplying or distributing goods'
(vide section 2(1)(e)]. A sale by a person who carries on the business of
buying, selling etc. and a sale in the course of business are the twin
requirements to attract of tax under the said 1957 Act. The crucial question is
whether these two requirements are satisfied. Is there an element of business
present in the disputed transactions? Assuming there was a sale of goods, did
such sale take place in the course of business and by a person who carries on
the business of buying and selling goods?
9. In the case of Hindustan Shipyard Ltd. vs. State of Andhra Pradesh reported
in 2001 (119) STC 533), this Court held that if the during to be
delivered has any individual existence before the delivery as the sole property
of the party who is to deliver it, then it is a sale. If the bulk of material
used in construction belongs to the manufacture who sells the end-product for a
price, then it is a strong pointer to the conclusion that the contract is in
substance one for the sale of goods and not one for labour. However, the test
is not decisive. It is not the bulk of the material alone but the relative
importance of the material qua the work, still and labour of the payee which
also has to be seen. If the major component of the end-product is the material
consumed in producing the chattel to be delivered and skill and labour are
employed for converting the main components into the end-products, the skill
and labour are only incidentally used, the delivery of the end-product by the
seller to the buyer would constitute a sale. On the other hand, if the main
object of the contract is to avail the skill and labour of the seller though
some material or components may be incidentally used during the process of the
end-product being brought into existence by the investment of skill and labour
of the supplier, the transaction would be a contract for work and labour. #
10. Applying the above tests, we may now proceed to notice the relevant
recitals of the contracts in questions. Under the 'price schedule' the assessee
agreed to supply and install a Kone Elevator for Rs. 3,30,000/-. It was agreed
that the customer shall approve the drawings and shall make machine room
Hoistway and the Lift Shaft including power supply for the assessee to commence
installation at the time of the delivery of the lift. The contractual
obligations of the assessee regarding installation included employing labour to
complete the mechanical erection, electrical wiring testing and commissioning
of the lift. The assessee agreed that it shall commence installation only after
the lifts arrived at the site and upon intimation from the customer that the
site was ready as per the drawings. As soon as the lift stood installed, the
customer was to take over. It was further agreed that any material supplied by
the assessee shall remain their property till the lift was handed over to the
customer. The contract in question consisted of certain obligations on the part
of the customers under the heading 'Customers' Contractual Obligations'. Under
this clause, the customer was obliged to undertake the work of civil
constructions consisting of:-
a) A properly enclosed lift Hoistway.
b) A lift pit of proper depth;
c) Properly lighted machine room; and
d) Private pockets on the lift well walls.
11. Further, certain obligations were passed on the customer under the Delivery
Schedule which are reproduced herein below:-
"The General Agreement Drawing in triplicate will be forwarded to you
in approximately six weeks from the date of receipt of complete site details
along with the order and advance payment. The purpose of this drawing is to
clearly indicate to you pertinent dimensional details of the lift shaft, pit,
machine room, car and landing entrances etc. if any modification is required by
you in our General Arrangement Drawing it is advisable to hold on construction
till the revised General Arrangement Drawing is approved by you.
Within six weeks from the date of receipt of all the site details, the same
should be returned to us within two weeks from the date of submission, duly
approved by you. We reserve the rights to charge extra for subsequent GAD
revisions if full site particulars are not made available to us at the time of
placing of the order (or) any modification is desired regarding the building
structure resulting in revision of GAD's.
We shall deliver the materials for each Elevator by the end of 6 months from
the date of receipt of approved General Arrangement Drawing and shall complete
the installation thereafter by the end of 2 months provided the lift shall
including power supply as per our requirements is made ready for us to commence
installations at the time of delivery of materials.
We shall commence the installation after the materials arrive at the job site
and upon intimation from you that the site is ready as per the approved General
Arrangement Drawing. If the site is not ready for taking up installation when
the materials arrive at the job site, we shall depute an installation team on
hearing from you that the site, is ready in all respects as required by
us." *
12. On a careful study of the aforestated clause in the Delivery Schedule, it
is clear that the customer was required to do the actual work at site for
installation of lift. On reading the above clause, it may be observed that the
entire onus of preparation and making ready of the site for installation of
lift was on the customer. It was agreed that under no circumstances, the
assessee shall undertake installation of lift if the site is not kept ready by
the customer. Under Clause 4(g) of the 'Customers' Contractual
Obligations", the assessee reserved the right to charge the customer for
delays in providing the required facilities. These facts clearly indicate that
the assessee divided the execution of the contract into two parts, namely, 'the
work' to be initially done in accordance with the specifications laid down by
the assessee and 'the supply' of lift by the assessee. 'The work' part in the
contract was assigned to the customer and 'the supply' part was assigned to the
assessee This 'supply' part included installation of lift. Therefore,
contractual obligation of the assessee was only to supply and install the lift,
while the customer's obligation was to undertake the word connected in keeping
the site ready for installation as per the drawings. In view of the contractual
obligations of the customer and the fact that the assessee undertook exclusive
installation of the lifts manufactured and brought to the site in knocked-down
state to be assembled by the assessee, it is clear that the transaction in
question was a contract of 'sale' and not a 'works-contract'. Moreover, on
perusal of the brochure of the assessee Company, one finds that the assessee is
in the business of manufacturing of various types of lifts, namely, Passenger
lifts, Freight elevators, Transport elevators and Scenic lifts. A combined
study of the above models, mentioned in the brochure, indicate that the
assessee has been exhibiting various models of lifts for sale. These lifts are
sold in various colours with various capacities and variable voltage. According
to the brochure, it is open for a prospective buyer to place purchase order for
supply for lifts as per his convenience and choice. Therefore, the assessee
satisfies, on facts, the twin requirements to attract the charge of tax under
the 1957 Act, namely, that it carries on business of selling the lifts and
elevators and it has sold the lifts and elevators during the relevant period in
the course of its business. In the present case, on facts, we find that the major
component of the end-product is the material consumed in producing the lift to
be delivered and the skill and labour employed for converting the main
components into the end-product was only incidentally used and, therefore, the
delivery of the end-product by the assessee to the customer constituted a
'sale' and not a 'works-contract'. Hence, transactions in question constitute
'sale' in terms of entry 82 of the first schedule to the said Act and,
therefore, section 5G of the said Act was not applicable. #
13. For the aforestated reasons, the department's appeal is allowed; the
impugned judgment and order of the High Court dated 2.7.1999 passed in Tax
Revision Case No. 129 of 1999 and the judgment and order of the Sales Tax
Appellate Tribunal dated 22.12.1995 passed in T.A. Nos. 676 & 677 of 1995,
are set aside. However, in the facts and circumstances of this case, there will
be no order as to costs.