Supreme Court of India
M/S. KONE ELEVATOR INDIA PVT. LTD.versusSTATE OF TAMIL NADU AND ORS.
- Citation
- 2014 INSC 359
- Decided
- 6 May 2014
- Disposal
- Disposed off
- Bench
- RAJENDRA MAL LODHA
Holding
The contract for manufacture, supply and installation of lifts is a contract for sale, not a works contract, and the earlier Kone Elevators decision is overruled.
Summary
The Court examined whether a composite contract for the manufacture, supply and installation of lifts constitutes a "sale of goods" or a "works contract" for tax purposes under Article 366(29A)(b) of the Constitution and related sales‑tax statutes. The petitioners argued that the installation component made the contract a works contract, relying on post‑46th Amendment jurisprudence such as Larsen & Toubro. The respondents contended that the contract was essentially a sale, emphasizing the payment terms, the purchaser’s responsibility for site preparation, and the dominant element of material supply. The Court held that the contract was an indivisible agreement for the supply of lifts, with installation being merely incidental, and therefore fell within the definition of a sale, overruling the earlier Kone Elevators decision. Consequently, the show‑cause notices and assessment orders were quashed and set aside. The writ petitions were disposed of with no order as to costs.
Issues considered
- Whether a contract for manufacture, supply and installation of lifts is a contract for sale of goods or a works contract within the meaning of Art.366(29A)(b).
- Whether the "dominant nature test" or similar tests apply post the 46th Constitutional Amendment.
- Whether the terms of the contract, including payment schedule and purchaser’s preparatory obligations, indicate a sale rather than a works contract.
Legislation cited
- Bombay Lifts Act, 1939s. s.3(c), s. s.4, s. s.5, s. s.7
- Constitution of Indias. Art.366(29A)(b)
- Finance Act, 1994s. s.65(105)(zzd), s. s.65(105)(zzzza), s. s.65(29), s. s.65(39a)
- Orissa Sales Tax Act, 1947s. s.2(jj)
- Sale of Goods Act, 1930s. s.2(7)
Subjects
sale of goodsworks contracttaxationArticle 366dominant nature testinstallationliftsales taxservice taxconstitutional amendment
Judgment
[2014] 5 S.C.R. 912
A M/S. KONE ELEVATOR INDIA PVT. LTD.
v.
STATE OF TAMIL NADU AND ORS.
(Writ Petition (c) No. 232 of 2005)
MAY El6, 2014
B
[R. M. LODHA, CJI, A. K. PATNAIK, SUDHANSU JYOTI
MUJ<HOPADHAYA, DIPAK MISRA AND FAKKIR
MOHAMED l~RAHIM KALIFULLA, JJ.]
C CONSTITUTION OF /NOIA, 1950:
Art. 366(29A) (b) - Tax on sale and purchase of goods
- 'Works contract'-Contract for manufacture, supply and
installation of lifts in a building - Held: (Per majority)(Fakkir
Mohamed Ibrahim Kalifulla,J. dissenting): Four concepts
D emerge as regards a 'works contract', viz., (i) the works
contract is an indivisible contract but, by legal fiction, is divided
into two parts, one for sale of goods, and the other for supply
of labour and services; (ii) the concept of "dominant nature
test" or, for that matter, the "degree of intention test" or
E "overwhelming component test" for treating a contract as a
works contract is not applicable; (iii) the term "works contract"
as used in Clause (29A) of Art. 366 takes in its sweep all
genre of works contract and is not to be narrowly construed to
cover one species of contract to provide for labour and service
F alone; and (iv) once the characteristics of works contract are
met with in a contract entered into between the parties, any
additional obligation incorporated in the contract would not
change the nature of the contract - As far as installation of
the lift is concerned, it has to be understood in the conceptual
G context of the manufacture and installation of a lift in a building
- Without installation, lift cannot be mechanically functional
because it is a permanent fixture of the building having been
so designed - If there are two contracts: one, for purchase of
the components of the lift from a dealer, it would be a contract
H 912
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 913
& ORS.
for sale; and two, if a separate contract is entered into for A
installation, that would be a contract for labour and service -
But, a pregnant one, as in the instant matters, once there is
a composite contract for supply and installation, it has to be
trf!_ated as a works contract, for it is not a sale of goods/chattel
simpliciter - It is not chattel sold as chattel or, for that matter, B
a chattel being attached to another chattel - In fact, after the
goods are assembled and installed with skill and labour at the
site, it becomes a permanent fixture of the building -
Therefore, it would not be appropriate to term it as a contract
for sale on the bedrock that _the components are brought to c
the site, i.e., building, and prepared for delivery - The
contract itself profoundly speaks of obligation to supply goods
and materials as well as installation of the lift which obviously
conveys performance of labour and service - Thus, the
fundamental characteristics of works contract are satisfied -
0
The decision rendered in Kone Elevators does not correctly
lay down the law and it is, accordingly, overruled - Show
cause notices and assessment orders challenged in the
instant matters are set aside - Assessment orders which have
attained finality and are not pending in appeal, shall be E
treated to have been closed and where assessments are
challenged in appeal or revision, the same shall be decided
in accordance with the judgment- Orissa Sa/es Tax Act, 1947
- s 2(jj) - Bombay Lifts Act, 1939 - Finance Act, 1994 -
ss. 65(29), 65(39a) and 65(105) (zzd) and (zzzza) - Sale of
Goods Act, 1930 - s.2(7). F
In the instant matters, referred to the larger Bench,
the question for consideration of the Court was: "whether
a contract for manufacture, supply and installation of lifts
in a building is a "contract for sale of goods" or a "works G
contract"."
Disposing of the matters, the Court
HELD: Per Dipak Misra, J. (for himself and for R.M.
Lodha, CJI, A.K. Patnaik and Sudhansu Jyoti
Mukhopadhaya, JJ): H
914 SUPREME COURT REPORTS [2014] 5 S.C.R.
A 1.1. The significance of the issue involved in these
matters is that if the contract for manufacture, supply and
installation of lift in a building is a "contract for sale of
goods" the entire sale consideration would be taxable
under the sales tax or value added tax enactments of the
B State legislatures, whereas if it is a "works contract", the
consideration payable or paid for the labour and service
element would have to fle excluded from the total
consideration received and sales tax or value added tax
would be charged on the balance amount. In the instant
C case, the petitioner is engaged in the manufacture, supply
and installation of lifts involving civil construction. [Para
3-4] [942-8-E]
1.2. The authorities clearly show that a works contract
could· not have been liable to be taxed under the State
o sales tax laws and whether the contract was a works
contract or a contract for sale of goods was, earlier
dependent on the dominant intention as reflected from
the terms and conditions of the contract and many other
aspects. [para 27] [959-C-D]
E State of Madras v. Gannon Dunkerley & Co., (Madras)
Ltd. (Gannon Dunker/ey-1) 1959 SCR 379 = AIR 1958 SC
560Car/ Still G.m.b.H. & Another v. State of Bihar and others
1962 SCR 81 = AIR 1961 SC 1615 State of Gujarat v. M/s.
Kai/ash Engineering ·ca. (Pvt.) Ltd. 1967 SCR 543 = AIR
F 1967 SC 547; The State of Madras v. Richardson & Cruddas
Ltd. (1968) 21 STC 245 (SC); State of A. P v. Kone Elevators
(India) Ltd. [2005] SCR 152 =(2005) 3 SCC 389; State of
Rajasthan v. Man Industrial Corporation Ltd. 1969 (3) SCR
505 = 1969 (1) -sec 567; State of Rajasthan and others v.
G Nenu Ram (1970) 26 STC 268 (SC); State of Punjap v. Mis.
Associated Hotels of India Ltd. 1972 (2) SCR 937 = 1972
(1) SCC 472; Vanguard Rolling Shutters and Steel Works v.
Commissioner of Sa/es Tax 1977 (3) SCR 165 =1977
(2) SCC 250; Federation of Hotel and Restaurant Association
H of India v. Union of India and others 1989 (2) SCR 918 = 1989
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 915
& ORS.
(3) SCC 634; State of Gujarat (Commissioner of Sales Tax, A
Ahmedabad) v. Mis. Variety Body Builders 1976 Suppl.
SCR 131 = 1976(3) SCC 500; Sentinel Rolling Shutters &
Engineering Company (P) Ltd. v. Commissioner of Sa/es Tax
1979 (1) SCR 644 = 1978 (4) SCC 260, Ram Singh & Sons
Engineering Works v. Commissioner of Sa/es Tax, U. P. 1979 B
(2) SCR 621 = 1979 (1) SCC 487; Commissioner of Sa/es
Tax, Madhya Pradesh v. Purshottam Premji 1970
(2) SCC 287; Hindustan Aeronautics Limited v. State- of
Orissa 1984 (2) SCR 267 = 1984 (2) SCC 16 - referred to.
Clark v. Bulmer (1843) 11 M & W. 243- referred to. C
1.3. The works contract could not be made amenable
to sales tax as the State Legislatures did not have the
legislative competence to charge sales tax under Entry
48 List II of the Seventh .Schedule of the Constitution on
an indivisible contract of sale of goods which had D
component of labour and service and it was nofwithin
the domain of the assessing officer to dissect an
indivisible contract to distinguish the sale of goods
constituent and the labour and service component. This
being the legal position, Parliament brought in the Forty- E
sixth Amendment by incorporating Clause (29A) in Art.
366 of the Constitution to undo the base of the
Constitution Bench decision in Gannon Dunkerley's-1
case. [para 27] [959-E-G]
1.4. The constitutional validity of the Forty-Sixth F
Amendment by which the State Legislatures were
conferred the competence to levy sales tax on certain
transactions, as incorporated in sub-clauses (a) to (f) of
Clause (29A) of Art. 366 of the Constitution, was upheld
in Builders' Association*. The Constitution Bench has G
opined that it is open to the States to segregate works
contract into two separate components or contracts by
legal fiction, namely, contract for sale of goods involved
in the works contract and for supply of labour and
service.Another Constitution Bench, in Gannon
916 SUPREME COURT REPORTS [2014] 5 S.C.R.
A Dunkerley-II**, has unequivocally restated and reaffirmed
the principle that the States have legislative power to
impose tax on the transfer of property in goods or in
some other form in the execution of works contract and
they have also the power to bifurcate the contract and
B levy sales tax on the value of materials used in the
execution of the works contract, regard being had to the
principle that the State Legislatures have been
empowered under Clause (29A) of Art:366 to levy tax on
the deemed sales. [para 29 and 31] [960-H; 961-A-B; 963-
C B-0]
*Builders' Association of India and others v. Union of
India and others 1989 (2) SCR 320 = (1989) 2 SCC 645 -
relied on
**Mis Gannon Dunkerley and Co. and others v. State of
D Rajasthan and others (Gannon Dunkerley-I/) 1992 (3)
Suppl. SCR 103 = (1993) 1 SCC 364 - followed.
1.5. It is significant to note that in Larsen and
Toubros, it has been stated that after the constitutional
E amendment, the narrow meaning given to the term
"works contract" in Gannon Dunkerley-/ no longer
survives. It has been observed in the said case that even
if in a contract, besides the obligations of supply of
goods and materials and performance of labour and
services, some additional obligations are imposed, such
F contract does not cease to be works contract, for the
additional obligations in the contract would not alter the
nature of the contract so long as the contract provides
for a contract for works and satisfies the primary
description of works contract. It has been further held
G that once the characteristics or elemerits of works
contract are satisfied in a contract, then irrespective of
additional obligations, such contract would be covered
by the term "works contract" because nothing in Art.
366(29-A)(b) limits the term "work~ contract" to contract
H for labour and service only. [para 40] [968-8-E]
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 917
& ORS.
$Larsen and Toubro Limited and another v. State of A
Karnataka and another (2014) 1 sec 708 - affirmed
1.6. At this juncture, it is condign to state that four
concepts have clearly emerged, viz. (i) the works contract
is an indivisible contract but, by legal fiction, is divided
into two parts, one for sale of goods, and the other for B
supply of labour and services; (ii) the cone-apt of
"dominant nature test" or, for that matter, the "degree of
intention test" or "overwhelming component test" for
treating a contract as a works contract is not applicable;
(iii) the term "works contract" as used in Clause (29A) of C
Art. 366 of the Constitution takes in its sweep all genre
of works contract and is not to be narrowly construed to
cover one species of contract to provide for labour and
service alone; and (iv) once the characteristics of works
contract are met with in a contract entered into between D
the parties, any additional obligation incorporated in the
contract would not change the nature of the contract.
[para 42] [969-A-C]
Bharat Sanchar Nigam Ltd. and anotherv. Union of India
=
and others 2006 (2) SCR 823 2006 (3) SCC 1; Associated E
Cement Companies Ltd. v. Commissioner of Customs 2001
(1) SCR 608 = 2001 (4) SCC 593; K. Raheja Development
=
Corporation v. State of Karnataka 2005 (3) SCR 1210 2005
(5) SCC 162; State of UP. and others v. P.N.C. Construction
Co. Ltd. and others 2007 (8) SCR 927 = 2007 (7) SCC 320 F
Hindustan Shipyard Ltd. v. State of A. P. 2000 (1) Suppl. SCR
=
592 (2000) 6 sec 579 - referred to
1.7. In OTIS Elevator$, the High Court opined that
after the lifts were properly ~rected and installed in the
building, they became permanent fixtures of the G
premises. It took note of the t~rms of the agreement and
held that the terms in the agreement were also indicative
of the fact that the whole contractual obligation was not
divisible in parts, and was intimately connected with the
labour and services undertaken by the applicants in H
918 SUPREME COURT REPORTS [2014] 5 S.C.R.
A erecting and installing the apparatus. After so stating, the
High Court observed that the work of erection and
installation of an apparatus like the lift in a huge building,
which has to carry passengers to several floors, is a type
of work which calls for considerable skill and experience
B and the technical skill and precision in execution of the
work is absolutely essential if satisfactory services are to
be rendered by the person who undertakes such work.
Eventually, the High Court ruled that it would be difficult
to hold that the mere use of the material, or the ultimate
C passing of property in the article or apparatus as a result
of the execution of the contract, will make it possible to
sever the agreement into two parts, one for the sale of
goods, and the other for services rendered, for the two
are so intimately connected that severance is not
possible in such cases and, in fact, it was an indivisible
0
contract. Further various technical aspects go into the
installation of the lift. There has to be a safety device. In
certain States, it is controlled by the legislative enactment
and the rules. In certain States, it is not, but the fact
remains that a lift is installed on certain norms and
E parameters keeping in view numerous factors. The
installation requires considerable skill and experience.
The labour and service element is obvious. [para 43 and
64] [972-A-E; 985-B]
$$QTfS Elevator Company (India) Ltd. v. The State of
F
Maharashtra (1969) 24 STC 525 (Born) - approved.
Name Tulaman Manufacturers Pvt. Ltd., Hyderabad v.
Collector of Central Excise, Hyderabad 1988 (3) Suppl.
=
SCR 1 (1989) 1 SCC 172; Collector of Central Excise,
G Calcutta-I/ v. Eastend Papers Industries Ltd. 1989
=
(3) SCR 1017 (1989) 4 SCC 244; Aspinwall & Co. Ltd. v.
Commissioner of Income Tax, Ernakulam 2001 (2)
Suppl. SCR 559 = (2001) 7 SCC 525; MIL India Ltd. v.
Commissioner of Central Excise, Noida 2007 (3) SCR 476 =
H (2007) 3 SCC 533; Sirpur Papers Mills Ltd. v. Collector of
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 919
& ORS.
Central Excise, Hyderabad 1997 (6) Suppl. SCR 431 = A
(1998) 1 sec 400 - referred to.
Underwood Limited v. Burgh Castle Brick and Cement
Syndicate (1922) 1 KB 343 - referred to.
1.8. As far as installation of the lift is concerned, it B
has to be understood in the conceptual context of the
manufacture and installation of a lift in a building. The lift
basically comprises components like lift car, motors,
ropes, rails, etc. having their own identity even prior to
installation. Without installation, the lift cannot be C
mechanically functional because it is a permanent fixture
of the building having been so designed. Therefore, the
installation of a lift in a building cannot be regarded as a
transfer of a chattel or goods but a composite contract.
[para 48] [974-G-H; 975-A]
D
1.9. This Court is of the convinced opinion that the
principles stated in Larsen and Toubro do correctly
enunciate the legal position. Therefore, "the dominant
nature test" or "overwhelming component test" or "the
degree of labour and service test" are really not E
applicable. If the contract is a composite one which falls
under the definition of works contracts as engrafted
under clause (29A)(b) of Art. 366 of the Constitution, the
incidental part as regards labour and service pales into
total insignificance for the purpose of determining the
F
nature of the contract. [para 63] [984-C-E]
1.10. Involvement of the skill has been elaborately
dealt with by the High Court of Bombay in Otis Elevator
and the factual position is undisputable and irrespective
of whether installation is regulated by statutory law or G
not, the result would be the same. This position is stated·
in respect of a composite contract which requires the
contractor to install a lift in a building. It is significant to
note that if there are two contracts - one, for purchase
of the components of the lift from a d·ealer, it would be a H
920 SUPREME COURT REPORTS [2014] 5 S.C.R.
A contract for sale; and two, if a separate contract is
entered into for installation, that would be a contract for
labour and service. But, a pregnant one, as in the instant
matters, once there is a composite contract for supply
and installation, it has to be treated as a works contract,
B for it is not a sale of goods/chattel simpliciter. It is not
chattel sold as chattel or, for that matter, a chattel being
attached to another chattel. Therefore, it would not be
appropriate to term it as a contract for sale on the
bedrock that the components are brought to the site, i.e.,
c building, and prepared for delivery. [para 64] [985-F-H;
986-A-B]
Patnaik & Co. v. State of Orissa (1965) 2 SCR 782 -
distinguished.
1.11. In Kone Elevators case, the three-Judge Bench
D ruled that a dealer carries on business of selling lifts and
elevators and 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 are incidentally used
E and, therefore, the delivery of the end product by the
assessee qua the customer has to be constituted as a sale
and not a works contract. This Court is of the opinion that
in Kone Elevators the principal logic applied, i.e., the
incidental facet of labour and service, is not correct. [para
F 54,. 57 and 64] [981-C-D; 984-D]
1.12. What has been taken note of in Kone Elevators
is that the company had brochures for various types of
lifts and one is required to place order, regard being had
to the building, and also make certain preparatory work.
G But it is not in dispute that the preparatory work has to
be done taking into consideration as to how the lift is
going to be attached to the building. The. nature of the
contracts clearly exposit that they are contracts for
supply and installation of the lift where labour and serviCe
H el~ment is involved. Individually manufactured goods
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 921
& ORS.
such as lift car, motors, ropes, rails, etc. are the A
components of the lift which are eventually installed at
the site for the lift to operate in the building. In
constitutional terms, it is transfer either in goods or some
other form. In fact, after the goods are assembled and
installed with skill and labour at the site, it becomes a B
permanent fixture of the building. [para 64) [985-C-F]
1.13. The conclusion, as has been reached in Kone
Elevators, is based on the bedrock of incidental service
for delivery. It would not be legally correct to make such
a distinction in respect of lift, for the contract itself C
profoundly speaks of obligation to supply goods arid
materials as well as installation of the lift which obviously
conveys performance of labour and service. Thus, the
fundamental characteristics of works contract are
satisfied. Thus analysed, this Court holds that the D
decision rendered in Kone Elevators does not correctly
lay down the law and it is, accordingly, overruled. [para
64) [986-B-D]
State of A. P v. Kone Elevators (India) Ltd. [2005] SCR
152 = (2005) 3 sec 389 - overruled. E
2.1. The writ petitions have been filed either against
the show-cause notices where cases have been
reopened or against the orders of assessment framed by
the assessing officers and civil appeals have been filed
against certain assessment orders or affirmation thereof F
which are based on the decision of the three-Judge
Bench in Kone Elevators case. Considering the factual
matr!x, it is directed that the show-cause notices, which
have been issued by taking recourse to reopening of
assessment, shall stand quashed. The assessment G
orders which have been framed and are under assail
before this Court are set aside. [para 65] [986-E-F]
2.2. Where the assessments have been framed and
have attained finality and are not pending in appeal, they
922 SUPREME COURT REPORTS · [2014] 5 S.C.R.
A shall be treated to have been closed, and where the
assessments are challenged in appeal or revision, the
same shall be decided in accordance with this judgment.
[para 65] [986-G]
T. V. Sundram Iyengar & Sons v. State of Madras 1975
B (2) SCR 372 = 1975 (3) SCC 424, Union of India v. Central
India Machinery Manufacturing Company Ltd. and others
1977 (3) SCR 437 = 1977 (2) SCC 847, Titan Medical
Systems (P) Ltd. v. Collector of Customs, New Delhi 2003
(9) SCC 133; Commissioner of Central Excise, Ahmedabad
C v: Solid & Correct Engineering of Works and others 2010
(.:\) SCR 476 = 2010 (5) sec 122- cited.
J. Marcel (Furrier) Ltd. v. Tapper (1953) 1 All ER 15 and
Love v. Norman Wright (Builders) Ltd. (1944) 1 All ER 618;
Anglo-Egyptian Navigation Co. v. Rennie (1875) LR 10 CP
D 271; Detroit Steel Cooperage Company v. Sistersville
Brewing Company 58 L.Ed. 1166 - cited.
Per Fakkir Mohammed Ibrahim Kalifulla, J(Dissenting):
1.1. The manufacture, supply and installation of lifts
E are to be treated as a contract of 'Sale'. [para 1] [987-8]
State of Andhra Pradesh vs. Kone Elevators (India) Pvt.
Ltd. 2005 (2) SCR 152 = (2005) 3 sec 389 - affirmed.
Mis. Patnaik and Company vs. State of Orissa 1965
SCR 782 =AIR 1965 SC 1655 - relied on.
F
1.2 As and from 16.05.2008, the erection,
commissioning or installation of lift and Escalator would
fall within the expression 'works contract' having regard
to the specific definition so brought out under the
G Finance Act, 1994 w.e.f. 16.05.2008 for the purpose of
Service Tax. [para 31] [1009-D]
Commissioner of Central Excise, Ahmadabad vs. Solid
and Correct Engineering Works and others 201 O
(4) SCR 476 = (2010) 5 SCC 122 - referred to.
H 1.3. Even after the Constitutional Amendment
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 923
& ORS.
introducing Art. 366(29A)(b), it will have to be necessarily A
examined for its application as to whether a particular
contract would fall within the expression 'works contract'
and only thereafter, the incidence of taxation as provided
in the said sub-clause could operate. This principle has
also been emphasised in the decision of Larsen & Toubro B
Ltd*. [para 7] [989-F-G]
The Commissioner of Commercial Taxes Mysore,
Bangalore vs. Hindustan Aeronautics Ltd. (1972) 1 SCC 395;
and *Larsen & Toubro Ltd. vs. State of Karnataka 2013 (12)
SCALE 77 - referred to. C
1.4. In the instant case, admittedly, the business of
the petitioner is manufacture and supply of lifts/elevators
as well as its installation. It is not the case of the
petitioner that mere installation/ erection of lift/elevator
simpliciter is their business activity. It cannot also be said D
that the job of installation/erection of a lift/elevator can be
done only by lift/elevator manufacturers. Thus,
manufacture of lift and erection of a lift can be
independently handled by different persons. [para 52]
[1020-8-D] E
1.5. In the instantcase, the terms of the contract are
significant, though it is one single contract, it contains
separate terms and conditions dealing with different
aspects relating to the supply and erection of the
elevator. The petitioner while agreeing to supply an F
elevator of a specific model, highlighted the details of the
lifts, such as, its technical details, advantages of its
product and other sophisticated equipments put into the
product. In fact, if at all any work element is involved in
the activity of supply of the ·lifts/elevators, the major part G
of the work has been directed to be carried out by the
purchaser, in its premises, in order to enable the
petitioner to erect its lift/elevator in the said premises. In
a very insignificant manner, the petitioner undertakes to
H
924 SUPREME COURT REPORTS [2014] 5 S.C.R.
A attend to certain aspects while erecting the lifts in the
premlses of its ·purchaser, such as connecting the power
supply to the lift after fixing it in the identified place where
the purchaser has prepared the hoist/well in its premises
and such other aspects as mentioned in the contract. The
B petitioner cannot be heard to say that it brings different
parts of the lift and that its activity of assembling the
~ame in the premises of the purchaser should be
construed as one of service. In view of the nature of
product that the petitioner agreed to supply to its .
c purchaser, it has to necessarily assemble different parts
in the premises of the' purchaser and thereby, fulfill its
contract of supply of the lift/elevator in a working
condition. [para 1O and 55] [991-A; 1021-G-H; 1022-A-D]
1). When examining the claim of the petitioner that
o what was agreed by it in the contract with its purchaser
is nothing but a 'works contract', such a claim should be
explicit and must be discernible from the contract itself.
When in the contract the element of 'works contract' is
totally absent and what was agreed between the parties
E was only supply of its elevator for a fixed price, mere
m~ntioning of the expression 'works contract' or by
making reference to the basis for fixing the cost of labour
involved in the manufacture or by simply using the
expression 'works contract' without any scope of
F performing any work at the command of the purchaser,
the petitioner's claim to hold its activity as a 'works
contract' cannot be accepted on mere asking: the
contract must disclose in no uncertain terms that it was
one for carrying out 'the work' and the supply of the
materials were part of such agreement to carry out any
G such specified work. In the instant case, it is the other
way around, the contract is only for supply of lifts/elevator
and whatever element of works which the petitioner
claims to carry out in effecting the supply is virtually very
insignificant as compared to the element of sale, which
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 925
& ORS.
is paramount as found in the terms of the contract. The A
whole of the preparatory work for the erection of the lift
is that of the purchaser and the petitioner merely goes
to the purchaser's premises and fixes the various parts
of the lift in the slots created for it. [para 56] [1022-E-H;
1023-A-B] B
1.8. While making a deeper scrutiny of the terms of
the contract as a whole in Annexure A•1, which is the
acknowledgement of the Order dated 23.12.2009, the
contents of the letter also state that the petitioner received
the order placed with it by the purchaser and it is C
·prepared "to supply and install One (1) No. OTIS Electric
Traction Passenger Elevator". The other set of terms are
called as 'Preparatory Work'. Under the said head, it is
mainly stated as to the nature of preparatory work that
the purchaser will have to organize in its premises, such D
as, the time within which such preparatory work is to be
carried out, which would require the purchaser to design
and furnish what is called as elevator hoist way/structure
to provide in its building to enable the petitioner to supply
its lift and locate it. It contains as many as 21 different E
aspects of preparatory work. It could not be held to be a
service or work for which the contract was entered into.
It is like doing some incidental work for fixing a Fan or
an Air Conditioner. [para 57, 59 and 60] [1023-B-C; 1024-
C, D; 1025-B] F
1.9. There is no basis in the petitioner referring to the
Price Variation Clause under the caption 'works contract'.
Therefore, it can be validly stated that by calling the Price
Variation Clause as an 'elevator works contract', the
contract cannot be construed as a 'works contract'. On G
the other hand, going by the stipulations contained
therein viz., that the claim for manufactured materials
should be paid along with material invoice and the
installation charges to be paid based on final invoice
makes it clear that the contract is divisible in its nature H
926. SUPREME COURT REPORTS [2014] 5 S.C.R.
A and to call it an indivisible one, is contrary to its own
terms. [para 62] [1026-G-H; 1027-A]
1.10. When examining the "conditions of the
contract", in the first instance, the most relevant and
clinching condition. is the one relating to the payment to
B be effected by the purchaser, which is to the effect that
on signing the contract, 90% of .the contract amount
should be paid and the balance 10% either on the
commissioning of the ljft or within 30 days of the
petitioner's offer to commission the lift and if for any
C delay caused beyond the control of the petitioner, within
90 days from the date the materials are ready for dispatch
at the premises of the petitioner. The agreed period for
execution of the supply of the lift, as per the contract, is
52 weeks i.e., one full year. The terms relating to payment
o in Condition No.5 and the right retained by the petitioner
to cancel the contract for any reason whatsoever under
Condition No.8 disclose that for mere signing of the
contract for supply of the lift, the petitioner would get the
whole value of it without any corresponding obligation
E to effect the supply or to suffer any damages. The said
outcome based on the payment conditions when read
along with the other stipulations, disclose that the claim
for manufactured materials should be paid along with the
material invoice and the claim for installation should be
F paid along with their final invoice. It further makes it
abundantly clear that the right of the petitioner to realize
the full value of the materials of the lift to be supplied does
not entirely depend upon the installation part of it. Supply
of materials of the lift and installation costs are separately
worked out in order to ensure that irrespective of the
G installation, the petitioner will be able to realize the value
of the material cost. This conclusion which is based on
the terms of the contract also strengthens the reasoning
that the contract is not an indivisible one and is always
separable i.e., one for supply of materials and the
H miniscule part of the work involved. The division of 90%
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 927
& ORS.
payment in the first instance and the balance 10% under A
certain other situations, fully supports the conclusion.If
the conditions of the contract relating to payment are
discernible to that effect, it can only be stated that the
contract of the petitioner with the purchaser is virtually
for the manufacture of the materials and for its absolute B
readiness to supply those materials and nothing more.
The sum and substance of the conditions of the contract
de hors the other clauses is only to that effect. Op a
detailed consideration of the conditions of the contract,
one will not be able to state with any certainty that the c
contract has got anything to do only with any work or
service to be performed in the course of supply of the lift/
elevator by the petitioner. [para 64-66] [1027-C-H; 1028-
A-E; 1029-C, D, G]
1.11. The signed part of the contract makes it clear D
that the price is inclusive of indirect taxes, as is currently
applicable either leviable by the Central Government or
State Government or any local Authority, including Excise
Duty and Service Tax. However, it also states that in the
event of any such statutory levy or payment of tax or E
otherwise faced by the petitioner, then under such
circumstances, that should be borne by the purchaser.
[para 67] [1029-H; 1030-A-B]
1.12 Keeping in view the terms of the contract
threadbare, it can only be concluded that the contract in F
the instant case is only one for the manufacture and
supply of the lift/elevator and the installation though
mentioned in the contract, has very insignificant relation
to the consideration agreed upon between the parties. In
any event, the contract of supply and installation are G
divisible in very many aspects, it is difficult to hold that it
is a 'works contract'. Therefore, it will have to be held that
the manufacture, supply and erection of lift/elevator
agreed upon by the petitioner to any of its customers,
would only fall within the expression 'sale' and ca·n never H
928 SUPREME COURT REPORTS [2014] 5 S.C.R.
A be called as 'works contract'. Once that is the conclusion
that can be made based on the contractual terms as
agreed between the petitioner and its customers, the
application of Art. 366(29A)(b) cannot be made and does
not in any way support the claim of the petitioner. [para
B 68] [1030-C-E]
/
2.1. The definition of 'works contract' u/s 2(jj) of the
Orissa Sales Tax Act, 1947 states that it would include any
agreement for carrying out for cash or deferred payment
or other valuable consideration, among other activities,
C fabrication, erection installation o~commissioning of any
movable or immovable properw. The most mandatory
requirement for invoking the said provision and for
applying the said definition would be that the whole of the
agreement should be for carrying out the work of
D fabrication, installation or erection of a movable or
immovable property. Significantly, the expression
'manufacture' is absent in s. 2(jj). [para 70-71] (1031-A, F-
G]
, 2.2. As far as a lift is concerned, in one sense it can
E be called as a movable property When it is in the course
of operation after its installation and that it is not
embedded to the earth permanently while, in .another
sense, having regard to the manner in which the lift is
installed in a· premises, it can also be stated to be part of
F an immovable property. However, whether as a movable
property or immovable property, it may not make any
difference while considering the other prescriptions
contained in the s.2 (jj) of the Orissa Sales Tax Act. [para
71] [1031-C-E]
G 2.3. In the instant case, as per the· agreement
between the parties, the purchaser is bound to pay 90%
of the agreed sum at the time of signin'g of the contract
itself and the balance 10% within 90 days from the day
the petitioner gets. the materials. ready for dispatch in its
H
KONE ELEVATOR !NOIA PVT. LTD. v. STATE OF T.N. 929
& ORS.
premises, if it could not commission as agreed or within A
30 days of its readiness to commission. Therefore, the
whole of the valuable consideration becomes payable
and was relatable _or as agreed upon by the parties
merely for the petitioner's readiness to take up the
contract of supply of the elevator and for its endeavour B
to effect the manufacture, procure the entire materials for
a lift/elevator and keep it ready for dispatch in its
premises. [para 74) (1033-C-E]
2.4. It cannot be said that there was any sordid •
agreement as between the· petitioner and the purchaser C
for any valuable consideration only for the purpose of
carrying out erection/installation of the lift in the premises
of the purchaser. If for any reason after the full payment
is effectuated by the purchaser as per the term relating
to the payment of the contracted amount, due to any fault O
of the petitioner, the contract could not be performed,
there is no specific clause which would entitle the
purchaser to seek for enforcement for erection/
installation. Merely mentioning in .some Clauses that the
contract is otherwise indivisible 'works contract' will not E
by itself make it indivisible or a 'works contract'. In the
factual and legal outcome as per the terms of the
contract, it will have to be held that there is no scope to
apply s.20j) of the Orissa Sales Tax Act to the case on
hand and to hold that the manufacture, supply and F
installation of the lift by the petitioner would fall within the
said definition of 'works contract'. {para 75-76) (1034-A-
D, ~H; 1035-A]
3.1. Besides, the provisions of the Contract Act
stipulate the element of offer, acceptance and G
consideration for a concluded contract. In the case on
hand, the offer would be for supply of the lift as described
in the proposal made by the petitioner. The consideration
upto 90% would become payable the moment the
purchaser agrees to the 'proposal made by the petitioner H
930 SUPREME COURT REPORTS [2014] 5 S.C.R.
A and the balance 10% can also be collected without any
positive guarantee for completion of erection or
installation of the lift under certain contingencies without
any corresponding right in the purchaser to seek for
enforcement of the erection/installation. In fact for
B payment of the balance 10% under such contingencies,
what all the petitioner has to show is that the materials
meant for the supply of the lifts are ready for dispatch in
its premises, which would mandate the purchaser to
make the payment within 90 days of such readiness as
c a
reported by the petitioner. In effect such contract as
agreed between the petitioner and its purchaser as per
the provisions of the Contract Act if were to be
considered for the invocation of the definition of 'works
contract' u/s 2(jj) of the Orissa Sales Tax Act, it can be
found that the said contract does not in any way create
0
any legal obligation on the petitioner to effect erection or
installation of the lift as a movable or immovable
property, satisfaction of which contract alone will attract
the definition of 'works contract' u/s 2(jj) of the Orissa
Sales Tax Act. [para 77f [1035-C-G]
E
3.2. As per the payment terms, the parties agreed
specifically to the effect: "under this clause claim for
manufactured materials shall be paid along with our
material invoice and claim for installation labour shall be
F paid along with our final invoice." In fact the copies of the
two invoices dated 17.12.2009 and 20.09.2010, clearly
explain the fact that the first one related to material cost
and the subsequent one only related to labour cost. [para
79] [1036-E-F]
G 3.3. The provisions of the Bombay Lifts Act, 1939
leave no scope to reach a conclusion that a contract as
between the petitioner and the purchaser would come
within the definition of the 'works contract'. [para 80]
[1037-B]
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 931
& ORS.
Re: OTIS Elevator Co. (India) Ltd. (1981) ELT 720 - held A
inapplicable.
3.4. Sections 65(29), 65(39a) and 65(105) (zzd) and
(zzzza) of the Finance Act, 1994 are all provisions for the
levy of Service Tax. It is well known that while interpreting
taxing statutes, strict and literal interpretation should be B
made. In T.S. Devinatha Nada*, this Court has 'held that
what is applicable to another taxing statute may not be
applied to a case governed by sales tax statutes. Since
s. 65 and the various sub-sections, namely, sub-ss. (29),
(39a), (105), (zzd), (zzzza) put together are only relatable C
to Service Tax, the question of importing the said
definition of 'works contract' in the explanation to
s.65(105)(zzzza) to the provisions of Sales Tax Acts
cannot be made. Further, clause (i) of the Explanation to
sub clause (zzzza) of sub-s.(105) of s.65 distinctly refers D
to transfer of goods in any such contract to mean such
goods leviable to tax as a sale of goods. Such leviability
by itself may independently attract tax liability under tlie
relevant Sales Tax statutes. Therefore, from these
provisions under the Service Tax Act, it cannot be s.aid E
that manufacture, supply and installation of a lift is a
'works contract'. Besides, sub-clause (zzzza) of sub-s.
(105) of s.65 came to be introduced under the Finance Act
of 2007, which came into force w.e.f. 11.05.2007. [para 84-
85] [1038-D; 1039-E-G; 1040-A-B] F
Income Tax Officer, Tuticorin vs. T.S. Oevinatha Nadar
AIR 1968 SC 623- relied on.
Cape Brand Syndicate vs. Inland Revenue
Commissioner, 1921-1 KB 64 - referred to.
G
3.5. It should also be noted that ss. 65(29), 65(39a)
and 65(105) (zzd) have nothing to do with manufacture
and supply which is actually the activity of the petitioner.
It is regarding the erection/commissioning/installation
simpliciter, even if the activities regarding lift or escalator H
is independently carried out by an Agency. On the basis
932 · SUPREME COURT REPORTS [2014] 5 S.C.R.
A of ss.65 (29), 65 (39a) and 65 (105) (zzd), the contract
cannot be construed as a works contract. Therefore, on
the ground of any liability being cast on the petitioner
under the provisions of the Service Tax Act, it will be
wrong to hold that the petitioner cannot be called upon
B to comply with the provisions relating to Sales Tax. [para
85] [1040-B-E]
3.6. In the case on hand, the payment has really
nothing to do with the erection and installation. It has also
got no relation to the delivery of the lift, either in its full
C form or in any semi-installed condition. The· contractual
terms between the petitioner and its purchaser have no
relation to any service to be performed by the petitioner
by way of the agreed terms of the contract. In any event,
in the instant case, the terms of the contract are not
D persuasive enough to call it a 'works contract'. The
manufacture, supply and installation of lift/elevator by the
petitioner would constitute a 'sale' and not 'works
contract', having regard to the specific terms of the
contract placed before this Court..[para 93-95] [1043-E-
E F; 1046-E] .
State of Andhra Pradesh vs. Kone Elevators (India) Pvt.
Ltd. 2005 (2) SCR 152 = (2005) 3 SCC 389 - affirmed.
State of Madras vs. Mis. Gannon Dunkerley and Co.
(Madras) Ltd., 1959 SCR 379 =AIR 1958 SC 560; Hindustan
F Shipyard Ltd. vs. State of Andhra Pradesh, 2000 (1) Suppl.
SCR 592 = (2000) 6 SCC 579 - referred to.
4.1 In order to invoke Art. 366 (29A)(b), it will have to
be found out whether a contract will fall within the four
G corners of the expression 'works contract'. Further, the
transactions have to be examined individually with.
particular reference to the essential ingredients contained
therein to find out as to whether such ingredients would
lead to a conclusion of a 'sale' as defined .in the Sale of
Goods Act, 1930 or not. In the event of such element of
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 933
& ORS.
'sale' not being present, then alone Art. 366(29A)(b) would A
get attracted for the purpose of applying the principle of
deemed sale. While applying Art. 366(29A)(b), it should
not be limited to a contract for labour and service only. If
a contract can be ascertained based on its definite terms
and can be held to be a contract for supply of goods, then B
in the course of implementation of the said contract,
namely, supply of the goods certain services are to be
rendered, it will have to be held that insig"ifjcant services
rendered alone, cannot be the basis to hold the entire
contract to be a 'works contract'. [para 105-107] [1050-E; c
1051-B-C; 1052-D-F]
Bharat Sanchar Nigam Ltd. and Another vs. Union of
=
India and others 2006 (2) SCR 823 (2006) 3 SCC 1 Larsen
& Toubro Ltd. vs. State of Karnataka 2013 (12) SCALE 77 -
referred to. D
4.2. In every contract what is to be seen in the first
instance is the relevant terms of the contract and finding
out as to whether the essential ingredients of those terms
would lead the court to hold whether the element of 'sale'
that would fall within the definition of 'sale' under the Sale E
of Goods Act is present. In this event, the question of
construing the said contract as a 'works contract'
covered by Art. 366(29A) would not arise. In the instant
case, by virtue of the ess.ential ingredients of the contract,
what was agreed between the parties was only sale of the F
lift and for that purpose the petitioner also agreed to carry
out the installation exercise. hi fact, when the very
contract itself was for supply of lift to its purchaser, simply
because there was some work element involved for the
purpose of installation of the lift, it cannot be held that the G
whole contract is a 'works contract' falling .within the
ambit of Art. 366(29A). Having regard to the essential
ingredients of the contractual terms, the supply of lift by
the petitioner to its purchaser cannot be held as a 'works
contract' and, as such Art. 366(29A)(b) cannot be invoked H
934 SUPREME COURT REPORTS [2014] 5 S.C.R.
A to the case on hand. [para 109,111 and 113] [1054-A-C;
1055-B-C; 1056-D]
Mis. Patnaik and Company vs. State of Orissa 1965
SCR 782 =AIR 1965 SC 1655 - relied on.
Associated Cement Companies Ltd. vs. Commissioner
8
of Customs 2001 (1) SCR 608 = (2001) 4 SCC 593 - held
inapplicable.
4.3. The supply of lift by the petitioner to its purchaser
satisfies the definition of 'sale' as defined under the Sale
c of Goods Act, and, therefore, the question of deemed sale
does not arise. [para 114] [1056-E]
4.4. In the instant case, the contract was put into
writing containing various clauses and conditions which
were elaborate and definite to the effect that the petitioner
D should manufacture, supply and then erect a product,
namely, the lift. The contract is definite and the terms of
the contract sufficiently demonstrate that it is one for
supply of lift and not a contract for works. It can be aptly
held that the contract in the instant case is nothing but a
E contract for 'sale' and not a 'works contract'. By virtue of
the terms, the manufacture, supply and installation of a
lift is a contract for 'sale' and not a 'works contract'. [para
116,121 and 123] [1057-F; 1061-G]
Mis T. V. Sundram Iyengar & Sons vs. The State of
F Madras (1975) 3 SCC 425; The Commissioner of
Commercial Taxes Mysore, Bangalore vs. Hindustan
Aeronautics Ltd. (1972) 1 SCC 395; and Union of India vs.
The Central India Machinery Manufacturing Company Ltd.
=
and others 1977 (3) SCR 437 (1977) 2 sec 847 - relied
G on.
State of Madras vs. Richardson Cruddas Ltd. [1968] 21
STC 245- held inapplicable
4.5. Based on the contractual terms as between the
H petitioner and its purchaser that the value of the lift upto
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 935
& ORS.
<the extent of 90% is payable, under certain contingencies, A
\even when such materials are made ready and available
for dispatch at the premises of the petitioner, the contract
is one for sale. It has also been found based on the terms
of the contract that the value of the labour content
referable to the remaining 10%, becomes payable after B
the installation of the lift. [para 127) [1064-F-G]
Mis. Vanguard Rolling Shutters and Steel Works vs.
Commissioner of Sales Tax, 1977 (3) SCR 165 (1977) 2=
sec 250 - referred to.
4.6. The whole of the materials manufactured for the C
installation of the lift belong to the petitioner and after the
installation of the lift and after receipt of the full payment,
the title to the lift passes on to the purchaser. Thus, after
execution of the installation part of it, what is transferred
by the petitioner to its purchaser is the lift as a chattel and D
this contract is nothing but a contract of 'sale'. Therefore,
it will have to be held that the contract as between the
petitioner and the purchaser was nothing but a 'sale' and
not a 'works contract'. [para 129 and 133) (1065-G-H;
1068-D] E
Commissioner of Sales Tax, MP. vs. Purshottam Premji
(1970) 2 SCC 287; and Bharat Sanchar Nigam Ltd. and
Another vs. Union of India and others 2006 (2) SCR 823 =
(2006) 3 SCC 1 ; Hindustan Shipyard Ltd. vs. State of Andhra F
Pradesh 2000 (1) Suppl. SCR 592 = (2000) 6 SCC 579 -
referred to
Builders' Association of India and others v. Union of India
and others 1989 (2) SCR. 320 = (1989) 2 sec 645 - held
inapplicable. .G
4.7. The question whether a particular transaction is
contract for sale or a 'works contract' will depend upon
the intention of the parties executing the contract and
there can be no standard formula by which one can
H
936 SUPREME COURT REPORTS [2014] 5 S.C.R.
A {fistingl.iish a contract of sale from a contract of work and
labour. It has to be necessarily examined based on the
terms agreed between the parties as to what is the
intention of the parties. Therefore, ~ince it is found that
the contract in the instant case is a contract for sale, it
B cannot be held to be a 'works contract'. [para 138] [1070-
F-H]
. Govt. of Andhra Pradesh vs. Guntur Tobaccos Ltd.
1965 SCR 167 =AIR 1965 SC 1396 - relied on
C Commissioner of Sales Tax, Gujarat vs. Mis. Sabarmati
Reti Udyog Sahakari Mandali Ltd. 1976 Suppl.
SCR 158 = (1976) 3 SCC 592 - referred to.
4.8. Even after the 46th A11endment, if Art. 366
(29A)(b) of the Constitution is to be invoked, as a
o n·ecess"ry concomitant, it must be shown that the terms
of the contract would lead to a conclusion that it is a
'works contract'. Unless a contract is proved to be a
'works contract' by virtue of the terms agreed as between
the parties, invocation of Art. 366 (29A)(b) cannot be
E made. Alternatively, if the terms of the contract disclose
or lead to a definite conclusion that it is not a 'works
contract', but one of outright sale, the same will have to
be declared as a 'sale' attracting the provisions of the
relevant sales tax enactments. Therefore, having applied
F the relevant principles to the case on hand, and having
regard to the nature of the terms of the contract displayed,
it will have to be held that the manufacture, supply and
installation of lifts/elevators comes under the definition of
'sale' and not 'works contract'. [para 140] [1071-G-H;
G 1072-A-B]
State of Andhra Pradesh vs. Kone Elevators (India) Pvt.
Ltd. 2005 (2) SCR 152 = (2005) 3 SCC 389 - affirmed.
K. Raheja Development Corporation vs. State of
Karnataka 2005 (3) SCR 1210 = 2005 (5) SCC 162; State of
H Rajasthan & Anr. vs. Man Industrial Corporation Ltd.[1969]
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 937 ·
& ORS.
24 STC 349, State of Rajasthan vs. Nenu Ram, [1970) 26 A
STC 268; Mis. Vanguard Rolling Shutters and Steel Works
vs. Commissioner of Sales Tax, 1977 (3) SCR 165 = (1977)
2 sec 250 - cited.
Case Law Reference
B
Per Dipak Misra, J.
[2005]SCR 152 affirmed para 2
1969 (3) SCR 505 referred to para 2
(1970) 26 STC 268 (SC) cited para 2
c
1977 (3) SCR 165 cited para 2
2006 (2) SCR 823 referred to para 5
(2014) 1 sec 108 affirmed para 5
(1969) 24 STC 525 (Born) approved para 7 D
1989 (2) SCR 320 relied on para 8
(1965) 2 SCR 782 distinguished Para 9
1975 (2) SCR 372 cited Para 9
1977 (3) SCR 437 cited Para 9 E
(1953) 1 All ER 15 cited Para 9
(1944) 1 All ER 618 cited Para 9
2003 (9) sec 133 cited Para 10
1988 (3) Suppl. SCR 1 referred to para 10 F
1989 (3) SCR 1017 referred to para 10
2001 (2) Suppl. SCR 559 referred to para 10
2007 (3) SCR 476 cited para 10
G
(1922) 1 KB 343 referred to . para 10
1979 (1) SCR 644 referred to para 10
1979 (2) SCR 621 referred to para 10
2010 (4) SCR 476 cited para 10
H
938 SUPREME COURT REPORTS (2014) 5 S.C.R.
A 58 L.Ed. 1166 cited para 10
1997 (6) Suppl. SCR 431 referred to para 10
1989 ( 2 ) SCR 918 referred to para 12
2000 (1) Suppl. SCR 592 referred to para 14
B 1959 SCR 379 referred to para 16
1962 SCR 81 referred to para 17
1967 SCR 543 referred to para 19
(1968) 21 STC 245 (SC) referred to para 20
c (1843) 11 M & W. 243 referred to para 20
1972 (2) SCR 937 referred to para 22
1976 Suppl. SCR 131 referred to para 23
1910 (2) sec 287 referred to para 25
D
1984 (2) SCR 267 referred to para 26
1992 (3) Suppl. SCR 103 followed para 31
2001 (1) SCR 608 referred to para 34
E 2005 (3) SCR 1210 referred to para 36
2007 (8) SCR 927 referred to para 37
(Per Fakkir Mohamed Ibrahim Kalifulla, J.)
2005 (2) SCR 152 affirmed para 3
F 1969] 24 STC 349 referred to para 3
[1970] 26 STC 268 referred to para 3
1977 ( 3 ) SCR 165 referred to para 3
2000 (1) Suppl. SCR 592 referred to para 4
G 2013 (12) SCALE 77 held inapplicable para 6
1965 SCR 782 relied on para 7
(1972) 1 sec 395 referred to para 7
959 SCR 379 referred to para 7
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 939
& ORS.
[1969] 24 STC 525 held para 34 ~
inapplicable
[1968] 21 STC 245 held para 37
inapplicable
(1981) ELT 720 held para 38 B
inapplicable
(1975) 3 sec 425 relied on para 42
1977 (3) SCR 437 relied on para 42
2006 (2) SCR 823 referred to para 46 c
(1875) LR 10 CP 271 cited para·46
(1970) 2 sec 287 referred to. para 50
2010 (4) SCR 476
1921-1 KB 64
referred to
referred to
..
para 50
para 50 D
AIR 1968 SC 623 relied on para 84
2005 (3) SCR 1210 ·cited para 96
2001 (1) SCR 608 held para 109
inapplicable E
1989 (2) SCR 320 held para 134
inapplicable
19761-(0) Suppl. SCR 158 referred to Para 13 7
1965.SCR 167 relied on para 139 F
CIVIL ORIGINAL JURISDICTION : Writ Petition (CIVIL)
No(s). 232 of 2005.
Under Article 32 of the Constitution of India.
WITH G
Writ Petition (Civil) Nos. 298/2005, 487/2005, 528/2005, 67/
2006, 511/2006, 75/2007, 519/2008, 531/2008, 548/2008,
569/2008, 186/2009, 23/2010, 62/2010, 232/2010, 279/2010,
377/2010, 112/2011, 137/2011, 181/2011, 207/2011, 278/
2011, 243/2011, 372/2011, 398/2011, 381/2011, 468/2011, H-'
940 SUPREME COURT REPORTS [2014] 5 S.C.R.
A. 547/2011, 107/2012, 125/2012, 196/2012, 263/2012, 404/
2012, 567/2012, 145/2013, 241/2013, 454/2013, 404/2013,
723/2013, 440/2012, 441/2012, 156/2013, 533/2013, 403/
2012, 824/2013, 428/2009, 1046/2013, 1047/2013, 1048/
2013, 1049/2013, 1050/2013, 1051/2013, ·1052/2013, 1098/
B 2013 and Civil Appeal Nos. 5116-5121, 5135-5141, 5142-
5147, 5152-5153, 5154, 5156, 5157, 5159-5160, 5162-5164,
5165, 5166, 5167-5168, 5170-5172, 5174, 5175, 5178, 5179,
5180-5192, 5193, 5195-5206 of 2014 and 6285/2010.
A. Mariarputham and Darius Khambata, AGs, P.P.
C Malhotra, ASG, Harish N. Salve, R.L. Ramani, Shyam Divan,
Rakesh Dwivedi, K. Radhakrishnan, Atul Chetalay, R.
Venkataramani, Sunil Kumar, P.N. Misra, K.N. Bhatt, Manjit
Singh, Krishna Sharma, Dr. Manish Singhvi, Suryanarayana
.Singh, AAGs, K.K. Mani, T. Archana, B. Raveendran, Abhishek
D Krishna, Anand Padmanathan .. Rohan Shah, Rohit Jain, Sonu
Bhatnagar, Monish Panda, Tarun Jain, Somnath Shukla, Kshitiz
Karjee, Praveen Kumar, Chirag M. Shroff, Abhishek Singh,
Priyanka Rai, s.· Nanda Kumar, R. Satish Kumar, P.
Dhayanand, Parivesh Singh, Shiva Kumar, Naresh Kumar, S.
E Gowthaman, Aarohi Bhalla, Supriya Deshpande, Subodh S.
Patil, Anil Katiyar, Kirti Renu Mishra, Apurva Upmanyu,
Chinmoy Khaladkar, Anirudha P. Mayee, Charudatta
Mahindrakar, Apoorva Kurup, Binu Tamta, Arijit Prasad, Yasin
Rouf, Yomaya Agnihotri, B. Krishna Prasad, D.S. Mahra, Asha
F Gopalan Nair, Yomaya Agnihotri, V. Vijayalakshmi, B. Balaji,
R. Rakesh Sharma, Selvin Raja, Anand S., Neelam Singh,
Shodhan Babu, Yashraj Singh, C.K. Sucharita, Yashraj Singh
Bundela, Gopal Singh, Chandan Kumar, Manish Kumar,
Shashank Kumar, Anubha Gupta (for Mfs. Parekh & Co.), Ratan
Kr. Choudhary, V. G. Pragasam, S.J. Aristotle, Prabhu
G Ramasubramanian, Bina Madhavan, Aruna Mathur, Yusuf, (for
Mis. Arputham Aruna & Co.), Ravi P. Mehrotra, Ashutosh Kr.
Sharma, Vibhu Tiwari, Abhinav Kumar Malik, Gunnam
Venkateswara Rao, Kamlendra Mishra, Anip Sahthey,
Saakaar Sardana, Mohit Paul, Preetesh, Hemantika Wahi,
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE T.N. & 941
ORS.
Sangeeta Singh, Tarjit Singh, Vinay Kuhar, Vikas Sharma, A
Nupur Choudhary, Kamal Mohan Gupta, Navnit Kumar (for M/
s. Corporate Law Group}, Mishra Saurabh, Naveen Sharma,
V.N. Raghupathy, Anitha Shenoy, Neha Singh, Visruti Vijay,
Anantha Krishna Bhat, Ananth Naryana M.G., Parikshit P.
Agadi, lrshad, Anirudha P. Mayee, Apoorva Kurup, Charudatta B
Mahindrakar, Rachna Srivastava, Utkarsh Sharma, Jogy
Scaria, Mohanprasad Meharia, Sanjay R. Hegde, Avijit
Bhattacharjee, B.S. Banthia, Adarsh Upadhyay, milind Kumar,
Pragati Neekhra, R. Nedumaran, Ramesh Babu M.R., .T.V.
George, G.N. Reddy, Himinder Lal, Sunil Fernandes, Anil c,
Katiyar and R. Sathish for the appearing parties.
The Judgment and Order of the Court was delivered by
DIPAK MISRA, J. [FOR R.M. LODHA, C.J., A.K.
PATNAIK, SUDHANSU MUKHOPADHAYA, JJ. AND D
HIMSELF]
1. Leave granted in all the special leave petitions.
2. By an order dated 13.2.2008 in Kone Elevator India
F?rivate Limited v. State of Tamil Nadu and others 1, a three-
Judge Bench of this Court, while dealing with the writ petition E
preferred by Kone Elevator India Pvt. Ltd. along with Special
Leave Petitions, noted that the question raised for
consideration in the said cases is whether manufacture, supply
and installation of lifts is to be treated as "sale" or "works
contract", and a three-Judge Bench. in St::,i1::1 of A.P. v. Kone F
Elevators (India) Ltd. 2, had not noticed the decisions rendered
by this Court in State of Rajasthan v. Man Industrial
Corporation Ltd. 3, State of Rajasthan and others v. Nenu
Ram 4 and Vanguard Rolling Shutters and Steel Works v.
Commissioner of Sa/es Tax 5 and perceiving the manifest G
discord, thought it appropriate that the controversy should be
resolved by the larger Bench. Thereafter, keeping in view the
1. (2010) 14 sec 788.
2. (2005) 3 sec 389.
3. (1969) 1 sec 567. H
942 SUPREME COURT REPORTS [2014) 5 S.C.R.
A commonality of the controversy in Civil Appeal No. 6285 of 2010
and other Special Leave Petitions, they were tagged with the
originally referred matters. Thus, the matters are before us.
3. The seminal controversy which has emerged in this
batch of matters is whether a contract for manufacture, supply
B and installation of lifts in a building is a "contract for sale of
goods" or a "works contract". Needless to say, in case of the
former, the entire sale consideration would be taxable under
the sales tax or value added tax enactments of the State
legislatures, whereas in the latter case, the consideration
C payable or paid for the labour and service element would have
to be excluded from the total consideration received and sales
tax or value added tax would be charged on the balance
amount.
-
4. Keeping in mind the said spinal issue, we think it
D apposite to briefly refer to the facts as adumbrated in the writ
petition preferred by Kone Elevator India Pvt. Ltd. The petitioner
is engaged in the manufacture, supply and installation of lifts
involving civil construction. For the Assessment Year 1995-96,
the Sales Tax Appellate Tribunal, Andhra Pradesh, considering
E the case of the petitioner, opined that the nature of work is a
"works contract", for the erection and commissioning of lift
cannot be treated as "sale". On a revision being filed, the High
Court of Andhra Pradesh affirmed the view of the tribunal and
dismissed the Tax Case (Revision) filed by the Revenue.
F Grieved by the decision of the High Court, the State of Andhra
Pradesh preferred special leave petition wherein leave was
granted and the matter was registered as Civil Appeal No.
6585 of 1999 and by judgment dated 17.2.2005 in Kone
Elevators (supra), the view of the High Court was overturned.
G After the pronouncement in the said case, the State
Government called upon the petitioner to submit returns treating
the transaction as sale. Similarly, in some other States,
4. (1970) 26 STC 268 (SC).
H 5'. (1977) 2 sec 2so.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 943
& ORS. [DIPAK MISRA, J.]
proceedings were initiated proposing to reopen the A
assessments that had already been closed treating the
transaction as sale. The said situation compelled the petitioner
to prefer the petition under Article 32 of the Constitution. As far
as others are concerned, they have preferred the writ petitions
or appeals by special leave either challenging the show cause B
notices or assessment orders passed by the assessing officers
or affirmation thereof or against the interim orders passed by
the High Court requiring the assessee to deposit certain sum
against the demanded amount. That apart, in certain cases,
appeals have been preferred assailing the original C
assessment orders or affirmation thereof on the basis of the
judgment in Kone Elevators (supra).
5. Mr. Harish Salve, learned senior counsel for the
petitioners, has contended that prior to the decision of this
Court in Bharat Sanchar Nigam Ltd. and another v. Union of D
India and others 6, which has been further explained in Larsen
and Toubro Limited and another v. State of Karnataka and
another7, the law as understood was (a) where a contract was
divisible by itself, then the element of sale would be taxed as
an ordinary sale of goods, irrespective of the element of E
service; (b) where a contract was for the supply of goods, and
for rendition of services, if the pre-dominant intention of the
parties was to supply goods, the element of service would be
ignored and the entirety of the contract consideration would be
treated as the price of goods supplied an_d the tax imposed F
accordingly; and (c) as the law did not provide for dividing, by
a legal fiction, a contract of such a nature into a contract for
goods and a contract for services, the goods in which property
passed from the contractor to the owner could not be brought
to tax under the law of sales tax. It is assiduously urged by Mr. G
Salve that the "predominant intention test" is no longer relevant
and after the decision in Larsen and Toubro (supra), supply
6. (2006) 3 sec 1
· · 7. (2014)1 sec 10s.
H
944 SUPREME COURT REPORTS [2014] 5 S.C.R.
A and installation of lift cannot be treated to be a contract for sale.
It is argued that a lift comprises of components or parts [goods]
like lift car, motors, ropes, rails, etc. and each of them has its
own identity prior to installation and they are assembledfinstalled
to create the working mechanism called lift. Learned senior
B counsel would contend that the installation of these components!
parts with immense skill is rendition of service, for without
installation in the building, there is no lift.
6. Mr. Salve, learned senior counsel, has also referred to
the Bombay Lifts Act, 1939, the Bombay Lifts Rules, 1958 and
C Bombay Lifts (Amendment) Rules, 2010. He has referred to the
Preamble of the Act which stipulates that an Act has been
1
enacted to provide for the regulation of the construction,
maintenance and safe working of certain classes of lifts and
all machinery and apparatus pertaining thereto in the State of
D Bombay. The State Act applies to the whole of Maharashtra.
He has drawn our attention to the dictionary clause of "lift" as
has been defined in clause 3(c) to mean a "hoisting
mechanism" equipped with a car which moves in a substantially
vertical direction, is worked by power and is designed to carry
E passengers or goods or both; and "lift installation" which
includes the lift car, the lift way, the lift way enclosure and the
. operating mechanism of the lift and all ropes, cables, wires and
plant, directly connected with the operation of the lift. He has
also placed reliance on Section 4 which deals with permission
F to erect a lift, Section 5 that deals with licence to use a lift and
Section 7 which provides a lift not to be operated without a
licence. Learned senior counsel has also drawn our attention
to the various rules that deal with many a technical aspect and
the terms on which lift shall work and what requirements are to
G be carried out by a licencee under the Act. In essence, the
submission is that the manufacture, supply and the installation
are controlled by the statutory provisions under an enactment
of the legislature and also the rules made in consonance with
the Act which would reflect that immense skill-is required for
H such installation and the separate parts of the lift are not sold
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 945
& ORS. [DIPAK MISRA, J.]
iike goods, but it only becomes operational after it is installed, A
1djusted, tested and commissioned in a building.
7. Mr. Khambatta, learned Advocate General, appearing
for the State of Maharashtra, submitted that in the case of sale
and installation of a lift or elevator, the contract would include
8
the obligation to install the lift or to undertake any se~ces in
ielation to the lift and these elements of value need lo--b~
deducted while taxing the sale of goods involved in such a
contract. It is his submission that in a given case, there can be
a contract which is exclusively for sale of lift, i.e., for sale of C
goods which does not include any labour or service element .
at all where the lift is bought from a manufacturer but a separate
contract for installation is .entered into with an independent
engineering contractor. Learned Advocate General urged that
such an installation by way of contract is permissible under the
Bombay Lifts Act, 1939 read with the Bombay Lifts Rules, D
1958. It is urged by him that prior to the decision in Kone
Elevators case, the State of Maharashtra had treated contracts
for sale and installation of lifts as "works contract" as per the
decision of the High Court in Otis Elevator Company (India)
Ltd. v. The State of Maharashtra 8 . He has copiously referred E
to the rule position which is prevalent in the State of
Maharashtra. He has brought on record a Trade Circular dated
11.11.2013 to show that from 1.4.2006, the decision in Kone
Elevators (supra) has been followed in the State of Maharashtra
and it has adjusted the position in accordance with the said F
authority and the State having adjusted its position to the law
rendered by the three-Judge Bench, in case the authority in
Kone Elevators (supra) is overruled, it should be given
prospective effect.
G
8. Mr. K.N. Bhat, learned senior counsel for the State of
Karnataka, has submitted that the contract of manufacture,
supply and installation of lifts comprises a works contract, for
a. (1969) 24 sec (Born). H
946 SUPREME COURT REPORTS [2014] 5 S.C.R.
A the expression "works contract" is not a term of art as has been
explained in Builders' Association of India and others v. Union
of India and others9 as well as in Larsen and Toubro (supra).
It is put forth by Mr. Bhat that lifts are assembled and
manufactured to suit the requirement in a particular building and
B are not something sold out of shelf and, in fact, the value of
goods and the cost of the components used in the
manufacturing and installation of a lift are subject to taxation
while the element of labour and service involved cannot be
treated as goods. In essence, the submission of Mr. Bhat is
C that taking into consideration the multifarious activities involved
in the installation of the lift, it has to be construed as a "works
contract" and the decision in Kone Elevators (supra) does not
lay down the law correctly.
9. Mr. Rakesh Dwivedi, learned senior counsel appearing
D for the State of Orissa, has referred to the terms of the
quotation, the confirmation letter, the letter of approval, the
preparatory erection work or civil work which are to be carried
out by the customer at its own cost, the specific mode of
payment and the nature of supply and, on that basis, contended
E that the contract was for sale and supply of a lift to the customer
for a monetary consideration. It is urged by him that a part of
manufacture is carried out at the project site of the customer
and the skill and labour deployed in the installation or the work
done is merely a component I
of the manufacturing process and,
F as a matter of fact, the elevator is supplied to the customer only
after its erection/installation at the site. It is further contended
by him that where a manufacturer of lift first manufactures
components and then completes the manufacture of the lift at
the site and retains ownership in the components as property
G while producing the completed lift, it is a case of pure
manufacture. It is contended by him that the phraseology used
in the contract is not decisive because it is the economic reality
which is decisive, for the installation is a part of the
H 9. (1989) 2 sec 645.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 947
& ORS. [DIPAK MISRA, J.]
manufacturing process resulting in the emergence of the product A
of elevator which is contracted for. Learned senior counsel
would contend that it has to be construed as an elevator bought
and sold as such. In this regard, he has drawn inspiration from
the authorities in Patnaik & Co. v. State of Orissa 10 , T. V.
Sundram Iyengar & Sons v. State of Madras 11 , Union of India 8
v. Central India Machinery Manufacturing Company Ltd. and
others 12, J. Marcel (Furrier) Ltd. v. Tapper13 and Love v.
Norman Wright (Builders) Ltd. 14 •
10. Mr. Dwivedi has also contended that even if high
degree of skill and craftsmanship goes into installation which C
·is a part of the manufacturing process, it is not more than
erecting an article for sale on the basis of a special order. For
the aforesaid-proposition, he has placed reliance on J. Marcel
(Furrier) Ltd. (supra)·. ll is his submission that emphasis on
technology and skill including labour and also the instructions D
in the manual are of no consequence as all are insegregable
facets of the manufacturing process. It is proponed by him that
erection, commissioning and assembling of parts and
components amount to manufacture as has been laid down by
this Court in MIL India Ltd. v. Commissioner of Central Excise,. E
Noida 15 , Name Tulaman v. Collector of Central Excise,
Hyderabad 16, Titan Medical Systems (P) Ltd. v. Collector of
Customs, New Oelhi1 7, Collector of Central Excise, Calcutta- ·
II v. Eastend Papers Industries Ltd 18• and Aspinwall & Co. Ltd.
v. Commissioner of Income Tax, Ernakulam 19 . He has also F
placed reliance on Underwood Limited v. Burgh Castle Brick
and Cement Syndicate 20 wherein the Kings Bench has ruled
that until the railway engine was reassembled and put on rail,
it could not be said that the goods were delivered as per the
G
10. (1965) 2 SCR 782.
11. (1975) 3 sec 424.
12. (1977) 2 sec 847.
13. (1953) 1 All ER 15.
14. (1944) 1 All ER 618. H
948 SUPREME COURT REPORTS [2014) 5 S.C.R.
A contract. Commenting on the attachment to immovable property
as permanent affixation, it is put forth by him that the decisions
in Sentinel Rolling Shutters & Engineering Company (P) Ltd.
v. Commissioner of Sales Tax 21 , Ram Singh & Sons
Engineering Works v. Commissioner of Sales Tax, U.P. 22 ,
8 Man Industrial Corporation (S\Jpra) and Van.guard Rolling
Shutters & Steel Works (supra) were rendered prior to the
amendment of the Constitution and hence, they stand on a
different footing as they were fundamentally dealing with
indivisible contracts. Elaborating an the nature of affixation, it
C is urged by him that only the guide rails and the frame of the
entry/exit doors are attached to the immovable property by nuts
and bolts and the motor is also placed on the beam with the
help of nuts and bolts. The sheave is attached to the motor and
it enables the steel rope to move. The steel rope is attached
to one side of the cabin car and on the other side to the counter
D weight. These parts are aligned so that the cabin car and the
counter weight move up and down in opposite directions.
Therefore, contends the learned senior counsel, the lift is only
partially attached to the building and the remaining major
portions of the components are constantly mobile. In fact,
E people buy lifts only with the object of movability and the lifts
are advertised as transport systems. The learned senior
counsel would further submit that if railway engines and coaches
are goods notwithstanding motion on rail alone which is fixed
to the earth by nuts and bolts, the elevators will also be goods
F notwithstanding the attachment of guide rails. For the aforesaid
15. c2007) 3 sec 533.
16. (1989) 1 sec 172.
G 17. (2003) 9 sec 133.
18. (1989) 4 sec 244
19. c2001) 7 7 sec 525.
20. (1922) 1 KB 343.
21. (1978) 4 sec 260.
H 22. (1979) 1 sec 487
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 949
& ORS. [DIPAK MISRA, J.]
purpose, he has drawn inspiration from Sirpur Papers Mills Ltd. A
'v. Collector of Central Excise, Hyderabad23, Commissioner
of Central Excise, Ahmedabad v. Solid & Correct Engineering
of Works and others24 and Detroit Steel Cooperage Company
v. Sistersville Brewing Company25 •
B
11. Mr. R. Venkataramani, learned senior counsel
appearing for the States of Tamil Nadu and Andhra Pradesh,
has contended that the primary intention behind the demand
of installation of a lift is the intention to have the lift as a system
and, therefore, the work of installation merely fulfills the erection C
and functional part of the system. The service or work element
may be the means to render a set of goods constituting a unit
to be fit for use and, in fact, the act of installation is to bring
the goods to use and hence, it is the culmination of the act of
sale. The learned senior counsel has put forth that the contract
involved would come in the category of contracts which can be 0
described as contracts where goods, in any form whatsoever,
are intended for transfer but the completion of the transfer may
involve certain set of activities, by whatever name called, for
the purposes of securing the use or consumption of such goods
in question and to that class of contracts, the principle of E
"deliverable state" as used in Section 21 of the Sale of Goods
Act, 1930 would be attracted and, therefore, such a contract
would be a pure contract for sale of goods. It is emphasized
by him that the threshold question to be put in every case is
whether the purchaser's true object is to obtain an identifiable F
product or goods or the intention is to utilize the services of or
works from a person for the purposes of realizing an end
product which may emerge only for the reason of the execution
of the work by rendering of the services in question. Applying
the said principle to a lift, it is canvassed by him that a lift or G
an elevator is an identifiable good which is transferred to the
23. (1998) 1 sec 400.
24. (201 o) 5 sec 122.
25. 58 L.Ed. 166.. H
950 SUPREME COURT REPORTS [2014] 5 S.C.R.
A purchaser as such and solely because certain amount of labour
or service is required for the purpose of putting together all the
components of the lift at the site to bring it to its usable state,
the same does not make a difference as to the nature of the
contract and it cannot be regarded as a works contract.
B
12. Ms. Hemantika Wahi and Mr. Preetesh Kumar, learned
counsel for the State of Gujarat, while adopting the submissions
of the learned senior counsel for the State of Orissa, have
submitted· that the traditional tests for determining whether a
C contract is a works contract or not would continue to apply. It is
urged that the sale of goods involved in the execution of a
works contract is quite distinct from the works performed while
executing a sale of goods contract. It is also put forth that it
would come within the competence of the State legislature
being a measure of tax and for that purpose, reliance has been
D placed on Federation of Hotel and Restaurant Association of
India v. Union of India and others26 • Be it noted, the learned
counsel for the State, while placing reliance on Bharat Sanchar
(supra), have also asserted that the dominant nature test or
other test approved in Larsen and Toubro (supra) are still
E relevant. It is apt to note here that in the written note of
submission, certain lines from para 45 of Bharat Sanchar
(supra) have been reproduced. Relying on the same, it is
contended that the "dominant nature test" is still available.
F . 13. Dr. Manish Singhvi, learned counsel appearing for the
State of Rajasthan, has submitted that the decision rendered
in Vanguard Rolling Shutters & Steel Works (supra), Man
Industrial Corporation Ltd. (supra) and Nenu Ram (supra) do
not lay down the correct law because the underlying reason
G accorded in those cases is that if a particular item is to be fixed
in the immovable property, then the property passes on as an
immovable property and, therefore, cannot be construed as a
sale. Reliance has been placed on the Constitution Bench
H 26. (1989) 3 sec 634.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 951
& ORS. [DIPAK MISRA, J.]
decisions in Patnaik & Co. (supra) and Hindustan Shipyard A
Ltd. v. State of AP. 27•
14. Mr. P.N. Mishra, learned senior counsel appearing for
the State of Haryana, has supported the law laid down in Kone
Elevators (supra) and, on that base, contended that supply 8
and installation of the lift is a contract for sale and not a works ·
contract. For the aforesaid purpose, he has laid emphasis on
the specification laid down in the terms and conditions of the
contract in which the customer is obliged to undertake certain
work of civil construction. He has brought on record an order C
of assessment for the assessment year 2009-2010 from which
it is quite vivid that the assessing officer has treated the
transaction as a sale adopting the principle stated in Kone
Elevators case. Learned counsel for the State has brought to
our notice a Gazette Notification providing 15% tax on labour,
service and other like charges as percentage of total value of ,,p
the contract to show that it has been so done keeping in view
the nature of composite contract. '
15. Mr. P.P. Malhotra, learned Additional Solicitor General
of India appearing for Union of India, has submitted that parts E
of the lift are assembled at the site in accordance with its
design and requirement of the building which may include the
floor levels and the lift has to open on different floors or
otherwise depending upon the requirement. It has to
synchronize with the building and each door has to open on the F
level of each floor and hence, by no stretch of imagination, it
can be treated as a manufacture or mere supply but
cumulatively considered, it is a works contract and, more so,
when the contract is a composite or turnkey contract. Mr.· ·
Malhotra would further submit that it is not a mere case of sale G
and according to the expanded definition of tax on sale, "tax"
is leviable only on the transfer of property in goods, wh~ther in
goods or in some other form, involved in the execution of work
21. (2000) 6 sec 579. H
952 SUPREME COURT REPORTS [2014) 5 S.C.R.
A and no sales tax is leviable on the execution of works contract.
Thus, the stand of the Union of India is that supply and
installation of lift is not a contract for sale but a works contract.
16. To appreciate the controversy in the backdrop of the
8 rivalised submissions, it is necessary to delve into the genesis
ot the law in respect of "works contract" and thereafter to dwell
upon how far the principles pertaining to "works contract" would
govern the manufacture, supply and installation of lifts. In this
context, it is seemly to appreciate the legal position as to how
C the impost of sales tax on "works contract" was treated prior
to the insertion of Clause (29A) in Article 366 of the Constitution
by the Constitution (Forty-sixth Amendment) Act, 1982 with
effect from 1.3.1983 and how this court has dealt with the said
facet after the constitutional amendment that changed the
concept of levy of sales tax on "works contract". For the
D aforesaid purpose, chronological recapitulation is imperative.
In State of Madras v. Gannon Dunkerley & Co., (Madras)
Ltd. 28 , the assessee faced a levy in respect of goods sold in
relation to works contract under the Madras General Sales Tax
Act, 1939 as amended by the Madras General Sales Tax
E (Amendment) Act 25 of 1947 wherein certain new provisions
were incorporated and one such provision, namely, Section 2(i)
defined "works contract" to mean "any agreement for carrying
out for cash or for deferred payment or other valuable
consideration, the construction, fitting out, improvement or
F repair of any building, road, bridge or other immoveable
property or the fitting out, improvement or repair of any movable
property". In pursuance of the said provision, the rules were
amended and the assessment was framed. When the matter
travelled to the Constitution Bench of this Court, it was
G contended by the assessee 'that nothing could be levied that
was received by the assessee from the persons for whose
ben·efit it had constructed the buildings. On behalf of the
Revenue, it was urged that once there was an agreement
H 28. AIR 1958 SC 560.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 953
& ORS. [DIPAK'MISRA, J.]
between the parties and in the carrying out of that agreement A
there was transfer of title in movables belonging to one person
to another for consideration, there would be a "sale". Repelling
the said submission, it was held that if the words "sale of goods"
were to be interpreted in their legal sense, that sense could only
be what it was in the law relating to sale of goods. It was B
observed that the ratio of the rule of interpretation that words
of legal import occurring in a statute should be construed in their
legal sense is that those words have, in law, acquired a definite
and precise sense, and that, accordingly, the legislature must
be taken to have intended that they should be understood in c
that sense and in interpreting an expression used in a legal
sense, the requirement was to ascertain the precise
connotation which it possesses in law because both under the
common law and the statute law relating to sale of goods in
England and in India, to constitute a transaction of sale, there
0
should be an agreement, express or implied, relating to goods
to be completed by passing of title in those goods. The essence
of the concept that both the agreement and the sale should
relate to the same subject-matter was highlighted and it was
opined that under the law, there could not be an agreement
relating to one kind of property and a ~ale as regards another. E
The Constitution Bench further held that on the true
interpretation of the expression "sale of go'ods", there must be
an agreement between the parties for the sale of the very
goods in which eventually property passes and in a building
contract, the agreement between the parties being to the effect F
that the contractor should construct a building according to the
specifications contained in the agreement, and in consideration
therefor receive payment as provided therein, there was neither
a contract to sell the materials used in the construction nor did ·
the property pass therein as movables and, therefore, it was G
impossible to maintain that there was implicit in a building
contract a sale of materials as understood in law. Eventually,·
the Court summed up the conclusion by stating that the
expression "sale of goods" in Entry 48 is a nomen juris, its
H
954 SUPREME COURT REPORTS [2014] 5 S.C.R.
A essential ingredients being an agr~ement to sell movables for
a price and property passing therein p,ursuant to that agreement
and in a building contract which was one, entire and indivisible,
there was no sale of goods, and it, was not within the
competence of the Provincial Legislature under Entry 48 to
·B impose a tax on the supply of the materials used in such a
contract treating it as a sale.
17. In Carl Still G.m.b.H. & Another v. State of Bihar and
others29 , the majority, interpreting the nature Of the contract
which related to assembling and installing machinery, plant and
C accessories for a coke-oven battery and by-products plant,
opined that the price was agreed for the execution of the works
and there was no agreement for sale of material~ as such by
the appellant therein to the owner and, therefore, the agreement
in question was an indivisible one for the construction of
D specified works for a lump sum and not a contract for sale of
materials as such.
18. Patnaik & Co. (supra) related to a case of construction
of bus bodies on a chassis and the builder of the bus bodies
E had taken the responsibility to bear the loss, if any, till the
delivery of the chassis with bus bodies. The question arose
whether the assessee was liable to pay sales tax under the
Orissa Sales Tax Act, 1947 on the whole amount or entitled to
deduction from its gross turnover in respect of the amount
F received from the State Government for building bodies on the
chassis supplied by the Government. The majority decision
observed that it was a case of fixing chattel on chattel and there
was no .authority for the proposition that when a chattel was fixed
on another chattel, there was no sale of goods. The decision
G in Gannon Dunkerley-/ (supra) was distinguished on the ground
that it related to contract to construct a building and th_e property
did not pass in the materials as movables but the property in
the bus bodies passed as a movable property. Thus, it was not
H 29. AIR 1961 SC 1615.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 955
& ORS. [DIPAK MISRA, J.]
one but sum total of several reasons which was the foundation A
of the majority judgment in Patnaik & Co. (supra).
19. In the case of State of Gujarat v. Mis. Kai/ash
Engineering Co. (Pvt.) Ltd. 30 , the issue was whel_her the
construction of third class sleeper coaches by the respondent-
8
assessee on certain conditions amounted to a works contract
or it was a sale under the said State enactment. This Court,
taking into account all the terms of the contract and treating the
same as one entire and indivisible contract for carrying out the
works specified in full details in the agreement, and considering C
that it did not envisage either the sale of materials by the
respondent to the Railway, or of the coach bodies as such,
treated it as a works contract.
20. In The State of Madras v. Richardson & Cruddas
31
Ltd. , there was a postulate that a consolidated lump sum would D
be paid per ton for fabrication, supply and erection at site of
all steelwork, and there was no provision under the contract for
dissecting the value of the goods supplied and the value of the
remuneration for the work and labour bestowed in the execution
of the work and the predominant idea underlying the contract E
was bestowing of special skill and labour by the experienced
engineers and mechanics of the respondent. Taking into
consideration the said aspects and relying on the principles
stated in Clark v. Butmei32 , the Court held that the contract was
a works contract and not a contract for sale. F
21. in Man Industrial Corporation Ltd. (supra), which has
been taken note of in the referral order, this Court treated the
contract for providing and fixing four different types of windows
of certain sizes according to "specifications, designs, drawings
and instructions" set out in the contract as a contract for work G
and labour and not a contract for sale, for 'fixing' the windows
30. AIR 1967 SC 547.
31. (1968) 21 STC 245 (SC).
32. (184311 M & W. 243. H
956 SUPREME COURT REPORTS [2014] 5 S.C.R.
A to the building was not incidental or subsidiary to the sale, but
was an essential term of the contract. Similar view has been
expressed in Nenu Ram (supra).
22. In The State of Punjab v. Mis. Associated Hotels of
B India Ltd. 33 , the Constitution Bench, while dealing with the
construction of a contract of work and labour on the one hand
and contract for sale on the other, opined that the difficulty which
the Courts have often to meet in construing a contract of work
and labour, on the one hand, and a contract for sale, on the
other, arises because the distinction between the two is very
C often a fine one and it is particularly so when the contract is a
composite one involving both a contract of work and labour and
a contract of sale. The Court thereafter proceeded to state thus:
D "Nevertheless, the distinction between the two rests on a
clear principle. A contract of sale is one whose main object
is the transfer of property in, and the delivery of the
possession of, a chattel as a chattel to the buyer. Where
the principal object of work undertaken by the payee of the
E price is not the transfer of a chattel qua chattel, the contract ·
is one of work and labour. The test is wtiether or not the
work and labour bestowed and in anything that can pro1: ..1riy
become the subject of sale; neither the ownership ot
materials, nor the value of the skill and labour as compared
F with the value of the materials, is conclusive, although such
matters may be taken into consideration in determining,
in the circumstances of a particular case, whether the
contract is in substance one for work and labour or one
for the sale of a chattel 34 ."
G Be it stated, in the said case, the respondent-company
carried business as hoteliers and, as a part of its business, the
company received guests to whom .,
it furnished certain
33. (1972) 1 sec 472.
H 34. Halsbury's Laws of England 3'' Ed., Vol. 34, 6-7.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 957
& ORS. [DIPAK MISRA, J.]
amenities. The Court ruled that the transaction between a A
hotelier and a visitor was essentially one of contract of service
and facilities provided at reasonable price.
23. In State of Gujarat (Commissioner of Sales Tax,
Ahmadabad) v. Mis. Variety Body Builders35 , this Court, after
8
refefring to the passage from Halsbury's Laws of England,
Third Edition, Volume 34, page 6, ruled thus: -
"47. It can be treated as well settled that there is no
standard formula by which one can distinguish a contract
of sale from a contract for work and labour. There may be C
many common features in both the contracts, some neutral
in particular context, and yet certain clinching terms in a
given case may fortify a conclusion one way or the other.
It will depend upon the facts and circumstances of each
case. The question is not always easy and has for all time D
vexed jurists all over."
24. In Vanguard Rolling Shutters and Stu: Works'
case, the assessee manufactured rolling shutters according to
specifications given by the parties and fixed the same at the
E
premises of the customers. The assessee claimed that it was
not liable to sales tax on the ground that the amount received
by it represented the proceeds of works contract. When the
matter travelled to the High Court, it opined that the contracts
entered into by the assessee were not works contracts but
contracts for supply of goods simpliciter and the assessee was, F
therefore, liable to pay sales tax. While reversing the decision
of the High ·court, this Court took note of certain aspects,
namely, that the amount from the owner of the premises was
in lump sum without specifying as what part was meant for the
material and the fabricated part and what part was meant for G
service or labour put in by the contractor; that the materials as
supplied was not supplied by the owner so far as to pass as
chattel simpliciter, but actually affixing to one immovable
35. (1976) 3 sec 500. H
;
958 SUPREME COURT REPORTS [2014] 5 S.C.R.
A property and after they were fixed and erected, they became
permanent fixture so as to become an accretion to the
immovable property; and that the operation to be done at the
site could not be said to be merely incidental to the contract
but was a fundamental part of the contract. In this backdrop, it
B was ruled that the contract in question was not a pure and
simple sale of goods or materials as chattels but was a works
contract.
25. In Ram Singh & Sons Engineering Works (supra), the
assessee-manufacturer had entered into contracts for
C fabrication, supply and erection of overhead travelling cranes.
Under the contract, it was required to design, fabricate and
erect the machines at the customers' factories according to the
specifications given by the customers. The Court followed the •
principles laid down in Commissioner of Sales Tax, Madhya
D Pradesh v. Purshottam Premji3 5, Sentinel Rolling Shutters &
Engineering Co. (P) Ltd. (supra) and Man Industrial
Corporation (supra) and treated it as works contract on the
ground that the erection is a fundamental and integral part of
the contract, because without it, the 3-motion electrical overhead
r: travelling crane does not come into being. It was further
observed that the manufacturer would undoubtedly be the owner
of the component parts when he fabricated them, but at no
stage does he become the owner of the 3-motion electrical
overhead travelling crane as a unit so as to transfer the property
F in it to the custol'!.1er. Emphasis was laid on the fact that the 3-
motion electrical overhead travelling crane comes into
existence as a unit only when the component parts are fixed in
position and erected at the site, but at that stage, it becomes
the property of the customer because it is permanently
G embedded in the land belonging to the customer and, therefore,
there is no transfer of property in it by the manufacturer to the
customer as a chattel.
H 36. (1970) 2 sec 2a1.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 959
& ORS. [DIPAK MISRA, J.]
26~ In Hindustan Aeronautics Limited v. State of Orissa 37, A
the Court, while emphasizing that there is no rigid or inflexible ,
rule applicable alike to all transactions which can indicate
distinction between a contract for sale and a contract for work
and labour, opined that basically and primarily, whether a
particular contract was one of sale or for work and labour B
depended upon the main object of the parties in the
circumstances of the transaction.
27. The aforesaid authorities clearly show that a works
contract could not have been liable to be taxed under the State C
sales tax laws and whether the contract was a works contract
or a contract for sale of goods was dependent on the dominant
intention as reflected from the terms and conditions of the
contract and many other aspects. In certain cases, the court has
not treated the contract to be a works contract by repelling the
plea of the assessee after taking into consideration certain D
special circumstances. No straitjacket formula could have been
stated to be made applicable for the determination of the nature
of the contract, for it depended on the facts and circumstances
of each case. As the works contract could not be made
amenable to sales tax as the State Legislatures did not have E
the legislative competence to charge sales tax under Entry 48
List II of the Seventh Schedule of the Constitution on an
indivisible contract of sale of gopds which h~d component of
labour and service and it was not within the domain of the
assessing officer to dissect an indivisible contract to distinguish
the sale of goods constituent and the labour and service
F I
component. The aforesaid being the legal position, the
Parliament brought in the Forty-sixth Amendment by
incorporating Clause (29A) in Article 366 of the Constitution to
l!ndo the base of the Constitution Bench decision in Gannon G
Dunker/ey's-1 case.
28. To have a complete picture, we think it apt to reproduce
the said constitutional provision: -
37. (1984) 2 SCC16. H
960 SUPREME COURT REPORTS [2014] 5 S.C.R.
A "366 (29A) "tax on the sale ~r purchase of goods" includes
.. ·_,
(a) a tax on the transfer, otherwise than in pursuance of a
contraCt, of property in any goods for cash, deferred
payment or other valuable consideration;
B
(b) a tax on the transfer of property, in goods (whether as
goods or in some other form) involved in the execution of
a works contract;
c (c) a tax on the delivery of goods on hire pvrchase or any
system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for
any purpose (whether or .not for a specified period) for
~ash, deferred payment or other valuable consideration;
D
(e) a tax on the supply of goods by any unincorporated
association or body of persons to a member thereof for
cash, deferred payment or other valuable consideration;
E (f) a tax on the supply, by way of or as part of any ·service
or in any other manner whatsoever, of goods, being food
or any other article for human consumption or any drink
(whether or not intoxicating), where such supply or service,
is for cash, deferred payment or other valuable
consideration,
F
and such transfer, delivery or supply of any goods shall be
deemed to be a sale of those goods by the person making
the transfer, delivery or supply and a purchase or those
goods by the person to whom such transfer, delivery or
G supply is made;"
29. After the amendment in the Constitution, various States
amended their legislations pertaining to sales tax for levy of
sales tax on works contract. The constitutional validity of the
H Forty-Sixth Amendment by which the State Legislatures were
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 961
& ORS. [DIPAK MISRA, J.]
confei:red the competence to levy sales tax on certain A
transactions, as incorporated in sub-clauses (a) to (f) of Clause
(29A) of Article 366 of the Constitution as well as the
amendments made by the State Legislatures, were challenged
in Builders' Association (supra). The Constitution Bench took
note of the various problems which arose on account of the B
decisions in the field pertaining. to works contract and the
recommendations by the Law Commission in its 61 st Report
recommending for certain amendments in the Constitution so
as to levy sales tax on transactions of the nature which were
not liable to sales tax and the purpose of the amendment to c
bring many of the transactions in which property in goods
passed for the purpose of levy of sales tax within the scope of
power of the State to levy tax. The Constitution Bench also took
note of the amendments that were incorporated in clause (1)
of Article 269 and clause (3) of Article 286 and eventually
0
upheld the constitutional validity of the amendment. In that
context, the court observed that sub-clause (b) of clause (29-
A) states that 'tax on the sale or purchase of goods' includes,
among other things, a tax on the transfer of property in the
goods (whether as goods or in some other form) involved in E
the execution of a works contract, but does not say that a tax
on the sale or purchase of goods included a tax on the amount
paid for the execution of a works contract. It refers to a tax on
the transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract and
the latter part of clause (29A) of Article 366 of the Constitution F
makes the position very clear. Further, the Court explained the
constitutional validity of clause (29A) of Article 366 of the
Constitution by expressing thus:
".... a transfer of property in goods under sub-clause (b) G
of clause (29-A) is deemed to be a sale of the goods
involved in the execution of a works contract by the person
making the transfer and a purchase of those goods by the
person to whom such transfer is made. The object of the
new definition introduced in clause (29-A) of Article 366 H
962 SUPREME COURT REPORTS [2014] 5 S.C.R.
A of tile Constitution is, therefore, to enlarge the scope of 'tax
on sale or purchase of goods' wherever it occurs in the
Constitution so that it may include within its scope the
transfer, delivery or supply of goods that may take place
under any of the transactions referred to in sub-clauses (a)
B to (f) thereof wherever such transfer, delivery or supply
becomes subject to levy of sales tax. So construed the
expression 'tax on the sale or purchase of goods' in Entry.
54 of the State List, therefore, includes a tax on the transfer
of property in goods (whether as goods or in some other
c form) .involved in the execution of a works contract also."
After so stating, the Constitution Bench, observed that all
transfers, deliveries and supplies of goods referred to in
clauses (a) to (f) of clause (29-A) of Article 366 of the
Constitution are subject to the restrictions and conditions
D mentioned in clause (1.), clause (2) and sub-clause (a) of clause
(3) of Article 286 of the Constitution and the transfers and
deliveries that take place under sub-Clauses (b), (c) and (cf) of
. clause (29-A) of Article 366 of the Constitution are subject to
an additional restriction mentioned ·in sub-clause (b) of Article
E 286(3) of the Constitution. The Constitution Bench further
opined that it is open to the States· to segregate works contract
into two separate components or contracts by legal fiction,
namely, contract for sale of goods involved in the works contract
and for supply of labour and service.
F
30. At this juncture, the pronouncement in M/s Gannon
Dunkerley and Co. and others v. State of Rajasthan- and
others38 is necessary-to be noted. While dealing with the various
submissions of the counsel for the States, the Constitution
G Bench referred to the Builders' Association case wherein it
has been clearly stated that the tax leviable by virtue of sub-
clause (b) of clause (29A) of Article 366 of the Constitution
becomes subject to the same discipline to which any levy under
H 38. (1993)' 1 sec 364.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 963
& ORS. [DIPAK MISRA, J.]
Entry 54 of the State List is made subject to \Under the A
Constitution. After so stating, the Court did not think it
appropriate to reopen the issues which were covered under the
Builders' Association case and proceeded to deal with the
matter in accordance with the law laid down in that case.
B
31. Be it noted, the Constitution Bench, in Gannon
Dunkerley-// (supra), has unequivocally restated and
reaffirmed the principle that the States have legislative power
to impose tax on the transfer of property in goods or in some
other form in the execution of works contract and they have also C
the power to bifurcate the contract and levy sales tax on the
value of materials used in the execution of the works contract,
regard being had to the principle that the State Legislatures
have been empowered under Clause (29A) of Article 366 to
levy ta.x on the deemed sales. We may state with profit that
certain principles have been laid down in the said decision to D
which we shall refer to at the appropriate stage.
32. Having dealt with the aforesaid authorities, as advised
at present, we shall refer to certain authorities as to how the
term ''works contract" has been understood in the contextual E
perspective post the constitutional amendment. In Hindustan
Shipyard Ltd. (supra), the Court observed that the distinction
between a contract of sale and a works contract is not free from.
difficulty and has been the subject-matter of several judicial
decisions. It is further observed that neither any straitjacket F
formula can be made available nor can such quick-witted tests
devised as would be infallible, for it is all a question of
determining the intention of the parties by culling out the same
on an overall reading of the several terms and conditions of a
contract. Thereafter, the two-Judge Bench set out three G
categories of contracts and explained the contours, namely, (1)
the contract may be for work to be done for remuneration and
for supply of materials used in the execution of the work for a
price; (i1) it may be a contract for work in which the use of the
materials is accessory or incidental to the execution of the work; H
964 SUPREME COURT REPORTS [2014] 5 S.C.R.
A and (iir) it may be a contract for supply of goods where some
work is required to be done as incidental to the sale.
Thereafter, it opined that the first contract is a composite
contract consisting of two contracts, one of which is for the sale
of goods and the other is for work and labour; the second is .
B clearly a contract for work and labour not involving sale of
goods; and the third is a contract for sale where the goods are
sold as chattels and the work done is merely incidental to the
sale.
33. Commenting on the said decision in Larsen and
c Toubro (supra), a three-Judge Bench opined that after the 46th
•
Amendment, the thrusts laid down therein are not of much help
in determining whether the contract is a works contract or a
contract for sale of goods. We shall elaborate the perception
as has been stated in Larsen and ToubFo (supra) at a later
D stage.
34. In Bharat Sanchar Nigam Ltd. (supra), a three-Judge
Bench was concerned with the question of the nature of the
transactiqn with regard to whether mobile phone connections
E which are enjoyed, is a sale or is a service or both. Though the
context pertained to the meaning of the term "goods" under
Article 366(29A), yet the Court referred tcr the case in
Associated Cement Companies Ltd. v. Commissioner of
Customs39 and stated thus: -
F
"After the Forty-sixth Amendment, the sale element of
those contracts which are covered by the six sub-clauses
of clause (29-A) of Article 366 are separable and may be
subjected to sales tax by the States under Entry 54 of List
II and there is no question of the dominant nature test
G applying. Therefore when in 2005 C.K. Jidheesh v. Union
of lndia 40 held that the aforesaid observations in
Associated Cement were merely obiter and that Rainbow
H 39. (200.1) 4 sec 593.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 965
& ORS. [DIPAK MISRA, J.]
Colour Lab v. State of M.P. 41 was still good law, it was not A
correct."
35. We have referred to the aforesaid decision only to
point out that the "dominant nature test" relating to the. works
contract that gets covered under Article 366(29A) of the
8
Constitution has been held therein to be not applicable. •
36. In K. Raheja Development Corporation v. State of
Karnataka 42 , the appellants were involved in carrying on
business of real estate development and allied contracts and
had entered into development agreement with the owners of C
the land. They had entered into agreement with the intended
purchasers for residential apartments and/or commercial
complexes. The agreement provided that on completion of the
construction, the residential apartments or the commercial
complexes would be handed over to the purchasers who would D
get an undivided interest in the land also with the further
condition that the owners of the land would then transfer the
· ownership directly to the society which was being formed under
the State Legislation. The question that arose for consideration
was whether the appellants, the dealers, were liable to pay E
turnover tax under the Karnataka Sales Tax Act. Their returns
were not accepted by the adjudicating authority and they were
assessed to sales tax. Facing failure at all levels including the
High Court, the appellant preferred an appeal by way of special
leave. The two-Judge Bench considered the scope of Section F
2(1)(u-1) of the Karnataka Sales Tax Act and other provisions
and, considering the wide amplitude of the definition of "works
contract" in the Act, interpreted the contract and came to hold
that the contract remained a works contract within the meaning
of the term as defined under the said Act. The Bench further
G
clarified that if the agreement was entered into after the flat or
unit was already constructed, then there would be no works
40. (2000) 13 sec 37.
41. (2005) 2 sec 385.
42. (2005) 5 sec 162. H
969 SUPREME COURT REPORTS. [2014) 5 $.C.R.
'
A contract. But so long as the agreement was entered into before
the construction was completed, it would be a works contract.
We may hasten to add that the aforesaid decision has been
approved to have been laying down the correct legal position
in Larsen and Toubro (supra).
B
,37. In State of U.P. and others v. P.N.C. Construction Co.
Ltd. and others 43 , the raw materials were bought by the
assessee which were used in the manufacture of hot mix utilized
for road construction. The question that emanated before the
Court was whether, on the said facts, the Department was right
C in denying the benefit of recognition certificate as contemplated
under Section 48 of the U.P. Trade Tax Act, 1948. In that context,
it was observed that after the introduction of sub-clause (b) of
Clause 29-A in Article 366, the emphasis is on the expression
"transfer of property in goods (whether goods as such or in
D some other form)" and, therefore, the works contract which is
an indivisible contract is, by a legal fiction, divided into two
parts-one for sale of goods and the other for supply of labour
and services, which has made it possible for the States to levy
sales tax on the value of the goods involved in a works contract
E in the same way in which the sales tax was leviable on the price
of the goods supplied in a building contract, for the concept of
"value addition" comes in.
· 38. Reference to the aforesaid authorities is for the
F purpose that post the constitutional amendment, the Court has
been interpreting a contract of work, i.e., works contract in the
constitutional backdrop. In certain cases, which involve transfer
of property and also an element of service in the context of work
rendered, it has been treated as works contract.
G 39. The essential characteristics have been elucidated by
a three-Judge Bench in Larsen and Toubro (supra) thus: -
1 "As the very title of Article 366 shows, it is the definition
H 43. (2007) 7 sec 320.
I
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 96/,:
& ORS. [DIPAK MISRA, J.]
clause. It starts by saying that in the Constitution unless the· A
context otherwise requires the expressions defined in that
article shall have the meanings respectively assigr:ied to
them in the article. The definition of expression "tax on sale
or purchase of the goods" is contained in clause (29-A). If
the first part of clause (29-A) is read with sub-clause (b) B
along with latter part of this clause, it reads like this: "tax
on the sale or purchase of the goods" includes a tax on
the transfer of property in goods (whether as goods or in
some other form) involved in the execution of a works
contract and such transfer, delivery or supply of any goods c
shall be deemed to be a sale of those goods by the person
making the transfer, delivery or supply and a purchase of
those goods by the person to whom such transfer, delivery
or supply is made. The definition of "goods" in clause (12)
is inclusive. It includes all materials, commodities and
0
articles. The expression "goods" has a broader meaning
,,than merchandise. Chattels or movables are goods within
the meaning of clause (12). Sub-clause (b) refers to
transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract. E
The expression "in some other form" in the bracket i.s of
utmost significance as by this expression the ordinary
understanding of the term "goods" has been enlarged by
bringing within its fold goods in a form other than goods.
Goods in some other form would thus mean goods which
have ceased to be chattels or movables or merchandise F
and become attached or embedded to earth. In other
words, goods which have by incorporation become part
of immovable property are deemed as goods. The
definition of "tax on the sale or purchase of goods" includes
a tax on the transfer of property in the goods as goods or G' .
which have lost its form as goods and have acquired some
other form involved in the execution of a works contract."
40. On the basis of the aforesaid elucidation, it has been
deduced that a transfer of property in goods under Clause H
968 SUPREME COURT REPORTS [2014] 5 S.C.R.
A (29A)(b) of Article 366 is deemed to be a sale of goods involved
in the execution of a works contract by the person making the
transfer and the purchase of those goods by the person to
whom such transfer is made. One thing is significant to note
that in Larsen and Toubro (supra), it has been stated that after
B the constitutional amendment, the narrow meaning given to the
term "works contract" in Gannon Dunkerley-I (supra) no
longer survives at present. It has been observed in the said
case that even if in a contract, besides the obligations of supply
of goods and materials and performance of labour and
c ~ervices, some additional obligations are imposed, such
contract does not cease to be works contract, for the additional
obligations in the contract would not alter the nature of the
contract so long as the contract provides for a contract for works
,and satisfies the primary description of works contract. It has
been further held that once the characteri:sucs or elements of
0
works contract are satisfied in a contract, then irrespective of
additional obligations, such contract would be covered by the
term "works contract" because nothing in Article 366(29-A)(b)
limits the term "works contract" to contract for labour and
E service only.
41. In the said case, another significant aspect has been
·considered. That relates to the "dominant nature test". We think
it apt to reproduce what has been stated in Larsen and Toubro
. (supra):-
F
"Whether the contract involved a dominant intention to
transfer the property in goods, in our view, is not at all
material. It is not necessary to ascertain what is the
dominant intention of the contract. Even if the dominant
intention of the contract is not to transfer the property in
G
goods and rather it is the rendering of service or the
ultimate transaction is transfer of immovable property, then
also it is open to the States to levy sales tax on the
materials used in sucl1 co11tract if it otherwise has
elements of works contract. .. "
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 969
& ORS. [DIPAK MISRA, J.]
42. At this juncture, it is condign to state that four concepts A
have clearly emerged. They are (i) the works contract is an
indivisible contract but, by legal fiction, is divided into two parts,
one for sale of goods, and the other for supply of labour and
services; (ii) the concept of "dominant nature test" or, for that
matter, the "degree of intention test" or "overwhE21ming 8
component test" for treating a contract as a works contract is
not applicable; (iii) the term "works contract" as used in Clause
(29A) of Article 366 of the Constitution takes in its sweep all
genre of works contract and is not to be narrowly construed to
cover one species of contract to provide for labour and service C
alone; and (iv) once the characteristics of works contract are
met with in a contract entered into between the parties, any
additional obligation incorpora~ed in the contract would not
change the nature of the contract.
43. Having noted the conceptual telescopic arena of the D
term "works contract" and the principles we have stated
hereinabove, it is necessitous to refer to how the installation of
a lift was understood and treated prior to the decision in Kone
Elevators case. In Otis Elevator (supra), a contract was entered
into between the parties for supply and installation of two lifts E
and in pursuance of the contract, the assessee duly erected and
installed two lifts in accordance with the terms of the contract
and, eventually, the lifts were handed over to-the customer. The
question arose for determination whether sales tax was payable
by the applicant therein in res~ect of the said contract. It was F
contended that it was an entire and indivisible contract for the
erection and installation of lifts and the materials furnished were
only in execution of the works contract and there was no sale
of goods and materials by them. The learned Deputy
Commissioner of Sales Tax came to hold that though the G
contract was one and indivisible contract and of lump sum
value, yet in essence, it was to transfer the property in the
goods for money consideration and so, the contract involved a
sale of lifts. When the matter travelled to the Sales Tax Tribunal,
it concurred with the view expressed by the Deputy H
970 SUPREME COURT REPORTS [2014) 5 S.C.R.
A Commiss:oner of Sales Tax. It was observed by the Tribunal
that the amount or price of the materials supplied was
overwhelming as compared to the amount agreed upon for
labour and service and that apart, the price of the materials
•
supplied was subject to adjustment. It was further held by the
8 Tribunal that the intention of the parties was that there was a
sale qua lifts for money consideration and there was also to
be the installation of those lifts by the applicants. On a reference
being made by the Tribunal, the High Court scanned the terms
of the contract and took note of certain facts, namely, that
C detailed provisions were given regarding the dimensions and
travel of the car, the load and speed of the elevator, the type of
the platform and the car enclosure, and what the car was to
consist of, as also of the place where the machine was to be
located, viz., above the hoistway upon rolled steel joists to be
provided to the elevator; that the car-frame was to be made of
D structural steel and equipped with suitable guides and an Otis
car safety device; that the counterbalance was also to be of a
suitably guided structural steel frame with appropriate filler
weights which would be furnished to promote smooth and
economical operation; that terminal limit switches were to be
E provided to slow down and stop the car automatically at the
terminal landing and final limit switches were to be furnished
to automatically cut off the power and apply the brake, should
the car travel beyond the terminal landings; that there was a
reference to terminal buffers; that Otis spring buffers were to
F be installed as a means for stopping the car and counterweight
at the extreme limits of travel; that there were provisions
regarding the machine, brake and motor; that the motor was
to be of Otis design and manufacture, or equivalent suited to
the service proposed and arranged for ample lubrication; that
G there were also provisions regarding sheaves and beams; that
the contract also made provisions for a special operating
device in the car and at hoistway landings; that for the actual
operation of the car, a provision was made for the car door or
gate, hoistway doors and alarm bell; and that the contract
. H specifically provided for the item of maintenance. The High
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 971
& ORS. [DIPAK MISRA, J.]
Court referred to various components of the price and, after A
referring to Richardson and Cruddas Ltd. (supra), opined that
after the lifts were properly erected and installed in the building,
they became permanent fixtures of the premises. The Court
took note of the terms of the agreement and held that the terms ·
in the agreement were also indicative of the fact that the whole B
contractual obligation was not divisible in parts, and was
intimately connected with the labour and services undertaken
by the applicants in erecting and installing the apparatus. After
so stating, the Court observed that the work of erection and
installation of an apparatus like the lift in a huge building, which c
has to carry passengers to several floors, is a type of work
which calls for considerable skill and experience and the
technical skill and precision in execution of the work is
absolutely essential if satisfactory services are to be rendered
by the person who undertakes such work. Eventually, the High 0
Court ruled that it would be difficult to hold that the mere use of
the material, or the ultimate passing of property in the article
or apparatus as a result of the execution of the contract, will
make it p'ossible to sever the agreement into two parts, one
for the sale of goods, and the other for services rendered, for E
the two are so intimately connected that severance is not
possible in such cases and, in fact, it was an indivisible contract.
44. The aforesaid decision makes it limpid how many
facets are to be taken care of for the purpose of installation of
the elevator, regard, being had to its technical facet, safety F
device and actual operation. That apart, the decision has taken
note of the fact that upon the installation of the lift in the building,
it becomes a permanent fixture in the premises and that the
involvement of technical skill and experience pertain to the
precisio"n in execution for rendering satisfactory service and the G
obligation to maintain which are integral to the supply and
installation.
45. In this backdrop, we shall now proceed to deal with the
submissions advanced by the learned counsel for the
H
972 SUPREME COURT REPORTS [2014] 5 S.C.R.
A respondents which we have already noted. The fundamental
submission of Mr. Dwivedi is that the manufacturer of the lift
retains ownership iri the components as property while
producing the completed lift an~. hence, it would be a case of
pw-e manufacture. A distinction has been sought to be made
B that if another agency is appointed to install, it does not have
the ownership of the components. To bolster the basic
submission, as we find, he has referred to various facets. The
said proponement, as we understand, is based on the
assumption that the supplier remains the owner of the
c components as per the contract; that the manufacture is a
process or activity which bripgs in existence new identifiable
and distinct component; that installation is an integral part of
the manufacturing process and proceeds from the manufacture
of the components themselves; that the concept of permanent
fixture to a building cannot be enlarged to such an extent to put
0
it in the realm of works contract or to take it away from the
conceptual meaning of manufacture. We have already dealt
with the principles stated in Patnaik and Co. (supra), Hindustan
Aeronautics Ltd. (supra), T. V. Sundaram Iyengar (supra),
Kai/ash Engineering Co. (supra) and the observations made
E by Sikri, J., in Patnaik & Co. (supra) wherein the decision in
Anglo-Egyptian Navigation Co. v. Rennie 44 was distinguished
by stating that whenever a contract provides for the fixing of a
chattel to another chattel, there is no sale of goods. Be it noted,
in Patnaik & Co. (supra), an illustration was given that when a
F dealer fits tyres supplied by him to the car of the customer, it
would tantamount to sale of the tyres by the dealer to the
customer. In these cases, the Court was really dealing with the
terms. of the contract contextually to come to a conclusion as
to whether the contract in question was a contract for sale or a
G works contract. The fundamental principle that was applied is
that what was sold was a chattel as chattel or the contract was
a composite one on a different base/foundation.
H 44. (1875) LR 10 CP 271.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 973
& ORS. [DIPAK MISRA, J.]
46. The other decisions which have been relied upon by A
Mr. Dwivedi to show that installation is a part of the
manufacturing process are J. Marcel (Furriers) Ltd. (supra),
Cen_tral India Machinery Manufacturing Company Ltd. (supra),
Norman Wright (Builders) Ltd. (supra), Titan Medical Systems
(supra}, MIL India Ltd. (supra), Eastend Papers Industries Ltd. B
(supra) and Aspinwall & Co. (supra). In J. Marcel (Furriers) Ltd.
(supra}, the plaintiff had kept a stock of furs made up ready for
sale and they also made up furs, coats, jackets, and boleros
for customers. An order was placed by the defendant for a
mutation mink jacket. As the jacket was not up to mark, it was c
rejected by the defendant. In that context, the Court observed
that though huge degree of skill and craftsmanship had gone
into making up of a fur jacket as was made for the defendant,
yet it was no more than making an article for sale to the
defendant on a special order and the transaction, in fact, 0
related to sale of a complete article and the receipt of the price.
47. In Norman Wright (Builders) Ltd. (supra}, an
agreement was entered into by the appellant for fixing of black-
out curtains at some London police stations. The appellant-
plaintiff contended before the Court that the fixing of curtains E
was not a sale of goods but a contract for work and labour and
the supply of material in connection therewith. Repelling the
said submission, it was held that as the contract involved
transferring chattels, namely, curtains to the defendants for a
price, in which they had no previous right, it was a sale of F
goods.
48. Name Tulaman Manufacturers Pvt. Ltd., Hyderabad
v. Collector of Central Excise, Hyderabad 45 , Eastend Paper
Industries Ltd. (supra}, Aspinwall & Co. Ltd. (supra), MIL India G
Ltd. (supra) and Sirpur Papers Mills Ltd. (supra) are the
decisions under the Central Excise Act, 1944 which are really
not of relevance as they relate to the conr.ept, term and
45 (19R 0 ' 1 .sec 1 n. H
I .
974 SUPREME COURT REPORTS [2014] 5 S.C.R.
A expression "manufacture" as used and understood under the
said Act. The concept of "manufacture" has limited relevance
and cannot be a determining factor to decide whether the
contract is one for supply of goods or is a composite contract.
In Name Tulaman Manufacturers Pvt. Lttf. (supra), installation
B of weighbridges was held to be manufacture for the purpose
of excise duty, observing that th'e assessee was obsessed with
the idea that part of the machinery was liable to duty but the
whole of the product was not dutiable as excisable goods.
Similarly, in Aspinwall & Co. (supra), curing of coffe·e, it was
C held, amounts to manufacture, as a new and distinct commodity
of independent identity, distinct from raw material, had come
into existence. In Sirpur Paper Mills Ltd. 's case, the question
arose whether paper making machine was an immovable
prope.rty as it was embedded on the earth and, therefore, not
exigible to excise duty. This Court opined that paper making
0
m?chine was exigible to excise duty as the whole machine
could be dismantled and it was attached to the earth only for
operational efficiency. Though the entire machine was
assembled from various components, yet, by itself, it was a new
marketable commodity that had emerged as a result of the
E manufacturing activity. The aforesaid decisions cannot be taken
aid of to come to a conclusion that installation is assembling
and, in the ultimate eventuate, it is a part of the manufacturing
process. We are disposed to think so as there is a fundamental
fallacy in the submission as far as installation of the lift is
F concerned. It is not a plant which is erected at the site. It is not
a different item like coffee which comes into the market after
processing. It is also not like a "weighbridge" as is understood
under the excise law. It has to be understood in the conceptual
context of the manufacture and installation of a lift in a building.
G The lift basically comprises components like lift car, motors,
ropes, rails, etc. having their own identity even prior to
installation. Without installation, the lift cannot be mechanically
functional because it is a permanent fixture of the building
having been so designed. These aspects have been elaborately
H distussed in Otis Elevator (supra) by the High Court of
......
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 975
& ORS. [DIPAK MISRA, J.]
Bombay. Therefore, the installation of a lift in a building cannot A
be regarded as a transfer of a chattel or goods but a composite
contract. Hence, we unhesitatingly hold that the said decisions
are not of much help to the learned sehior counsel for the State
of Orissa.
B
49. Coming to the submissions of Mr. Venkataramani, we
find that the fundamental facet of the contention is based on
the principle of "deliverable state" and the intention of the
purchaser to obtain an identifiable product or goods and the
said identified product comes into being after the components C
are fixed at the site to make the lift usable. As submitted, the
rendering of service is only to make the lift deliverable. The
aforesaid submission, on proper appreciation, really rests on
the bedrock of incidental or ancillary service involved in the
installation of lift. We shall deal with this aspect when we
address more elaborately to the dominant nature test and the D
incidental service in the context of clause 29A(b) of Article 366
of the Constitution.
50. As far as the submission put forth by the learned
counsel for the State of Gujarat, it is based on the edifice that E
the "dominant nature test" is still available in view of the
decisions in Bharat Sanchar (supra) and Larsen and Toubro
(supra). On a careful reading of the written note of submission
of the learned counsel for the State of Gujarat, we find that the
learned counsel have not appositely understood the ratio laid • F
down in the aforesaid authorities. Reliance was placed on para
45 of the decision in Bharat Sanchar (supra). It is noticeable
that the Court was analyzing the principle stated in Gannon
Dunkerley-I (supra) and thereafter, in para 49, which we have
reproduced hereinabove, it has been clearly held that after the G
Forty Sixth Amendment of the Constitution, the works contract
which is covered under Clause (29A)(b) of Article 366 of the
Constitution is separable and may be subject to sales tax by
the State under Entry 54 of List-II and there is no question of
the dominant nature test being applicable. Thus, the submission H
97.6 SUPREME COURT REPORTS [2014] 5 S.C.R.
I
A is absolutely misconceived.
51. The submission of Dr. Manish Singhvi, learned counsel
for the State of Rajasthan, primarily rests on the base that
decisions which have been discussed in the referral order, do
not lay down the correct law. In our considered opinion, the
9
judgments rendered in the said cases rested on the nature of
the contract and the tests laid down in Gannon Dunkerley-I
(supra). We see no reason to hold that the said decisions do
not lay down the correct law in the context of works contract as
it was understood and treated prior to the Forty Sixth
C Amendment.
,
52. Coming to the stand and stance of the State of
Haryana, as put forth by Mr. Mishra, the same suffers from two
basic fallacies, first, the supply and installation of lift treating it
D as a contract for sale on the basis of the overwhelming
component test, because there is a stipulation in the contract
that the customer is obliged to undertake the work of civil
construction and the bulk of the materia·I used in construction
belongs to the manufacturer, is not correct, as the subsequent
E discussion would show; and second, the notification dated 17th
May, 2010 issued .by the Government of Haryana, Excise and
Taxation Department, whereby certain rules of the Haryana
Value Added Tax Rules, 2003 have been amended and a table
has been annexed providing for "Percentages for Works
F Contract and Job Works" under the heading '~Labour, service
and other like charges as percentage of total value of the
contract" sr;iecifying 15% for fabrication and installation of
elevators (lifts) and escalators, is self-contradictory, for once it
is treated as a composite contract invoking labour and service
as a natural corollary, it would be works contract and not a
G contract for sale. To elaborate, the submission that the element
of labour and service can be deductec;I from the total contract
value without treating the composite contract as a works
contract is absolutely fallacious. In fact, it is an innovative
subterfuge. We are inclined to think so as it would be frustrating
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 977
& ORS. [DIPAK MISRA, J.]
the constitutional provision and, accordingly, we unhesitatingly A
repel the same.
53. As far as submissions of Mr. K.N. Bhat, learned senior
counsel for the State of Karnataka, and Mr. P.P. Malhotra,
learned Additional Solicitor General, are concerned, as their B
stand is that the decision in Kone Elevators (supra) is not
correct, we have only noted that for completeness.
54. ·Having dealt with the submissions advanced by the
learned counsel for various States and the learned Additional
Solicitor General for the Union of India, we shall presently C
proceed to deal with the correctness of the legal position as
stated in Kone Elevators case. In the said case, a three-Judge
Bench. took note of the submissions on belJalf of the
Department that the main object of the contract in question was
to sell the lifts and the works done by the assessee for D
installation was incidental to the sale of lifts. It had also taken
note of the submission that the legislature has classified the
commodity "lift" under Entry 82 of the First Schedule to the
Andhra Pradesh General Sales Tax Act, 1957 keeping in mind
that the word "installation" was ancillary to the "sale" of lifts. The E
Court, while dealing with the differentiation between "contract
for sale" and "works contract", opined thus: -
"5. It can be treated as well settled that there is no standard
formula by which one can distinguish a "contract for sale"
F
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 thereunder 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, G
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
H
978 SUPREME COURT REPORTS [2014] 5 S',C.R.
A 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
is: when and how the property of the dealer in such a
transaction passes to the customer: is it by transfer at the
B 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, 1t 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
c the transaction as a whole has to be taken into
consideration. The predominant object of the contract, the
. circumstances of the case and the custom of the trade
· provide a guide in deciding whether transaction is a "sale"
or a "works contract". Essentially, the question is of
D
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
E 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
F of the contract between the parties."
55. After so stating, the three-Judge Bench adverted to the
definitions in the State Act, referred to the decision in Gannon
Dunkerley-I (supra), placed reliance on the decision in
G Hindustan Shipyard Ltd. (supra) and, analyzing the principle
stated therein, observed thus: -
1'9. In the case of Hindustan Shipyard Ltd. v. State of A.P.
this Court held that if the thing to be delivered has any
Individual existence before the delivery as the sole
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 979
& ORS. [DIPAK MISRA, J.]
property of the party who is to deliver it, then it is a sale. If A 1
the bulk of material used in construction belongs to the
manufacturer 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 B
material alone but the relative importance of the material
qua the work, skill 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 c
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 D
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."
56. Applying the above test, the learned Judges referred E
to the terms of the contract and took note of the fact 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 would the assessee undertake installation of
lift if the site was not kept ready by the customer inasmuch as F
under clause 4(g) of the "Customers' Contractual Obligations",
the assessee reserved the right to charge the customer for
delay in providing the required facilities. The Court· observed
that these facts clearly indicated that the assessee divided the
execution of the contract into two parts, namely, "the work" to G
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 and the said
"supply" part included installation of lift: Therefore, the learned H
980 SUPREME COURT REPORTS [2014) 5 S.C.R.
A Judges further observed that the contractual obligation of the
assessee was only to supply and install the lift, while the
customer's obligation was to undertake the work connected in
keeping the site ready for installation as p~r the drawings. The
Court took note of the contractual obligations of the customer
B 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 and ruled that it
was clear that the transaction in question was a contract of
"sale" and not a "works contract". The Cou~ perused the
c brochure of the assessee Company and noticed that the
assessee was in the business of manufacturing of various types
of lifts, namely, passenger lifts, freight elevators, transport
elevators and scenic lifts and a combined study of the above
models, mentioned in the brochure, indicated that the assessee
had been exhibiting various models of lifts for sale and the said
0
lifts were being sold in various colours with various capacities
and variable voltage. From the further analysis, it is manifest
that the Court took into account the fact that it was open for a
prospective buyer to place purchase order for supply of lifts as
per' his convenience and choice and ruled that the assessee,
E on facts, satisfied the twin requirements to attract the charge
of tax under the 1957 Act, namely, that it carried on business
of selling the lifts and elevators and it had sold the lift~ and
elevators during the relevant period in the course of its business.
To strengthen the conclusion, it has been held that the major
F 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 are only incidentally used.
'
G ' 57. From the aforesaid decision, it is perceptible that the
.three-Judge Bench has drawn distinction between the contract
for safe and works contract and, in that context, the essence of
the contract or reality of the transaction aS! a whole, regard
being had to the predominant object of the contract, the
H circumstances of the case and the custom of the trade have
)
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 981
& ORS. [DIPAK MISRA, J.]
been taken into consideration. In that context, the learned A
Judges have opined that it is not the bulk of the material al'one
but the relevant importance of the material qua the work, skill
and labour of the payee which also has to be seen and if the
major component of the end product is the material consumed
in producing the chattel to be delivered and skill and labour are B
employed for converting the main corjiponents into the end
product, the skill and labour are only incidentally used and the
delivery of the end product by the seller to thi(buyer would
constitute a sale. On the aforesaid principle, the three-Judge
Bench has finally ruled that a dealer carries on business of c
selling lifts and elevators and 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 are incidentally used and,
therefore, the delivery of the end product by the assessee qua
0
the customer has to be constituted as a sale and not a works
contract.
58. To understand the reasons ascribed in the said
decision, it is requisite to appreciate the principle relating to
the overwhelming component test or major component test. We E
have already referred to the decision in Bharat Sanchar (supra)
wherein it has been clearly stated that the dominant nature test
has no application. The said principle has been reiterated in
Larsen and Toubro (supra) by stating thus: -
F
"87. It seems to us (and that is the view taken in some of
the decisions) that a contract may involve both a contract
of work and labour and a contract of sale of goods. In our
opinion, the distinction between contract for sale of goods
~nd contract for work (or service) has almost diminished G
in the matters of composite contract involving both a
contract of work/labour and a contract for sale for the
purposes of Article 366(29-A)(b). Now by legal fiction
under Article 366(29-A)(b), it is permissible to make such
contract divisible by separating the transfer of property in
H
982 SUPREME COURT REPORTS [2014] 5 S.C.R.
A goods as goods or in some other form from the contract
of work and labour. A transfer of property in goods under
clause (29-A)(b) of Article 366 is deemed to be a sale of
goods involved in the execution of a works contract by the
person making the transfer and the purchase of those
B goods by the person to whom such transfer is made, For
this reason, the traditional decisions which hold that the
substance of the contract must be seen have lost their
significance. What was viewed traditionally has to be now
understood in light of the philosophy of Article 366(29-A)."
c xxx xxx xxx
"97 .5. A contract may involve both a contract of work and
labour and a contract for sale. In such composite contract,
the distinction between contract for sale of goods and
D contract for work (or service) is virtually diminished.
97.6. The dominant nature test has no application and the
traditional decisions which have held that the substance
of the contract must be seen have lost their significance
where transactions are of the nature contemplated In
E
Article 366(29-A). Even if the dominant intention of the
contract is not to transfer the property in goods and rather
it is rendering of service or the ultimate transaction is
transfer of immovable property, then also it is open to the
States to levy sales tax on the materials used in such
F contract if such contract otherwise has elements of works
contract. The enforceability test is also not determinative."
59. It is also necessary to state here that in Larsen and
11,oubro (supra), the question arose whether taxing of sale of
G goods in an agreement for sale of flat which is to be constructed
by the developer-promoter is permissible under the
Constitution. The three-Judge Bench opined that though the
ultimate transaction between the parties may be sale of the flat,
yet it cannot be said that the characteristics of works contract
H cjre not involved in that transaction because the term "works
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 983
& ORS. [DIPAK MISRA, J.]
contract" is nothing but a contract in which one of the parties is A
obliged to undertake OF. to execute the work and such an activity
of construction bears all the characteristics and elements of
works contract. In that context, in paragraph 107 of the decision,
reliance was placed on Builders' Association (supra) wherein
the contention that a flat is sold as a flat and not as an 8
aggregate of its component parts was negated on the ground
that the properties that were transferred to the owner in the
execution of the works contract are not goods involved in the
execution of the works contract, but a conglomerate, that is, the
entire building which is actually constructed. c
60. The aforesaid analysis has to be understood on the
anvil of Article 366 (29A) of the Constitution. In this regard, we
may fruitfully reproduce a passage from Builders' Association
case: -
D
"... After the 46th Amendment the works contract which
was an indivisible one is by a legal fiction altered into a
cdntract which is divisible into one for sale of goods and
the other for supply of labour and services. After the 46th
Amendment, it has become possible for the States to levy E
sales tax on the value of goods involved in a works contract
in the same way in which the sales tax was leviable on the
price of the goods and materials supplied in a building
contract which had been entered into in two distinct and
separate parts as stated above." F
61. Explaining the said passage, the Constitution Bench,
in Gannon Dunkerley-I/ (supra), has opined thus:-
"This would mean that as a result of the Forty-sixth
Amendment, the contract which was single and indivisible G
has been altered by a legal fiction into a contract which is
divisible into one for sale of goods and other for supply of
labour and services and as a result such a contract which
was single and indivisible has been brought on a par with
a contract containing two separate agreements." H
984 SUPR~ME COURT REPORTS [2014] 5 S.C.R.
A 62. It has been further observed therein as follows: -
"36. If the legal fiction intFOduced by Article 366(29-A)(b)
is carried to its logical end it follows that even in'a single
and indivisible works contract there is a deemed sale of
the gaods which are involved in the execution of a works
B
contract. Such a deemed sale has all the incidents of a
.sale of goods involved in the execution of a works contract
where the contract is divisible into one for sale of goods
and the other for supply of labour and services."
I
C 63. Considered on the touchstone of the aforesaid two
Constitution Bench decisions, we are of the convinced opinion
that the principles stated in Larsen and Toubro (supra) as
reproduced by us hereinabove, do correctly enunciate the legal
position. Therefore, "the dominant nature test" or "overwhelming
D component test" or "the degree of labour and service test" are
really not applicable. If the contract is a composite one which
falls under the definition of works contracts as engrafted under
clause (29A)(~) of Article 366 of the Constitution, the incidental
part as regards labour and service pales into total
E insignificance for the purpose of determining the nature of the
contract.
64. Coming back to Kone Elevators (supra), it is
perceivable that the three-Judge Bench has referred to the
statutory provisions of the 1957 Act and thereafter referred to
F the decision in Hindustan Shipyard Ltd. (supra), and has further
taken note of the customers' obligation to do the civil
construction and the time schedule for delivery and thereafter
proceeded to state about the major component facet and how
the skill and labour employed for converting the main
G components into the end product was only incidental and
arrived
I
at the conclusion that it was a contract for sale. The
principal logic applied, i.e., the incidental facet of labour and
service, according to us, is not correct. It may be noted here
tha,t in all the cases that have been brought before us, there is
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 985
& ORS. [DIPAK MISRA, J.]
a composite contract for the purchase and installation of the A
lift. The price quoted is a composite one for both. As has been
held by the High Court of Bombay in Otis Elevator (supra),
various technical aspects go into the installation of the lift. There
has to be a safety device. In certain States, it is controlled by
the legislative enactment and the rules. In certain States, it is B
not, but the fact remains that a lift is installed on certain norms
and parameters keeping in view numerous factors. The
installation requires considerable skill and experience. The
labour and service element is obvious. What has been taken
note of in Kone Elevators (supra) is that the company had c
brochures for various types of lifts an'tl one is required to place
order, regard being had to the building, and also make certain
preparatory work. But it is not in dispute that the preparatory
work has to be done taking into consideration as to how the
lift is going to be attached to the building. The nature of the 0
contracts clearly exposit that they are contracts for supply and
installation of the lift where labour and service element is
involved. Individually manufactured goods such as lift car,
motors, ropes, rails, etc. are the components of the lift which
are eventually installed at the site for the lift to operate in the E
building. In constitutional terms, it is transfer either in goods or
some other form. In fact, after the goods are assembled and
installed with skill and labour at the site, it becomes a
permanent fixture of the building. Involvement of the skill has
been elaborately dealt with by the High Court of Bombay in Otis
Elevator (supra) and the factual position is undisputable and F
irrespective of whether installation is regulated by statutory law
or not, the result would be the same. We may hasten to add
that this position is stated in respect of a composite contract
which requires the contractor to install a lift in a building. It is
necessary to state here that if there are two contracts, namely, G
purchase of the components of the lift from a dealer, it would
be a contract for sale and similarly, if separate contract is
entered into for installation, that would be a contract for labour
and service. But, a pregnant one, once there is a composite
contract for supply and installation, it has to be treated as a H
986 SUPREME COURT REPORTS [2014] 5 S.C.R.
A works contract, for it is not a sale of goods/chattel simpliciter.
It is not chattel sold as chattel or, for that matter, a chattel being
attached to another chattel. Therefore, it would not be
appropriate to term it as a contract for sale on the bedrock that
the components are brought to the site, i.e•., building, and
B prepared for delivery. The conclusion, as has been reached in
Kone Elevators (supra), is based on· the bedrock of incidental
service for delivery. It would not be l~gally correct to make such
a distinction in respect of lift, for the contract itself profoundly
speaks of obligation to supply goods and materials as well as
c installation of the lift which obviously conveys performance of
labour and service. Hence, the fundamental characteristics of
works comract are satisfied. Thus analysed, we conclude and
hold that the decision rendered in Kone Elevators (supra) does
not correctly lay down the law and it is, accordingly, overruled.
D 65. Ordinarily, after so stating, we would have directed the
matter to be listed before the appropriate Division Bench.
However, it is not necessary to do so in this batch of cases
inasmuch as the writ petitions have been filed either against
the show-cause notices where c~ses have been reopened or
E against the orders of assessment framed by the assessing
officers and civil appeals filed against certain assessment
orders or affirmation thereof which are based on the decision
of the three-Judge Bench in Kone Elevators case.
Considering the factual matrix, we direct that the show-cause
F notices, which have been issued by taking recourse to
reopening of assessment, shall stand quashed. The
assessment orders which have ·been framed and are under
assail before this Court are set aside. It is necessary to state
here that where the assessments have been framed and have
G attained finality and are not pending in appeal, they shall be
treated to have been closed, and where the assessments are
challenged in appeal or revision, the same shall be decided in
accordance with the decision rendered by us.
H , 66. The writ petitions and the civil appeals are disposed
of with no order as to costs.
i
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 987
ORS.
FAKKIR MOHAMED IBRAHIM KALIFULLA, J. 1. I had A
the benefit of reading the illuminating judgment of my brother
Justice Dipak Misra. With respect, I state that I am not able to
subscribe to the views and conclusions of His Lordship.
Therefore, I wish to record my reasoning and conclusions
holding that the manufacture, supply and installation of lifts are B
to be treated as a contract of 'Sale' in the following paragraphs.
2. By an Order dated 13.02.2008, a three Judge Bench
of this Court, headed by the Hon'ble Chief Justice, referred the
following question to be decided by a Constitution Bench,
namely, C
"Whether manufacture, supply and installation of LIFTS are
to be treated as a contract of 'Sale' or 'Works Contract'?"
3. In the decision reported in State of Andhra Pradesh vs.
Kone Elevators (India) Pvt. Ltd.,. (2005) 3 SCC 389, it was held D
that a contract for supply of LIFTS constituted a 'Sale' and did
not amount to a 'Works Contract' and that the element of
service provided by the vendor of the elevator was negligible.
The referral order referred to the other decisions which were
drawn to the attention of the Court, namely, State of Rajasthan E
& Anr. vs. Man Industrial Corporation Ltd., [1969] 24 STC 349,
State of Rajasthan vs. Nenu Ram, [1970] 26 STC 268 and
Mis. Vanguard Rolling Shutters and Steel Works vs.
Commissioner of Sales Tax, (1977) 2 SCC 250, wherein a
contrary view was expressed than what has been taken in F
Kone Elevators (India) Pvt. Ltd (supra).
4. On behalf of the State of Tamil Nadu, Gujarat, Uttar
Pradesh and Andhra Pradesh, it was submitted that Kone
Elevator (India) Pvt. Ltd. (supra) was correctly decided and
placed reliance on Hindustan Shipyard Ltd. vs. State of Andhra G
Pradesh, (2000) 6 SCC 579, apart from contending that the
Writ Petition under Article 32 was not maintainable. In the
referral order, while giving liberty to raise all contentions at the
time of final hearing, the issue came to be referred to this
Constitution Bench. H
988 SUPREME COURT REPORTS [2014) 5 S.C.R.
A 5. We heard Mr. Harish N. Salve, learned Senior Counsel
appearing for the Petitioner a'nd Mr. Rakesh Dwivedi, Dr.
Manish Singhvi, Mr. R. Venkataramani, Mr. Kapoor, Mr. K.N.
Bhatt and Mr. Darius Khambata, Counsel for the State of
Orissa, Rajasthan, Tamil Nadu, Andhra Pradesh, Gujarat,
B Karnataka and Maharashtra. We also heard Mr. P. P. Malhotra,
learned Additional Solicitor General, who appeared on behalf
of the Union of India.
6. Mr. Salve, learned Senior Counsel for the Petitioner in
C his submission contended that after the 46th Amendment,
Article 366(29A}(b) came to be introduced and in the light of
the ratio laid down in a recent decision of this Court in Larsen
& Toubro Ltd. vs. State of Kamataka reported in 2013 (12)
SCALE 77, the nature of contract as between the Petitioner and
the various buyers of LIFTS was nothing but" a 'contract for
D
works' and consequently, whatever materials used in the
performance of the contract could be taxed only based on the
prescription contained in Article 366(29A)(b} and that the
transaction could not be categorized as one of 'Sale' attracting
payment of Sales Tax under the various State enactments, as
E well as the Central Sales Tax Act.
· 7. At the very outset, it must be stated that in the light of
the three Judge Bench decision in Kone Elevators (India) Pvt.
Ltd. (supra) and the decision of the same strength of Judges
F reported in Larsen & Toubro Ltd. (supra), the ultimate answer
to the question would result in affirming either of the vi.ews of
the above two decisions. Further, certain Constitution Bench
decisions shou'ld also have to be kept in mind, wherein the
basic principle/test to be applied to find out as to whether the
G contract is one for 'Sale' or 'Works Contract'. The first decision
is the Mis. Patnaik and Company vs. State of Orissa reported
in AIR 1965 SC 1655, wher.ein the principle stated by the High
Court was affirmed by the Constitution Bench of this Court. The
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 989
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
said principle was to the effect that it makes no difference A
whether an article is a ready-made article or is prepared
according to the customer's specification. It would also make
no difference whether the assessee prepares it separately from
the thing and then fixes it on it, or does the preparation and the
fixation simultaneously in one operation. It was further held that B
it is the essence of the transaction viz., the agreement and sale,
which relates to the same subject-matter, i.e. the goods agreed
to be sold and in which the property gets transferred. In another
c'orrstitution Bench decision of this Court in The Commissioner
of Commercial Taxes Mysore, Bangalore vs. Hindustan C
Aeronautics Ltd. reported in (1972) 1 SCC 395, it was again
held that the answer to the question whether it is a works
contract or it is a contract of sale depends upon the construction
of the terms of the contract and in the light of the surrounding
o
circumstances. It will have to be further noted that the principles.
set down in the above Constitution Bench decisions were
neither varied nor upset in any other judgment of equal strength,
though in Larsen & Toubro Ltd. (supra) it has been stated that
the 'Dominant Nature Test' laid down in State of Madras vs.
Mis. Gannon Dunkerley and Co. (Madras) Ltd., AIR 1958 SC E
560, no longer survives. In my humble view, it will have to be
stated that even after the Constitutional Amendment introducing
Article 366(29A)(b), it will have to be necessarily examined for
its application as to whether a particular contract would fall
within the expression 'Works Contract' and only thereafter, the F
incidence of taxation as provided in the said sub-clause could
operate. I must also point out that this principle has also been
emphasised in the decision of Larsen & Toubro Ltd. (supra).
Therefore, while venturing to answer the question referred for
our consideration, the various principles laid down in the G
Constitution Bench decisions have to be necessarily kept in
mind to state whether the decision in Kone Elevators (India)
Pvt. Ltd. (supra) will prevail or the one in Larsen & Toubro Ltd.
(supra) should be followed.
8. Before referring to the detailed submissions of the H
990 SUPREME COURT REPORTS [2014] 5 S.C.R.
A respective counsel, since the substantive submission of the
Counsel for the Petitioner centers around the contract between
the Petitioner and its customers, which contains various terms
and conditions, the same are to be noted in the forefront. With
that in view, I wish to refer to the specimen documents relating
B to the supply of the elevators by the Petitioner for its customers.
• Annexure A1 consists of the order of acknowledgement of the
·model, details of the benefits of the elevator to be supplied, the
preparatory work to be carried out by the customer, the
.document containing price variation clause and elevator works
c contracts, the general conditions of Contract, the acceptance
document by both parties and the invoice raised along with the
various bills for purchase of the model items. A detailed
reference to each one of the documents has to be noted in
order to examine the question as to whether the manufacture,
0
supply and installation of LIFT by the Petitioner should be
treated either as a 'Sale' or 'contract for work'.
9. The above documents are found in Volume 1 of I.A. No.
2 of 2013. The details of the above documents are available
in Annexure A-1, which are at pages 6 to 27. The first document
E is dated 23.12.2009, addressed to one of the customers of the
Petitioner. The subject column reads as under:
"Order Acknowledgment for One (1) No. OTIS Electric
Traction Passenger Elevator for your Building at "BAPU
F NAGAR, JAIPUR, RAJASTHAN"."
10. In the body of the said letter, the order placed by the
customer was acknowledged by referring to the acceptance of
the Petitioner's proposal for 'SUPPLY' and 'INSTALLATION'
of one (1) No. OTIS Electric Traction Passenger Elevator for
G their building. Along with the said letter, a copy of the proposal
duly approved by the Petitioner's authorized officer was also
enclosed. The contract number allocated to the customer was
also mentioned. The first document enclosed along with the said
letter dated 23.12.2009, is a document dated 21.10.2009,
H cohtaining nine pages and in the last page the signatures of
'
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 991
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
the Petitioner and its customers were found affixed in proof of A'
acceptance of the Petitioner's offer to supply and installation
of its elevator. Though it is one single contract, it contains
separate terms and conditions dealing with different aspects
relating to the supply and erection of the elevator.
B
11. The first one is titled as Model Code, which contains
the various details about the elevator to be supplied. Such
details relate to the load and speed, the travel and rise of the
LIFT, the stops arid openings of the LIFT, the power supply
requirement for its operation, the control aspect of the LIFT, the C
nature of operation of the LIFT manual or automatic, the
mechanical aspect of the LIFT, the size of the LIFT, the
requirement of the hoist way for installing the LIFT, the various
panels to be provided in the LIFT and handrails to be provided
inside the LIFT, the nature of false ceiling, the nature of flooring,
the width of opening in the LIFT, the method of operation of the D
doors of the LIFT, the design of the signals, other details such
as the type of Buttons at different levels of the LIFT, the type of
LIFT car operating panel with Touch Screen facility, Battery
operated alarm bell & emergency light, fireman's switch at main
lobby and one number colour LCD in the lobby. It also specifies E
the colour scheme of the LIFT and the shape of the LIFT.
12. The next page of the document is under the caption
'AC. Variable Voltage Variable Frequency Control'. In the said
document description of the machine, the brake system, the F
motor and other technological details have been set out. As far
as the type of machine is concerned, various details about the
operating mechanism, which is part of the elevator such as
motor, electro-mechanical brake, chromium molybdenum steel
worm, bronze gear etc., have been mentioned. The brake G
system has been described as direct current brake with spring
applied and electrically released and desigr;ied to provide for
smooth stop under variable loads. As far as. the motor is
concerned, it is mentioned that the A.C. motor has been
designed for elevator service, which will have high starting
H
992 SUPREME COURT REPORTS [2014] 5 ·s.C.R.
A torque with low starting current. That apart, the advance
technological system, which is called as 'Microprocessor
Based Control' that will be provided in the LIFT has been stated
in detail. The details about the digital control provisions, other
user friendly features included in the Microprocessor ·Based
B Control has also been furnished. It is finally mentioned in the
said document that the system would continuously monitor.
critical aspects of system health, self-health, diagnostic
capabilities, which are built into the control system to speed up
trouble-shooting, which can be monitored from seven segment
c display provided in the logic board and that it will facilitate quick
identification of fault for restoration of normal operation.
· 13. The next page of the document annexed is under the
caption 'Benefits of ACV F (Variable Voltage Variable
Frequency Drive)'. This document contains 10 specific details,
D namely,.(i) smooth and controlled acceleration/deceleration, (ii)
better riding quality, (iii) assured leveling accuracy +/- 5 MM,
(iv) improved flight time, (v) improved reliability & increased
efficiency, (vi) reduced power consumption about 50% and
improved power factor, (vii) reduced heat release, (viii) flexibility
E of programme and programming of features at site, (ix)
enhances the value of building, and (x) simplified maintenance.
A cursory glance of the details furnished under the above 10
heads by way of benefits of the offered LIFT discloses the claim
of the Petitioner as to the advantage that will be available to
F the customer in the event of ordering for supply of the said type
of elevator.
14. The next page of the document is under the caption
'Maintenance'. Under the head of 'Maintenance' it is mentioned
G as to from when the free maintenance for 12 months period as
per the quotation would commence, the nature of inspection
and examination that would be carried out during the said
period of 12 months of free maintenance and the extent to
which replacement of parts could be made free of cost, as well
H as on chargeable basis. It also specifies the exclusion of any
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 993
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
special examination that may be carried out in between the A
monthly free examination dates, in which event, the exclusive
responsibility would be of the Purchaser as owner when once
possession is handed over apart from the force majeure clause.
15. The next page of the document is under the heading B
'Preparatory Work'. This document contains as many as 21
Clauses and at the very outset it is stipulated as 'You Agree at
your cost'. The nature of preparatory work set out in the said
21 Clauses relates to the RESPONSIBILITY OF THE
PURCHASER to furnish within two weeks or sooner if required C
from the date of acceptance of the proposal all the required
data for the performance of the contract, to design and furnish
a properly framed and enclosed legal ELEVATOR HOIST
WAY/STRUCTURE, to furnish an ELEVATOR PIT of proper
and legal depth below the lowest landing, to furnish properly
lighted and FIRE PROOF MACHINE ROOM of sufficient size D
to accommodate the Petitioner's equipment with other detailed
specifications, to furnish and install necessary HOIST WAY
DOOR FRAMES and allied provisions, to provide continuous
SILL BEARING AREA for each hoist way entrance of such
constructions, to do all painting except elevator material, to do E
all CUTTING OF WALLS, floors, partitions including grouting
of all bolts, sills etc., to furnish REQUIRED POWER at the top
floor landing terminating in suitable main switches for power
and light circuits with allied provisions, to furnish LIGHT OUTLET
POINTS at the middle of the hoist way and a light point in the F
pit, to be furnished during the erection of the elevators,
ELECTRIC POWER SUPPLY of necessary characteristics to
provide illumination and operation of tools and hoists etc., to
guard and protect the hoist way, TO COMPLETE ALL THE
WORKS IN SUCH SPECIFIED TIME so that no delay is caused G
in carrying out the installation by the Petitioner, to relieve the
Petitioner of any responsibility in respect of expenses relating
to power supply or expenses of any nature relating to the rest
of the building and other contractor's work, to pay all fees that
may be required in connection with erection of preparation of H
994 SUPREME COURT REPORTS [2014] 5 S.C.R.
A th~ structure in which the elevator equipment is to be erected
including any general permit/certificate fees, usually billed by
the Government Agency licence fee etc., to PROVIDE
SCAFFOLDING for erector's requirement in the elevator hoist
way, during the erection period AND FOR ITS REMOVAL
B thereafter and in the event of the elevator hoist way being more
than 40 meter height, such scaffolding should be in steel
structure by OTIS, to provide suitable weatherproof lock-up
storage accommodation of approximately 50 sq.mt. per
elevator at the ground floor level near the hoist way, to provide
c and maintain adequate safety and security measures, as also
retain OTIS safety infrastructure to prevent any injury to third party
or damage, theft or pilferage of material during erection period
till the installed LIFT is handed over, to provide hoisting beam
in the machine room ceiling and rolled steel sections with
bearing plates for support of the machine if required, to provide
0
acceptable living accommodation with facilities such as light,
running water, sanitary for the erection crew at or near the sit~
and to indemnify and SAVE THE PETITIONER HARMLESS
AQAINST ALL LIABILITY GROWING OUT OF THE
PURCHASER'S FAILURE TO CARRY OUT ANY OF THE
E FOREGOING. Out of the above 21 items, the aspects for which
Petitioner takes the responsibility are the provision of a ladder
in a pit, provision of steel fascia by OTIS in respect of S. No.6
and the provision relating to scaffolding. It also states that the
clause relating to provision for living accommodation is not
F applicable. The rest of the works to be carried out relating to
provision of a HOIST, which is otherwise also called as 'Well'
for erecting the LI FT has been entirely fastened on the
Purchaser. It is also relevant to note that under the heading
'Preparatory Work', major responsibility has been entrusted
G with the Purchaser for providing the HOIST/WELL, which relates
to both prior to the erection of the LIFT, as well as in the course
of the erection of the LIFT.
• 16. The next page of the document is under the caption
H 'IEEMA Price Variation Clause for Elevator Works Contracts'.
I
'
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 995
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
It is described therein that the price quoted/confirmed is based A
on the cost of raw materials/components and labour costs as
on the date of quotation and the same is deemed to be related
to Wholesale Price Index Number for Metal Products and All
India Average Consumer Price Index Number for Industrial
Workers as specified in the said document and that in case of B
any variation in the index numbers, the price would be subject
to adjustment up or down in accordance with the formula.
Though, a formula is set out in the said document, based on
enquiries with the counsel appearing for the Petitioner, it is
revealed that the said formula is a formal one and is never c
applied for the purpose of determining the cost. For the
purpos~ of working out the formula, the details of various
abbreviations noted in the formula are furnished. Inasmuch as
it was informed to this Court that the formula as a matter of
practice is not worked out, there is no need to go into the 0
details of those abbreviations mentioned in the formula. There
are two notes, namely, Note 1 and Note 2 at the bottom of the
said document, which states that the sole purpose of the above
stipulation is to arrive at the amount of the entire contract under
the various situations and the above stipulations do not indicate
E
any intentions to sell materials under this contract as movables.
Note No.2 states that the indices MP and WO are regularly
published by IEEMA in monthly basic price circulars based on
information bulletins from the authorities mentioned and those
indices would be used for determining price variation and only
IEEMA circulars would be shown as evidence, if required. F
Another very important clause stated in the said document is
'Payment Terms', which reads as under:
"Under this clause claim for manufactured materials shall
be paid along with our material invoice and claim for G
installation labour shall be paid along with our final invoice.
Firm prices: The prices quoted in this proposal will be firm
upto 5/5/10. Thereafter for any delay in completion of
installation and commissioning due to reasons attributable to H
I
996 SUPREME COURT REPORTS [2014] 5 S.C.R.
A your goodselves prices will be adjusted in accordance with the
above clause."
17. Therefore, it is quite apparent that there is no relevance
to the subtitle, namely, 'Elevator Works Contract' mentioned in
the said page of the document. The only relevant aspect which
8
is required to be noted is that in the event of price variation due
to the delay attributable to the Purchaser, the lali>our cost and
the material cost would be workec;l out based on the prevailing
Consumer Price Index Number for Industrial Workers and
Wholesale Price Index Number for Metal Products. In other
C words, there is.no significant relevance for the subtitle and the
various details mentioned in the satd page of the document.
18. The next page of the document is a very relevant
document, which is in two pages, which carries the title
D 'Conditions of Contract'. As many as 27 conditions have been
stipulated. In order to appreciate the stand of the Petitioner and
to arrive at a conclusion whether the contract of supply of
erection can be construed as 'Sale' or 'Works Contract', the
conditions ti'ave to be necessarily examined in detail. The first
E condition mentions that the quotations are effective for 30 days
from the date of proposal and thereafter, are subject to change
without notice. The second condition pertains to the various
circumstances under which the Petitioner would be entitled 'to
vary the price as per 'IEEMA Price Variation Clause' inasmufh
F as the price quoted would be valid for 52 weeks from the daie
of acceptance of the proposal. Condition No.3 also is an
ancjllary stipulation relating to the application of Price Variation
Clause as per 'IEEMA Price Variation Clause'. Condition No.4
again shifts the burden on the Purchaser to furnish the Petitioner
G within two weeks from the date of the agreement, all required
data for performance of the contract, that the PURCHASER TO
AG~EE TO PREPARE THE HOIST WAY STRUCTURE and
make it ready with proper electric power supply as per the
required data to enable the Petitioner to have uninterrupted use
H for installation and adjustment of the elevator. It also mentions
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 997
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
that if the electric power supply is not provided, the installation A
of the equipment would still be completed and the Purchaser
should be prepared to take over the elevator and make the
payment as they fall due. Condition No.5 consists of the
payment schedule and also a default clause. The payment ·
schedule is 90% on acceptance of the proposal and the B
balance 10% by way of final payment either on commissioning
or in the event of delay by any cause beyond the control of the
\ Petitioner, which is to be paid within 90 days from the date the
materials are ready for dispatch. In the event of any fault on the
, part of th~rchaser in makina the Preparatory Work c
unavailable to enable the Petitioner to carry out the installation,
such as defects in the hoist room or for any ·other lapse, the
option is retained by the Petifierier to discontinue the work or
withhold the release of completed elevator subject however, to
charge of over payments to be charged at the rate of 1.5% per D
month of the agreed price. It also entitles the Petitioner to
reschedule the erection time depending upon the delay caused
at the instance of the Purchaser. Condition No.6 relates to the
provision to be made by the Purchaser for the stay of the
employees of the Petitioner who are assigned the task of
erection of the LIFT. Condition No.7 relates to the work timings E
and in the event of the employees of the Petitioner were to work
overtime based on mutual agreement with the Purchaser, such
overtime charges should be borne by the Purchaser. Condition
No.8 is a mutual FORCE MAJEURE clause as between both
the parties. ~ndijion t-Jo.9 ~pecifies that the title to each F
elevator would pas~on t~.t~P.urchaser when payment for such
elevators are fulh' pafd)p.{l;ie. Re°titloner and in the event of
default being committed.-iiY.":1titi~Purbh~~r,
., ~-._.~ ~. ·.-.'.
_,· ·/~
the right of the
Petitioner to retrieve the'eleva.tQr-:in:)).:dtpf'.ir:i;p_art and also its
right to recover from the PurchaS'er, the value of the elevator G
supplied, can be initiated by appropri~te l~gal proceedings.
Condition No.1 O mainly uses the expression that the contract
should be deemed to be an INDIVISIBLE WORKS CONTRACT
though the cost of labour involved and the price of movables
could be specifically ascertained. Condition No.11 is H 1
998 SUPREME COURT REPORTS [2014) 5 S.C.R.
A prescription of the defect liability period, which would be 18
months from the date ofinitial supply of materials or 12 months
from the date of completion of the erected elevator, whichever
- is earlier. The default clause is that such agreed warranty period
would apply for normal wear and tear only and if any repair or
a damage would occur due to any unauthorized person's
handling, such warranty would not be applicable. Condition No.
12 relates to any work to be carried out for the purpose of
erection of an elevator due to statutory prescription and
according to the Petitioner that would be the responsibility of
c the Purchase·r and if for any reason the Petitioner is to carry
out such works, extra cost would be charged on the Purchaser.
Condition No.13 pertains to any changes, modifications,
additions, deletion or extra work involved in which event the cost
escalation would be mutually agreed b~tween the parties and
finalized. As per Condition No.14, the Petitioner wants to call
0
the Contract as indivisible Works Contract and states that the
materials such as packing cases, left over materials, tools
tackles, instruments, etc., brought to site by the Petitioner would
remain the property of the Petitioner and also its right to sub-
contract any of the work ·which. it deems fit.. Under Condition
E No.15, the Petitioner wants to make it clear that any descriptive
matter, drawings or illustrations brochures furnished along with
its proposal are not accurate but are approximate. Under
Condition No.16, it is made clear that the specifications of the
Petitioner will be the one. which can be relied upon even if such
F specifications varied with th.e requirements made by the
Purchaser prior. to the Contract. Condition No.17 is again a
FORCE MAJEURE clause. Under Condition No.18, the
Petitioner wants to reserve its right to effect the supply either
from its factory at Karnataka or from any other place in India
G or by importing the LIFT from a foreign country. Condition No.19
is the provision under which the Petitioner's right to claim
compensation/damages in the event of breach of contract at
the instance of the Purchaser. Condition No.20 provides for
settlement of the disputes by way of conciliation at the bipartite
H I
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 999
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.)
level and on its failure to go in for Arbitration. Condition No.21 A
refers to the manner in which the apportionment over the
expenses of the contract relating to the amount or advances
paid by the Purchaser, which would be determined by the
Petitioner and that the same cannot be questioned by the
Purchaser even before the legal forums. As per Condition B
No.22, the proposals when accepted by the Purchaser, the
same would supersede all other earlier proposals,
representations etc. Condition No.23 clarifies that in order to
authenticate any change in the conditions 'of the contract after
the signing of the contract, the same can be done only by the · c
authorized person from the Head Office of the Petitioner.
Condition No.24 states that the contract could be deemed to
be concluded at Mumbai/Delhi/Calcutta/Bangalore after
allocation of the contract by the Petitioner. Clause 25 specifies
the delivery time and erection time and that the completion of
0
the installation would be made within 16 weeks from the date
of the receipt of the order, advance payment, layout approval
and settlement of all technical details, whichever is later. It
however, reserves the Petitioner's right to vary the delivery and
the erection schedule depending upon any delay being caused E
at the instance of the Purchaser in carrying out the Preparatory
Works as per the contract. Condition No.26 is again a default
clause for escalation of the cost of labour in the event of the
Petitioner withdrawing the work force for no fault of its. The last
Condition No.27 shifts the entire responsibility on the Purchaser
for getting necessary certificates/permits/licenses from the F
Statutory/Regulatory Authorities, including payment of all
necessary fees for such certificates/licenses/permits etc. and
that the Petitioner will not be in anyway liable for any delay
occurring on that score.
G
19. The last page of the document, which is also dated
21.10.2009, disclose the signature affixed by the Authorized
Official/Signatory of the Petitioner and the Purchaser wherein,
the price of the elevator to be supplied in a sum of
Rs.12,50,000/- is quoted. In the said page, applicable rate of H
1OQO SUPREME COURT REPORTS [2014] 5 S.C.R.
A Excise Duty, Service Tax and other statutory tax liabilities to be
incurred are all mentioned. Along with the above document, the
payment of Rs.12, 12,500/- already made by the Purchaser, as
. well as the final invoice raised for value of the full amount,
namely, Rs.12,50,000/- is also enclosed.
B
20. Before adverting to the other statutory provisions, V¥hich
are to be noted while dealing with the issue involved, as well
as, the submissions made by either side, it will be appropriate
to sum up the nature of the contract that is normally transacted
C by the Petitioner with its customers, based on the above
Ar)nexure A-1. From what has been noted from the said
Annexure, the following facts emerge:
(a) Every supply and erection of an elevator by the
Petitioner is always preceded by a proposal furnishing the
D requirement of the customer. The model of the LIFT
specifying its capacity load, technical aspects and other
minute details relating to the LIFT to be supplied along with
the works to be carried out at the instance of the Purchaser
to enable the Petitioner to supply and erect the LIFT are
E also furnished.
(b) Based on the proposal of the Petitioner, once the order
is placed by the Purchaser by way of acknowledging the
said order, specific communication is issued furnishing a
distinct contract number. In the said acknowledgment of
F order, the entire set of documents relating to the proposal
and the signed contract is also enclosed with the price
agreed between the parties.
(c) The documents found in the ultimate agreed contract,
G I therefore, contain the details relating to the model and the
mechanical details about the operation of the LIFT, which
are furnished with detailed particulars.
(d) The various details contained in the proposal are all
H I mainly related to the nature of the LIFT to be supplied and
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1001
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
as to how the technology involved in the LIFT would be A
advantageous to the customer when it is ultimately erected
and put into operation.
(e) The details of the Preparatory Work is one of the
relevant aspects of the contract, which disclose that at the
B
site, where the LIFT is to be installed, the entire
Preparatory Work is to be carried out by the customer such
as, the setting up of the hoist way/structure, ·elevator pit,
fire proof machine room, hoist way door frames, provision
of sill bearing area, all cutting of the walls, provision of C
required power supply, furnishing of light outlet points,
provision of elevators electric power supply, provision of
required accommodation for the work force of the
Petitioner and above all, the time within which the above
works have to be carried out by the customer. As part of
the Preparatory Work, the only area where the Petitioner D
comes forward to take the responsibility are the provision
of a ladder in a pit, the provision of a steel fascia and the
provision relating to scaffolding.
(f) As far as the price variation clause is concerned, it only E
states that in the event of any delay being caused not due
to the fault of the Petitioner, the price variation of the labour
cost and material cost would depend upon the All India
Average Consumer Price Index Number for Industrial
Workers and Wholesale Price Index Number for Metal F
Products.
(g) The specific condition imposed in the prescription
contained under the heading 'Preparatory Work' makes it
clear that only after the customer satisfactorily completes
all the basic works such as, erection of the hoisUstructure G
and other allied necessary works, the Petitioner would
commence its installation. In the event of any delay being
caused at the instance of the customer, the
H
1002 SUPREME COURT REPORTS [2014) 5 S.C.R.
A commencement of the installation would get postponed at
the risk of the customer.
(h) Though, in the conditions of contract the expression
used in condition number 10 is 'indivisible works contract'
the reading of as many as 27 conditions disclose that it
B
only highlights the overall responsibility of the customer to
undertake the main work of providing a solid hoisVstructure
to enable the Petitioner to bring its LIFT and fix it in the
said earmarked place with all the other provisions readily
made available by the Purchaser, including the electric
c points.
(i) As per condition No.5 of the conditions of contract, 90%
of the value is to be paid on acceptance of the proposal.
Balance 10% payment is payable either on commissioning or
. D in the event of any delay being caused and not attributable to
the Petitioner, within 90 days of the materials relating to the LIFT
to be supplied being made and kept ready for dispatch.
Therefore, the said condition is required to be examined in
detail to ascertain as to whether the payment schedule really
E determines the nature of the contract.
21. Having noted the above salient features of the contract
relating to the supply and erection of the LIFT by the Petitioner,
to which I will discuss in detail in the latter part of this judgment,
I wish to refer to the statutory provisions which are required to
F be noted at this stage. Mr. Salve, learned Senior Counsel in
his submissions drew our attention to various statutory
provisions relating to LIFTS, which provide for charging of duty
und19r the provisions of the Central Excise Legislation as well
as the provisions brought out by various States for charging tax
G . on supply and installation of LIFTS construing the same as
'Works Contract' and the subsequent changes brought about
after the decision of this Court in Kone Elevators (India) Pvt.
Ltd. (supra), besides the Constitutional provision, namely,
Article 366(29A)(b) of the Constitution.
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1003
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.)
22. Under Article 366(29A), tax on the sale or purchase A
of the goods is defined and the concerned sub-clause (b) of
sub-Article (29A), reads as under:
"A tax on the transfer of property in goods (whether as
goods or in some other form) involved in the execution of 8
a works contract;"
23. This clause was inserted under the Constitution 46th
Amendment Act of 1982. A reading of the said sub-clause (b),
which is a part of various other definitions under Article 366,
would enable the tax levying authorities to levy tax on the transfer C
of property in goods involved in the execution of a 'Works
Contract'. In order to apply the said sub-clause (b), in the
foremost, what is to be ascertained is whether there is a 'Works
Contract' and while executing such a 'Works Contract' any
transfer of property in goods are involved, whether as goods D
or in some other form on which a tax can be validly levied by
the concerned authorities.
24. Having noted the constitutional mandate provided
therein, it will be beneficial to refer to the other statutory E
prescriptions brought to our notice. Mr. Salve, learned Senior
Counsel brought to our notice the definition of 'Works Contract'
under Section 2Uj) of the Orissa Sales Tax Act, 1947. The said
provision reads as under:
"works contract includes any agreement for carrying out for F
cash or deferred payment or other valuable consideration
, the building, construction, manufacture, processing,
fabrication, erection, installation, fitting out, improvement,
modification, repair or commissioning of any movable or
immovable property." G
25. It was also brought to our notice certain provisions in
the Bombay Lifts Act, 1939. The relevant provisions are
Sections 3(c),(d),(e)&(f), which defines 'Lift, Lift Car, Lift
Installation and Lift way'. Section 4 stipulates that every owner H
1004 SUPREME COURT REPORTS [2014] 5 S.C.R.
A of a place intending to install a LIFT after the commencement
of the said Act, should make an application to the concerned
authprity of the State Government for permission to erect such
a LIFT and while seeking for such a permission, the obligation
is o~ the applicant to furnish the various details about the LIFT
B to be erected. Section 5 deals with the licence to be obtained
to use a LIFT, which states that every owner of a place who is
I
permitted to install a LIFT under Section 4 should within one
month after completion of the erection of such LIFT, inform the
Authorized Officer of the State Government who has been
c empowered to issue a licence for the working of the LIFT. Such
intimation about the erection of the LIFT and the nature of
licence to be issued in the prescribed format has been
specified. The required fee to be paid is also mentioned in the
said section. Section 7 specifies that no LIFT should be
ope'rated without a licence. The corresponding rules, namely,
0
Rules 3, 5, 6, 9 and 9(a), as well as Form A has also been
referred. In furtherance of Sections, 4, 5, 6 and 7 of the Bombay
Lifts Act, 1939 and the Bombay Lifts Rules, 1958, namely,
Ruli:s 3, 4, 5, 6, 9 and 9(a), what is specified is the detailed
procedure to be followed by approaching the concerned
E authorities initially for the erection of the LIFT by getting a
permission and securing a licence after successful installation
of the LIFT and the periodical inspection to be carried out in
order to ensure that the LIFT erected does not cause any
damage to men and materials due to any defect in the material
F used while installing the LIFT, as well.as in its future operation
on regular basis, as well as in the course of its maintenance.
Rule 9A(5) prescribes the fee for issuing a licence to LIFT
contractors for permission, while issuing the licence for
prescribed number of LIFTS. Apart from the above rules, Form
G A is the prescribed form by which an application for permission
to Install a LIFT or for making any addition or alteration to the
LIFTS is to be made. The details to be furnished in the said
form includes the name of the owner, the name of the person
who would be installing the LIFT, the place where the LIFT would
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1005
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
be installed and some basic details about the LIFT which is to A
be installed. Under Form A-1, the ~IFT installation contractor
has to make a declaration as to the successful installation of
the LIFT undertaken by it.
26. Reference to the above provisions contained in the B
Bombay Lifts Act and Rules show that before erection of LIFT
in the premises, necessary permission has to be obtained from
the concerned authority appointed by the State Government. By
making a specific application for permission for the erection
of a LIFT and secure a licence when a LIFT is erected, C
thereafter also periodical intimation is to be sent to the
concerned authority about the proper maintenance of the LIFT,
which has been erected in the premises of the owner. The
underlining requirement of the statute is apparently to ensure
that such a LIFT installed in a premises, which would be
regularly used by the persons visiting the said premises should D
not endanger their lives either due to any defects in the
installation or its operation or in its maintenance after its
installation. Therefore, reference to the above provisions in my
view is not decisive for finding out as to whether the
manufacture, supply and installation of a LIFT would fall within E
the expression 'Works Contract' or not.
27. Mr. Salve, learned Senior Counsel in his submissions
also made reference to the definition 'Commissioning and
Installation Agency' and 'Taxable Service' under Section 65(29) F
and (105)(zzd) of the Finance Act, 1994 as was brought out
w.e.f. 14.05.2003 and subsequently w.e.f. 10.09.2004 and
16.06.2005. In fact, the learned Senior Counsel also referred
to the ~efinition of 'Erection, Commissioning and Installation'
as was inserted as sub-section (39a) to Section 65 by the G
Finance Act (No.2) of 2004 w.e.f. 10.09.2004. The definition
of the above provisions were made w.e.f. 16.06.2005. Lastly,
learned Senior Counsel brought to our notice the definition of
'Taxable Service' under sub-clause (zzzzaf\o sub-section (105)
of Section 65, which was inserted by the Finance Act, 2008 H
1066 SUPREME COURT REPORTS [2014) 5 S.C.R.
A w.e,f. 16.05.2008. The said provision reads as under:
"105 - Taxable Service means any service provided,-
"(zzzza) to any person, by any other person in relation to
the execution of a works contract, excluding works contract
B in respect of roads, airports, railways, transport terminals,
1
bridges, tunnels and dams.
Explanation-For the purposes of this sub-clause, "works
contract" means a contract wherein-
c 1
(i) Transfer of property in goods involved in the execution
of such contract is leviable to tax as sale of goods, and
. (ii) Such contract is for the purposes of carrying out.-
I
D (a) erection, commissioning or installation of plant,
machinery, equipment or structures, whether pre-
fabricated or otherwise, installation of electrical and
electronic devices, plumbing, drain laying or other
installations for transport of fluids, heating,
E ventilation or air-conditioning including related pipe
work, duct work and sheet metal work, thermal
insulation, sound insulation, fire proofing or water
proofing, lift and escalator, fire escape staircases
or elevators; or
F (b) construction of a new building or a civil structure
or a part thereof, or of a pipeline or coriduit,
primarily for the purposes of commerce or industry;
or
G (c) construction of a new residential complex or a
part thereof; or
(d) completion and finishing services, repair,
alteratiol) renovation or restoration of, or similar
services, in relation to (b) and (c) or
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1007
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
(e) turnkey projects including engir1eering, A
procurement and construction or commissioning
(EPC) projects:"
28. Before referring to the details of the abov!3 provisions
brought to our notice, it is relevant. to mention at this juncture 8
the specific prayers of the Petitioner in the leading case W.P.(C)
No.232 of 2005 and W.P.(C) No. 548 of 2008. In W.P.(C)
No.232 of 2005, the Petitioner seeks to challenge the impugned
notices dated 30.03.2005 by whicti the First Respondent
wa11ted to re-open the assessment for the Assessment Years
1999~2000 (C.S.T. No. 631067/1999-2000) under the Central C
Sales Tax Act and again for the years 1999-2000 (TNGST No.
1340636/99-2000), and 2000-2001 (TNGST No. 1340636/
2000-01) under the Tamil Nadu General Sales Tax Act, 1959.
Similarly,. in W.P No.548 of 2008, the challenge is to the revised D
pre-assessment notices dated 23.06.2006 for the assessment
period 2002-2003 and 03.04.2008 for the Assessment Year
2001-2002, issued by the Third Respondent and the Second
Respondent respectively. Keeping the said challenges in mind,
the provisions will have to be examined. As has been stated
in the opening part of this Judgment, the answer to the question E
referred to us will have to be made, keeping in mind the
statutory provisions relating to charging of tax vis-a-vis the
impact of Article 366 (29A)(b) of the Constitution.
29. Sub-section (29) of Section 65 of the Finance Act, F
1994 defines what is 'Commissioning and Installation Agency'
providing services in relation to commissioning and installation.
Sub-clause (zzd) to sub-section (105) of Section 65 defines the
'taxable service' to mean any service provided to a customer
by a commissioning and installation agency in relation to G
commissioning or installation. These definitions relating to
taxable service of commissioning and installation agency as
was prevailing w.e.f. 14.05.2003, were general and there was
no specified category or class of service referred to therein.
With effect from 10.09.2004, there was an addition made in sub- H
100~ SUPREME COURT REPORTS [2014] 5 S.C.R.
A section (29) of Section 65 by which while defining a
'commissioning and installation agency', the expression
'erection' came to be added. A further sub-section, namely, sub-
sectibn 39(a) was also introduced by Finance Act (No.2) of
2004 w.e.f. 10.09.2004, which further defined the expression
B 'ereqtion, commissioning or installation' to mean any service
provided by a commissioning and installation agency in relation
to erection, commissioning of installation of plant, machinery
or equipment. Consequently: in sub-section 105(zzd) the
E1xpression 'erection' was added along with the other
c epepr'3ssions 'commissioning or installation', which was again
to operate w.e.f. 10.09.2004. The above definition relating to
'commissioning and installation agency' under sub-section (29)
of Section 65 continued even w.e.f. 16.06.2005. However, in
sub-section 39(a) of Section 65 while defining 'erection,
com,missioning or installation', an elaborate definition came to
0
be introduced as per which the expression 'erection,
commissioning or installation' would mean any service provided
by a commissioning or installation agency in relation to
installation of among other classes of service included under
sub-clause (ii)(e) LIFT and ESCALATOR, fire escape
E staircases or travelators or such other similar services, which
came into operation w.e.f. 16.06.2005. However, the definition
of lfaxable Service under sub-section 105(zzd) remained
unaltered.
F , 30. Chapter V under the caption 'Service Tax' of the
'Finance Act', 1994 underwent a further change wherein a sub-
clause (zzzza) to sub-section 105 came to be added, which
while defining a 'taxable service' to any person by any other
person in relation to the execution of 'Works Contact' excluding
G 'Wc;>rks Contract' in respect of roads, airports, railways,
transport terminals, bridges, tunnels and dams, specifically
brought out an explanation for the purpose of the said sub-
clause, in and by which, the expression 'Works Contract' came
to be defined for the first time. As per the said definition, it
H me~nt that a transfer of property in goods involved in the
KONE ELEVATOR INDIA PVT. LJ°D. v. STATE OF T.N. & 1009
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
execution of such contract would be leviable to tax as sale of A
goods and to ascertain whether the said contract is a 'Works
Contract', it went on to State that such contract should be for
the purpose of carrying out inter aJia for the erection,
commissioning or installation of LIFT and Escalator, fire
escape staircases or elevators. It is very relevant to note that B
this definition of 'Works Contract' by way of an explanation to
sub-clause (zzzza) to sub-section (105) of Section 65 came to
be introduced for the first time w.e.f. 16.05.2008.
31. Therefore, while examining the question referred to this C
Bench in the order of reference dated 12.05.2005, in an
attempt to answer the said reference,· it will have to be
necessarily noted at the very outset that as and from
16.05.2008, the erection, commissioning or installation of LIFT
and Escalator would fall within the expression 'Works Contract'
having regard to the specific definition so brought out under the D
Finance Act, 1994 w.e.f. 16.05.2008 for the purpose of Service
Tax. However, the question still remains whether the same
would hold good for levy of Sales Tax on the anvil of Article
366(29A)(b) of the Constitution read along with the provisions
of the Sales Tax Act and that to. for the period prior to the said E
date, namely, 16.05.2008. As noted by us, in the Writ Petitions,
the challenge is to the revised pre-assessment notices under
the Central Sales Tax Act or under the respective State General
Sales Tax Act for the assessment periods related to the years
1999-2000, 2000-2001, 2001-2002 and 2002-2003. Therefore, F
the question for consideration is what is the legal position with
reference to the nature of contract of the Petitioner vis-a-vis its
Purchaser with reference to manufacture, supply and
installation of LIFTS. Based on the terms of the specific
contracts, a specimen copy is placed before us vis-a-vis the G
relevant statutory provisions which are in existence during the
relevant years.
32. Other statutory provisions which are relevant to be
noted while construing the definitions prior to 16.05.2008 are H
1b10 SUPREME COURT REPORTS [2014) 5 S.C.R.
A sub-clause (29), (39a) and (105)(zzd) of Section 65. Service
Tax was levied at the rate of 12% for the value of the 'taxable
services' referred to under sub-clause (zzd) of sub-section (105)
of Section 65. After 16.05.2008, under the amendments
introduced by Finance Bill No.2 of 2009, the charge of service
B tax underwent a change and the rate was brought down to 5%
of the value of taxable services referred to in sub-clauses (zzd)
and (zzzza) of sub-section (105) of Section 65.
! 33. Having noted the above statutory provisions, we are
now again mandated to examine the question as to whether
C the manufacture, supply and installation of LIFTS by the
Petitioner would fall within the expression 'Works Contract' or
'Sale'. For examining the said question, a recapitulation of the
various details has to be noted based on the specimen contract
that came into existence as between the Petitioner and the
D Purchaser.
I
A detailed
.
reference has been made to the salient'
features of the said contract and I have also highlighted the
terms contained therein. There was a detailed description of
the product to be supplied by the Petitioner, namely, the LIFT
to its Purchaser. The description about the product content with
E very many minute details relating to the model, the capacity it
would carry, namely, the number of passengers, the weight, the
sophisticated equipments such as feather touch buttons, highly
precisioned stop facility at each floor of its operation, the
smooth sailing of the LIFT in between different floors, the other
F safety gadgets provided in the LIFT and so on. Thereby, what
was highlighted in one part of the contract was the advantage
that a customer would get when the Petitioner's LIFT is
purchased and erected in its premises. In the other parts of the
contract, the obligation of the Purchaser was to provide certain
G facilities such as hoist way, power supply, procurement '"of
permits, licences, etc. under certain other enactments, the
payment schedule with the time schedule along with the default
clauses are stipulated. There are also provisions in the contract
rel~ting to the time within which the LIFT will be commissioned,
H namely, within 52 weeks and if for any reason any delay is·
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1011
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
caused beyond the control of the Petitioner, even then there A
would be a requirement of making the full payment by the
Purchaser to the Petitioner. This is on the Petitioner informing
its readiness with the materials of the LIFT to be commissioned
available at the premises of the Petitioner with no obligation
for its commissioning. Also a period of 90 days is stipulated B
for effectuating the final payment.
•
34. The arguments on behalf of the Petitioners was mainly
addressed by Mr. Salve, learned Senior Counsel. In his
submissions, learned Senior Counsel contended that after the
C,
decision of this Court in Kone Elevators (India) Pvt. Ltd.
(supra), the various States who were earlier conte~ding that
supply and erection of a LIFT was a 'Works Contract', took a
diametrically opposite view and started contending that the said
contract will amount to 'Sale' and not 'Works Contract'. The
learned Senior Counsel drew our attention to some of the D
counter affidavits filed on behalf of the State of U.P., Andhra
Pradesh and Karnataka in Writ Petition No.232 of 2005,
wherein such a stand has been taken by the respective State
I
Governments. The learned Senior Counsel by referring to the
definition of 'Works Contract' under Section 20j) of the Orissa E
Sales Tax Act, 1947, which has been extracted in the earlier
part of this Judgment, submitted that the manufacture., supply
and erection/installation of a LIFT squarely falls within the said
definition of 'Works Contract' and, therefore, the stand of the
Petitioner is well-fol.inded. In support of his submissiops, the F
learned Senior Counsel also relied upon the Division Bench
decision of the Bombay High Court in OTIS Elevators Co.
(India) Ltd. vs. The State of Maharashtra reported in [1969]
24 STC 525.
G
35. The learned Senior Counsel then referred to the
Standard Contract Form of the Petitioner, as well as the Field
Installation Manual and contended that the various works to be
carried out. in the course of installation of a LIFT can only be
held to be a 'Works Contract'. By doing so, he drew our H
1012 SUPREME COURT REPORTS [2014] 5 S.C.R.
A attention
I
to the Field Installation Manual, which is meant for its
field staff at the time of erection of the LIFT to follow the various
instructions and the manner in which the LIFT is to be
assembled at the premises of the Purchaser. By making
reference to the said manual, which contains very many details
B as to the various parts of the LIFT and how these parts are to
I
be .assembled and also the safety measures to be followed,
su~mitted that such an elaborate process involved in the
.
assembling of the LIFT is nothing but a contract for work and
not for sale. He therefore, contended that the decision in Kone
c EIEfvators (India) Pvt. Ltd. (supra) has to be varied.
36. The learned Senior Counsel in his submissions further
contended that in the light of the prescription contained in sub-
Article 29A(b) of Article 366 of the Constitution and having
regard to the nature of operation/function in the supply and
D installation of a LIFT, the said activity cannot be called as a
mere
I
'Sale' but can only be called as a 'Works Contract'.
37. The learned Senior Counsel also relied upon the
decision- in State of Madras vs. Richardson Cruddas Ltd.
E reported in (1968] 21 STC 245 in support of his submissions.
By referring to the provisions contained in the Bombay Lifts Act,
1939 in particular Sections 3, 4, 5 and 7 and Rules 3, 5, 6, 9
and 9A along with Form A 1, the learned Senior Counsel
contended that the said provisions in the Acts and the Rules,
F also goes to show that the installation of a LIFT, having regard
to the nature of the activity and the functions involved can only
be held to be a 'Works Contract' and not a 'Sale'. According.
to the learned Senior Counsel, the contract being an indivisible
cbntract for supply and erection of the LIFT to the customer and
G t~e erection part of it is so intertwined with the supply of the
UFT, the contract-can only be construed as 'Works Contract'
and not a 'Sale'.
38. The learned Senior Counsel also relied upon a
decision of the Government of India in In re: OTIS Elevator
H Co. (India) Ltd. (1981) ELT 720 in support of his submissions.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1013
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
That was a decision of the Government of India in an appeal A
filed by OTIS Elevator Company under the provisions of the
Central Excise Act, wherein it was contended that erection and
installation of elevators and escalators were indivisible 'Works
Contract' and do not constitute contracts for mere sale of goods.
·While dealing with the said submission, the above decision B
came to be rendered by the Government stating that elevators
and escalators erected and installed by the company became
a part of immovable property and hence are not goods. It was,
however, held that the component parts of the elevators and
escalators manufactured and cleared from their respective c
factory would be chargeable to duty at the appropriate rates.
39. By relying on the above decision, the learned Senior
Counsel also brought to our notice an order under Section 37B
of the Central Board of Excise and Customs dated 15.01.2002,
wherein the assessibility of plant and machinery assembled at D
site was explained and as regards the LIFTS and Escalators
in sub-paragraph (iv) of paragraph 5, it was described that
though LIFTS and Escalators are specifically mentioned in sub-
heading 8428.10, those which are installed in buildings and
permanently fitted into the civil structure cannot be considered E
to be excisable goods. The learned Senior Counsel therefore,~
by referring to the above orders of the Government of India and
the Board of Central Excise, contended that the same
reasoning would hold good while considering the case of the
Petitioner. F
40. As regards the question whether manufacture, supply
and installation of LIFTS would fall within the expression 'Sale'
or 'Works Contract', the learned Senior Counsel heavily relied
upon the recent three Judge Bench decision of this Court in G
Larsen & Toubro Ltd. (supra). The judgment was rendered by
one of us, Hon'ble Mr. Justice R.M. Lodha, wherein in
paragraph 101, this Court while answering a reference made
by a two Judge Bench, held that a contract may involve both
work and labour and also an element of sale and in such
H
1014 SUPREME COURT REPORTS [2014] 5 S.C.R.
'
'
A combosite contract, the distinction between a contract for sale
of goods and contract for work (or services) virtually gets
diminished. It was further held that the 'Dominant Nature Test'
has no application and the earlier decisions which held that the
substance of the contract must be seen, have lost their
B significance where transactions are of the nature contemplated
in Article 366(29A). It went on to hold that even if the dominant
intention of the contract is not to transfer the property in goods
and rather it is rendering of service or the ultimate transaction
is transfer of immovable property, then also it is open to the
C States to levy Sales Tax on the materials used in such contract,
if such contract otherwise has elements of 'Works Contract'.
Ultimately, it was held that the enforceability test is also not
determinative. The learned Senior Counsel drew our attention
to paragraphs 17, 19, 21, 47, 60 to 65 and 76, as well as
paragraph 101 where the legal position was summarised while
0
answering the question referred to it.
41. The learned Senior Counsel by drawing our attention
to the definition contained in the Finance Act of 1994, in
particular sub-sections (29), 39(a) of Section 65 and sub-clause
E (zzd) to sub-section (105) of Section 65, contended that ·such
definitions in the Finance Act under Chapter V for imposition
of Service Tax, would show that the installation of a LIFT is
nothing but a 'Contract for Works' and not 'Sale'. The learned
Senior Counsel drew our attention to sub-clause (zzzza) to sub-
F · section (105) of Section 65 wherein, in the explanation to the
said sub-clause, the erection of a LIFT has been defined to
mean a 'Works Contract'. The learned Senior Counsel would,
therefore, contend that there cannot be two different meanings
relating to 'Works Contract', one for the purpose of Service Tax
G and the other for the purpose of Sales Tax. The submission of
the 1$arned Senior Counsel was adopted by all other counsel
who ~ppeared for the Petitioners in the other cases.
42. Mr. Dwivedi, learned Senior Counsel appearing for the
State of Orissa, in his submissions contended that the contract
H
KONE ELEVATOR INDIAPVT. LTD. v. STATE OF T.N. & 1015
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
as between the Petitioner and its Purchaser, going by its terms, A
is always one for sale of its branded LIFTS, which having
regard to the nature of the product has to be necessarily
erected at the site, that 90% of payment is to be made on the
signing of the contract, that the LIFTS would be handed over
to the Purchaser on its erection and that the contract provides B
for the payment of balance 10% on fulfillment of certain other
conditions. The learned Senior Counsel would, therefore,
contend that in the present case, there can pe no doubt at all
as to the nature of contract as between the parties, which is
one for sale and, therefore, there is no necessity to further c
examine whether it is a 'Sale' or 'contract for works'. The
learned Senior Counsel by drawing our attention to the
judgment in Larsen and Toubro Ltd. (supra) contended that the
converse position argued by the learned Senior Counsel Mr.
Rohinton Nariman in the said judgment as recorded therein, 0
would explicitly show as to how a clear distinction can be drawn
as between a 'Works Contract' and a 'contracts for Sale'. The
learned Senior Counsel further pointed out that in the case on
hand, the contract being one for sale of the LIFTS, the same
cannot fall within the expression 'Works Contract'. In support
of his submissions the learned Senior Counsel relied upon the E
decisions in Mis Patnaik and Company (supra), Mis T. V.
Sundram Iyengar & Sons vs. The State of Madras - (1975) 3
SCC 425, Union of India vs. The Central India Machinery
Manufacturing Company Ltd. and others - (1977) 2 SCC 847
and also referred to the decision in Hindustan Aeronautics Ltd. F
(supra), to state as to what are the basic tests to be applied in
order to find out whether a contract as between the parties will
fall within the expression 'Works Contract' or one of 'Sale'. The
learned Senior Counsel, however, fairly brought to our notice
the provisions contained in the Orissa Value Added Tax Act, G
2004, in particular Rule 6 and the Appendix, to show that by
virtue of the said Act in the State of Orissa, as far as value
added tax is concerned, erection of a LIFT, Elevator and
Escalator would fall under the category of 'Works Contract' and
that in the Appendix, a provision of 15% is made for deduction H
1016 1
SUPREME COURT REPORTS [2014] 5 S.C.R.
A towards labour charges, while arriving at the taxable turnover.
43. Mr. R. Venkataramani, learned Senior Counsel,
appearing for the State of Tamil Nadu and Andhra Pradesh,
drew pur attention to the definition of 'Sale' and 'Works
Contract' under the Andhra Pradesh General Sales Tax Act,
8
1957 as defined in Section 2(n) & (t) and submitted that going
by the definition of 'Sale' every transfer of the property in goods
in pursuance of a contract or otherwise by one person in the
course of his trade or business, for cash, or for deferred
payment or for any other valuable consideration, the same
C would I be a sale and by referring to the definition of 'Works
Contract' under Section 2(t), he pointed out that the definition
itself makes it clear that any agreement for cash or for any other
valuable consideration for carrying out the building construction,
manufacture, fabrication etc., including erection/installation or
D commissioning of any movable or immovable property alone
would fall within the said definition. By referring to the above
statutory provisions, the learned Senior Counsel contended that
there is a world of difference as betw¢en a contract by which
one party agrees to supply a product /as compared to a party
E agreeing to carry out a work such as ponstruction of building,
erection, installation or commissioning of movable or
immovable property. In other words, ~ccording to the learned,
Senior Counsel going by the terms of ~he contract between the/
Petitioner and the prospective Purchasers~what is agreed t~
F between the parties is the supply of LIFTS and the act o
installation is not the contract for which the parties were a
idem. Therefore, if the contract distinctly discloses that it is on~
for supply of a LIFT ~nd the same is effected by erecting it in~
the pre. mises of the Purchaser, it cannot be eld that the act o
1
h.,
G erection alone shot.11d be taken into account and on that basis
hold that the contra;ct was one for 'Works' and not for 'Sale'. '·
44. The learned Senior Counsel by referring to paragraph
101 of the judgment in Larsen & Toubro Ltd. (supra) contended
H that by installation, the LIFT in its full form is brought out and
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1017
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
handed over to the Purchaser. In other words, according to the A
learned Senior Counsel by installation, the LIFT is put in a fit
condition for use and submitted that the principles laid down
in the case of Mis. Patnaik and Company (supra), T. V.
Sundaram Iyengar & Sons (supra), have all laid down the
correct principles and, therefore, the decision in Kone Elevators 8
(India) Pvt. Ltd. (supra) was rightly decided. While referring to
the decisions in Vanguard Rolling Shutters and Steel Works
(supra) and Man Industrial Corporation Ltd. (supra), the
learned counsel submitted that none of the said decisions can
be said to warrant any consideration. In support of his C
submission learned Senior Counsel relied upon the decision
in Dell Inc. vs. Superior Court No.A 118657 and relied upon
the following passage in the said judgment:
"Drawing the line between taxable sales of tangible
property and nontaxable sales of services or intangibles D
is sometimes difficult, especially where property that was
largely created by personal services is transferred.
(Hellerstein, State Taxation (3d ed.2007) 12.08[1], p.1 ).
Where services and tangible property are inseparably
bundled together, determination of the taxability of the E
translation turns upon whether the purchaser's "true object" .
was to obtain the finished product or the service."
45. The learned Senior Counsel, therefore, contended that
when the true object of the transaction in the case on hand was
F
to obtain a finished product whatever services involved should
be held to be incidental and also should be treated as part of
a sale of the tangible property and thus subject to 'sales' or 'use
tax'.
46. Dr. Singhvi, learned Additional Advocate General G
appearing for the State of Rajasthan prefaced his submission
by contending that the first question to be examined is whether
the transaction is a 'Sale' or 'Works Ccinfract'. According to the
H
1018 SUPREME COURT REPORTS (2014] 5 S.C.R.
I
A learned Counsel, the test that was prevailing pre 46th
Amendment, continued to hold good and that the sale of a LIFT
is definitely not a 'Works Contract'. The learned Counsel relied
upon the decision reported in Bharat Sanchar Nigam Ltd. and
Another vs. Union of India and others, (2006) 3 SCC 1, in
particular paragraph 43 and pointed out that the transactions
8
which are 'mutant ·sales' alone are limited to the clauses of
Article 366 (29-A) and that all other transactions would have to
qualify sales within the meaning of Sale of Goods Act, 1930
for the purpose of levy of sales tax. The learned Counsel while
C referring to the judgment in Larsen & Toubro Ltd. (supra) by
making specific reference to paragraph 90, contended that
although the decision in Hindustan Shipyard Ltd. (supra) has\
been distinguished, paragraph 6 of the said decision is still the
correct proposition of law to be applied in all cases to find out
the nature of a contract.
0
47. Mr. Preetesh Kumar, learned Standing Counsel for the
St<;ite of Gujarat by referring to paragraphs 71 to 76 of the
judgment in Larsen & Toubro Ltd. (supra) and in particular the
ratio laid down in paragraph 76, contended that even by
E applying the test stated therein, the contract of the Petitioner
for supply of the LIFT could not be brought within the concept
of 'Works Contract'. The learned Counsel contended that in the
light of the agreement by which the Petitioner came forward to
supply the LIFT and erect the same in the premises of the
F Petitioner, it could only be held to be a 'contract for sale' and
not 'Works Contract', thereby attracting Article 366 (29-A) (b)
of the Constitution.
1
48. Mr. Darius Khambata, learned Advocate General for
Maharashtra and Mr. K.N. Bhatt, learned Senior Counsel for
G Karnataka actually conceded to the effect that the quest,ion .
posed for consideration has been fully answered in the decision
in Larsen & Toubro Ltd. (supra).
49. Mr. Malhotra, learned Additional Solicitor General for
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1019
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
Union of India contended that the Union of India has nothing to A
do with the issue as to whether it is a 'Sale' or 'Works
Contract', inasmuch as erection of LIFT has been brought under
the definition of 'Works Contract' for the purpose of levying
service tax.
8
50. Mr. Salve, learned Senior Counsel in his submissions
referred to the decisions in Mis Vanguard Rolling Shutters and
Steel Works (supra), Commissioner of Sales Tax, M.P. vs.
Purshottam Premji reported in (1970) 2 SCC 287 and
Commissioner of Central Excise, Ahmadabad vs. Solid and C
Correct Engineering Works and others reported in (2010) 5
SCC 122. The learned Senior Counsel attempted to distinguish
the decision in Mis Vanguard Rolling Shutters and Steel
Works (supra). In so far as the decision in Solid and Correct
Engineering Works and others (supra), the learned Counsel
after making reference to paragraph 16, 23 and 25, submitted D
that erection or installation of a LIFT could not, therefore, be
held to be a structure which was embedded to the earth on a
permanent basis in order to call it an immovable property.
51. Having heard the learned Counsel for the Petitioners E
and the Respondents and having considered the material
papers placed before us and the various decisions relied upon
by the Petitioners as well as the Respondents, at the foremost,
what has to be first ascertained is whether the contract between
the Petitioner and its Purchaser would fall within the definition F
of 'Works Contract' in order to attract clause (b) to Sub-Article
(29-A) of Article 366 of the Constitution. In fact, if an answer to
the said question can be held in the affirmative, then that would
axiomatically lead to an answer in favour of the Petitioner.
Though, several decisions, wherein various tests have been G
highlighted, were cited before us and also reference to various
provisions of different statutes, as well as the Finance Act
provisions were brought to our notice, in my view, before
adverting to those tests and the provisions, in the first instance,
H
1 o~o SUPREME COURT REPORTS [2014) 5 S.C.R.
A it will have to be found out as to what exactly was the nature of
contract, as between the Petitioner and its Purchasers.
52. At the outset, even before examining the terms of the
contract, it will have to be stated that the only business of the
Petitioner is manufacture and supply of LIFTS/ELEVATORS.
8
In fact, neither Mr. Salve nor any other Counsel appearing for
the Petitioners submitted before us that the business of the
Petitioner included any other activity along with the manufacture
and supply of LIFTS/ELEVATORS. Certainly, it is not the case
of the Petitioner that mere installation/erection of LIFT/
C ELEVATOR simpliciter is their business activity. It cannot also
be contended that the job of installation/erection of a LIFT/
ELEVATOR can be done only by LIFT/ELEVATOR
manufacturers. In other words, manufacture of LIFT and erection
of a LIFT can be independently handled by different persons.
D Therefore, the best course to proceed is on the admitted
position that the business of the Petitioner is manufacture and
supply of LIFTS/ELEVATORS as well as its installation. Once,
the said factual position relating to the business of the .
Petitioners is steered clear of, the next question relates to the
E basis of the Contract that emerged between the Petitioners and 1
the Purchasers in regard to the supply of the LIFTS/ i
ELEVATORS and thereby ascertaining what were the agreed
terms as between the parties. It must be stated that in order to
find out the answer to the question referred, namely, whether
F mantJfacture, supply and erection/installation of LIFTS would fall
within the concept of 'Sale' or 'Works Contract', analyzing the
various tests in the forefront and thereafter apply them to the
contract concerned, may not be an appropriate approach in the
peculiar facts of this case.
G
53. Therefore, ii1 my view, the proper course would be to
first analyze what exactly is the contract between the Petitioner
and the Purchaser and under the terms of the 'Contract' what
is the element of works/service involved in order to hold that it
H
KONE ELEVATOR INDIAPVT. LTD. v. STATE OF T.N. & 1021
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
is a 'Works Contract'. Therefore, at the risk of repetition, it will A
have .to be stated that the initial exercise to be carried out is
as to what are the terms of the contract.
54. I have set out in detail the said terms based on the
specimen contract filed before us in the form of Annexure A-1
B
along with its enclosures. These terms have been set out in
detail in paragraphs 8 to 19 and 32. I have also found that the
Purchaser placed an order with the Petitioner for supply of
LIFTS/ELEVATORS mentioning the specifications. In fact, the
document dated 23.12.2009, along with which all the other
connected annexures have been enclosed states that it is by C
way of acknowledgement of the order of the proposed features
of the ~IFT to be supplied. It is true that in the enclosures
annexed along with the said document, in few places, the
expression 'Works Contract' has been used. It is needless to
state that simply because someone calls an activity as a 'Works D
Contract' that by itself will not ipso facto make the activity a
'Works Contract' unless the activity as explained in the
document affirms and confirms to the effect that the said activity
is nothing but a 'Works Contract'. In my opinion, when a
detailed reference to the terms agreed upon between the E
Petitioner and the Purchaser is made, it will not be proper to
merely go by such expression used sporadically to hold that the
contract is a 'Works Contract'. On the other hand, I find that what
the Petitioner has agreed under the Contract, is only to supply
its branded LIFT in the premises of the Purchaser. I can firmly F
and validly state that a careful analysis of the terms contained
in the contract will lead only to that conclusion and not any other
conclusion.
55. As stated earlier and as has been set out in detail in
paragraphs 8 to 19, the Petitioner while agreeing to supply an G
Elevator of a specific model, highlighted the details of the
LIFTS, such as, its technical details, advantages of its product
and other sophisticated equipments put into the product. In fact,
if at all any work element is involved in the activity of supply of
H
1022 SUPREME COURT REPORTS [2014] 5 S.C.R.
A the LIFTS/ELEVATORS, I find that the major part of the work
has been directed to be carried out by the Purchaser, in its
premises, in order to enable the Petitioner to erect its LIFT/
ELEVATOR in the said premises. In a very insignificant manner,
the Petitioner undertakes to attend to certain aspects while
B erecting the LIFTS in the premises of its Purchaser, such as
connecting the power supply to the LIFT after fixing it in the
identified place where the Purchaser has prepared the Hoist/
Well in its premises and such other aspects as mentioned in
the contract. The Petitioner cannot be heard to say that it brings
C different parts of the LIFT and that its activity of assembling the
same in the premises of the Purchaser should be construed
as one of service. In view of the nature of product that the
Petitioner agreed to supply to its Purchaser, it has to
necessarily assemble different parts in the premises of the
Purchaser and thereby, fulfill its contract of supply of the LIFT/
0
ELEVATOR in a working condition.
56. When examining the claim of the Petitioner that what
was agreed by the Petitioner in the contract with its Purchaser
is nothing but a 'Works Contract', such a claim should be
E explicit and must be discernable from the contract itself. When
in the Contract the element of 'Works Contract' is totally absent
and what was agreed between the parties was only supply of
its elevator for a fixed price, mere mentioning of the expression
'Works Contract' or by making refere,nce to the basis for fixing
F the cost of labour involved in the manufacture or by simply using
che expression 'Works Contract' without any scope of
performing any work at the command of the Purchaser, in my
opinion, the Petitioner's claim to hold its activity as a ··works
Contract' cannot be accepted on mere asking. In other words,
G the contract must disclose in no uncertain terms that it was one
for carrying out 'the work' and the supply of the materials were
part of such agreement to carry out any such specified work.
Here, it is the other way around, the contract is only for supply
of LIFTS/ELEVATOR and whatever element of works which the
H Petitioner claims to carry out in effecting the supply is virtually
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1023
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
very insignificant as compared to the element of sale, which is A
paramount as found in the terms of the contract. The whole of
the preparatory work for the erection of the LIFT is that of the
Purchaser and the Petitioner merely goes to the Purchaser's
premises and fixes the various parts of the LIFT in the slots
created for it. B
57. While making a deeper scrutiny of the terms of the
· contract as a whole, as noted earlier, in Annexure A-1, which
is the acknowledgement of the Order dated 23.12.2009, the
very subject column States:
c
"Order Acknowledgment for One (1) No. OTIS Electric
Traction Passenger Elevator for your Building at "BAPU
NAGAR, JAIPUR, RAJASTHAN"."
58. The contehts of the letter also states that the Petitioner o
was glad to receive the valued order placed with it by the
Purchaser and stated that it is prepared to supply and install
One (1) No. OTIS Electric Traction Passenger Elevator. Thus,
while acknowledging the order placed by the Purchaser, the
proposed specifications submitted earlier based on the E
Purchaser's requirement have been enclosed. A specific
Contract number is also provided. Rest of the documents
consist of the details of the model, the nature of the machine
that would be operating the LIFTS, the brake system, the type
of parts that are used in the Machine and the peculiar features
F
of those mechanical aspects. Thereafter, the benefits of the
LIFTS are set out, namely, the smooth and controlled
acceleration/deceleration, better riding quality, assured leveling
accuracy of+/- 5 MM, improved flight time, improved reliability
and increased efficiency, reduced power consumption, reduced
heat release, flexibility of programme and programming of G
features at site, enhancing the value of the building where the
LIFT is erected and simplified maintenance. The other terms
relate to maintenance, wherein the Petitioner's offer of
providing 12 months free maintenance, the time from which
such maintenance would commence and the conditions upon H
1024 SUPREME COURT REPORTS [2014] 5 S.C.R.
A which such maintenance offered would operate and also
making it clear that during the period of maintenance the
Purchaser will be the owner and also the circumstances in
which the Petitioner would be liable for any damage that occurs
to the LIFT. A consideration of this part of the contract also
B does not refer to or contain any element of work or service to
be provided as agreed between the parties.
59. The other set of terms are called as 'Preparatory
Work'. Under the said head, it is mainly stated as to the nature
of preparatory work that the Purchaser will have to organize in
C its premises, such as, the time within which such preparatory
work is to be carried out, which would require the Purchaser
to design and furnish what is called as Elevator hoist way/
structure to provide in its building to enable th~ Petitioner to
supply its LIFT and locate it. It contains as many as 21 different
D aspects of preparatory work wherein, what all the Petitioner has
come forward to provide is a ladder for having access to the
pit. The other one which the Petitioners agreed to provide is a
steel fascia for each sill. The third one is the cutting of walls,
floors or partitions together with any repairs to be made
E necessary including .. grouting of all bolts, sills, members
indicator and button boxes, etc. and a steel scaffolding to be
made Jn the course of erection, which the Petitioner undertakes
to provide.
F 60. As far as the provision of a ladder in the pit is
concerned, it can again be taken only as a material part of the
LIFT .and it does 11ot involve any work to be performed. Similarly,
provi'sion of a steel fascia at every sill level is again another
part of the LIFT and here again there is no element of work or
G service to be rendered. The provision relating to cutting of walls,
floors or partitions together with any repairs to be made
necessary including groufing of all boltS, sills, members
indicator and button boxes etc., are but certain incidental minor
jobs to be attended to in the course of the supply and erection
of the LIFT. When under the contract, the Purchaser has been
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1025
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.)
directed to prepare the hoist way, which is a solid structure in A
the building and in the course of the erection of the LIFT if some
holes are to be drilled for fixing a frame or a nut and bolt as
compared to the enormity of the preparatory work that has been
entrusted with the Purchaser for the purpose of erecting the
LIFT, it must be stated that the said work of cutting the walls to B
fix the frames and grouting the bolts could not be held to be a
service or work for which the contract was entered into. It is like
doing some incidental work for fixing a Fan or an Air
Conditioner. Providing a steel scaffolding again is not a matter
which can be held to be a contract for works. On the other hand, c
for the purpose of grouting bolts and fixing the frames in a hoist
way, which is stated to be having 30/40 metres height/depth, it
has to be mandatorily arranged by someone but here again it
will have to be stated that the same cannot be a decisive one
for ascertaining the nature of contract, as between the parties. D
Therefore, on the whole, the terms under the head 'Preparatory
Work' does not in anyway persuade us to hold that what was
agreed between the parties in this contract was a 'Works
Contract'.
61. The next set of conditions contained in the Contract is E
under the head 'IEEMA Price Variation Clause for Elevator
Works Contracts'. As stated earlier, this is the document in
which the expression 'Works Contract' has been used. When
examining the details contained under the said head what all it
says is that the price quoted/confirmed is based on the cost of F
raw materials/components and labour cost as on the date of
quotation and the same is deemed to be related to Wholesale
Price Index Number for Metal Products and All India Average
Consumer Price Index Number for Industrial Workers. The said
part of the contract is nothing but an indication that the price G
agreed between the parties or the supply of the LIFT may vary
under certain contingencies and such variation will depend upon
the price indices relating to Metal Products and the Consumer
Price Index. I see no co-relation at all for the said stipulation
contained vis-a-vis the caption 'Elevator Works Contract'. H
1026 SUPREME COURT REPORTS [2014] 5 S.C.R.
A Merely because the price is likely to vary based on the variation
in the indices of the price of Metals and Consumer Price, I fail
to understand as to how that has any relevance or a reference
to those indices would determine the nature of the contract as
a 'Works Contract'. Therefore, the caption 'Elevators,..Works
B ·Contract', while referring to the Price Variation Clause is a total
misnomer and based on the said caption simpliciter, the whole
• contract cannot be called as a 'Works Contract'. Under the very
same head it is stipulated by way of payment terms that claim
for manufactured materials should be paid along with the
c material invoice and claim for installation should be paid along
with their final invoice, which according to the Petitioner would
relate to the labour costs. It however, states that the price
quoted in the proposal would be formed upto a particular date
and thereafter, if there is any delay in completion of installation
and commissioning due to reasons attributable to the
0
Purchaser, the price would be varied in accordance with the
above costs indices. The price variation is supposedly agreed
between the parties to prevail upto a specified date. Therefore,
in the event of the contract being completed within the specified
E date, there is no question of any price variation arising in order
to work out such variation based on the 'Wholesale Price Index'
or 'Consumer Price Index'. Even assuming a contingency
arises due to the fault of the Purchaser, at best it may result in
some variation in the price and I fail to understand as to how
based on the working out of such variation in the price, it can
F be held that the whole contract is a 'Works Contract'.
62. I do not find any sound logic or basis in the Petitioner
referring to the Price Variation Clause under the caption
I
'Works Contract'. Therefore, it can be validly stated that by
G calling the Price Variation Clause as an 'Elevator Works
Contract', the contract cannot be construed as a 'Works
Contract'. On the other hand, going by the stipulations contained
therein viz., that the claim for manufactured materials should be
paid along with material invoice and the installation charges to
H be pai~ based on final invoice makes it clear that the contract
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1027
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
is divisible in its nature and to call it an indivisible one, is A
contrary to its own terms.
63. With this, the 'Conditions of the Contract' can be
referred to, which contains as many as 27 conditions. Tnese
conditions have been elaborately discussed in paragraph 18 8
of this judgment, to which I once again bestow my serious
consideration, in order to appreciate whether, these conditions
at least throw any light to state that the contract can be brought
within the expression 'Works Contract'.
64. When examining these conditions, in the first instance, C
the most relevant and clinching condition is the one relating to
the payment to be effected by the Purchaser, which is to the
effect that on signing the contract, 90% of the contract amount
should be paid and the balance 10% either on the
commissioning of the LIFT or within 30 days of the Petitioner's D
offer to commission the LIFT and if for any delay caused beyond
the control of the Petitioner, within 90 days from the date the
materials are ready for dispatch at the premises of the
Petitioner. The agreed period for execution of the supply of the
LIFT, as per the contract, is 52 weeks i.e., one full year. · E
Whereas by reason of any delay beyond the control of the
Petitioner, within 90 days from the date of the commencement
of the contract, the Petitioner will have the right to demand for
the entire payment without doing anything towards the erection
part of it. Alternatively, while the Purchaser would be liable to F
pay the entirety of the contracted amount for the supply of the
LIFT, the Petitioner after receiving the full payment would still
have sufficient time to effectuate the supply in the event of the
supply not being effectuated within the due date, then, on that
ground the inability to commission the LIFT within 30 days or G
within 90 days after the materials are ready for dispatch will not
for any reason be attributable to the Petitioner. In fact, Condition
No.8 at the end states that if for any reason the Petitioner is
not able to supply any equipment within 52 weeks, then at its
option, it can cancel the contract without there being any liability H
1028 SUPREME COURT REPORTS
1 (2014) 5 S.C.R.
I
A for payment of damages or compensation. Therefore, those
terms relating to payment in Condition No.5 and the right
retained by the Petitioner to cancel the contract for any reason
whatsoever under Condition No.8 disclose that for mere signing
of the contract for supply of the LIFT, the Petitioner would get
s the whole value of it without any corresponding obligation to
effect the supply or to suffer any damages. The said outcome
based on the payment conditions when read along with the
other stipulations, disclose that the claim for manufactured
materials should be paid along with the material invoice and
c the claim for installation should be paid along with their final
invoice. It further makes it abundantly clear that the right of the
Petitioner to realize the full value of the materials of the LIFT to
be supplied does not entirely depend upon the installation part
of it. In other words, supply of materials of the UFT and
D installation costs are separately worked out in order to ensure
I that irrespective of the installation, the Petitioner will be able
to realize the value of the material cost. This.conclusion which
is based on the above terms, also strengthens the reasoning
that the contract. is not an indivisible one and is always
E separable i.e., one for supply of materials and the miniscule part
of the work involved. The division of 90% payment in the first
instance and the balance 10% under certain other situations,
fully supports the above conclusion.
65. A reference to the various other conditions in the
F contract also do not suggest that the consideration under the
Contract to be borne by the Purchaser, has got anything to do
with the installation part of the LIFT. On the other hand, the tenns
have downright been agreed upon between the parties only to
mandate the Purchaser to pay 90% of the contracted amount
G on mere signing of the contract and to pay the balance 10%
within 30 days of the Petitioner's offer to commission. the LIFT
and even if the said event of commissioning of the LIFT fails
to occur due to any reason not attributable to the Petitioner or
beyond its control, within 90 days of the materials made ready
H for dispatph at the premises of the Petitioner. In that situation
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1029.
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
also what all the Petitioner will have to ensure is that such A
components of the LIFTS are ready for dispatch. At the risk of
repetition, it can be stated that if on the date of the signing of
the contract 90% payment is made and within the contract
period i.e 52 weeks, the Petitioner is able to show that the whole
of the components of the LIFTS are ready for dispatch at its B
premises, the Purchaser is boung to pay the balance 10% also
within 90 days from the date of such availability of materials
for dispatch without any other stipulation as to such equipments
or components being delivered at the spot of the Purchaser for
its installation. If the conditions of the contract relating to c
payment are discernable to that effect, it can only be stated ttlat
the contract of the Petitioner with the Purchaser is virtually for
. the manufacture of the materials and for its absolute readiness
to supply those materials and nothing more. The sum and
substance of the conditions of the contract de hors the other
D
clauses is only to that effect.
66. As far as the other clauses are concerned, they have
nothing to do with the execution of the works or creating any
duty or respon'sibility on the Petitioner to carry out such
execution and thereby, .any corresponding liability being E
fastened on the Petitioner in the event of its failure to carry out
the erection/installation part of it will not become attributable. It
' " also be relevant to note that if for any reason, the contract
is.not fulfilled due to reasons attributable to the Purchaser, the
apportionment clause will enable the Petitibner to retain such F
part of the amount of 90% already received to cover its costs
and expenses. In fact the whole discretion vests with the
Petitioner to determine such apportionment under Clause 21.
Therefore, on a detailed consideration of the conditions of the
contract, one will not be able to state with any certainty that the G
contract has got anything to do only with any work or service to
be performed in the course of supply of the LIFT/ELEVATOR
by the Petitioner.
67. The signed part of the said contract makes it clear that H
1030 SUPREME COURT REPORTS (2014) 5 S.C.R.
A the price is inclusive of indirect taxes, as is currently applicable
either leviable by the Central Government or State Government
or any local Authority, including Excise Duty and Service Tax.
However, it also states that in the event of any such statutory
levy or payment of tax or otherwise faced by the Petitioner, then
8 unaer such circumstances, that should be borne by the
Purchaser.
68. Having considered the above terms of the contract
threadbare, I am convinced that it can only be concluded that
this contract is only one for the manufacture and supply of the
C LIFT/ELEVATOR and the installation though mentioned in the
contract, has very insignificant relation to the consideration
agreed upon between the parties. In any event, as I have found
that the contract of supply and installation are divisible in very
many aspects, it is difficult to hold that it is a 'Works Contract'.
D Therefore, it will have to be held that the manufacture, supply
and erection of LIFT/ELEVATOR agreed upon by the Petitioner
to any of its customers, would only fall within the expression
'Sale' and can never be called as 'Works Contract'. Once that
is the conclusion that can be made based on the contractual
E terms as agreed between the Petitioner and its customers, the
application of Article 366(29A)(b) cannot be made and does
not in any way support the contentions raised by the Petitioner.
69. De hors the abovesaid conclusion, based on the very
F contract, I wish to deal with the various submissions of the
Petitioner based on various decisions relied upon, including the
decision in Larsen & Toubro Ltd. (supra).
70. Keeping the above salient features of the contract
between the Petitioner and the Purchaser in mind, I now deal
G with the submissions made by the learned Senior Counsel for
the Petitioners. Mr. Salve, learned Senior Counsel in his
opening submission relied upon Section 2Uj) of the Orissa
Sales Tax Act, 1947 and contended that applying the said
definition of 'Works Contract' to the present contract, the same
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1031
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
would squarely fall within the said definition. When examining A
the said contention, it will be relevant to make a detailed
reference to the said provision under the Orissa Sales Tax Act.
For appreciating this provision, a reading of it is required and
has been extracted in paragraph 24 of this judgment. The
definition of 'Works Contract' under Section 20j) of the Orissa B
Sales Tax Act states that it would include any agreement for
carrying out for cash or deferred payment or other valuable
consideration, among other activities, fabrication, erection,
installation or commissioning of any movable or immovable
property. c
71. As far as a LIFT is concerned, in one sense it can be
called as a movable property when it is in the course of
operation after its installation and that it is not embedded to
the earth permanently while, in another sense, having regard
to the manner in which the LIFT is installed in a premises, it D
can also be stated to be part of an immovable property. In my
view, whether as a movable property or immovable property, it
may not make any difference while considering the other
prescriptions contained in the said provision. What is really
relevant for consideration is to examine the issue by referring E
to the said provision, which in the foremost, depends upon an
agreement between the parties. The said agreement should
ordain an obligation on one party who has been entrusted with
the task of fabrication, erection, installation of any movable or
immovable property. The most mandatory requirement for F
invoking the said provision and for applying the said definition
would be that the whole of the agreement should be for carrying
out the work of fabrication, installation or erection of a movable
or immovable property. Significantly, the expression
'manufacture' is absent in Section 2Qj). G
72. Next, as per the agreement, it should be for cash or
deferred payment or other valuable consideration. In other
words, it must first satisfy the definition of a 'concluded contract'
as provided under that Section. In this context, it would be
H
1032 SUPREME COURT REP.ORTS [2014] 5 S.C.R.
I
A relevant to refer to Section 2(h) and the first part of Section 10
of the Indian ·contract Act, 1872. Section 2(h) reads as under:
"Ah agreement enforceable by law is a contract."
The first part of Section 10 reads as under:
B
I •
"What Agreements are contracts - All Agreements are
Contracts if they are made by the free consent of parties,
competent to contract, for a lawful consideration and with
th~ lawful object and are not hereby expressly declared to
c be void."
73. Therefore, in order for a contract to be valid, it must
be one which can be enforced by law and such agreements if
made between the parties must be for a lawful consideration
and wi.th a lawful object. It is needless to state that for any
D contract to be valid and lawful, the basic ingredients of offer and
acceptance for valuable consideration must be present.
Keeping the said provisions relating to a valid contract under
the provisions of the Indian Contract Act in mind, when an
examination is made on the implication of the definition of
E 'Works Contract' under Section 2Ui) of the Orissa Sales Tax Act
to the base on hand, at the foremost, it is necessary to examine
as to whether there is a valid agreement and that valid
agreement and if such an agreement is for a lawful
consideration to perform the work of fabrication, erection,
F installation of any movable or immovable property. Further, such
an agreement should also be one for cash or deferred payment
or oth~r valuable consideration.
74. Keeping the above statutory prescriptions in mind, the
G same ~an be applied to the case on hand. As has been pointed
out in the earlier part of the judgment, where the various terms
of the contract as between the Petitioner and the Purchaser
have beenI
examined, in particular the consideration part of it,
it is found that the majority of the consideration was payable· to
H the Petitioner within one monti 1 from the date of commissioning
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1033
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
, or within 90 days of keeping the materials ready for supply in A
its premises. This is on the ground that the commissioning could
not be effected as agreed or within 30 days of its readiness to
commission and by stating that its inability to commission was
delayed due to reasons beyond its control. This provision in the
Contract is de hors the stipulation in Condition No.25(a) under B
which a minimum of 16 weeks is prescribed for commissioning
while the maximum period is 52 weeks, which again depends
upon the fulfillment of the agreed conditions fastened on the
Purchaser. It also provides for extending the contract periods.
To recapitulate the said regime of the contract, it can be stated c
that the parties agreed as per the agreement wherein the
Purchaser is bound to pay 90% of the agreed sum at the time
of signing of the contract itself and the balance 10% within 90
days from the day the Petitioner gets the materials ready for
dispatch in its premises, if it could not commission as agreed
or within 30 days of its readiness to commission. Therefore, D.
the whole of the valuable consideration becomes payable and
was relatable or as agreed upon by the parties merely for the
Petitioner's readiness to take up the contract of supply of the
ELEVATOR and for its endeavour to effect the manufacture,
E
procure the entire materials for a LIFT/ELEVATOR and keep
it ready for dispatch in its premises. In other words, the moment
the materials for a LIFT/ELEVATOR are made ready and kept
for dispatch in the premises of the Petitioner, under a particular
contingency within 90 days thereof, the majority of the
contracted amount is to be paid to the Petitioner without any F
corresponding legally enforceable obligation on the Petitioner
to carry out the erection or installation in the premises of the
Purchaser.
75. In fact, the period actually agreed between the parties, G
as per which the Petitioner is to carry out the installation part
of the LIFT runs to 52 weeks i.e., for one full year, whereas the
whole of the consideration would become payable within 90
days from the date the materials are kept ready for dispatch in
the premises of the Petitioner. Therefore, I fail to understand H
1034 SUPREME COURT REPORTS [2014] 5 S.C.R.
A as to how it can be held that there was any sordid agreement
as between the Petitioner and the Purchaser for any valuable
consideration only for the purpose of carrying out erection/
installation of the LIFT in the premises of the Purchaser. If for
any reason after the full payment is effectuated by the Purchaser
B as per the term relating to the payment of the contracted
amount, due to any fault of the Petitioner, the supply of the
material ,or erection or installation fails to take place, the remedy
of the Purchaser may at best be for recovery of the material
part of the contract and I do not find any provision in the terms
C of the c©ntract, which would entitle the Purchaser to lawfully
enforce as against the Petitioner for the execution part of it,
namely, the erection/installation of the LIFT in its premises. In
my opinion such a consequence would be inevitable having
regard to the terms of the contract, which in spite of my best
efforts, was not able to discern any specific clause which would
0
entitle the Purchaser to seek for such enforcement for erection/
installation. On one hand, a provision from the contract states
that the Purchaser may be entitled to retain the materials even
in uninstalled position in the event of the contract not being
fulfilled in its fullest terms.
E
76. ~n the other hand, in the event of any failure on the
part of the Purchaser in effectuating the payment or in fulfilling
certain other aspects, such as construction of hoist way and
other wor~s related, obligations to be performed on its part, the
F Petitioner has retained every right to charge interest for such
delay, if any, caused at the instance of the Purchaser and in
the event1of the Contract failing to fructify, the Purchaser would
be liable to pay compensation/damages to the Petitioner and
not vice versa. Since the above conclusion is the outcome
G based on 1the relevant terms of the Contract, the mentioning in
Clauses 10 and 14 that the contract is otherwise indivisible
'Works Contract' will not by itself make it indivisible or a 'Works
Contract'.j When that is the factual and legal outcome as per
the terms of the contraQt, it will have to be held that there is no
H scope to ~pply Section 2Uj) of the Orissa Sales Tax Act to the
I
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1035
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
case on hand and hold that the manufacture, supply and A
installation of the LIFT by the Petitioner would fall within the said
definition of 'Works Contract'. It may be a different situation if
the contract was one for mere fabrication/erection/installation.
Certainly a simple activity of fabrication cannot be equated to
manufacture of parts of a LIFT since such fabrication may take B
place at the site with the aid of material and labour.
77. That apart, provisions of the Indian Contract Act
stipulates the element of offer., acceptance and consideration
for a concluded contract. In the case on hand, the offer would C
be for supply of the LIFT as described in the proposal made
by the Petitioner. The consideration upto 90% would become
payable the moment the Purchaser agrees to the proposal
made by the Petitioner and the balance 10% can also be
collected without any positive guarantee for completion of
erection or installation of the LIFT under certain contingencies D
without any corresponding right in the Purchaser to seek for
enforcement of the erection/installation. In fact for payment of
the balance 10% under such contingencies, what all the
Petitioner has to show is that the materials meant for the supply
of the LIFTS are ready for dispatch in its premises, which would E
mandate the Purchaser to make the payment within 90 days
of such readiness as reported by the Petitioner. In effect such
a contract as agreed between the Petitioner and its Purchaser
as per the provisions of the Indian Contract Act if were to be
considered for the invocation of the definition of 'Works F
Contract' under Section 2Uj), it can be found that the said
contract does not in any way create any legal obligation on the
Petitioner to effect the erection or installation of the LIFT as a
movable or immovable property, satisfaction of which contract
alone will attract the definition of 'Works Contract' under Section G
2Uj) of the Orissa Sales Tax Act.
78. Mr. Salve, learned Senior Counsel then contended that
the terms contained in the contract for manufacture, supply and
installation of the LIFT as well as the various prescriptions
H
1036 SUPREME COURT REPORTS [2014] 5 S.C.R.
A contained in the Field Installation Manual show that what was
agreed as between the parties would fall within the definition
of 'Wor~s Contract' and therefore, be held ~s the same. In the
previous paragraphs, it has been stated as to how the contract
between the Petitioner and its Purchaser is mainly for the supply
B of the LIFT and the agreement is not in any way conditional to
the insdllation part of it. Therefore, the reference to the Field
Installation Manual will be of no assistance to the Petitioner,
since it only describes as to how various steps are to be
followed by the personnel of the Petitioner while erecting the
1
c LIFT. Since, the agreement, namely, the proposal for the supply
and the consideration was agreed as between the Parties,
without creating any legally enforceable rights as regards the
installati<Pn part of it, the reference to the Field Installation
Manual, which is an internal document of the Petitioner issued
to its employees for their guidance, does not in anyway
0
advance the case af the Petitioner. Therefore, for the very same
reasons, 1the said contention of the learned Senior Counsel is
also liable to be rejected.
79. I have also highlighted how as per the payment terms
E the parti~s agreed specifically to the effect: 'under this clause
claim for 'manufactured materials shall be paid along with our
material invoice and claim for installation labour shall be paid
along with our final invoice.' In fact the copy of the two invoices
dated 17 .~ 2.2009 and 20.09.2010, clearly explains the fact that
F the first one related to material cost and the subsequent one
only related to labour cost.
80. I have examined the provisions of the Bombay Lifts Act.
1939 which ' have been raised by learned Senior counsel for the
G petitioners in paragraph 25 and have extensively dealt with
them in paragraph 37 of this judgment. Based on such
examinatipn of the various provisions of the Act, I have found
that these provisions are meant for getting a permit, licence,
registration etc. and for the purpose of ensuring that in the
course of the installation, as well as, while the LIFT is in
H I
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1037
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
operation or in the course of the maintenance of the LIFT, no A
damage is caused to men and materials. Beyond that, based
on the said provisions there is no scope to reach a conclusion
that a contract as between the Petitioner and the Purchaser
would come within the definition of the 'Works Contract'.
Therefore, the said submission of the learned Senior Counsel B
cannot also be accepted.
81. The learned Senior Counsel then referred to a decision
of the Government of India reported in In Re: OTIS Elevator
Co. (India) Ltd. (supra), which has been dealt in paragraph 38 C
of this judgment. I fail to see any scope to rely on the said
decision, as it is only that of the Department of Government of
India. Even otherwise, the said decision was for the purpose
of finding out as to whether 'excise duty' was payable at the
time when the manufactured parts of elevators/escalators were
cleared from the premises of the Petitioner. I do not find any D
scope at all to apply the said conclusion of the Government of
India to the case on hand, apart from the fact that the said
conclusion reached under the provisions of the Central Excise
Laws cannot be applied to the legal issue with which we are
concerned. In any event, such a decision of the authority of the E
Government of India cannot even have a persuasive value on
this Court.
82. A reference was also made to a notice issued by the
Central Board of Excise and Customs dated 15.01.2002, under F
Section 378 of the Central Excise Act which has been dealt
with in paragraph 39 of this judgment. Here again I fail to see
any acceptable grounds to apply any of the reasoning for such
conclusion. When I examined the nature of the contract of the
Petitioner for manufacture, supply and installation of the LIFTS G
to its Purchaser, I do not find any scope at all to apply those
decisions or the conclusions taken by the concerned authority
under the provisions of Central Excise Act.
83. The learned Senior counsel for the petitioner lastly
made reference to sub-Sections 29, 39(a) and sub-clause (zzd) H
1038 SUPREME COURT REPORTS [2014] 5 S.C.R.
A to sub-Section 105 of Section 65 along with a further reference
to sub-Clause (zzza) to sub-Section 105 to Section 65, which
has been dealt with in paragraph 41 of this judgment. Though
in the first blush, the submission appears to be forceful, on a
meticulous examination of the provisions with particular
B reference to the contract as between the Petitioner and its
Purchaser, I am compelled to reject the said submission as it
has no force.
84. To note the fallacy in the submission, a clear
C understanding of the said provision is required. At the very
outset, it will have to be stated that the present attempt is to
find out ~n answer to the question whether manufacture, supply
and eredtion of a LIFT, will fall under the category of 'Sale' or
'Works d:ontract' for the purpose of a levy under the Sales Tax
Act. Section 65(29), 65(39a) and 65(105) (zzd) and (zzzza) are
D all provi$ions for the levy of Service Tax. It is well known that
I
while interpreting taxing statutes, strict and literal interpretation
should be made. For this proposition of law, reference can be
made td one of the earliest decisions of England in Cape
Brand Syndicate vs. Inland Revenue Commissioner, 1921-1
E KB 64. The above decision was followed in Income Tax Officer,
Tuticorin vs. T.S. Devinatha Nadar, Etc., AIR 1968 SC 623
wherein it held that what is applicable to another taxing statute
may not be applied to a case governed by sales tax statutes.
Keeping the above fundamental principle in mind, an
F examination of Section 65(29), defines 'commissioning and
installation agency' to mean any agency providing service in
relation to erection, commissioning or installation. Section
65(39a) further defines the expression 'erection, commissioning
or installation' to mean any service provided by any such
G agency, in relation to, inter alia installation of LIFT and
escalation. Section 65(105) (zzd) defines 'Taxable Service'
inter alia to mean service provided or to be provided to any
per.s0fti5Y erection, commissioning or installation agency in
relation to commissioning and installation. Therefore, reading
,1 the abov~ provisions together, what emerges is that any service
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1039
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
provided by way of commissioning and installation of LIFT and A
Escalators by any agency would be a Taxable Service. Once
the said position is steered clear of, the other provision referred
to was Section 65(105)(zzzza), which again is one other
taxable service, namely, a service to any person by any other
person in relation to the execution of 'Works Contract'. It B
excludes 'Works Contract' in respect of roads, airports,
railways, transport terminals, bridges, tunnels and dams
obviously because those are services of the State. The s~id
sub-clause, however, contains a definition of 'Works Contract'
in the explanation part. It, however, refers to a contract which c
includes transfer of property in goods involved in the execution
of a works contract. In Clause (i) of the Explanation, it makes it
clear that such transfer of goods would attract levy of tax as sale
of goods, under the relevant statutes, namely, Sales Tax Acts;
State or Central. In Clause (ii) of the Explanation, it specifically D
includes erection, commissioning or installation of LIFT arid
Escalator. It will be profitable also to refer to Section 65(50),
which defines 'goods' to mean what is assigned to it in clause
(7) of Section 2 of the Sale of Goods Act, 1930. Section 2(7)
of Sale of Goods Act defines it to mean every kind of movable
E
property other than actionable claim, etc. Similar such
definitions are attributed to 'goods' under the Sales Tax Acts.
Since Section 65 and the various subsections, namely,· (29),
(39a), (105), (zzd), (zzzza) put together only relatable to Service
Tax, the question of importing the said definition of 'Works
Contract' in the explanation to Section (65)(105)(zzzza) to the F
provisions of Sales Tax Acts cannot be made. Further, clause
(i) of the Explanation to sub clause (zzzza) of Sub-section 105
to Section 65, distinctly refers to transfer of goods in any such
contract to mean such goods leviable to tax as a sale of goods.
It will have to be stated that such leviability by itself may G
independently attract tax liability under the relevant Sales Tax
Statutes. However, it is notthe coocern in this case and it is to
be left open for consideration as and when any need arrives
to decide that question. Therefore, the reference to the above
H
1040 SUPREME COURT REPORTS [2014] 5 S.C.R.
A provision~ under the Service Tax Act are of no assistance to
the Petiti;oner to hold that its manufacture, supply and
installation of a lift is a 'Works Contract'.
85. The above conclusion is de hors the position that sub-
B clause (zzzza) of Sub-section 105 of Section 65 came to be
introduced under the Finance Act of 2007, which came into
force w.e.f. 11.05.2007. It should also be noted that Section
65(29), 65(39a) and 65(105) (zzd) have nothing to do with
manufacture and supply which is actually the activity of the
C Petitioner. It is regarding the erection/commissioning/
installation simpliciter, even if the LIFT or Escalator is
independently carried out by an Agency. According to me, by
relying upon Section 65 (29), 65 (39a) and Section 105 (zzd),
the case of the Petitioner cannot be comprehensively answered
and he further cannot possibly contend that the contract should
D be construed as a works contract. Therefore, on the ground of
any liability being cast on the Petitioner under the provisions
of the Se~ice Tax Act, it will be wrong to hold that the Petitioner
cannot be ~ailed upon to comply with the provisions relating to
Sales Taxi The said submission of the learned Counsel is,
E therefore, liable to be turned down.
86. On examination of the various decisions, which were
relied upon by the learned Senior Counsel, the first case was
the Division Bench decision of the Bombay High Court in OTIS .
F Elevators Co. (India) Ltd. (supra). It is true that in the said
decision the Bombay High Court dealt with the very same issue,
namely, whether supply, erection, installation of LIFT by the
Petitioner would fall within the definition of 'Works Contract' or
a 'Sale'. Tile Division Bench of the Bombay High Court posed
G two questions for consideration. The questions were:
"1. Whether on the facts and in the circumstances of the
case, the Tribunal was justified in holding that the contract
dated 10.06.1958 between the applicants and M/s Tea
j
Mana~ and Co. was a composite and divisible contract,
H
I
I
'
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1041
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.)
one for the sale of goods in which the property has passed A
and the other for labour and service charges for the
installation of the goods so sold.
2. Whether the said contract was one and indivisible
contract for work and labour."
B
87. While examining the above two questions apart from
the various terms of the contract, the Division Bench has
referred to a very vital term in the contract, which again related
to the payment of consideration. The said term has been
extracted at page 531, which reads as under: c
"531. We propose to furnish and erect the elevator,
installation outlined in the foregoing specifications for the
sum of price of two passenger lifts as above duly delivered
and erected at site@ Rs.28,156/- each."
D
88. The Division Bench, thereafter, noted clause (iv) of the
Agreement, which related to the payment of price. The said
clause was as under:
"30% within 30 days of the builders accepting the
proposal; 60% on receipt of shipping documents from the E
applicants' factories; and the remaining 10% (+)or(-) any
adjustments required on completion of erection or in any
case within 6 months of delivery of equipment."
89. After referring to the above clauses in the agreement F
and also the various decisions relied upon by the respective
parties, the Division Bench noted the contention of the
Department and the substance of the contention of the
Department was as under:
"We have already referred to the contention of the G
Department that in view of the proportion of cost separately
indicated for the material as against labour, and the use
of the word 'price' in describing the consideration for the
supply, erection and installation of the lifts the intention of
the parties was to sell the goods." H
1042 ~UPREME COURT REPORTS [2014] 5 S.C.R.
A 90. While dealing with the said contention, the Division
Bench observed as under:
"In the ultimate analysis in this case the form in which
services are rendered does not permit its severance into
two compartments. In this connection, there are certain
B
factors which have relevance in determining the intention
of the parties. The time-limit fixed for doing the work, the
mention of and all-inclusive price for the totality of the
materials and services rendered. the absence of an
agreement for the sale of chattel as chattel, the point of
c time when, the property in the goods passed from the
applicants to the opposite party, the nature of the contract
undertaken by the Applicants under and the indivisibility of
the contract, are all factors which would indicate what
should be the proper construction of the contract entered
D into between the parties."
91. The Division Bench then felt it necessary to examine
the terms pf the contract and the surrounding circumstances and
ultimately!reached its conclusion as under:
E
"In this connection the mode of payment set out in clause
4 is also pertinent. Under that clause 30% of the price was
to be paid within 30 days from the date of the acceptance
of the proposal, 60% was to be paid on receipt of shipping
documents from the factories, and the remaining 10% had
F to be paid, subject to adjustments required, on completion
of the erection, or, in any case, within six months of the
delivery of the equipment, if the erection was delayed due
to th~ reasons beyond their control. This is more consistent
with <':Ind all-inclusive price being fixed irrespective of the
G mateHals supplied from time to time with the building
contractors."
92. The answers to the questions were ultimately made at
the end of the judgment to the following effect:
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1043
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
"In the result, we answer the questions referred to us as A
follows:-
Question No.(1) in the negative.
Question No.(2) in the affirmative."
B
93. The Division Bench ultimately held that the contract was
a composite and indivisible contract for work and labour and,
therefore, no sale of goods can be spelt out of the contract. As
observed from the said judgment, the Division Bench has noted
the agreed terms of the parties, which stated that the proposal C
was to manufacture/erect/install the elevator, for which the price
~
was agreed upon. The payment term also made it clear that
the entirety of the payment would be made on completion of
the erection or in any case within six months of delivery of the
equipment. It has further noted that the price was all inclusive o
for supply, erection and installation which were the specific
terms of the contract. Therefore, the said judgment having
regard to the special facts, namely, the specific terms contained
in the contract as between the parties, can have no application
to the facts of this case. In the case on hand, the payment has E
really nothing to do with the erection and installation. It has also
got no relation to the delivery of the LIFT, either in its full form
or in any semi-installed condition. The contractual terms
between the Petitioner and its Purchaser have been explained
in detail and have no relation to any service to be performed
F
by the Petitioner by way of the agreed terms of the contract.
The said decision is, therefore, of no assistance to the case
of the Petitioner. In any event, if it is argued that the contract
involved in the said decision is identical to the case on hand,
as it has been found and held that the terms of the contract is
not persuasive enough to call it a 'Works Contract', the said G
decision will no longer hold good.
94. Before analyzing the various other decisions relied
H
1044 SUPREME COURT REPORTS [2014] 5 S.C.R.
A upon by either side, having regard to the above conclusion that
the manufacture, supply and installation of LIFT by the Petitioner
would constitute a 'Sale' and not 'Works Contract', a reference
can be mCjde to t~e reasoning, which weighed with the learned
Judges in the judgment rendered in Kone Elevators (India) Pvt.
B Ltd. (supra). In the said judgment this very question which has
been referred to this Constitution Bench directly arose for
consideration. The present Petitioner when submitted its returns
under the provisions of the Andhra Pradesh General Sales Tax
Act, 1957 for the period 1.04.1995 to 31.05.1995 and
c 01.06.1995 to 31.07.1995, provisional assessments were
made byl the Commercial Tax Officer by order dated
19.08.1995 and 05.09.1995, respectively. The claim of the
Petitioner by way of deductions of labour charges for
composition of Tax under Section 5G read with Section SF of
D the said Act! .on the ground that the nature of work undertaken
by it constitutes a 'Works Contract', was rejected by the
Assessing Authority holding that the same amounted to 'Sale'.
The appeal preferred by the Petitioner was also rejected. The
further ap!peal to the Tribunal was allowed in favour of the
E assessee holding that the activities of the Petitioner would fall
within the expression 'Works Contract' and not 'Sale'. The
Department's challenge in the High Court also ended in a
failure. In an appeal preferred by the Department before this
Court, after applying the effect of sub-article (29A)(b) of Article
366 and also the decisions in Gannon Dunkerley (supra),
F Hindusta1 Shipyard Ltd. (supra) etc., and after making a
detailed reference to the contractual terms it was held as under
in paragraph 12:
"12. On a careful study of the aforestated clause in the
G Delivery Schedule, it is clear that the customer was
required to do the actual work at the site for installation of
lift. On reading the above clause, it may be observed that
the e1tire onus of preparation and making ready of the site
for in?tallation of lift was on the customer. It was agreed
H that under no circumstances would the assessee
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1045
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
undertake installation of lift if the site was not kept ready A
by the customer. Under clause 4(g) of the "Customers'
Contractual Obligations", the assessee reserved the right
to charge the customer for delay in providing the required
facilities. These facts clearly indicate that the assessee
divided the execution of the contract into two parts, namely, B
"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 c
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 work
connected in keeping the site ready for installation as per
the drawings. In view of the contractual obligations of the
0
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 E
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,
indicates that the assessee has been exhibiting various F
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 of lifts as per his
convenience and choice. Therefore, the assessee G
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 elev;:itors during the relevant period in the
course of its business. 1n the present case, on facts, we H
1046 SUPREME COURT REPORTS [2014] 5 S.C.R.
A find that the major component of the ~nd product is the
material consumed in producing the lift to be delivered and
the s~ill and labour employ~d for converting the main
components into the end product were only incidentally
used and, therefore, the delivery of the end product by the
B. assessee to the customer constituted a "sale" and not a
"works contract". Hence, the transactions in question
constitute "sale" in terms of Entry 82 of the First Schedule
to the paid Act and, therefore, Section 5-G of the said Act
was not applicable."
c 95. It can be concluded that the reasoning of this Court in
the above-referred decision is in tune with the law on the subject
and it should be held that could be the only reasoning which
can be ass,igned, having regard to the nature of the contract
and the relevant provision of law that would apply to such a
D transaction as between the Petitioner and its customers.
Therefore, the said decision should remain as no other view
other than what has been taken in the said decision is possible.
I, thus, affirm the said decision and hold that the activity of the
Petitioner i~ the manufacture, supply and installation of LIFT/
E ELEVATOR is a 'Sale' and not a 'Works Contract', having
regard to the specific terms of the contract placed before this
Court.
96. On behalf of the Petitioners, reliance was heavily
F placed upon the three Judge Bench decision of this Court in
Larsen & toubro Ltd. (supra). That decision came to be
rendered pursuant to a reference by a two judge Bench of this
Court in K. Raheja Development Corporation vs. State of
Karnataka, (2005) 5 SCC 162. In the order of reference dated
G 19.08.2008, the two judge Bench after noticing the relevant
provjsions pf the Karnataka Sales Tax Act, 1957 and the
distinction between the 'contract of sale' and the 'Works
Contract' felt it necessary to refer the question to a larger
Bench. In the order of reference, it was held that prima facie it
faced difficulty in accepting the proposition laid down in Raheja
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 104 7
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
Development (supra), in particular, paragraph 20, inasmuch as A
Larsen & Toubro being a developer undertook the contract to
develop the property of one Mr. Dinesh Ranka, owner of the
land and subsequently, the show cause notice issued to the
said assessee proceeded on the basis that the tripartite
agreement was a 'Works Contract'. Further, it noted that in the B
show cause notice there was no allegation made by the
Department that there was any monetary consideration involved
in the first contract, which was the Development Agreement.
The reference came before the three Judge Bench to which one
of us was a party (Honble the Chief Justice of India, Mr. Justice c
R.M. Lodha).
97. Before referring to the various reasons in th~ said
judgment, it will be appropriate to note the basic facts which
were noted in the said judgment in paragraph 3, which reads
as under: D
"3. Of the 26 appeals under consideration before us, 14
are from Karnataka and 12 from Maharashtra. Insofar as
Karnataka appeals are concerned, it is appropriate that
we take the facts from the leading case being Larsen and E
Toubro. The ECC division of Larsen and Toubro (for short,
"L&T") is engaged in property development along with the
owners of vacant sites. On 19.10.1995, L& T entered into
a development agreement with Dinesh Ranka, owner of
the land bearing survey numbers 90/1, 91, 92 (Part), 94, F
95 and 96/1 (Part) together measuring 34 acres all
situated at Kothanur Village, Bengur Hobli, Bangalore
South Taluk, Bangalore, for construction of a multi-storeyed
apartment complex. The owner was to contribute his land
and L& T was to construct the apartment complex. After G
development, 25% of the total space was to belong to the
owner and 75% to L&T. A power of attorney was executed
by the owner of the land in favour of L& T to enable it to
negotiate and book orders from the prospective
Purchasers for allotment of built up area. Accordingly, L&T H
1048 SUPREME COURT REPORTS [2014] 5 S.C.R.
A entered into agreements of sale with intended Purchasers.
The agreements provided that on completion of the
construction, the apartments would be handed over to the
Purchasers who will get an undivided interest in the land
also. Sale deeds, thus, were exocuted in favour of the
B ihtended Purchasers by L& T and the owner."
98. In the said case on behalf of Larsen and Toubro, it was
argued that the Developer and the owner were on the one side,
while :the Purchaser was on the other side, that there was no
C monetary consideration so far as the contract between the
Develbper was concerned and the owne~ and that the only
transaction was by the Developer/Owner to the prospective
Purchaser after the construction of the flat and, therefore, there
was only a sale element of the Flat along with the undivided
share of the land jointly by the Developer/Owner in favour of the
D prosp~ctive Purchaser. H.ence, it was claimed that the
agreement can only be construed as 'Sale' and not a 'Works
Contra.ct'. It was also contended on the above footing as under:
"21 ..... Conversely a suit by an owner/developer against
E the flat Purchaser would be for payment of consideration
of, the flaU fractional interest in the land .. Such suit would
never be for payment of work done at the behest of the
flat Purchaser and payment of consideration therefor. It is,
thl!ls, submitted that the judgment in Raheja Development
F ddes not lay down good law and deserves to be
overruled."
99. On the other hand, another learned counsel submitted
that in a composite works contract transfer of immovable
property will not denude it of its character of 'Works
G Cohtract' and that Article 366(29A)(b) takes care of such
situations where the goods are transferred in the form of
immovable property.
1OQ. While dealing with the reference, the various
H contentions were noted in the first instance and while examining
I
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1049
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
the implication of Article 366(29A)(b), it was observed in A
paragraph 60:
"60 ..... in other words goods which have by incorporation
become part of immovable property or deemed as I
goods the definition of Tax on the sale and purchase 8
of sale includes tax on the transfer of the property
in the goods as goods or which have lost its form
as goods and have acquired some other form
involved in the execution of works contract."
101. Thereafter, in paragraph 61 it was further observed C
as under:
"61. Viewed thus, a transfer of property in goods under
clause 29-A(b) of Article 366 is deemed to be a sale of
the goods involved in the execution of a works contract by D
the person making the transfer and the purchase of those
goods by the person to whom such transfer is made."
102. In paragraph 63 while interpreting the effect of Article
366 (29A)(b), which was brought into the Constitution by the
46th Amendment, the Bench held that tax on the sale or E
purchase of goods may include a tax on the transfer in goods
as goods or in a form other than goods involved in the
execution of the works contract. It was also held that it would
be open to the States to divide the works contract into two
separate contracts by legal fiction, namely: F
(ii) Contract for Sale of Goods involved in the works
contract and
(iii) For supply of the labour and service.
G
103. It was then observed that by implication of the 46th
Amendment, States have been empowered to bifurcate the
contract and to levy sales tax on the value of the material in the
execution of the works contract by holding it to be a deemed
sale. H
1050 , SUPREME COURT REPORTS [2014] 5 S.C.R.
A 104. As far as the implication of Article 366(29A)(b) after
the 46th Amendment as held above is concerned, the same
cannot be faulted. However, at this juncture, it will have to be
kept in' mind that in that decision, this Court was dealing with a
contract relating to development of land in which, the Developer
B and owner of the land and the prospective Purchaser after the
development in the form of constructed building units were
parties: By virtue of the nature of the contract and its terms,
immov~ble property in the form of a building ultimately emerged
in the land in question where substantial use of materials in the
c form of' goods was involved for which equal amount of labour
was also employed. It was in that context the said judgment
came tq be rendered. In fact, this court has noted that in the
peculiar facts of that case, the goods employed became part
of the immovable property and in the ultimate process lost its
form as, goods.
0
1OB. In the above-stated background of the said case,
what is relevant to be examined is, in order to invoke Article
366 (29A)(b), it will have to be found out whether a contract will
fall withih the four corners of the expression 'Works Contract'.
E Therefore, the endeavour is to find out the principles that have
been staled in the various decisions, including in the decision
of Larsen & Toubro Ltd. (supra), so that such principles can
be applied to the case on hand to ascertain the nature of the
contract., Keeping the said perception in mind, a detailed
F reading qf the decision in Larsen & Toubro Ltd. (supra) can
be made.
106. ,In paragraph 65 of the said decision reference was
made to (3harat Sanchar (supra), wherein sub-clause (d) of
G Clause 29A of Article 366 came to be considered. It was laid
down theriein that all the sub-clauses of Article 366(29A) serve
to bring transactions where essential ingredients of a 'Sale' as
1
defined in the Sale of Goods Act, 1930 are absent, within the
ambit of sale or purchase fof the purposes of levy sales tax.
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1051
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
The said proposition stated in Bharat Sanchar (supra} would A
only go to show that before invoking Article 366 (29A), the
concerned transactions ought to be ex(lmined individually with
particular reference to the essential ingredients contained
therein to find out as to whether such ingredients would lead to
a conclusion of a 'Sale' as defined in the Sale of Goods Act, B
1930 are present or not. In the event of such element of 'Sale'
not being present, then alone Article 366(29A)(b) would get
attracted for the purpose of applying the principle of deemed
sale. I find no relevance in paragraph 76 of the said decision
where this Court laid down as to what nature of contract can c
be called as a 'Works Contract' falling under the said definition
vis-a-vis Article 366 (29A)(b). Paragraph 76 reads as under:
"76. In our opinion, the term 'Works Contract' in Article
366(29A)(b) is amply wide and cannot be confined to a
particular understanding of the term or to a particular form. D
The term encompasses a wide range and many varieties
of contract. The Parliament had such wide meaning of
'Works Contract' in its view at the time of Forty-sixth
Amendment. The object of insertion of clause 29A in
Article 366 was to enlarge the scope of the expression 'tax E
of sale or purchase of goods' and overcome Gannon
Dunkerley-13. Seen thus, even if in a contract, besides the
obligations of supply of goods and materials and
performance of labour and services, some additional
obligations are imposed, such contract does not cease to F
be works contract. The additional obligations in the contract
would not alter the nature of contract so long as the contract
provides for a contract for works and satisfies the primary
description of works contract. Once the characteristics or
elements of works contract are satisfied in a contract then G
irrespective of additional obligations. such contract would
be covered by the term 'Works Contract'. Nothing in Article
366(29A)(b) limits the term 'Works Contract' to contract
for labor and service only. Learned Advocate General for
Maharashtra was right in his submission that the term H
1052 SUPREME COURT REPORTS [2014] 5 S.C.R.
A 'Works Contract' cannot be confined to a contract to
provide labour and services but is a contract for
undertaking or bringing into existence some 'works'. We
are also in agreement with the submission of Mr. K.N. Bhat
that the term 'Works Contract' in Article 366(29A)(b) takes
B within its fold all genre of works contract and is not
restricted to one specie of contract to provide for labour
and services above. The Parliament had all genre of works
contract in view when clause 29A was inserted in Article
366." (Underlining is mine)
c 107. While examining the above reasoning to ascertain a
contract as to whether it is 'Works Contract' or 'Sale', it is stated
that the characteristics of 'Works Contract' would be satisfied
in a contract irrespective of any additional obligations. In other
words, while applying Article 366(29A)(b), it should not be
D limited to a contract for labour and service only. It was further
held that it could not be confined to a contract to provide labour
and services, but if a contract is for undertaking and bringing
into existence some element of 'works', though the contract may
be for supply of goods, it will become a 'Works Contract'. With
E great respect, it will have to be held that such a sweeping
interpretation may not be appropriate for invoking Article
366(29A)(b). I say so because if a contract can be ascertained
based on its definite terms and can be held to be a contract
for supply of goods, then in the course of implementation of the
F said contract, namely, supply of the goods certain services are
to be r.endered, it will have to be held that insignificant services
rendered alone, cannot be the basis to hold the entire contract
to be a 'Works Contract'.
G 108. In this context, it will be relevant to note that in the
execution of the present contract, the property in the goods
would not loose its form as 'goods' as compared to a contract
for development of a land into flats. What would be available
after the ultimate conclusion or implementation of the contract
would be an immovable property in the form of a building and
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1053
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
the goods employed in the course of execution of such contract, A
might have lost its character as goods such as bricks, cement,
sand, steel, fittings etc. Therefore, as a general proposition of
law, it will not be appropriate to hold that wherever an element
of works is involved irrespective of its magnitude, all contracts
should be held to be 'Works Contract'. Since the argument B
made by the Advocate General of Maharashtra, which weighed
with the learned Judges in the said decision does not appear
to be an appropriate reasoning, it will have to be held that such
a proposition laid in paragraph 76 to hold every contract as
'Works Contract' based on a minuscule element of 'works' c
involved cannot be accepted.
109. In paragraph 66 of Larsen & Toubro Ltd. (supra), it
was observed that in Bharat Sanchar (supra), this Court
reiterated what was stated earlier in Associated Cement
Companies Ltd. vs. Commissioner of Customs (2001) 4 SCC D
593 that 'Dominant Nature Test' has no application to a
composite transaction covered by the Clauses of Article
366(29A). Therefore, it was concluded that there was no
ambiguity in stating that after the 46th Amendment the sale
element of those contracts which are covered by six sub- E
clauses of Clause 29A of Article 366 are separable and may
be subjected to sales tax by the States under Entry 54 of List
II and there is no question of the 'Dominant Nature Test' being
applied. With great respect, it will have to be stated that what
was omitted to be considered, was as to in the first instance, F
whether a contract would fall within the four corners of 'Works
Contract' by virtue of the essential ingredients of that very
contract. Even by referring to Bharat Sanchar (supra), before
finding out the application of Article 366(29A), it will have to be
seen whether the transaction and essential ingredients of 'Sale' G
as defined in the Sale of Goods Act a.re present or absent for
the purpose of levy of sales tax. In other words, if the essential
ingredients of 'Sale' as defined in the Sale of Goods Act are
present, then going by the ratio laid down in Bharat Sanchar
H
1054 SUPREME COURT REPORTS (2014] 5 S.C.R.
A (supra), the application of Article 366(29A) will not be available.
Therefore, in every contract what is to be seen in the first
instance is the relevant terms of the contract and finding out as
to whether the essential ingredients of those terms would lead
the Court to hold whether the element of 'Sale' that would fall
B within the definition of 'Sale' under the Sale of Goods Act is
present. In this event, the question of construing the said
contract as a 'Works Contract' covered by Article 366(29A)
cannot be made. In fact, in the earlier part of this judgment a
detailed reference has been made to the various terms of the
.C contract to find out as to whether the element of sale was
present or not. It has been held that by virtue of the essential
ingredients of the contract, what was agreed between the
parties was only sale of the LIFT and for that purpose the
Petitioner also agreed to carry out the installation exercise.
D 110. In Larsen & Toubro Ltd. (supra), this Court rightly
noted in paragraph 72 that to attract Article 366(29A)(b) there
has to be a 'Works Contract' and what is its meaning should
also be found out. It was further held that the term 'Works
Contract' needs to be understood in a manner that the
E Parliament had in its view at the time of introducing the 46th
Amendment and which is more appropriate to Article
366(29A)(b). Reference can be made to paragraph 76, which
has been extracted in paragraph 102 of this judgment.
F 111. In fact, I find that in the abovesaid paragraph in
Larsen & Toubro Ltd. (supra), it was ultimately held by
accepting the argument of the learned Advocate General of
Maharashtra that the term 'Works Contract' cannot be confined
to a contract to provide labour and services alone. The said
G conclusion having regard to the nature of contract which was
dealt with in the said judgment could not be in any way
contradicted since as noted earlier, in Larsen & Toubro Ltd.
(supra) the contract related to development of a property which
consisted of the developer, the owner and the prospective
Purchasers of the 1;1ltimate building units constructed. In that
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1055
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
context, whatever held in paragraph 76 to the effect that a A
contract which was undertaken to bring into existence some
element of works, would be sufficient to hold the said as a
'Works Contract', would be perfectly in order. The question is
as to whether such a ratio can be applied universally to every
other contract where some miniscule or insignificant element B
of works is involved. In fact, in the case on hand when the very
contract itself was for supply of LIFT to its Purchaser, simply
because there was some work element involved for the
purpose of installation of the LIFT, it cannot be held that the
whole contract is a 'Works Contract' falling within the ambit of c
Article 366(29A). Therefore, the principle stated in paragraph
76 of Larsen & Toubro Ltd. (supra) would apply in the peculiar
facts relating to that case where it related to construction of a
building by virtue of the contract between the developer and
owner on the one side and the prospective Purchaser on the D
other side. It is difficult to apply the said ratio rendered in the
context of the said contract as applicable universally in all sorts
of contracts where some element of work is involved and state
that such contract would also fall within the definition of 'Works
Contract'.
E
112. The said conclusion is also fully supported by the
reasoning in Larsen & Toubro Ltd. (supra), as held in
paragraph 94, which is to the followinQ effect:
"94. For s11staining the levy of tax on the goods deemed F
to have been sold in execution of a works contract, in our
opinion, three conditions must be fulfilled: (i) there must be
a works contract. (ii) the goods should have been involved
in the execution of a works contract, and (iii) the property
in those goods must be transferred to a third party either G
as goods or in some other form. In a building contract or
any contract to do construction. the above three things are
fully met. In a contract to build a flat there will necessarily
be a sale of goods element. Works contracts also include
building contracts and therefore without any fear of H
1056 SUPREME COURT REPORTS [2014] 5 S.C.R.
A contradiction it can be stated that building contracts are
species of the works contract. (Underlining is mine)
113. A reading of the above paragraph, thus discloses
three conditions and that at the foremost a contract must be a
'Works Contract' and in that contract in the course of its
8
execution, goods must have been applied and the property in
those goods ultimately gets transferred either as goods or in
some other form. If the said condition is not fulfilled, the other
two conditions will have no application. Therefore, the above
principles stated in paragraph 94 of Larsen & Toubro Ltd.
C (supra) are applied to the contract-necessarily an exercise has
to be carried out to find out whether the contract was a 'Works
Contract' or not. Having regard to the essential ingredients of
the contractual terms, it is difficult to hold that the supply of LIFT
by the Petitioner to its Purchaser can be called as a 'Works
D Contract' and, therefore, since the very first condition is not
fulfilled, the other conditions are of no consequence in order to
invoke Article 366(29A)(b) to the case on hand.
114. Even when the ultimate conclusion as noted in
E paragraph 101 (x) is applied, the supply of LIFT by the Petitioner
to its Purchaser satisfies the definition of 'Sale' as defined
under the Sale of Goods Act, and, therefore, the question of
deemed sale does not arise. Analyzing the decision from all
frontiers it can be concluded that the ratio laid down in Larsen
F & Toubro Ltd. (supra) which related to a construction contract,
cannot be applied to the case on hand, and therefore, would
not be a sufficient reasoning to hold the present contract as
'Works Contract'.
115. Once the application of Larsen & Toubro Ltd. (supra)
G judgment to the facts of this case has been steered clear, next
it is to be found out as to whether the other judgments relied
upon by the learned Senior Counsel for the Petitioner support
his submission, claiming that the transaction, namely,
manufacture, supply and installation of LIFT is a 'Works
H Contract' or not. Reliance was placed upon the decision of this
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1057
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
Court in Richardson Cruddas Ltd. (supra). In order to note the A
distinction as to the nature of the contract in that case as
compared to the present one, the relevant paragraph in page
249 can be usefully extracted which reads as under:
"249.There is no formal contract in the present case for
8
fabrication and erection of the steel structures required by
the society. The agreement between the parties has to be
ascertained from the correspondence between them. The
correspondence may be briefly referred to. By letter dated
December 4, 1956 the Corporative Society informed the C
Respondents that they had placed an order for a sugar
plant and machinery for manufacture of sugar and they had
to design the factory." (Underlining is mine)
116. Therefore, the above passage in the said judgment
itself discloses that the contract itself had to be understood D
based on the correspondence as between the parties. There
was no formal contract in any event. What was required to be
fulfilled by the Respondent was setting up of a sugar plant and
machinery for the manufacturing of sugar and that too to be
decided by the contractor. It is difficult to understand as to how E
the conclusion reached in the said case based on the above
contract could be applied to the case on hand. In the present
case, the contract was put into writing containing various
clauses and conditions which were elaborate and definite to
the effect that the Petitioner should manufacture, supply and F
then erect a product, namely, the LIFT. Apart from setting up
of a sugar plant in Richardson Cruddas (supra), the parties
also agreed for supply of fabrication and installation of bottle
cooling equipment at the premises of the customer. While
describing the said contract, it was held in page 251 that the G
contractor fabricated the component parts according to the
requirements and specification of the customer and installed
the same on a suitable base and foundation at the premises
of the customer. It was held that the installation of the bottle
cooling unit in the premises of the customer was not merely H
1058 SUPREME COURT REPORTS [2014] 5 S.C.R.
A ancillary or incidental to the supply of the unit. Here again it was
noted that for the installation of bottle cooling equipment also,
there was no formal written contract and the terms of the
contract had to be gathered from the correspondence. Having
regard to such a nature of contract which was dealt with in that
B decision, it will have to be held that it will not be safe to apply
the said ruling to the facts of this case where the contract is
definite and the terms of the contract sufficiently demonstrate
that it is one for supply of LIFT and not a contract for works.
117. Mr. Dwivedi, learned Senior Counsel appearing for
C State of Orissa in support of his submission relied upon the
Constitution Bench decision of this Court in Mis. Patnaik and
Company (supra). In paragraph 28 as a proposition of law, the
Constitution Bench has held as under:
D "28. In Commissioner of Sales Tax, UP. v. Haji Abdul
Majid [1963] 14 STC 435 (All), the Allahabad High Court
arrived at the conclusion that in the circumstances of the
case the transaction was a contract for the sale of bus
bodies and not a contract for work and labour. Desai, C.J.,
E rightly pointed out at p. 443 that "since it makes no
difference whether an article is a ready- made article or
is prepared according to the customer's specification, it
should also make no difference whether the assessee
prepares it separately from the thing and then fixes it on it
or does the preparation and the fixation simultaneously in
F
one operation."
118. Thereafter, while repelling the contention made on
behalf of the Appellant in that case, it was held as under:
G "31. To constitute a sale there must therefore be an
agreement and in performance of the agreement property
belonging to one party must stand transferred to the other
party for money consideration. Mere transfer of property
in goods used in the performance of a contract is,
H however, not sufficient: to constitute a sale there must be
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1059
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
an agreement - express or implied - relating to sale of A
goods and completion of the agreement by passing of title
in the very goods contracted to be sold. It is of the essence
of the transaction that the agreement and sale should relate
to the same subject-matter i.e. the goods agreed to be
sold and in which the property is transferred." (Emphasis B
Added)
119. Going by the above dictum of the Constitution Bench
of this Court, the contract as a whole will have to be examined
to see as to what was the real intention of the parties. In my C
opinion, the said legal principle will continue to apply even after
the 46th Amendment while examining each case to find out as
to whether the contractual terms would persuade the Court to.
hold that the said contract as a whole would fall within the
definition of 'Works Contract'. This Court in paragraph 31
rejected the submission of the counsel for the Appellant and D
clearly pointed out the distinction as between a building contract
and a contract for supply of a chattel as a chattel. I am in full
agreement with the proposition of law laid down in the said
decision, which fully supports my conclusion.
E
120. The learned Senior Counsel also relied upon the
decision in Mis. T. V. Sundaram Iyengar (supra). Paragraph 7
is relevant for the case on hand where the principle has been
laid down, which reads as under:
'7. The question with which we are concerned, as would F
appear from the resume of facts given above, is whether
the construction of the bus bodies and the supply of the
same by the assessees to their customers was in
pursuance of a contract of sale as distinguished from a
contract for work and labour. The distinction between the G
two contracts is often a fine one. A contract of sale is a
contract whose main object is the transfer of the property
in. and the deliverv of the possession of. a chattel as a
chattel to the buyer. Where the main object of work
H
1060 SUPREME COURT REPORTS [2014] 5 S.C.R.
A undertaken by the payee of the price is not the transfer of
a chattel qua chattel, the contract is one for work and
labour. The test is whether or not the work and labour
bestowed end in anything that can properly become the
subject of sale; neither the ownership of th~ materials, nor
B the value of the skill and labour as compared with the value
of the materials, is conclusive, although such matters may
be taken into consideration in determining in the
circumstances of a particular case, whether the contract
is in substance one for work and labour or one for the sale
c of a chattel." (Emphasis Added)
121. When the above principles are applied to the facts
of this case, it can be aptly held that the present contract is
nothing but a contract for 'Sale' and not a 'Works Contract'.
D 122. A profitable reference can also be made to another
Constitution Bench decision of this Court in Commissioner of
Commercial Taxes Mysore, Bangalore (supra). The question
that arose for consideration was as to whether construction of
railway coaches from the materials belonging to railways under
E a contract is a sale or works contract. Dealing with the said
question, this Court held as under in paragraphs 12 and 13:
"12. On these facts we have to decide whether there has
been any sale of the coaches within the meaning of the
Central Sales Tax Act. We were referred to a number of
F cases of this Court and the High Courts. but it seems to
us that the answer must depend upon the terms of the
contract. The answer to the question whether it is a works
contract or it is a contract of sale depends upon the
construction of the terms of the contract in the light of the
G surrounding circumstances. In this case the salient features
of the contract are as follows:
'( 1) ....... .
(2) ........ .
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1061
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
(3) .. . . .. ... A ~
(4) ........ .
(5) ........ .
(6) ........ . B
(7)
13. On these facts it seems to us that it is a pure works
contract. We are unable to agree that when all the material
used in the construction of a coach belongs to the Railways C
there can be any sale of the coach itself. The difference
between the price of a coach and the cost of material can
only be the cost of services rendered by the assessee. If
it is necessary to refer to a case which is close to the facts
of this case, then this case is more in line with the decision D
of this Court in State of Gujarat v. Kai/ash Engineering
Co. than any other case." (Emphasis Added)
123. It can be discerned from the abovementioned case
that having regard to the specific terms of the contract, which E
inter a/ia states that the material used for construction of
coaches before its use was the property of the railways and
the contract substantially related to the service or works to be
rendered by the contractor for the construction of the coaches,
it was, therefore, held that it was a 'Works Contract' and not a
F
'Sale'. However, it was categorically held that the question
whether a contract is a 'Works Contract' or a contract of 'Sale'
depends upon the conception of the terms of the contract in the
light of the surrounding circumstances. Therefore, applying the
above principle to the case on hand, I am convinced that by
virtue of the terms as has been noted in the earlier part of this G
judgment, the manufacture, supply and installation of a LIFT is
a contract for 'Sale' and not a 'Works Contract'.
124. Mr. Dwivedi, learned Senior Counsel also placed
reliance upon the three Judge Bench decision of this Court in H
1062 SUPREME COURT REPORTS [2014] 5 S.C.R.
A The Central India Machinery Manufacturing Company
Limited (supra). An identical question has arisen for our
consideration, namely, whether manufacture and supply of
wagons by way of a contract between Union of India and Central
India Machinery Manufacturing Company Limited was a
s contract of 'Sale' or 'Works Contract'. Dealing with the said
question, this Court after making a detailed reference to the
various terms of the contract as between the Appellant and
Respondent therein, held as under in paragraphs 31 and 32:
"31. The upshot of the above discussion is that with the
c exception of wheelsets (with axle boxes and couples),
substantially all the raw materials required for the
construction of the wagons before their use belong to the
Company and not to the President/Railway Board. In other
words with the exception of a relatively small proportion of
D the components supplied under Special Condition 6, the
entire wagons including the material at the time of its
completion for delivery is the property of the Company.
This means that the general test suggested by Pollock and
Chalmers has been substantially albeit not absolutely
E satisfied so as to indicate that the contract in question was
one for the sale of wagons for a price, the Company being
the seller and the President/Railway Board being the buyer.
It is true that technically the entire wagon including all the
material and components used in its construction cannot
F be said to be the sole property of the Company before its
delivery to the Purchaser. But as pointed out by Lord
Halsbury in the above quoted passage from his renowned
work neither the ownership of the materials nor the value
of the skill and labour as compared with the value of the
G materials used in the manufacture is conclusive.
Nevertheless. if the bulk of the material used in the
construction belongs to the manufacturer who sells the end
2roduct for a price that will be a strong pointer to the
conclusion that the contract is in substance one for the sale
, of goods and not one for work and labour.
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1063
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
32. Be that as it may clause (1) of Standard Condition 15 A
dispels all doubt with regard to the nature of the contract.
This clause stipulates in unmistakable terms that as soon
as a vehicle has been completed, the Company will get it
examined by the Inspecting Officer and submit to the
Purchaser an "On Account" Bill for 90% of the value of the B
vehicle and within 14 days of the receipt of such bill
together with a certificate of the Inspecting Officer, the
Purchaser will pay 90% bill and on such payment, the
vehicle in question will become the property of the
Purchaser. There could be no clearer expression of the c
intention of the contracting parties than this clause that the
contract was, in substance, one for the sale of
manufactured wagons by the Company for a stipulated
price." (Emphasis Added)
125. I find that the ratio laid therein mutatis mutandis apply D
to the facts of this case. In fact, in the said decision the
Constitution Bench decision of this Court in Mis. Patnaik and
Company (supra) was followed. Therefore, it has now become
clear to the effect that such contract for manufacture, supply and
installation of LIFT is nothing but a 'Sale' and not a 'Works E
Contract'.
126. Mr. Salve, learned Senior Counsel in his submissions
placed reliance upon a Division Bench judgment of this Court
in Mis Vanguard Rolling Shutters and Steel Works (supra). F
That was a case where the question of law was as to 'whether
under the circumstances of the case and under the terms of the
contract the supply of shutters related and iron gats worth
Rs.1,08,633.08/- was sale or amounted to 'Works Contract'.
The Appellant therein was a contractor dealing in fabrication G
of rolling shutters and steel works who used to manufact4re iron
shutters according to specifications given by the partil:!s and
fix the same at the premises of the customers. This Court after
considering the terms of the contract took the view that the
same would amount to a 'Works Contract' and not 'Sale'.
H
1064 SUPREME COURT REPORTS [2014] 5 S.C.R.
A However, in paragraph 2, the principle to be applied to find an
answer to such a question has been set out as under:
"2 .... ... The question as to under what circumstances a
contract can be said to be a work contract is not free from
difficulty and has to depend on the facts of each case. It
B
is difficult to lay down any rule of universal application, but
there are some well recognised tests which are laid down
by decided cases of this Court which afford guidelines for
determining as to whether a contract in question is a work
contract or a contract for supply of goods. One of the
c important tests is to find out whether the contract is
primarily a contract for supply of materials at a price
agreed to between the parties for the materials so
supplied and the work or service rendered is incidental to
the execution of the contract. If so, the contract is one for
D sale of materials and the sale proceeds would be eligible
to sales tax. On the other hand where the contract is
primarily a contract for work and labour and materials are
supplied in execution of such contract, there is no contract
for sale of material but it is a work contract. ...... "
E (Emphasis Added)
127. Therefore, even as per the above principle stated in
the said decision and applying the same to the facts of this
case, it is found, based on the contractual terms as between
F the Petitioner and its Purchaser that the value of the LIFT upto
the extent of 90% is payable, under certain contingencies, even
when such materials are made ready and available for dispatch
at the premises of the Petitioner. It has also been found based
on the terms of the contract that the value of the labour content
G referable to the remaining 10%, becomes payable after the
installation of the LIFT. That apart in the said decision the
Constitution Bench decision of this Court in Mis. Patnaik and
Company (supra) and Commissioner of Commercial Taxes
Mysore, Bangalore (supra) were not brought to the notice of
the learned Judges. Therefore, the reliance placed upon the
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1065
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
said decision is of no assistance to the Petitioner except to the A
general proposition of law propounded in paragraph 2 referred
to above.
128. The learned Senior Counsel also relied upon a three
Judge Bench decision of this Court in Purshottam Premji
8
(supra). That was also a case where the assessee was to
quarry stones from the quarries belonging to the South-Eastern
Railways and thereafter break those stones into pieces and
convert them into ballast of a specified size Cl,nd thereafter,
supply them to the South-Eastern Railway. Dealing with the said C
contract, it was held that it was a 'Works CoRi1"?ct' and not a
'Sale'. In paragraph 7, the principle was stated as under:
"7. The primary difference between a contract for work or
service and a contract for sale of goods is that in the former
there is in the person performing work or rendering service D
no property in the thing produced as a whole
notwithstanding that a part or even the whole of the
materials used by him may have been his property. In the
case of a contract for sale, the thing produced as .a whole
has individual existence as the sole property of the party E
who produced it, at some time before delivery, and the
property therein passes only under the ·contract relating
thereto in goods used in the performance of the contract
is not sufficient; to constitute a sale there must be an
agreement express or implied relating to the sale of goods F
and completion of the agreement by passing of title in the
very goods contracted to be sold ...... " (Emphasis Added)
129. Even applying the above principle to the case on
hand, I find that the whole of the materials manufactured° for the
installation of the LIFT belong to the Petitioner and after the G
installation of the LIFT and after receipt of the full payment, the
title to the LIFT passes on to the Purchaser. Hence, it will have
to be held that the contract as between the Petitioner and the
Purchaser was nothing but a 'Sale' and not a 'Works Contract'.
H
1066 SUPREME COURT REPORTS [2014] 5 S.C.R.
A 130. Dr. Singhvi, learned Additional Advocata General for
Rajasthan in his submissions contended that to find out an
answer to the question whether the present contract for supply
of LIFT and its installation is a sale or works contract, the test
which were invoked prior to the 46th Amendment continue to
s remain. In support of the said submission the learned Additional
Advocate General relied upon a three Judge Bench decision
of this Court in Bharat Sanchar (supra). Paragraph 43 of the
said judgment is relevant for the case on hand, which reads as
under:
c "43. Gannon Dunkerley survived the Forty-sixth
Constitutional Amendment in two respects. First with
regard to the definition of "sale" for the purposes of the
Constitution in general and for the purposes of Entry 54
of List II in particular except to the extent that the clauses
D in Article 366(29-A) operate. By introducing separate
categories bf "deemed sales", the meaning of the word
"goods" was not altered. Thus the definitions of the
composite elements of a sale such as intention of the
parties, goods, delivery, etc. would continue to be defined
E according to known legal connotations. This does not mean
that the content of the concepts remain static. The courts
must move with the times. But the Forty-sixth Amendment
floes not give a licence, for example, to assume that a
transaction is a sale and then to look around for what could
F be the goods. The word "goods" has not been altered by
the Forty-sixth Amendment. That ingredient of a sale
continues to have the same definition. The second respect
in which Gannon Dunkerley has survived is with reference
to the dominant nature test to be applied to a composite
G transaction not covered by Article 366(29-A). Transactions
which are mutant sales are limited to the clauses of Article
366(29-A). All other transactions would have to qualify as
sales within the meaning of the Sales of Goods Act 1930
for the purpose of levy of sales tax." (Emphasis Added)
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1067
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
131. I am in full agreement with the proposition of law A
stated in the said paragraph as regards the tests to be applied
even after the introduction of Article 366(29A) into the
Constitution. Therefore, I am convinced that the various tests
laid down in the earlier Constitution Bench decisions, in
particular, the ones which have been relied upon, namely, Mis. B
Patnaik and Company (supra), Hindustan Aeronautics Ltd.
(supra), The Central India Machinery Manufacturing Company
Limited (supra) still hold good. Consequently the ultimate
conclusion is that the present contract between the Petitioner
and its Purchaser is one for 'Sale' and not 'Works Contract', c
is justified.
132. Dr. Singhvi, learned Additional Advocate General also
relied upon the decision of this Court in Hindustan Shipyard
Ltd. (supr,a) wherein reference to Halsbury's Laws of England
(4th Edn. Vol.41, para 603) has been noted to understand the D
distinction between contract of sale and contract for work and
labour. The said paragraph as extracted in paragraph 8 of the
said judgment can be usefully referred to, which reads under:
"8. We will shortly re~rt back to analysing the abovesaid E
terms and conditions of the contract and in between try to
find out the tests which would enable determination of the·
nature of the transactions covered by such contracts. The
distinction between contract of sale and contract for work
and labour has been so stated in Halsbury's Laws of F
England (4th Edn., Vol. 41, para 603):
"603. Contract of sale distinguished from contract
for work and labour.-A contract of sale of goods
must be distinguished from a contract for work and
labour. The distinction is often a fine one. A contract G
of sale is a contract the main object of which is the
transfer of the property in, and the delivery of the
possession of, a chattel as such to the buyer.
Where the main object of work undertaken by the
payee of the price is not the transfer of a chattel as H
1068 SUPREME COURT .REPORTS [2014] 5 S.C.R.
A such, the contract is one for work and labour. The
test is whether or not the work and labour bestowed
end in anything that can properly become the
subject of sale. Neither the owne'rship of the
materials, nor the value of the skill and labour as
B compared with the value of the materials, is
conclusive, although such matters may be taken into
consideration in determining in the circumstances
of a particular case whether the contract is in
substance one for work and labour or one for the
c sale of a chattel."
133. It must be stated that when the said principle to
ascertain a contract of 'Sale' and 'Works Contract' is applied
to the case on hand, it can be held that under the contract of
the Petitioner with its Purchaser, what was agreed was to
D ultimately supply its product of LIFT/ESCALATOR to its
customers. Therefore, after execution of the installation part of
it, what is transferred by the Petitioner to its Purchaser is the
LIFT as a chattel and this contract is nothing but a contract of
'Sale'.
E
134. Mr. K.N. Bhatt, learned Senior Counsel appearing for
the State of Karnataka submitted that the question posed for
consideration before this Bench no longer survives in the light
of the 46th Amendment, as well as, the judgment of this Court
F in Larsen & Toubro Ltd. (supra). The learned Senior Counsel
relied upon Builders' Association of India and others v. Union
of India and others, (1989) 2 sec 645, which is also a
Constitution Bench judgment, wherein in paragraph 41 it was
held as under:
G "41 ......... The case-book is full of the illustrations of the
infinite variety of the manifestation of 'works contracts'.
Whatever might be the situational differences of individual
cases, the constitutional limitations on the taxing power of
the State as are applicable to 'works contracts'
H
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 1069
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
represented by 'building c9ntracts' in the context of the A
expanded concept of 'tax on the sale or purr::hase of goods'
as constitutionally defined under Article 366(29-A}, would
equally apply to other species of 'works contracts' with the
requisite situational modifications." (Underlining is mine)
135. The learned Senior counsel, fairly brought to our B
notice paragraph 94 of the judgment in Larsen & Toubro Ltd.
(supra), which has been dealt with in paragraph 112 of this
judgment, wherein it has been concluded as a case dealing
with building contracts and hence is inapplicable to the case
on hand. C
136. While considering this submission of Mr. Bhatt,
learned Senior Counsel for Karnataka, it can be found in
paragraph 94 of Larsen & Toubro Ltd. (supra}, that the first
condition stated therein is that it must be a 'Works Contract'.
Therefore, while all building contracts have been held to be D
'Works Contract' by virtue of the Constitution Bench decision
in Builders' Association of India (supra}, when it comes to the
question of other contracts, if the ingredients of Article 366(29A)
are to be applied, the first exercise to be carried out is to find
out as to whether such contract would fall within the definition E
of 'Works Contract'. It must be stated at the risk of repetition
that simply because some element of work is involved in a
contract, it cannot be straight away concluded that such contract
would become a works contract, irrespective of the nature of
contract, which if probed into would show that it is a contract F
for sale. Therefore, even going by the decision reported in
Builders Association of India (supra), as well as, the conditions
set out in paragraph 94 of the Larsen & Toubro Ltd. (supra}, it
shall be ascertained whether the contract of the Petitioner with
its Purchaser falls within the definition of 'Works Contract', in G
order to apply the implication of Article 366(29A). Hence, the
said submission of the learned Senior Counsel therefore, does
not appeal to us.
137. A useful reference can also be made to one other
H
1070 SUPREME COURT REPORTS [2014] 5 S.C.R.
A decision of this Court in Commissioner of Sales Tax, Gujarat
vs. Mis. Sabarmati Reti Udyog Sah?kari Mandali Ltd. reported
in (1976) 3 SCC 592. In paragraph 6, this Court has laid down
as to how to find an answer to a question whether a particular
transaction is a contract of sale or a works contract. The said
B paragraph is as under:
"6. It is well-settled that whether a particular transaction is
a contract of sale or a works contract depends upon the
true construction of all the terms and conditions of the
document. when there is one. The question will depend
C upon the intention of the parties executing the contract. As
we have observed in our judgment in Civil Appeal Nos.
1492 and 1493of1971 which we have just delivered there
is no standard formula by which one can distinguish a
contract of sale from a contract for work and labour. The
O ·question is not always easy and has for all time vexed
jurists all over. The distinction between a contract of sale
of goods and a contract for work and labour is often a fine
one. A contract of sale is a contract whose main object is
the transfer of the property in, and the delivery of the
E possession of, a chattel as a chattel to the buyer.
(Halsbury's Laws of England, 3rd edn., Vol. 34, p. 6)
(Emphasis Added)
138. The above paragraph sufficiently demonstrates that
the question will depend upon the intention of the parties
F executing the contract and that there can be no standard
formula by which one can distinguish a contract of sale from a
contract of work and labour. The said principle stated in the
above said paragraph can be applied under all situations and
since after the 46th Amendment as held in Larsen & Toubro
G Ltd. (supra), the first condition to be found out is as to whether
a contract is a 'Works Contract'. It has to be necessarily
examined based on the terms agreed between the parties as
to what is the intention of the parties. Therefore, applying the
above tests, since it is found that the present contract is a
H contract for sale, it cannot be held to be a 'Works Contract'.
KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. &1071
ORS. [FAKKIR MOHAMED IBRAHIM KALIFULLA, J.]
139. In support of my conclusion, reliance can also be A
placed upon the majority view of the judgment of this Court in
Govt. of Andhra Pradesh vs. Guntur Tobaccos Ltd. reported
in AIR 1965 SC 1396. Paragraph 18 is relevant for the case
on hand, which reads as under:
"18. The fact that in the execution of a contract for work B
some materials are used and property in the goods so
used passes to the other party, the contractor undertaking
to do the work will not necessarily be deemed on that
...
account to sell the materials. A contract for work in the
execution of which, goods. are used may take one of three C
forms. The contract may be for work to be done for
remuneration and for supply of materials used in the
execution of the works for a price: it may be a contract for
work in which the use of materials is accessory or
incidental to the execution of the work: or it may be a D
contract for work and use or supply of materials though not
accessory to the execution of the contract is voluntary or
gratuitous. In the last class there is no sale because though
property passes it does not pass for a price. Whether a
contract is of the first or the second class must depend E
upon the circumstances: if it is of the first; it is a composite
contract for work and sale of goods: where it is of the
second category, it is a contract for execution of work not
involving sale of goods."
The above ratio also demonstrates as to how to find out i=
· whether a contract is a 'Works Contract' or one for 'Sale'. .,
140. In light of the above discussions, it will have to be held
that even after the 46th Amendment, if Article 366 (29A)(b) is
to be invoked, as a necessary concomitant, it must be shown
that the terms of the contract would lead to a conclusion that it G
is a 'Works Contract'. In other words, unless a contract is
proved to be a 'Works Contract' by virtue of the terms agreed
as between the parties, invocation of Article 366 (29A)(b) of
the Constitution, cannot be made. Alternatively, if the terms of
H
1072 SUPREME COURT REPORTS [2014] 5 S.C.R.
A the contract disclose or 'lead to a definite conclusion that it is
not a 'Works Contract', but one of outright sale, the same will
have to be declared as a 'Sale' attracting the provisions of the
relevant sales tax enactments. Therefore, based on the
conclusions arrived at and having applied the above principles
B to the case on hand, and having regard to the nature of the
terms of the contract displayed, it will have to be held that the
manufacture, supply and installation of LIFTS/ELEVATORS
comes under the definition of 'Sale' and not 'Works Contract'
and the decision in Kone Elevators (India) Pv~ Ltd. (supra) has
c been correctly decided. The Reference is, therefore, answered
on the above terms.
ORDER
1. Keeping in view the conclusions of the majority,
expressed in the judgment of Dipak Misra, J., it is held that the
0 decision rendered in State of A.P. v. Kone Elevators does not
correctly lay down the law and it is accordingly overruled.
2. It is directed that the show-cause notices, which have
been issued by taking recourse to reopening of assessment,
E shall stand quashed. The assessment orders which have been
framed and are under assail before this Court are set aside. It
is necessary to state here that where the assessments have
been framed and have attained finality and are not pending in
appeal, they shall be treated to have been closed, and where
F the assessments are challenged in appeal or revision, the same
shall be decided in accordance with the decision rendered by
us
3.; he writ petitions and the civil appeals are disposed of
with no order as to costs.
G
Rajendra Prasad Matters disposed of.
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "sale of goods"Sign in to search