Summary of facts:

Kone (petitioner) was awarded contract for supply, erection, commissioning of elevators. It billed the purchaser for the entire transaction as work, charging the then applicable works tax. The Sales Tax officials demanded sales tax on entire amount stating sale of Elevator concluded after commissioning and the preparatory work was to be done by customer before lift was brought to site. The Sales Tax Tribunal ruled otherwise and High Court (on appeal of Sales Tax department, called Revenue) concurred with Tribunal leading to appeal in Supreme Court which was decided by a three-judge bench wherein the decision of the High Court was overruled. Therefore, the present appeal was heard by a five-judge bench. As all states had opened even closed assessments of similar contracts (involving sale & works both) a large number of appeals appeared in Supreme Court which were clubbed/tagged with instant case.

Issue:

Whether a contract for manufacture, supply and installation of lifts is a contract of sale or a works contract.

Summary of arguments:

The petitioner is engaged in the manufacture, supply and installation of lifts involving civil construction. Mr. Harish Salve, learned senior counsel for the petitioners has argued that supply and installation of lift cannot be treated to be a contract for sale, referring to Bharat Sanchar Nigam Ltd. and another v. Union of India and others and Larsen and Toubro Limited and another v. State of Karnataka and another. Mr. Salve had also referred to the Bombay Lifts Act, 1939,

Mr. Khambatta, learned Advocate General, appearing for the State of Maharashtra has argued that there are two separate contracts entered into, for the sale of the lift and services provided to install the lift. such an installation by way of contract is permissible under the Bombay Lifts Act, 1939 read with the Bombay Lifts Rules, 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.

Mr. K.N. Bhat, learned senior counsel for the State of Karnataka, has argued that contract of manufacture, supply and installation of lifts is a works contract, and that lifts are assembled and manufactured to suit the requirement in a particular building and are not something sold out of shelf.

Analysis:

Definition of Works Contract is stated in Sec 2(43) which defines as “Works Contract” includes any agreement for carrying out for cash, deferred payment or other valuable consideration, building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. Supply and Installation of lift cannot be treated to be a contract for sale because Lift comprises of components like lift car, motors, ropes, rails, etc. and each of them has its own identity prior to installation and they are assembled/installed to create the working mechanism called lift.

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 price is not the transfer of a chattel qua chattel, the contract is one of work and labour. A works contract could not have been liable to be taxed under the State 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 like whether the end product was for to be used without the labour & skill inputs which constitute the WORK part of contract.

In judging whether the contract is for a sale or for work and labour, the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The installation of a lift in a building cannot be regarded as a transfer of a chattel or goods but a composite contract as it requires critical local work to be carried out in assembling the input components. 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 contract for work (or service) is virtually diminished. Once there is a composite contract for supply and installation, it has to be treated 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, 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 prepared for delivery.

The genesis of case appears to be classic approach of various tax departments to maximize their revenue by looking at various transactions submitted to them or by identifying random cases as well.

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