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CASE NO.: Appeal (civil)  6585 of 1999

PETITIONER: State of Andhra Pradesh                  

RESPONDENT: M/s Kone Elevators (India) Ltd.          

DATE OF JUDGMENT: 17/02/2005

BENCH: S.N. VARIAVA,Dr. AR. LAKSHMANAN & S.H. KAPADIA  

JUDGMENT: J U D G M E N T

KAPADIA, J.

       The question involved in this civil appeal filed by the  department is \026 whether contracts entered into and executed by  the assessee were contracts for sale and not works-contract.

       M/s Kone Elevators (India) Ltd. (hereinafter referred to  as "the assessee") is a unit of M/s Kone Corporation, Finland  who are one of the pioneers in the manufacture of Hi-tech New  Generation Elevators in the world.  M/s Kone Corporation,  Finland has its operations spread over 37 countries in the world.   The assessee herein is a registered dealer falling in the  jurisdiction of the Commercial Tax Officer, R.P. Road Circle,  Secunderabad, having its head office at 50, Vanagaram Road,  Aynambakkam, Madras, with branches at Vijaywada and  Vizag.  The assessee filed monthly returns in form A-2 for the  months of April and May, 1995.  It was assessed by the said  Commercial Tax Officer provisionally for the period 1.4.1995  to 31.5.1995 and for the period from 1.6.1995 to 31.7.1995  under the Andhra Pradesh General Sales Tax Act, 1957  (hereinafter referred to for the sake of brevity as "the 1957  Act").  The said two provisional assessments were made by the  Commercial Tax Officer vide orders dated 19.8.1995 and  5.9.1995 respectively.  The assessee claimed deductions of  labour charges for composition of tax under section 5G read  with section 5F of the said Act saying that nature of the work  undertaken by it constituted "works-contract" involving  manufacture, supply, installation and commissioning of  elevators and lifts.  The assessing authority however did not  allow the deduction sought for and passed the provisional  assessment orders giving rise to two appeals against the said  assessment orders.  By judgment and order dated 9.10.1995, the  Deputy Commissioner, Secunderabad Division, Hyderabad, in  turn dismissed the appeals filed by the assessee and thereby  confirmed the aforestated assessment orders.  Both the lower  authorities treated the disputed turnover of the assessee as  falling under Entry 82 of the First Schedule to the said 1957  Act, which was objected to by the assessee by filing two  separate appeals bearing T.A. Nos.676 and 677 of 1995 before  the Sales Tax Appellate Tribunal, Hyderabad.  The point that  arose before the Tribunal in the aforestated two appeals, heard  and disposed of jointly, was \026 whether the transactions related  to "works-contract" or to "sale" of lifts.  By judgment and order  dated 22.12.1995, the said appeals bearing T.A. Nos.676 and  677 of 1995 were allowed in favour of the assessee setting aside  the impugned orders of the lower authorities by holding that the

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disputed turnover related to the manufacture, supply,  fabrication and erection involved in the works-contract and that  the said transaction did not amount to a contract of sale.   The  original assessing authority was accordingly directed to allow  the deduction of labour charges and to complete the assessment  under section 5G read with section 5F of the 1957 Act, as  amended, without treating it under Entry 82 of the first schedule  to the Act.  Aggrieved by the decision of the Tribunal dated  22.12.1995, the department preferred Tax Revision Case no.129  of 1999 under section 22(1) of the 1957 Act, to the High Court.   By impugned judgment and order dated 2.7.1999, the Tax  Revision Case filed by the department was dismissed.  Hence,  this civil appeal.

       Shri Debojit Borkakati, learned counsel for the  department submitted that the main object of the contract in  question was to sell the lifts and the works done by the assessee  for installation was incidental to the sale of lifts.  It was urged  that the Legislature had classified the commodity "lift" under  Entry 82 of the first schedule to the Act keeping in mind that  the word "installation" was ancillary to the "sale" of lifts.  It  was urged that the High Court had erred in holding that the  installation of the lift involved skill and technical know-how,  which was to be treated as works-contract.

       Shri M.N. Rao, learned senior counsel for the assessee,  on the other hand, submitted that the assessee was engaged in  the manufacture, supply, erection, installation and  commissioning of lifts by undertaking works-contract; that the  lifts/elevators as such cannot be delivered to the customer; that  various accessories and components were required to be taken  to the site where after carrying out the civil work, lifts were  installed and commissioned.  It was further urged that only after  all the parts stood assembled at site, the lifts came into being;  that installation and commissioning of lifts involved skill and  only after installation and commissioning of the lifts, the  ownership stood transferred to the customer.  Consequently, the  assessee was entitled for deduction of labour charges and was  entitled to composition of tax under section 5G of the said Act.   It was urged that the assessing authority had erred in treating  the transaction as a sale assessable to tax under Entry 82 of the  first schedule to the said Act.  It was further submitted on  behalf of the assessee that manufacture, supply, erection,  installation and commissioning of lift came under definition of  the words "works-contract" under section 2(1)(t) of the said Act  and, therefore, the tax leviable fell under section 5F of the said  Act.  It was urged that lifts and elevators cannot be delivered  like A/Cs as standard units; that manufacture, supply, erection,  installation and commissioning of lifts involved skill and labour  as well as technical know-how.  Reliance was placed, in  support of above contentions, on various invoices raised by the  assessee for manufacture, supply, erection, installation and  commissioning of lifts.  Reliance was also placed on the copy  of the contracts entered into by the assessee.  Reliance was also  placed on Indian Standards Institution’s specifications and code  of practice for installation of lifts and elevators to show the  amount of skill, labour and technical know-how involved in the  manufacture, supply, erection, installation and commissioning  of lifts.  In the circumstances, it was submitted that no  interference was called for in this matter.   

       It can be treated as well settled that there is no standard  formula by which one can distinguish a "contract for sale" from  a "works-contract".  The question is largely one of fact  depending upon the terms of the contract including the nature

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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, the true  effect of an accretion made pursuant to a contract has to be  judged not by artificial rules but from the intention of the  parties to the contract.  In a "contract of sale", the main object  is the transfer of property and delivery of possession of the  property, whereas the main object in a "contract for work" is  not the transfer of the property but it is one for work and labour.   Another test often to be applied to is : when and how the  property of the dealer in such a transaction passes to the  customer: is it by transfer at the time of delivery of the finished  article as a chattel or by accession during the procession of  work on fusion to the movable property of the customer?  If it is  the former, it is a "sale"; if it is the latter, it is a "works- contract".  Therefore, in judging whether the contract is for a  "sale" or for "work and labour", the essence of the contract or  the reality of the transaction as a whole has to be taken into  consideration.  The pre-dominant object of the contract, the  circumstances of the case and the custom of the trade provides a  guide in deciding whether transaction is a "sale" or a "works- contract".   Essentially, the question is of interpretation of the  "contract".  It is settled law that the substance and not the form  of the contract is material in determining the nature of  transaction.  No definite rule can be formulated to determine the  question as to whether a particular given contract is a contract  for sale of goods or is a works-contract.  Ultimately, the terms  of a given contract would be determinative of the nature of the  transaction, whether it is a "sale" or a "works-contract.   Therefore, this question has to be ascertained on facts of each  case, on proper construction of terms and conditions of the  contract between the parties.

       Before proceeding further, an insight into the relevant  provisions more especially the definitions of "sale" and "works- contract" have to be noticed.  Section 2(1)(n) which defines  "sale" and section 2(1)(t) which defines the "works-contract"  are extracted hereunder: "2(1)(n).       ’Sale’ with all its grammatical  variations and cognate expressions means every  transfer of the property in goods (whether as such  goods or in any other form in pursuance of a  contract or otherwise) by one person to another in  the course of trade or business, for cash, or for  deferred payment, or for any other valuable  consideration or in the supply or distribution of  goods by a society (including a co-operative  society), club, firm or association to its members,  but does not include a mortgage, hypothecation or  pledge of, or a charge on goods.

Explanation VI: Whenever any goods are  supplied or used in the execution of a works  contract, there shall be deemed to be a transfer of  property in such goods, whether or not the value of  the goods so supplied or used in the course of  execution of such works contract is shown  separately and whether or not the value of such  goods or material can be separated from the  contract for the service and the work done.

2(1)(t).        ’Works Contract’ includes any  agreement for carrying out for cash or for deferred  payment or for any other valuable consideration,

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the building construction, manufacture, processing,  fabrication, erection, installation, fitting out,  improvement, modification, repair or  commissioning of any movable or immovable  property."

       We also quote hereinbelow Entry 82 of the First  Schedule to the 1957 Act: Sl.  No. Description of  Goods Point of  Levy Rate of Tax Effective  from 82. Lifts, electrical or  hydraulic (1082) At the point of  first sale in  the State. 10   paise in          the rupee

16   paise in          the rupee 1.8.1986

1.4.1995

       The bracketed words and the transactions brought within  the purview of sale by the aforestated Explanation-VI appended  to section 2(1)(n) are meant to cover non-conventional sale  transactions which are now specified in Clause (29A) of Article  366 introduced by the Constitution 46th Amendment Act.   Before the inclusive definition of the "tax on sale or purchase of  goods" was introduced by the 46th Amendment, the expression  "sale of goods" occurring in Entry 48 of List II of the  Government of India Act was interpreted by this Court in the  classical case of State of Madras v. Gannon Dunkerley & Co.  (Madras) Ltd. reported in [AIR 1958 SC 560] as a term of well- recognized legal import in the general law and as mentioned in  the Sale of Goods Act.  The expression "sale of goods" in Entry  48 was described as "nomen juris", its essential ingredients  being an agreement to sell movables for a price and property  passing therein pursuant to that agreement.  It was held that in a  building contract which is composite and indivisible, there is no  sale of goods as there could be no agreement to sell materials as  such and moreover, the property does not pass as movables.  In  order to enlarge the concept of sale and to arm the State  Legislatures with power to tax the transactions simulating sales  but not conforming to the concept of sale under the Sale of  Goods Act, clause (29A) was inserted in Article 366 by the 46th  Constitutional Amendment.  The Andhra Pradesh State  Legislature fell in line with this amendment and changed the  definition of "sale" so as to bring within the tax net the  transactions which are not stricto sensu sales as per the law laid  down in Gannon Dunkerley’s case (supra).  It is important to  note that the 1957 Act ordains that transfer of property in goods  for valuable consideration must be "in the course of trade or  business" [vide section 2(1)(n)].  This is because the incidence

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of tax falls on a dealer who "carries on the business of buying,  selling, supplying or distributing goods" [vide section 2(1)(e)].   A sale by a person who carries on the business of buying,  selling etc. and a sale in the course of business are the twin  requirements to attract the charge of tax under the said 1957  Act.  The crucial question is whether these two requirements  are satisfied.  Is there an element of business present in the  disputed transactions?  Assuming there was a sale of goods, did  such sale take place in the course of business and by a person  who carries on the business of buying and selling goods?  

        In the case of Hindustan Shipyard Ltd. v. State of  Andhra Pradesh reported in [(2001) 119 STC 533], this Court  held that if the thing to be delivered has any individual  existence before the delivery as the sole property of the party  who is to deliver it, then it is a sale.  If the bulk of material used  in construction belongs to the 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 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 the main  components into the end-products, the skill and labour are only  incidentally used, the delivery of the end-product by the seller  to the buyer would constitute a sale.  On the other hand, if the  main object of the contract is to avail the skill and labour of the  seller though some material or components may be incidentally  used during the process of the end-product being brought into  existence by the investment of skill and labour of the supplier,  the transaction would be a contract for work and labour.  

       Applying the above tests, we may now proceed to notice  the relevant recitals of the contracts in questions.  Under the  "Price Schedule", the assessee agreed to supply and install a  Kone Elevator for Rs.3,30,000/-.  It was agreed that the  customer shall approve the drawings and shall make machine- room Hoistway and the Lift Shaft including power supply for  the assessee to commence installation at the time of the delivery  of the lift.  The contractual obligations of the assessee regarding  installation included employing labour to complete the  mechanical erection, electrical wiring testing and  commissioning of the lift.   The assessee agreed that it shall  commence installation only after the lifts arrived at the site and  upon intimation from the customer that the site was ready as per  the drawings.  As soon as the lift stood installed, the customer  was to take over.  It was further agreed that any material  supplied by the assessee shall remain their property till the lift  was handed over to the customer.  The contract in question  consisted of certain obligations on the part of the customers  under the heading "Customers’ Contractual Obligations".   Under this clause, the customer was obliged to undertake the  work of civil constructions consisting of:- a)      A properly enclosed lift Hoistway; b)      A lift pit of proper depth; c)      Properly lighted machine room; and d)      Private pockets on the lift well walls.

       Further, certain obligations were passed on the customer  under the Delivery Schedule which are reproduced herein  below:- "The General Agreement Drawing in triplicate will  be forwarded to you in approximately six weeks

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from the date of receipt of complete site details  along with the order and advance payment.  The  purpose of this drawing is to clearly indicate to  you pertinent dimensional details of the lift shaft,  pit, machine room, car and landing entrances etc.,  if any modification is required by you in our  General Arrangement Drawing it is advisable to  hold on construction till the revised General  Arrangement Drawing is approved by you.

Within six weeks from the date of receipt of all the  site details, the same should be returned to us  within two weeks from the date of submission,  duly approved by you.  We reserve the rights to  charge extra for subsequent GAD revisions if full  site particulars are not made available to us at the  time of placing of the order (or) any modification  is desired regarding the building structure resulting  in revision of GAD’s.

We shall deliver the materials for each Elevator by  the end of 6 months from the date of receipt of  approved General Arrangement Drawing and shall  complete the installation thereafter by the end of 2  months provided the lift shaft including power  supply as per our requirements is made ready for  us to commence installations at the time of  delivery of materials.

We shall commence the installation after the  materials arrive at the job site and upon intimation  from you that the site is ready as per the approved  General Arrangement Drawing.  If the site is not  ready for taking up installation when the materials  arrive at the job site, we shall depute an installation  team on hearing from you that the site, is ready in  all respects as required by us."                          On a careful study of the aforestated clause in the  Delivery Schedule, it is clear that the customer was required to  do the actual work at site for installation of lift.  On reading the  above clause, it may be observed that the entire onus of  preparation and making ready of the site for installation of lift  was on the customer.  It was agreed that under no  circumstances, the assessee shall undertake installation of lift if  the site is not kept ready by the customer.  Under Clause 4(g) of  the "Customers’ Contractual Obligations", the assessee  reserved the right to charge the customer for delays in providing  the required facilities.  These facts clearly indicate that the  assessee divided the execution of the contract into two parts,  namely, "the work" to be initially done in accordance with the  specifications laid down by the assessee and "the supply" of lift  by the assessee.  "The work" part in the contract was assigned  to the customer and "the supply" part was assigned to the  assessee.  This "supply" part included installation of lift.   Therefore, contractual obligation of the assessee was only to  supply and install the lift, while the customer’s obligation was  to undertake the word connected in keeping the site ready for  installation as per the drawings.  In view of the contractual  obligations of the customer and the fact that the assessee  undertook exclusive installation of the lifts manufactured and  brought to the site in knocked-down state to be assembled by  the assessee, it is clear that the transaction in question was a  contract of "sale" and not a "works-contract".  Moreover, on  perusal of the brochure of the assessee Company, one finds that

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the assessee is in the business of manufacturing of various types  of lifts, namely, Passenger lifts, Freight elevators, Transport  elevators and Scenic lifts.  A combined study of the above  models, mentioned in the brochure, indicate that the assessee  has been exhibiting various models of lifts for sale.  These lifts  are sold in various colours with various capacities and variable  voltage.  According to the brochure, it is open for a prospective  buyer to place purchase order for supply of lifts as per his  convenience and choice.  Therefore, the assessee satisfies, on  facts, the twin requirements to attract the charge of tax under  the 1957 Act, namely, that it carries on business of selling the  lifts and elevators and it has sold the lifts and elevators during  the relevant period in the course of its business.  In the present  case, on facts, we find that the major component of the end- product is the material consumed in producing the lift to be  delivered and the skill and labour employed for converting the  main components into the end-product was only incidentally  used and, therefore, the delivery of the end-product by the  assessee to the customer constituted a "sale" and not a "works- contract".  Hence, transactions in question constitute "sale" in  terms of entry 82 of the first schedule to the said Act and,  therefore, section 5G of the said Act was not applicable.

       For the aforestated reasons, the department’s appeal is  allowed; the impugned judgment and order of the High Court  dated 2.7.1999 passed in Tax Revision Case No.129 of 1999  and the judgment and order of the Sales Tax Appellate Tribunal  dated 22.12.1995 passed in T.A. Nos.676 & 677 of 1995, are  set aside.  However, in the facts and circumstances of this case,  there will be no order as to costs.