Sales Tax - Works contracts - Lifts - The Constitutional Bench overruled the judgment of Kone Elevators- upheld the judgment of Larsen and Toubro -If the contract is a composite one which falls under the definition of works contracts as engrafted under clause (29A)(b) of Article 366 of the Constitution, the incidental part as regards labour and service pales into total insignificance for the purpose of determining the nature of the contract. - Quashed all reopened assessments etc., =
whether a contract for manufacture, supply 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 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. =
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 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”. - High court confirmed the same but apex court by judgment dated
17.2.2005 in Kone Elevators (supra), the view of the High Court was
overturned. After the pronouncement in the said case, the State
Government called upon the petitioner to submit returns treating
the transaction as sale. =
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 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)(b) of Article 366
of the Constitution, the incidental part as regards labour and
service pales into total 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 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 components into the end product was only
incidental and arrived 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 that in all the cases that have been brought before us,
there is a composite contract for the purchase and installation of
the 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 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 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.
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 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 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 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, 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 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 conclusion, as has been
reached in Kone Elevators (supra), 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 profoundly speaks of obligation to supply goods and
materials as well as installation of the lift which obviously
conveys performance of labour and service. Hence, the fundamental
characteristics of works contract 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.
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 cases have been reopened or 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
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 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.
66. The writ petitions and the civil appeals are disposed of with no
order as to costs.
O R D E R
Keeping in view the conclusions of the majority, expressed in
the judgment of Dipak Misra, J., it is held that the decision rendered
in State of A.P. v. Kone Elevators[46] 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, 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 the assessments are challenged in appeal or
revision, the same shall be decided in accordance with the decision
rendered by us.
2014 ( May.Part) http://judis.nic.in/supremecourt/filename=41510
R.M. LODHA, A.K. PATNAIK, SUDHANSU JYOTI MUKHOPADHAYA, DIPAK MISRA, FAKKIR MOHAMED IBRAHIM KALIFULLA
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL/APPELLATE JURISDICTION
WRIT PETITION (C) NO. 232 OF 2005
M/S. Kone Elevator India Pvt. Ltd. … Petitioner
Versus
State of Tamil Nadu and Ors. … Respondents
WITH
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,
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, 1098/2013,
WITH
Civil Appeal Nos. 5116-5121 of 2014
(Arising out of SLP (C) Nos. 14148-14153/2005)
WITH
Civil Appeal Nos. 5135-5141 of 2014
(Arising out of SLP (C) Nos. 14961-14967/2005)
WITH
Civil Appeal Nos. 5142-5147 of 2014
[Arising out of SLP (C) Nos. 17842-17847/2005
WITH
Civil Appeal No. 5152 of 2014
[Arising out of SLP (C) No. 5377/2006
WITH
Civil Appeal No. 5153 of 2014
[Arising out of SLP (C) No. 7037/2006
WITH
Civil Appeal No. 5154 of 2014
[Arising out of SLP (C) No. 30272/2008
WITH
Civil Appeal No. 5156 of 2014
[Arising out of SLP (C) No. 30279/2008
WITH
Civil Appeal No. 5157 of 2014
[Arising out of SLP (C) No. 5289/2009
WITH
Civil Appeal Nos. 5159-5160 of 2014
[Arising out of SLP (C) Nos. 6520-6521/2009
WITH
Civil Appeal Nos.5162-5164 of 2014
[Arising out of SLP (C) Nos. 4469-4471/2010
WITH
Civil Appeal No. 5165 of 2014
[Arising out of SLP (C) No. 11258/2010
WITH
Civil Appeal No. 5166 of 2014
[Arising out of SLP (C) No. 17228/2010
WITH
Civil Appeal Nos.5167-5168 of 2014
[Arising out of SLP (C) Nos. 17236-17237/2010
WITH
Civil Appeal Nos.5170-5172 of 2014
[Arising out of SLP (C) Nos. 23259-23261/2010
WITH
Civil Appeal No. 5174 of 2014
[Arising out of SLP (C) No. 15732/2011
WITH
Civil Appeal No. 5175 of 2014
[Arising out of SLP (C) No. 16466/2011
WITH
Civil Appeal No. 5178 of 2014
[Arising out of SLP (C) No. 16137/2011
WITH
Civil Appeal No. 5179 of 2014
[Arising out of SLP (C) No. 5503/2011
WITH
Civil Appeal No. 5180 of 2014
[Arising out of SLP (C) No. 11147/2011
WITH
Civil Appeal Nos.5181-5192 of 2014
[Arising out of SLP (C) Nos. 11227-11238/2012
WITH
Civil Appeal No. 5193 of 2014
[Arising out of SLP (C) No. 19901/2013
WITH
Civil Appeal Nos. 5195-5206 of 2014
[Arising out of SLP (C) Nos. 36001-36012/2013 and
WITH
Civil Appeal No. 6285/2010
J U D G M E N T
Dipak Misra, J. [for R.M. Lodha, C.J., A.K. Patnaik,
Sudhansu Mukhopadhaya, JJ. and
himself]
Leave granted in all the special leave petitions.
2. By an order dated 13.2.2008 in Kone Elevator India Private
Limited v. State of Tamil Nadu and others[1], a three-Judge Bench
of this Court, while dealing with the writ petition 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
State of A.P. v. Kone 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 Sales Tax[5] and perceiving the manifest discord,
thought it appropriate that the controversy should be resolved by
the larger Bench. Thereafter, keeping in view the 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 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 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 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 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. 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. 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,
proceedings were initiated proposing to reopen the 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 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
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 India and others[6],
which has been further explained in Larsen and Toubro Limited and
another v. State of Karnataka and another[7], 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 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 and
the tax imposed 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. Salve that the “predominant intention test” is no longer
relevant and after the decision in Larsen and Toubro (supra),
supply 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
assembled/installed to create the working mechanism called lift.
Learned senior 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 Bombay Lifts
(Amendment) Rules, 2010. He has referred to the Preamble of the
Act which stipulates that an Act has been 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 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 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 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 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
such installation and the separate parts of the lift are not sold
like goods, but it only becomes operational after it is installed,
adjusted, 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 the obligation to
install the lift or to undertake any services in relation to the
lift and these elements of value need to be 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 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, 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 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 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.
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 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 others[9] 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 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 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 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 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 of the manufacturing process and, 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 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 manufacturing process resulting in
the emergence of the product 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 v. Central India Machinery Manufacturing Company
Ltd. and others[12], J. Marcel (Furrier) Ltd. v. Tapper[13] 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 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). It is his submission that emphasis on technology and
skill including labour and also the instructions 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, Noida[15], Narne Tulaman v.
Collector of Central Excise, Hyderabad[16], Titan Medical Systems
(P) Ltd. v. Collector of Customs, New Delhi[17], 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 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
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], Man Industrial Corporation
(supra) and Vanguard 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 on the nature of
affixation, it 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 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, 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 notwithstanding the attachment of
guide rails. For the aforesaid purpose, he has drawn inspiration
from Sirpur Papers Mills Ltd. v. Collector of Central Excise,
Hyderabad[23], Commissioner of Central Excise, Ahmedabad v. Solid &
Correct Engineering of Works and others[24] and Detroit Steel
Cooperage Company v. Sistersville Brewing Company[25].
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 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 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 “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 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 an
elevator is an identifiable good which is transferred to the
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.
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 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 placed on Federation of Hotel and
Restaurant Association of India v. Union of India and others[26].
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 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.
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 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 decisions in Patnaik & Co. (supra) and Hindustan
Shipyard Ltd. v. State of A.P.[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 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 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 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 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 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
and according to the expanded definition of tax on sale, “tax” is
leviable only on the transfer of property in goods, whether in
goods or in some other form, involved in the execution of work 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 rivalised
submissions, it is necessary to delve into the genesis of 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 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 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
(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 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 contended by the assessee that nothing could be
levied that was received by the assessee from the persons for whose
benefit it had constructed the buildings. On behalf of the
Revenue, it was urged that once there was an agreement between the
parties and in the carrying out of that agreement 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 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 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 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 sale as regards another. The Constitution
Bench further held that on the true interpretation of the
expression "sale of goods", 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 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 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 essential ingredients being an agreement
to sell movables for a price and property passing therein pursuant
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
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 others[29],
the majority, interpreting the nature of the contract which related
to assembling and installing machinery, plant and 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 materials as such by the appellant therein to the owner
and, therefore, the agreement in question was an indivisible one
for the construction of 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 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 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 in Gannon Dunkerley-I (supra) was distinguished on the
ground that it related to contract to construct a building and the
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
one but sum total of several reasons which was the foundation of
the majority judgment in Patnaik & Co. (supra).
19. In the case of State of Gujarat v. M/s. Kailash Engineering Co.
(Pvt.) Ltd.[30], the issue was whether the construction of third
class sleeper coaches by the respondent-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 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 Ltd.[31], there was
a postulate that a consolidated lump sum would 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 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. Bulmer[32], the Court held
that the contract was a works contract and not a contract for sale.
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 and
labour and not a contract for sale, for ‘fixing’ the windows 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. M/s. Associated Hotels of 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 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: -
“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 price is not the transfer
of a chattel qua chattel, the contract is one of work and
labour. The test is whether or not the work and labour bestowed
and in anything that can properly become the subject of sale;
neither the ownership of materials, nor 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 of a chattel[34].”
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 amenities. The Court
ruled that the transaction between 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, Ahmedabad) v. M/s.
Variety Body Builders[35], this Court, after referring 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 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 vexed jurists all over.”
24. In Vanguard Rolling Shutters and Steel Works’ case, the assessee
manufactured rolling shutters according to specifications given by
the parties and fixed the same at the 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, 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 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
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 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 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 Pradesh v. Purshottam Premji[36],
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 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 in it to the
customer. 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 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.
26. In Hindustan Aeronautics Limited v. State of Orissa[37], 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 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 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 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 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 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 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 undo the base of the Constitution Bench
decision in Gannon Dunkerley’s-I case.
28. To have a complete picture, we think it apt to reproduce the said
constitutional provision: -
“366 (29A) “tax on the sale or 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) 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) a tax on the delivery of goods on hire purchase 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
cash, deferred payment or other valuable consideration;
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;
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,
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 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 Forty-Sixth
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 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 decisions in the field pertaining to works
contract and the recommendations by the Law Commission in its 61st
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 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 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 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 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) 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 of the 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) 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
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 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 (d) of clause (29-A) of Article 366 of the Constitution
are subject to an additional restriction mentioned in sub-clause (b)
of Article 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.
30. At this juncture, the pronouncement in M/s Gannon Dunkerley and Co.
and others v. State of Rajasthan and others[38] is necessary to be
noted. While dealing with the various submissions of the counsel
for the States, the Constitution 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 Entry 54 of the State List is made subject to under
the 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.
31. Be it noted, the Constitution Bench, in Gannon Dunkerley-II
(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 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 tax on the deemed sales. We
may state with profit that certain principles have been laid down
in the said decision to 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 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 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 categories of contracts and explained the
contours, namely, (i) 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; (ii) it may be a contract for work in which
the use of the materials is accessory or incidental to the
execution of the work; and (iii) 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
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 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
Toubro (supra) at a later stage.
34. In Bharat Sanchar Nigam Ltd. (supra), a three-Judge Bench was
concerned with the question of the nature of the transaction with
regard to whether mobile phone connections 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 to the case in Associated Cement Companies Ltd. v.
Commissioner of Customs[39] and stated thus: -
“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 applying. Therefore when in
2005 C.K. Jidheesh v. Union of India[40] held that the aforesaid
observations in Associated Cement were merely obiter and that
Rainbow Colour Lab v. State of M.P.[41] was still good law, it
was not 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 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 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 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 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 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 clarified that if the
agreement was entered into after the flat or unit was already
constructed, then there would be no works 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).
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 in denying the
benefit of recognition certificate as contemplated under Section 4B
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 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 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 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.
39. The essential characteristics have been elucidated by a three-Judge
Bench in Larsen and Toubro (supra) thus: -
“As the very title of Article 366 shows, it is the definition
clause. It starts by saying that in the Constitution unless the
context otherwise requires the expressions defined in that
article [pic]shall have the meanings respectively assigned 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) 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 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 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. The expression
“in some other form” in the bracket is 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 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 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 (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 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
services, 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 characteristics or elements 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 Article 366(29-A)(b) limits the term
“works contract” to contract for labour and 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):-
“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 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 such contract if it otherwise
has elements of works contract…”
42. At this juncture, it is condign to state that four concepts 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 “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 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 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.
43. Having noted the conceptual telescopic arena of the 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 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 respect of the said contract. It was
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 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 Commissioner 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 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 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 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
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 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 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 specifically provided for the item of maintenance. The
High Court referred to various components of the price and, after
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 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 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 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 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
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 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 precision in
execution for rendering satisfactory service and the 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 respondents which we have
already noted. The fundamental submission of Mr. Dwivedi is that
the manufacturer of the lift retains ownership in the components as
property while producing the completed lift and, hence, it would be
a case of pure manufacture. A distinction has been sought to be
made 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 components as per the
contract; that the manufacture is a process or activity which
brings 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 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), Kailash Engineering Co. (supra) and the observations made
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 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
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.
46. The other decisions which have been relied upon by Mr. Dwivedi to
show that installation is a part of the manufacturing process are
J. Marcel (Furriers) Ltd. (supra), Central India Machinery
Manufacturing Company Ltd. (supra), Norman Wright (Builders) Ltd.
(supra), Titan Medical Systems (supra), MIL India Ltd. (supra),
Eastend Papers Industries Ltd. (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 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,
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 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 goods.
48. Narne Tulaman Manufacturers Pvt. Ltd., Hyderabad v. Collector of
Central Excise, Hyderabad[45], Eastend Paper Industries Ltd.
(supra), Aspinwall & Co. Ltd. (supra), MIL India 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 concept, term and 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 Narne Tulaman Manufacturers Pvt. Ltd. (supra),
installation of weighbridges was held to be manufacture for the
purpose of excise duty, observing that the 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 coffee, it was
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 property as it was
embedded on the earth and, therefore, not exigible to excise duty.
This Court opined that paper making machine 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
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
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. 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 discussed in Otis Elevator (supra) by the High Court of
Bombay. Therefore, the installation of a lift in a building cannot
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 senior counsel for the State of
Orissa.
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 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 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 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 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 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 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 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 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 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 material used in construction belongs to the manufacturer, is
not correct, as the subsequent 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
Contract and Job Works” under the heading “Labour, service and
other like charges as percentage of total value of the contract”
specifying 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 contract
for sale. To elaborate, the submission that the element of labour
and service can be deducted 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 the constitutional
provision and, accordingly, we unhesitatingly 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 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 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 behalf 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 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
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” 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, 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 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 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 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.”
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 Hindustan Shipyard Ltd.
(supra) and, analyzing the principle stated therein, observed thus:
-
“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 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.”
56. Applying the above test, the learned Judges referred 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 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 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 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 per the drawings.
The Court took note 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 and ruled that it was clear
that the transaction in question was a contract of “sale” and not a
“works contract”. The Court perused the 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 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, 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 lifts and elevators during the relevant period in the
course of its business. To strengthen the conclusion, it has been
held 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 are only incidentally used.
57. From the aforesaid decision, it is perceptible that the three-Judge
Bench has drawn distinction between the contract for sale 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 circumstances of the case
and the custom of the trade have been taken into consideration. In
that context, the learned Judges have opined that it is not the
bulk of the material alone 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 employed for converting the main components
into the end product, the skill and labour are only incidentally
used and the delivery of the end product by the seller to the buyer
would constitute a sale. On the aforesaid principle, the three-
Judge Bench has finally 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 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.
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 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: -
“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 and contract for
work (or service) has almost diminished 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 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 [pic]purchase of those
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).”
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 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 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 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 Toubro
(supra), the question arose whether taxing of sale of 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 are not involved in that
transaction because the term “works contract” is nothing but a
contract in which one of the parties is obliged to undertake or 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 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.
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: -
“… After the 46th Amendment the works contract which was an
indivisible one is by a legal fiction altered into a contract
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 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.”
61. Explaining the said passage, the Constitution Bench, in Gannon
Dunkerley-II (supra), has opined thus:-
“This would mean that as a result of the Forty-sixth Amendment,
the contract which was single and indivisible 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.”
62. It has been further observed therein as follows: -
“36. If the legal fiction introduced 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 goods
which are involved in the execution of a works 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.”
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 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)(b) of Article 366
of the Constitution, the incidental part as regards labour and
service pales into total 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 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 components into the end product was only
incidental and arrived 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 that in all the cases that have been brought before us,
there is a composite contract for the purchase and installation of
the 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 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 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.
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 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 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 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, 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 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 conclusion, as has been
reached in Kone Elevators (supra), 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 profoundly speaks of obligation to supply goods and
materials as well as installation of the lift which obviously
conveys performance of labour and service. Hence, the fundamental
characteristics of works contract 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.
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 cases have been reopened or 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
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 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.
66. The writ petitions and the civil appeals are disposed of with no
order as to costs.
……………………………………….…CJI
[R.M. Lodha]
…………………………………….………J.
[A.K. Patnaik]
……………………………………….……J.
[Sudhansu Jyoti Mukhopadhaya]
……………………………………….……J.
[Dipak Misra]
New Delhi;
May 06, 2014.
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
WRIT PETITION (CIVIL) NO. 232 OF 2005
M/s. Kone Elevator India Pvt. Ltd. ….Petitioner
VERSUS
State of T.N. & Ors. .…Respondents
With
W.P.(C) No.298/2005, W.P.(C) No.487/2005, W.P.(C) No.528/2005,
W.P.(C) No.67/2006, W.P.(C) No.511/2006, W.P.(C) No.75/2007, W.P.(C)
No.519/2008, W.P.(C) No.531/2008, W.P.(C) No.548/2008, W.P.(C)
No.569/2008, W.P.(C) No.186/2009, W.P.(C)
No.23/2010, W.P.(C) No.62/2010, W.P.(C) No.232/2010, W.P.(C)
No.279/2010, W.P.(C) No.377/2010, W.P.(C) No.112/2011, W.P.(C)
No.137/2011, W.P.(C) No.181/2011, W.P.(C) No.207/2011, W.P.(C)
No.278/2011, W.P.(C) No.243/2011, W.P.(C) No.372/2011, W.P.(C)
No.398/2011, W.P.(C) No.381/2011, W.P.(C) No.468/2011, W.P.(C)
No.547/2011, W.P.(C) No.107/2012, W.P.(C) No.125/2012, W.P.(C)
No.196/2012, W.P.(C) No.263/2012, W.P.(C) No.404/2012, W.P.(C)
No.567/2012, W.P.(C) No.145/2013, W.P.(C) No.241/2013, W.P.(C)
No.454/2013, W.P.(C) No.404/2013, W.P.(C) No.723/2013, W.P.(C)
No.440/2012, W.P.(C) No.441/2012, W.P.(C) No.156/2013, W.P.(C)
No.533/2013, W.P.(C) No.403/2012, W.P.(C) No.824/2013, W.P.(C)
No.428/2009, W.P.(C) No.1046/2013, W.P.(C) No.1047/2013, W.P.(C)
No.1048/2013, W.P.(C) No.1049/2013, W.P.(C) No.1050/2013, W.P.(C)
No.1051/2013, W.P.(C) No.1052/2013, W.P.(C) No.1098/2013
SLP(C) Nos.14148-14153/2005, SLP(C) Nos.14961-14967/2005, SLP(C)
Nos.17842-17847/2005, SLP(C) No.5377/2006, SLP (C) No.7037/2006,
SLP (C) No.30272/2008, SLP (C) No.30279/2008, SLP (C) No.5289/2009,
SLP (C) No.6520-6521/2009, SLP (C) No.4469-4471/2010, SLP(C)
No.11258/2010, SLP (C) No.17228/2010, SLP (C) No.17236-17237/2010,
SLP (C) No.23259-23261/2010, SLP (C) No.15732/2011, SLP(C)
No.16466/2011, SLP (C) No.16137/2011, SLP (C) No.5503/2011, SLP (C)
No.11147/2011, SLP (C) No.11227-11238/2012, SLP (C) No.36001-
36012/2013, SLP (C) No.19901/2013, C.A. No.6285/2010
J U D G M E N T
Fakkir Mohamed Ibrahim Kalifulla, J.
. 1. I had 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 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,
“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 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 & Anr. vs. Man Industrial Corporation Ltd., [1969] 24 STC 349,
State of Rajasthan vs. Nenu Ram, [1970] 26 STC 268 and M/s. 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
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 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.
. 5. We heard Mr. Harish N. Salve, learned Senior Counsel appearing for
the Petitioner and 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,
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 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 Karnataka
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
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 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 reported in Larsen & Toubro Ltd.
(supra), the ultimate answer to the question would result in affirming
either of the views of the above two decisions. Further, certain
Constitution Bench decisions should also have to be kept in mind, wherein
the basic principle/test to be applied to find out as to whether the
contract is one for ‘Sale’ or ‘Works Contract’. The first decision is the
M/s. Patnaik and Company vs. State of Orissa reported in AIR 1965 SC 1655,
wherein the principle stated by the High Court was affirmed by the
Constitution Bench of this Court. The said principle was to the effect
that it makes no difference 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 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 Constitution Bench decision of this
Court in The Commissioner of Commercial Taxes Mysore, Bangalore vs.
Hindustan 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 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. M/s.
Gannon Dunkerley and Co. (Madras) Ltd., AIR 1958 SC 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 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 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 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 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 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,
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 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 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 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, containing nine pages and in
the last page the signatures of the Petitioner and its customers were
found affixed in proof of 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.
. 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 and openings of the
LIFT, the power supply requirement for its operation, the control aspect
of the LIFT, the 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 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 the colour
scheme of the LIFT and the shape of the LIFT.
. 12. The next page of the document is under the caption ‘A.C. Variable
Voltage Variable Frequency Control’. In the said document description of
the machine, the brake system, the 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 system has been described as
direct current brake with spring applied and electrically released and
designed 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 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 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 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, 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 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 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 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 as on chargeable
basis. It also specifies the exclusion of any special examination that may
be carried out in between the 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 ‘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 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 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 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 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 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 the 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 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 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 acceptable living accommodation with facilities such
as light, running water, sanitary for the erection crew at or near the
site and to indemnify and SAVE THE PETITIONER HARMLESS AGAINST ALL
LIABILITY GROWING OUT OF THE PURCHASER’S FAILURE TO CARRY OUT ANY OF THE
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 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 LIFT has been entirely fastened on the
Purchaser. It is also relevant to note that under the heading ‘Preparatory
Work’, major responsibility has been entrusted 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 ‘IEEMA Price
Variation Clause for Elevator Works Contracts’. It is described therein
that the price quoted/confirmed is based 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 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 applied for the purpose of determining the cost. For the purpose 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 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 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. 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 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 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 is required to be noted is
that in the event of price variation due to the delay attributable to the
Purchaser, the labour cost and the material cost would be worked out based
on the prevailing Consumer Price Index Number for Industrial Workers and
Wholesale Price Index Number for Metal Products. In other words, there is
no significant relevance for the subtitle and the various details
mentioned in the said 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 ‘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 have to be necessarily examined in detail. The first 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’
inasmuch as the price quoted would be valid for 52 weeks from the date of
acceptance of the proposal. Condition No.3 also is an ancillary
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 within two weeks from the date of
the agreement, all required data for performance of the contract, that the
PURCHASER TO AGREE 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 for installation and adjustment of
the elevator. It also mentions that if the electric power supply is not
provided, the installation 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 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 the Purchaser in making the Preparatory Work 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 Petitioner 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
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 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. Condition No.9 specifies that
the title to each elevator would pass on to the Purchaser when payment for
such elevators are fully paid to the Petitioner and in the event of
default being committed by the Purchaser, the right of the Petitioner to
retrieve the elevator in full or in part and also its right to recover
from the Purchaser, the value of the elevator supplied, can be initiated
by appropriate legal proceedings. Condition No.10 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 prescription of the
defect liability period, which would be 18 months from the date of initial
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 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 the Purchaser 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 between the parties and finalized. As
per Condition No.14, the Petitioner wants to call 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 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 specifications varied with
the 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 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 level and on its failure to go in for Arbitration. Condition
No.21 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
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 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 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 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
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.
. 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 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.
. 20. Before adverting to the other statutory provisions, which 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 by the Petitioner with its customers,
based on the above Annexure 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 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
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 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, 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 mainly
related to the nature of the LIFT to be supplied and as to how the
technology involved in the LIFT would be 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 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 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 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
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 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 hoist/structure 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 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 only highlights the overall
responsibility of the customer to undertake the main work of providing
a solid hoist/structure 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
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 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 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 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 under the provisions of the Central Excise Legislation as well as
the provisions brought out by various States for charging tax 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.
. 22. Under Article 366(29A), tax on the sale or purchase 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 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 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 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 prescriptions brought to our
notice. Mr. Salve, learned Senior Counsel brought to our notice the
definition of ‘Works Contract’ under Section 2(jj) of the Orissa Sales Tax
Act, 1947. The said provision reads as under:
“works contract includes any agreement for carrying out for 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.”
. 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 of a place intending to install a LIFT after
the commencement of the said Act, should make an application to the
concerned authority of the State Government for permission to erect such a
LIFT and while seeking for such a permission, the obligation is on the
applicant to furnish the various details about the LIFT 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 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 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 operated without a licence. The corresponding rules,
namely, 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, Rules 3, 4, 5, 6, 9
and 9(a), what is specified is the detailed procedure to be followed by
approaching the concerned 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 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 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 be installed and some basic details about the LIFT which is
to be installed. Under Form A-1, the LIFT 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 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,
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
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 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) 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 definition of ‘Erection, Commissioning and Installation’
as was inserted as sub-section (39a) to Section 65 by the 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 (zzzza) to sub-
section (105) of Section 65, which was inserted by the Finance Act, 2008
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 in respect of roads,
airports, railways, transport terminals, bridges, tunnels and dams.
Explanation-For the purposes of this sub-clause, “works contract” means a
contract wherein-
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,-
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, 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
b) construction of a new building or a civil structure or a part
thereof, or of a pipeline or conduit, primarily for the
purposes of commerce or industry; or
c) construction of a new residential complex or a part thereof; or
d) completion and finishing services, repair, alteration,
renovation or restoration of, or similar services, in relation
to (b) and (c) or
e) turnkey projects including engineering, procurement and
construction or commissioning (EPC) projects:”
. 28. Before referring to the details of the above provisions brought to
our notice, it is relevant to mention at this juncture 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 which the First
Respondent wanted to re-open the assessment for the Assessment Years 1999-
2000 (C.S.T. No. 631067/1999-2000) under the Central 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
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
referred to us will have to be made, keeping in mind the statutory
provisions relating to charging of tax vis-à-vis the impact of Article 366
(29A)(b) of the Constitution.
. 29. Sub-section (29) of Section 65 of the Finance Act, 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
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-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-section 39(a) was also
introduced by Finance Act (No.2) of 2004 w.e.f. 10.09.2004, which further
defined the expression ‘erection, 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 expression ‘erection’
was added along with the other expressions ‘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, commissioning or
installation’, an elaborate definition came to 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 staircases or travelators or such
other similar services, which came into operation w.e.f. 16.06.2005.
However, the definition of Taxable Service under sub-section 105(zzd)
remained unaltered.
. 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 ‘Works 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 meant that a transfer of property in goods
involved in the execution of such contract would be leviable to tax as
sale of 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 alia for the erection, commissioning or
installation of LIFT and Escalator, fire escape staircases or elevators.
It is very relevant to note that 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 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 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 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, the question for consideration is
what is the legal position with reference to the nature of contract of the
Petitioner vis-à-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-à-vis the 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 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 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 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 Purchaser. 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 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 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 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 relating to the time
within which the LIFT will be commissioned, namely, within 52 weeks and if
for any reason any delay is caused beyond the control of the Petitioner,
even then there 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 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 decision of this Court in Kone Elevators
(India) Pvt. Ltd. (supra), the various States who were earlier contending
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 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
Governments. The learned Senior Counsel by referring to the definition of
‘Works Contract’ under Section 2(jj) of the Orissa 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-founded. In support of his submissions,
the 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.
. 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 attention 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 as to the various parts of the LIFT and
how these parts are to be assembled and also the safety measures to be
followed, submitted 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 Elevators (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 installation of a LIFT, the said
activity cannot be called as a mere ‘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. 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 A1, the learned Senior Counsel contended
that the said provisions in the Acts and the Rules, 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 contract for supply and erection of the LIFT to the
customer and the erection part of it is so intertwined with the supply of
the LIFT, 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 Co. (India) Ltd. (1981) ELT
720 in support of his submissions. That was a decision of the Government
of India in an appeal 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 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 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 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 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.
. 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 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 composite 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 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
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 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 (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-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 and the other for the purpose of Sales Tax. The submission of
the learned Senior Counsel was adopted by all other counsel who appeared
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 as between the
Petitioner and its Purchaser, going by its terms, 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 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 be 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 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, 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 decisions in M/s Patnaik and Company
(supra), M/s 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. (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, 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 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 our attention to the definition of
‘Sale’ and ‘Works Contract’ under the Andhra Pradesh General Sales Tax
Act, 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 would 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
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
between a contract by which one party agrees to supply a product as
compared to a party agreeing to carry out a work such as construction of
building, erection, installation or commissioning of movable or immovable
property. In other words, according to the learned Senior Counsel going by
the terms of the contract between the Petitioner and the prospective
Purchasers, what is agreed to between the parties is the supply of LIFTS
and the act of installation is not the contract for which the parties were
ad idem. Therefore, if the contract distinctly discloses that it is one
for supply of a LIFT and the same is effected by erecting it in the
premises of the Purchaser, it cannot be held that the act of erection
alone should be taken into account and on that basis hold that the
contract 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 that by installation,
the LIFT in its full form is brought out and handed over to the Purchaser.
In other words, according to the 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 M/s. Patnaik and Company (supra), T.V.
Sundaram Iyengar & Sons (supra), have all laid down the correct principles
and, therefore, the decision in Kone Elevators (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 submission
learned Senior Counsel relied upon the decision in Dell Inc. vs. Superior
Court No.A118657 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 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 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 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 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
Contract’. According to the 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 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 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.
. 47 Mr. Preetesh Kumar, learned Standing Counsel for the State 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 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 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.
. 48. Mr. Darius Khambata, learned Advocate General for Maharashtra and Mr.
K.N. Bhatt, learned Senior Counsel for Karnataka actually conceded to the
effect that the question posed for consideration has been fully answered
in the decision in Larsen & Toubro Ltd. (supra).
. 49. Mr. Malhotra, learned Additional Solicitor General for Union of India
contended that the Union of India has nothing to 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.
. 50. Mr. Salve, learned Senior Counsel in his submissions referred to the
decisions in M/s 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
Correct Engineering Works and others reported in (2010) 5 SCC 122. The
learned Senior Counsel attempted to distinguish the decision in M/s
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 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 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 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 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, 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. 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/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.
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 basis of the Contract that emerged between the Petitioners and the
Purchasers in regard to the supply of the LIFTS/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 manufacture, 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.
. 53. Therefore, in 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 is a ‘Works Contract’. Therefore, at the
risk of repetition, it will 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 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 way of
acknowledgement of the order of the proposed features of the LIFT 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 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 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 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 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, 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 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 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/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 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 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 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, 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 Petitioner claims to carry out in effecting the
supply is virtually very insignificant as compared to the element of sale,
which is 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.
. 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:
“Order Acknowledgment for One (1) No. OTIS Electric Traction
Passenger Elevator for your Building at “BAPU NAGAR, JAIPUR,
RAJASTHAN”.”
. 58. The contents of the letter also states that the Petitioner 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
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 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 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 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 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 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 the Petitioner to
supply its LIFT and locate it. It contains as many as 21 different 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 necessary including, grouting of all bolts, sills,
members indicator and button boxes, etc. and a steel scaffolding to be
made in the course of erection, which the Petitioner undertakes to
provide.
. 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 not involve
any work to be performed. Similarly, provision 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 service to be rendered. The provision relating to
cutting of walls, floors or partitions together with any repairs to be
made necessary including grouting 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 directed to prepare the hoist
way, which is a solid structure in 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 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, 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. 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 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 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 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-à-vis the caption ‘Elevator Works Contract’. 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 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 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
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 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 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 ‘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 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 and to
call it an indivisible one, is contrary to its own terms.
. 63. With this, the ‘Conditions of the Contract’ can be referred to, which
contains as many as 27 conditions. These conditions have been elaborately
discussed in paragraph 18 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, 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 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. 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 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 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 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 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
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 LIFT and installation costs are separately
worked out in order to ensure 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
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 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 terms have downright been agreed upon between the
parties only to mandate the Purchaser to pay 90% of the contracted amount
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 for dispatch at the premises of the Petitioner.
In that situation also what all the Petitioner will have to ensure is that
such 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 premises, the Purchaser is bound 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 payment
are discernable 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 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.
. 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 responsibility on
the Petitioner to carry out such execution and thereby, any corresponding
liability being fastened on the Petitioner in the event of its failure to
carry out the erection/installation part of it will not become
attributable. It will 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 Petitioner to retain such 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 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 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 under 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 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’.
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 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 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 with the submissions made
by the learned Senior Counsel for the Petitioners. Mr. Salve, learned
Senior Counsel in his opening submission relied upon Section 2(jj) of the
Orissa Sales Tax Act, 1947 and contended that applying the said definition
of ‘Works Contract’ to the present contract, the same would squarely fall
within the said definition. When examining 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 2(jj) of the Orissa 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.
. 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 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 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
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 2(jj).
. 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 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:
“An agreement enforceable by law is a contract.”
The first part of Section 10 reads as under:
“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 the lawful object and are not hereby
expressly declared to 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 with a lawful object. It is
needless to state that for any 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 ‘Works Contract’ under
Section 2(jj) of the Orissa Sales Tax Act to the case 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,
installation of any movable or immovable property. Further, such an
agreement should also be one for cash or deferred payment or other
valuable consideration.
. 74. Keeping the above statutory prescriptions in mind, the same can 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 been examined, in particular the
consideration part of it, it is found that the majority of the
consideration was payable to the Petitioner within one month from the date
of commissioning or within 90 days of keeping the materials ready for
supply in 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 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 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, 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, 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 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, 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 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 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 of the contract,
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
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.
. 76. On 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 works related,
obligations to be performed on its part, the Petitioner has retained every
right to charge interest for such delay, if any, caused at the instance of
the Purchaser and in the event of 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 based on the
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’. When that is 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 Section 2(jj) of the Orissa Sales Tax Act
to the case on hand and hold that the manufacture, supply and 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 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 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 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 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 Contract’ under Section 2(jj), 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 2(jj) 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 contained in the Field
Installation Manual show that what was agreed as between the parties would
fall within the definition of ‘Works Contract’ and therefore, be held as
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
of the LIFT and the agreement is not in any way conditional to the
installation 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 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 installation 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 advance the case of the
Petitioner. Therefore, for the very same reasons, the said contention of
the learned Senior Counsel is also liable to be rejected.
. 79. I have also highlighted how 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 paid along with our final invoice.’
In fact the copy of the two invoices dated 17.12.2009 and 20.09.2010,
clearly explains the fact that 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 petitioners in
paragraph 25 and have extensively dealt with them in paragraph 37 of this
judgment. Based on such examination 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 operation or
in the course of the maintenance of the LIFT, no 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 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 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 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
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 Section 37B 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 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) 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
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 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 an answer to the question whether
manufacture, supply and erection of a LIFT, will fall under the category
of ‘Sale’ or ‘Works Contract’ for the purpose of a levy under the Sales
Tax Act. Section 65(29), 65(39a) and 65(105) (zzd) and (zzzza) are all
provisions for the levy of Service Tax. It is well known that while
interpreting taxing statutes, strict and literal interpretation should be
made. For this proposition of law, reference can be made to one of the
earliest decisions of England in Cape Brand Syndicate vs. Inland Revenue
Commissioner, 1921-1 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 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 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 person by erection, commissioning or installation agency
in relation to commissioning and installation. Therefore, reading the
above provisions together, what emerges is that any service provided by
way of commissioning and installation of LIFT and 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 excludes
‘Works Contract’ in respect of roads, airports, railways, transport
terminals, bridges, tunnels and dams obviously because those are services
of the State. The said sub-clause, however, contains a definition of
‘Works Contract’ in the explanation part. It, however, refers to a
contract which 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 includes
erection, commissioning or installation of LIFT and 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 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 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 independently
attract tax liability under the relevant Sales Tax Statutes. However, it
is not the concern 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 provisions under the Service Tax Act
are of no assistance to the Petitioner 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-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
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
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 to comply with the provisions relating to Sales Tax. The said
submission of the learned Counsel is, 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 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’. The Division Bench of the Bombay High Court posed 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 Manak and Co. was a composite and
divisible contract, one for the sale of goods in which the property
has passed 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.”
. 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:
“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.”
. 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 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 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 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.”
. 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 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 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 into between the
parties.”
. 91. The Division Bench then felt it necessary to examine the terms of the
contract and the surrounding circumstances and ultimately reached its
conclusion as under:
“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 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 the reasons beyond their control.
This is more consistent with and all-inclusive price being fixed
irrespective of the materials 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:
“In the result, we answer the questions referred to us as
follows:-
Question No.(1) in the negative.
Question No.(2) in the affirmative.”
. 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 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 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 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 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 decision will no longer hold good.
. 94. Before analyzing the various other decisions relied 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 made to the reasoning, which
weighed with the learned Judges in the judgment rendered in Kone Elevators
(India) Pvt. 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 01.06.1995 to 31.07.1995, provisional
assessments were made by 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 5F of 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 appeal to the
Tribunal was allowed in favour of the 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), Hindustan 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 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 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. 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, “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 work connected in keeping the site ready for
installation as per the drawings. In view of the contractual
obligations of the customer and the fact that the assessee undertook
exclusive installation of the lifts manufactured and brought to the
site in knocked-down state to be assembled by the assessee, it is
clear that the transaction in question was a contract of “sale” and
not a “works contract”. Moreover, on perusal of the brochure of the
assessee Company, one finds that the assessee is in the business of
manufacturing of various types of lifts, namely, passenger lifts,
freight elevators, transport elevators and scenic lifts. A combined
study of the above models, mentioned in the brochure, indicates 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 were 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, the
transactions in question constitute “sale” in terms of Entry 82 of
the First Schedule to the said Act and, therefore, Section 5-G of
the said Act was not applicable.”
. 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 assigned, having regard to the nature of the
contract and the relevant provision of law that would apply to such a
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 in the manufacture, supply
and installation of LIFT/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 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 19.08.2008,
the two judge Bench after noticing the relevant provisions of 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
Development (supra), in particular, paragraph 20, inasmuch as 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
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 R.M. Lodha).
. 97. Before referring to the various reasons in the 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:
“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 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, 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
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 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 executed in favour of the intended 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 monetary consideration so far as the
contract between the Developer was concerned and the owner 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 prospective Purchaser. Hence, it was
claimed that the agreement can only be construed as ‘Sale’ and not a
‘Works Contract’. It was also contended on the above footing as under:
“21. ….Conversely a suit by an owner/developer against the flat
Purchaser would be for payment of consideration of the flat/
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, thus, submitted that
the judgment in Raheja Development does 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 Contract’ and that Article 366(29A)(b) takes
care of such situations where the goods are transferred in the form of
immovable property.
. 100. While dealing with the reference, the various contentions were
noted in the first instance and while examining the implication of Article
366(29A)(b), it was observed in paragraph 60:
“60.….in other words goods which have by incorporation become part
of immovable property or deemed as goods the definition of Tax on
the sale and purchase 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 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 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 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:
. (ii) Contract for Sale of Goods involved in the works contract
and
. (ii) For supply of the labour and service.
. 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.
. 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 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, immovable
property in the form of a building ultimately emerged in the land in
question where substantial use of materials in the form of goods was
involved for which equal amount of labour was also employed. It was in
that context the said judgment came to 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.
. 105. 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 within the four
corners of the expression ‘Works Contract’. Therefore, the endeavour is to
find out the principles that have been stated 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 reading of
the decision in Larsen & Toubro Ltd. (supra) can be made.
. 106 In paragraph 65 of the said decision reference was made to Bharat
Sanchar (supra), wherein sub-clause (d) of Clause 29A of Article 366 came
to be considered. It was laid down therein that all the sub-clauses of
Article 366(29A) serve to bring transactions where essential ingredients
of a ‘Sale’ as defined in the Sale of Goods Act, 1930 are absent, within
the ambit of sale or purchase for the purposes of levy sales tax. The said
proposition stated in Bharat Sanchar (supra) would only go to show that
before invoking Article 366 (29A), the concerned transactions ought 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 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 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. 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 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 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 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 ‘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 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)
. 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 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 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 said contract, namely, supply
of the goods certain services are to be rendered, 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’.
. 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 the goods employed in the course of execution of such
contract, 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 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’ 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 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-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, 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’ as defined in the Sale of Goods Act are 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 (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
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 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.
. 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 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.
. 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 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 ultimate building units constructed. In
that context, whatever held in paragraph 76 to the effect that 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 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 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 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’.
. 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
following effect:
“94. For sustaining the levy of tax on the goods deemed 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 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 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 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. (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 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 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 & 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) 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 Contract’ or not. Reliance was placed upon the decision of this
Court in Richardson Cruddas Ltd. (supra). In order to note the 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
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 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 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 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 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 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 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 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 State of
Orissa in support of his submission relied upon the Constitution Bench
decision of this Court in M/s. Patnaik and Company (supra). In paragraph
28 as a proposition of law, the Constitution Bench has held as under:
“28. In Commissioner of Sales Tax, U.P. 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., 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 one operation.”
. 118 Thereafter, while repelling the contention made on behalf of the
Appellant in that case, it was held as under:
“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, however, not sufficient: to constitute a sale there
must be an agreement — express or implied — relating to sale of
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 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 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 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.
. 120. The learned Senior Counsel also relied upon the decision in
M/s. 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 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 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 delivery of
the possession of, a chattel as a chattel to the buyer. Where the
main object of work 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 the materials, nor 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 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’.
. 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 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 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
surrounding circumstances. In this case the salient features of the
contract are as follows:
‘(1) ……..
(2) ………
(3) ………
(4) ………
(5) ………
(6) ………
(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 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 of this Court in State of Gujarat v. Kailash
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 inter alia 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
‘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 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 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 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 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 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 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 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 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 product
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.
32. Be that as it may clause (1) of Standard Condition 15 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 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 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 to
the facts of this case. In fact, in the said decision the Constitution
Bench decision of this Court in M/s. 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 Contract’.
. 126. Mr. Salve, learned Senior Counsel in his submissions placed
reliance upon a Division Bench judgment of this Court in M/s Vanguard
Rolling Shutters and Steel Works (supra). 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 of rolling
shutters and steel works who used to manufacture iron shutters according
to specifications given by the parties 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’.
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 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 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 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…….”
(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 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 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 M/s. 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 said decision is of no assistance to the Petitioner except
to the 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 (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 and thereafter,
supply them to the South-Eastern Railway. Dealing with the said contract,
it was held that it was a ‘Works Contract’ 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 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 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 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 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’.
. 130. Dr. Singhvi, learned Additional Advocate 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 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:
“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 in Article 366(29-A) operate. By introducing
separate categories of “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 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 does not give a licence, for example, to
assume that a transaction is a sale and then to look around for
what could 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 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)
. 131. I am in full agreement with the proposition of law 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, M/s. 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’, is justified.
. 132. Dr. Singhvi, learned Additional Advocate General also relied
upon the decision of this Court in Hindustan Shipyard Ltd. (supra) wherein
reference to Halsbury’s Laws of England (4th Edn. Vol.41, para 603) has
been noted to understand the 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 revert back to analysing the abovesaid 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 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 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 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 ownership of the materials, nor 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 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 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’.
. 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 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 SCC 645, which is also a
Constitution Bench judgment, wherein in paragraph 41 it was held as under:
“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’ represented by
‘building contracts’ in the context of the expanded concept of
‘tax on the sale or purchase 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 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.
. 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 ‘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 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 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 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 decision of
this Court in Commissioner of Sales Tax, Gujarat vs. M/s. Sabarmati Reti
Udyog Sahakari 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 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 upon the intention of
the parties executing the contract. As we have observed in our
judgment in Civil Appeal Nos. 1492 and 1493 of 1971 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 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 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 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
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 contract for sale, it cannot be held to be a ‘Works
Contract’.
. 139. In support of my conclusion, reliance can also be 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 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 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 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 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 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 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 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 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) Pvt. Ltd. (supra) has been correctly decided. The
Reference is, therefore, answered on the above terms.
………..…………………………………..J.
[Fakkir Mohamed Ibrahim Kalifulla]
New Delhi
May 06, 2014
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL/APPELLATE JURISDICTION
WRIT PETITION (C) NO. 232 OF 2005
M/S. Kone Elevator India Pvt. Ltd. … Petitioner
Versus
State of Tamil Nadu and Ors. … Respondents
WITH
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,
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, 1098/2013,
WITH
Civil Appeal Nos. 5116-5121 of 2014
(Arising out of SLP (C) Nos. 14148-14153/2005)
WITH
Civil Appeal Nos. 5135-5141 of 2014
(Arising out of SLP (C) Nos. 14961-14967/2005)
WITH
Civil Appeal Nos. 5142-5147 of 2014
[Arising out of SLP (C) Nos. 17842-17847/2005
WITH
Civil Appeal No. 5152 of 2014
[Arising out of SLP (C) No. 5377/2006
WITH
Civil Appeal No. 5153 of 2014
[Arising out of SLP (C) No. 7037/2006
WITH
Civil Appeal No. 5154 of 2014
[Arising out of SLP (C) No. 30272/2008
WITH
Civil Appeal No. 5156 of 2014
[Arising out of SLP (C) No. 30279/2008
WITH
Civil Appeal No. 5157 of 2014
[Arising out of SLP (C) No. 5289/2009
WITH
Civil Appeal Nos. 5159-5160 of 2014
[Arising out of SLP (C) Nos. 6520-6521/2009
WITH
Civil Appeal Nos. 5162-5164 of 2014
[Arising out of SLP (C) Nos. 4469-4471/2010
WITH
Civil Appeal No. 5165 of 2014
[Arising out of SLP (C) No. 11258/2010
WITH
Civil Appeal No. 5166 of 2014
[Arising out of SLP (C) No. 17228/2010
WITH
Civil Appeal Nos. 5167-5168 of 2014
[Arising out of SLP (C) Nos. 17236-17237/2010
WITH
Civil Appeal Nos. 5170-5172 of 2014
[Arising out of SLP (C) Nos. 23259-23261/2010
WITH
Civil Appeal No. 5174 of 2014
[Arising out of SLP (C) No. 15732/2011
WITH
Civil Appeal No. 5175 of 2014
[Arising out of SLP (C) No. 16466/2011
WITH
Civil Appeal No. 5178 of 2014
[Arising out of SLP (C) No. 16137/2011
WITH
Civil Appeal No. 5179 of 2014
[Arising out of SLP (C) No. 5503/2011
WITH
Civil Appeal No. 5180 of 2014
[Arising out of SLP (C) No. 11147/2011
WITH
Civil Appeal Nos. 5181-5192 of 2014
[Arising out of SLP (C) Nos. 11227-11238/2012
WITH
Civil Appeal No. 5193 of 2014
[Arising out of SLP (C) No. 19901/2013
WITH
Civil Appeal Nos. 5195-5206 of 2014
[Arising out of SLP (C) Nos. 36001-36012/2013 and
WITH
Civil Appeal No. 6285/2010
O R D E R
Keeping in view the conclusions of the majority, expressed in
the judgment of Dipak Misra, J., it is held that the decision rendered
in State of A.P. v. Kone Elevators[46] 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, 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 the assessments are challenged in appeal or
revision, the same shall be decided in accordance with the decision
rendered by us.
3. The writ petitions and the civil appeals are disposed of with no
order as to costs.
………………………………….....…CJI.
[R.M. Lodha]
…………………………………….………J.
[A.K. Patnaik]
……………………………………….……J.
[Sudhansu Jyoti Mukhopadhaya]
……………………………………….……J.
[Dipak Misra]
……………………………………….……J.
[F.M. Ibrahim Kalifulla]
New Delhi;
May 06, 2014.
-----------------------
[1] (2010) 14 SCC 788
[2] (2005) 3 SCC 389
[3] (1969) 1 SCC 567
[4] (1970) 26 STC 268 (SC)
[5] (1977) 2 SCC 250
[6] (2006) 3 SCC 1
[7] (2014) 1 SCC 708
[8] (1969) 24 STC 525 (Bom)
[9] (1989) 2 SCC 645
[10] (1965) 2 SCR 782
[11] (1975) 3 SCC 424
[12] (1977) 2 SCC 847
[13] (1953) 1 All ER 15
[14] (1944) 1 All ER 618
[15] (2007) 3 SCC 533
[16] (1989) 1 SCC 172
[17] (2003) 9 SCC 133
[18] (1989) 4 SCC 244
[19] (2001) 7 SCC 525
[20] (1922) 1 KB 343
[21] (1978) 4 SCC 260
[22] (1979) 1 SCC 487
[23] (1998) 1 SCC 400
[24] (2010) 5 SCC 122
[25] 58 L.Ed. 1166
[26] (1989) 3 SCC 634
[27] (2000) 6 SCC 579
[28] AIR 1958 SC 560
[29] AIR 1961 SC 1615
[30] AIR 1967 SC 547
[31] (1968) 21 STC 245 (SC)
[32] (1843) 11 M & W. 243
[33] (1972) 1 SCC 472
[34] Halsbury’s Laws of England 3rd Ed., Vol. 34, 6-7.
[35] (1976) 3 SCC 500
[36] (1970) 2 SCC 287
[37] (1984) 2 SCC 16
[38] (1993) 1 SCC 364
[39] (2001) 4 SCC 593
[40] (2005) 13 SCC 37
[41] (2000) 2 SCC 385
[42] (2005) 5 SCC 162
[43] (2007) 7 SCC 320
[44] (1875) LR 10 CP 271
[45] (1989) 1 SCC 172
[46] (2005) 3 SCC 389
whether a contract for manufacture, supply 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 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. =
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 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”. - High court confirmed the same but apex court by judgment dated
17.2.2005 in Kone Elevators (supra), the view of the High Court was
overturned. After the pronouncement in the said case, the State
Government called upon the petitioner to submit returns treating
the transaction as sale. =
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 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)(b) of Article 366
of the Constitution, the incidental part as regards labour and
service pales into total 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 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 components into the end product was only
incidental and arrived 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 that in all the cases that have been brought before us,
there is a composite contract for the purchase and installation of
the 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 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 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.
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 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 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 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, 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 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 conclusion, as has been
reached in Kone Elevators (supra), 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 profoundly speaks of obligation to supply goods and
materials as well as installation of the lift which obviously
conveys performance of labour and service. Hence, the fundamental
characteristics of works contract 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.
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 cases have been reopened or 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
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 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.
66. The writ petitions and the civil appeals are disposed of with no
order as to costs.
O R D E R
Keeping in view the conclusions of the majority, expressed in
the judgment of Dipak Misra, J., it is held that the decision rendered
in State of A.P. v. Kone Elevators[46] 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, 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 the assessments are challenged in appeal or
revision, the same shall be decided in accordance with the decision
rendered by us.
2014 ( May.Part) http://judis.nic.in/supremecourt/filename=41510
R.M. LODHA, A.K. PATNAIK, SUDHANSU JYOTI MUKHOPADHAYA, DIPAK MISRA, FAKKIR MOHAMED IBRAHIM KALIFULLA
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL/APPELLATE JURISDICTION
WRIT PETITION (C) NO. 232 OF 2005
M/S. Kone Elevator India Pvt. Ltd. … Petitioner
Versus
State of Tamil Nadu and Ors. … Respondents
WITH
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,
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, 1098/2013,
WITH
Civil Appeal Nos. 5116-5121 of 2014
(Arising out of SLP (C) Nos. 14148-14153/2005)
WITH
Civil Appeal Nos. 5135-5141 of 2014
(Arising out of SLP (C) Nos. 14961-14967/2005)
WITH
Civil Appeal Nos. 5142-5147 of 2014
[Arising out of SLP (C) Nos. 17842-17847/2005
WITH
Civil Appeal No. 5152 of 2014
[Arising out of SLP (C) No. 5377/2006
WITH
Civil Appeal No. 5153 of 2014
[Arising out of SLP (C) No. 7037/2006
WITH
Civil Appeal No. 5154 of 2014
[Arising out of SLP (C) No. 30272/2008
WITH
Civil Appeal No. 5156 of 2014
[Arising out of SLP (C) No. 30279/2008
WITH
Civil Appeal No. 5157 of 2014
[Arising out of SLP (C) No. 5289/2009
WITH
Civil Appeal Nos. 5159-5160 of 2014
[Arising out of SLP (C) Nos. 6520-6521/2009
WITH
Civil Appeal Nos.5162-5164 of 2014
[Arising out of SLP (C) Nos. 4469-4471/2010
WITH
Civil Appeal No. 5165 of 2014
[Arising out of SLP (C) No. 11258/2010
WITH
Civil Appeal No. 5166 of 2014
[Arising out of SLP (C) No. 17228/2010
WITH
Civil Appeal Nos.5167-5168 of 2014
[Arising out of SLP (C) Nos. 17236-17237/2010
WITH
Civil Appeal Nos.5170-5172 of 2014
[Arising out of SLP (C) Nos. 23259-23261/2010
WITH
Civil Appeal No. 5174 of 2014
[Arising out of SLP (C) No. 15732/2011
WITH
Civil Appeal No. 5175 of 2014
[Arising out of SLP (C) No. 16466/2011
WITH
Civil Appeal No. 5178 of 2014
[Arising out of SLP (C) No. 16137/2011
WITH
Civil Appeal No. 5179 of 2014
[Arising out of SLP (C) No. 5503/2011
WITH
Civil Appeal No. 5180 of 2014
[Arising out of SLP (C) No. 11147/2011
WITH
Civil Appeal Nos.5181-5192 of 2014
[Arising out of SLP (C) Nos. 11227-11238/2012
WITH
Civil Appeal No. 5193 of 2014
[Arising out of SLP (C) No. 19901/2013
WITH
Civil Appeal Nos. 5195-5206 of 2014
[Arising out of SLP (C) Nos. 36001-36012/2013 and
WITH
Civil Appeal No. 6285/2010
J U D G M E N T
Dipak Misra, J. [for R.M. Lodha, C.J., A.K. Patnaik,
Sudhansu Mukhopadhaya, JJ. and
himself]
Leave granted in all the special leave petitions.
2. By an order dated 13.2.2008 in Kone Elevator India Private
Limited v. State of Tamil Nadu and others[1], a three-Judge Bench
of this Court, while dealing with the writ petition 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
State of A.P. v. Kone 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 Sales Tax[5] and perceiving the manifest discord,
thought it appropriate that the controversy should be resolved by
the larger Bench. Thereafter, keeping in view the 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 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 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 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 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. 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. 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,
proceedings were initiated proposing to reopen the 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 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
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 India and others[6],
which has been further explained in Larsen and Toubro Limited and
another v. State of Karnataka and another[7], 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 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 and
the tax imposed 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. Salve that the “predominant intention test” is no longer
relevant and after the decision in Larsen and Toubro (supra),
supply 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
assembled/installed to create the working mechanism called lift.
Learned senior 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 Bombay Lifts
(Amendment) Rules, 2010. He has referred to the Preamble of the
Act which stipulates that an Act has been 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 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 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 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 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
such installation and the separate parts of the lift are not sold
like goods, but it only becomes operational after it is installed,
adjusted, 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 the obligation to
install the lift or to undertake any services in relation to the
lift and these elements of value need to be 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 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, 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 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 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.
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 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 others[9] 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 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 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 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 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 of the manufacturing process and, 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 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 manufacturing process resulting in
the emergence of the product 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 v. Central India Machinery Manufacturing Company
Ltd. and others[12], J. Marcel (Furrier) Ltd. v. Tapper[13] 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 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). It is his submission that emphasis on technology and
skill including labour and also the instructions 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, Noida[15], Narne Tulaman v.
Collector of Central Excise, Hyderabad[16], Titan Medical Systems
(P) Ltd. v. Collector of Customs, New Delhi[17], 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 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
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], Man Industrial Corporation
(supra) and Vanguard 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 on the nature of
affixation, it 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 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, 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 notwithstanding the attachment of
guide rails. For the aforesaid purpose, he has drawn inspiration
from Sirpur Papers Mills Ltd. v. Collector of Central Excise,
Hyderabad[23], Commissioner of Central Excise, Ahmedabad v. Solid &
Correct Engineering of Works and others[24] and Detroit Steel
Cooperage Company v. Sistersville Brewing Company[25].
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 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 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 “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 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 an
elevator is an identifiable good which is transferred to the
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.
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 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 placed on Federation of Hotel and
Restaurant Association of India v. Union of India and others[26].
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 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.
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 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 decisions in Patnaik & Co. (supra) and Hindustan
Shipyard Ltd. v. State of A.P.[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 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 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 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 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 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
and according to the expanded definition of tax on sale, “tax” is
leviable only on the transfer of property in goods, whether in
goods or in some other form, involved in the execution of work 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 rivalised
submissions, it is necessary to delve into the genesis of 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 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 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
(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 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 contended by the assessee that nothing could be
levied that was received by the assessee from the persons for whose
benefit it had constructed the buildings. On behalf of the
Revenue, it was urged that once there was an agreement between the
parties and in the carrying out of that agreement 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 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 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 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 sale as regards another. The Constitution
Bench further held that on the true interpretation of the
expression "sale of goods", 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 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 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 essential ingredients being an agreement
to sell movables for a price and property passing therein pursuant
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
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 others[29],
the majority, interpreting the nature of the contract which related
to assembling and installing machinery, plant and 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 materials as such by the appellant therein to the owner
and, therefore, the agreement in question was an indivisible one
for the construction of 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 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 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 in Gannon Dunkerley-I (supra) was distinguished on the
ground that it related to contract to construct a building and the
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
one but sum total of several reasons which was the foundation of
the majority judgment in Patnaik & Co. (supra).
19. In the case of State of Gujarat v. M/s. Kailash Engineering Co.
(Pvt.) Ltd.[30], the issue was whether the construction of third
class sleeper coaches by the respondent-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 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 Ltd.[31], there was
a postulate that a consolidated lump sum would 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 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. Bulmer[32], the Court held
that the contract was a works contract and not a contract for sale.
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 and
labour and not a contract for sale, for ‘fixing’ the windows 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. M/s. Associated Hotels of 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 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: -
“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 price is not the transfer
of a chattel qua chattel, the contract is one of work and
labour. The test is whether or not the work and labour bestowed
and in anything that can properly become the subject of sale;
neither the ownership of materials, nor 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 of a chattel[34].”
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 amenities. The Court
ruled that the transaction between 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, Ahmedabad) v. M/s.
Variety Body Builders[35], this Court, after referring 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 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 vexed jurists all over.”
24. In Vanguard Rolling Shutters and Steel Works’ case, the assessee
manufactured rolling shutters according to specifications given by
the parties and fixed the same at the 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, 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 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
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 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 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 Pradesh v. Purshottam Premji[36],
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 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 in it to the
customer. 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 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.
26. In Hindustan Aeronautics Limited v. State of Orissa[37], 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 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 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 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 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 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 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 undo the base of the Constitution Bench
decision in Gannon Dunkerley’s-I case.
28. To have a complete picture, we think it apt to reproduce the said
constitutional provision: -
“366 (29A) “tax on the sale or 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) 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) a tax on the delivery of goods on hire purchase 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
cash, deferred payment or other valuable consideration;
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;
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,
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 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 Forty-Sixth
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 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 decisions in the field pertaining to works
contract and the recommendations by the Law Commission in its 61st
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 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 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 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 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) 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 of the 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) 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
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 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 (d) of clause (29-A) of Article 366 of the Constitution
are subject to an additional restriction mentioned in sub-clause (b)
of Article 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.
30. At this juncture, the pronouncement in M/s Gannon Dunkerley and Co.
and others v. State of Rajasthan and others[38] is necessary to be
noted. While dealing with the various submissions of the counsel
for the States, the Constitution 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 Entry 54 of the State List is made subject to under
the 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.
31. Be it noted, the Constitution Bench, in Gannon Dunkerley-II
(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 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 tax on the deemed sales. We
may state with profit that certain principles have been laid down
in the said decision to 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 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 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 categories of contracts and explained the
contours, namely, (i) 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; (ii) it may be a contract for work in which
the use of the materials is accessory or incidental to the
execution of the work; and (iii) 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
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 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
Toubro (supra) at a later stage.
34. In Bharat Sanchar Nigam Ltd. (supra), a three-Judge Bench was
concerned with the question of the nature of the transaction with
regard to whether mobile phone connections 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 to the case in Associated Cement Companies Ltd. v.
Commissioner of Customs[39] and stated thus: -
“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 applying. Therefore when in
2005 C.K. Jidheesh v. Union of India[40] held that the aforesaid
observations in Associated Cement were merely obiter and that
Rainbow Colour Lab v. State of M.P.[41] was still good law, it
was not 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 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 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 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 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 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 clarified that if the
agreement was entered into after the flat or unit was already
constructed, then there would be no works 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).
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 in denying the
benefit of recognition certificate as contemplated under Section 4B
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 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 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 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.
39. The essential characteristics have been elucidated by a three-Judge
Bench in Larsen and Toubro (supra) thus: -
“As the very title of Article 366 shows, it is the definition
clause. It starts by saying that in the Constitution unless the
context otherwise requires the expressions defined in that
article [pic]shall have the meanings respectively assigned 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) 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 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 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. The expression
“in some other form” in the bracket is 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 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 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 (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 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
services, 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 characteristics or elements 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 Article 366(29-A)(b) limits the term
“works contract” to contract for labour and 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):-
“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 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 such contract if it otherwise
has elements of works contract…”
42. At this juncture, it is condign to state that four concepts 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 “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 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 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.
43. Having noted the conceptual telescopic arena of the 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 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 respect of the said contract. It was
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 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 Commissioner 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 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 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 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
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 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 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 specifically provided for the item of maintenance. The
High Court referred to various components of the price and, after
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 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 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 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 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
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 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 precision in
execution for rendering satisfactory service and the 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 respondents which we have
already noted. The fundamental submission of Mr. Dwivedi is that
the manufacturer of the lift retains ownership in the components as
property while producing the completed lift and, hence, it would be
a case of pure manufacture. A distinction has been sought to be
made 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 components as per the
contract; that the manufacture is a process or activity which
brings 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 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), Kailash Engineering Co. (supra) and the observations made
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 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
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.
46. The other decisions which have been relied upon by Mr. Dwivedi to
show that installation is a part of the manufacturing process are
J. Marcel (Furriers) Ltd. (supra), Central India Machinery
Manufacturing Company Ltd. (supra), Norman Wright (Builders) Ltd.
(supra), Titan Medical Systems (supra), MIL India Ltd. (supra),
Eastend Papers Industries Ltd. (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 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,
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 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 goods.
48. Narne Tulaman Manufacturers Pvt. Ltd., Hyderabad v. Collector of
Central Excise, Hyderabad[45], Eastend Paper Industries Ltd.
(supra), Aspinwall & Co. Ltd. (supra), MIL India 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 concept, term and 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 Narne Tulaman Manufacturers Pvt. Ltd. (supra),
installation of weighbridges was held to be manufacture for the
purpose of excise duty, observing that the 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 coffee, it was
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 property as it was
embedded on the earth and, therefore, not exigible to excise duty.
This Court opined that paper making machine 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
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
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. 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 discussed in Otis Elevator (supra) by the High Court of
Bombay. Therefore, the installation of a lift in a building cannot
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 senior counsel for the State of
Orissa.
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 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 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 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 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 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 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 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 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 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 material used in construction belongs to the manufacturer, is
not correct, as the subsequent 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
Contract and Job Works” under the heading “Labour, service and
other like charges as percentage of total value of the contract”
specifying 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 contract
for sale. To elaborate, the submission that the element of labour
and service can be deducted 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 the constitutional
provision and, accordingly, we unhesitatingly 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 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 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 behalf 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 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
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” 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, 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 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 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 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.”
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 Hindustan Shipyard Ltd.
(supra) and, analyzing the principle stated therein, observed thus:
-
“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 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.”
56. Applying the above test, the learned Judges referred 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 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 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 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 per the drawings.
The Court took note 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 and ruled that it was clear
that the transaction in question was a contract of “sale” and not a
“works contract”. The Court perused the 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 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, 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 lifts and elevators during the relevant period in the
course of its business. To strengthen the conclusion, it has been
held 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 are only incidentally used.
57. From the aforesaid decision, it is perceptible that the three-Judge
Bench has drawn distinction between the contract for sale 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 circumstances of the case
and the custom of the trade have been taken into consideration. In
that context, the learned Judges have opined that it is not the
bulk of the material alone 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 employed for converting the main components
into the end product, the skill and labour are only incidentally
used and the delivery of the end product by the seller to the buyer
would constitute a sale. On the aforesaid principle, the three-
Judge Bench has finally 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 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.
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 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: -
“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 and contract for
work (or service) has almost diminished 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 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 [pic]purchase of those
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).”
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 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 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 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 Toubro
(supra), the question arose whether taxing of sale of 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 are not involved in that
transaction because the term “works contract” is nothing but a
contract in which one of the parties is obliged to undertake or 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 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.
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: -
“… After the 46th Amendment the works contract which was an
indivisible one is by a legal fiction altered into a contract
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 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.”
61. Explaining the said passage, the Constitution Bench, in Gannon
Dunkerley-II (supra), has opined thus:-
“This would mean that as a result of the Forty-sixth Amendment,
the contract which was single and indivisible 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.”
62. It has been further observed therein as follows: -
“36. If the legal fiction introduced 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 goods
which are involved in the execution of a works 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.”
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 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)(b) of Article 366
of the Constitution, the incidental part as regards labour and
service pales into total 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 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 components into the end product was only
incidental and arrived 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 that in all the cases that have been brought before us,
there is a composite contract for the purchase and installation of
the 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 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 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.
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 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 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 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, 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 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 conclusion, as has been
reached in Kone Elevators (supra), 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 profoundly speaks of obligation to supply goods and
materials as well as installation of the lift which obviously
conveys performance of labour and service. Hence, the fundamental
characteristics of works contract 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.
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 cases have been reopened or 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
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 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.
66. The writ petitions and the civil appeals are disposed of with no
order as to costs.
……………………………………….…CJI
[R.M. Lodha]
…………………………………….………J.
[A.K. Patnaik]
……………………………………….……J.
[Sudhansu Jyoti Mukhopadhaya]
……………………………………….……J.
[Dipak Misra]
New Delhi;
May 06, 2014.
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
WRIT PETITION (CIVIL) NO. 232 OF 2005
M/s. Kone Elevator India Pvt. Ltd. ….Petitioner
VERSUS
State of T.N. & Ors. .…Respondents
With
W.P.(C) No.298/2005, W.P.(C) No.487/2005, W.P.(C) No.528/2005,
W.P.(C) No.67/2006, W.P.(C) No.511/2006, W.P.(C) No.75/2007, W.P.(C)
No.519/2008, W.P.(C) No.531/2008, W.P.(C) No.548/2008, W.P.(C)
No.569/2008, W.P.(C) No.186/2009, W.P.(C)
No.23/2010, W.P.(C) No.62/2010, W.P.(C) No.232/2010, W.P.(C)
No.279/2010, W.P.(C) No.377/2010, W.P.(C) No.112/2011, W.P.(C)
No.137/2011, W.P.(C) No.181/2011, W.P.(C) No.207/2011, W.P.(C)
No.278/2011, W.P.(C) No.243/2011, W.P.(C) No.372/2011, W.P.(C)
No.398/2011, W.P.(C) No.381/2011, W.P.(C) No.468/2011, W.P.(C)
No.547/2011, W.P.(C) No.107/2012, W.P.(C) No.125/2012, W.P.(C)
No.196/2012, W.P.(C) No.263/2012, W.P.(C) No.404/2012, W.P.(C)
No.567/2012, W.P.(C) No.145/2013, W.P.(C) No.241/2013, W.P.(C)
No.454/2013, W.P.(C) No.404/2013, W.P.(C) No.723/2013, W.P.(C)
No.440/2012, W.P.(C) No.441/2012, W.P.(C) No.156/2013, W.P.(C)
No.533/2013, W.P.(C) No.403/2012, W.P.(C) No.824/2013, W.P.(C)
No.428/2009, W.P.(C) No.1046/2013, W.P.(C) No.1047/2013, W.P.(C)
No.1048/2013, W.P.(C) No.1049/2013, W.P.(C) No.1050/2013, W.P.(C)
No.1051/2013, W.P.(C) No.1052/2013, W.P.(C) No.1098/2013
SLP(C) Nos.14148-14153/2005, SLP(C) Nos.14961-14967/2005, SLP(C)
Nos.17842-17847/2005, SLP(C) No.5377/2006, SLP (C) No.7037/2006,
SLP (C) No.30272/2008, SLP (C) No.30279/2008, SLP (C) No.5289/2009,
SLP (C) No.6520-6521/2009, SLP (C) No.4469-4471/2010, SLP(C)
No.11258/2010, SLP (C) No.17228/2010, SLP (C) No.17236-17237/2010,
SLP (C) No.23259-23261/2010, SLP (C) No.15732/2011, SLP(C)
No.16466/2011, SLP (C) No.16137/2011, SLP (C) No.5503/2011, SLP (C)
No.11147/2011, SLP (C) No.11227-11238/2012, SLP (C) No.36001-
36012/2013, SLP (C) No.19901/2013, C.A. No.6285/2010
J U D G M E N T
Fakkir Mohamed Ibrahim Kalifulla, J.
. 1. I had 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 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,
“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 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 & Anr. vs. Man Industrial Corporation Ltd., [1969] 24 STC 349,
State of Rajasthan vs. Nenu Ram, [1970] 26 STC 268 and M/s. 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
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 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.
. 5. We heard Mr. Harish N. Salve, learned Senior Counsel appearing for
the Petitioner and 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,
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 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 Karnataka
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
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 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 reported in Larsen & Toubro Ltd.
(supra), the ultimate answer to the question would result in affirming
either of the views of the above two decisions. Further, certain
Constitution Bench decisions should also have to be kept in mind, wherein
the basic principle/test to be applied to find out as to whether the
contract is one for ‘Sale’ or ‘Works Contract’. The first decision is the
M/s. Patnaik and Company vs. State of Orissa reported in AIR 1965 SC 1655,
wherein the principle stated by the High Court was affirmed by the
Constitution Bench of this Court. The said principle was to the effect
that it makes no difference 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 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 Constitution Bench decision of this
Court in The Commissioner of Commercial Taxes Mysore, Bangalore vs.
Hindustan 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 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. M/s.
Gannon Dunkerley and Co. (Madras) Ltd., AIR 1958 SC 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 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 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 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 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 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,
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 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 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 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, containing nine pages and in
the last page the signatures of the Petitioner and its customers were
found affixed in proof of 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.
. 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 and openings of the
LIFT, the power supply requirement for its operation, the control aspect
of the LIFT, the 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 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 the colour
scheme of the LIFT and the shape of the LIFT.
. 12. The next page of the document is under the caption ‘A.C. Variable
Voltage Variable Frequency Control’. In the said document description of
the machine, the brake system, the 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 system has been described as
direct current brake with spring applied and electrically released and
designed 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 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 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 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, 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 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 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 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 as on chargeable
basis. It also specifies the exclusion of any special examination that may
be carried out in between the 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 ‘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 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 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 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 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 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 the 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 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 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 acceptable living accommodation with facilities such
as light, running water, sanitary for the erection crew at or near the
site and to indemnify and SAVE THE PETITIONER HARMLESS AGAINST ALL
LIABILITY GROWING OUT OF THE PURCHASER’S FAILURE TO CARRY OUT ANY OF THE
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 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 LIFT has been entirely fastened on the
Purchaser. It is also relevant to note that under the heading ‘Preparatory
Work’, major responsibility has been entrusted 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 ‘IEEMA Price
Variation Clause for Elevator Works Contracts’. It is described therein
that the price quoted/confirmed is based 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 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 applied for the purpose of determining the cost. For the purpose 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 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 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. 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 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 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 is required to be noted is
that in the event of price variation due to the delay attributable to the
Purchaser, the labour cost and the material cost would be worked out based
on the prevailing Consumer Price Index Number for Industrial Workers and
Wholesale Price Index Number for Metal Products. In other words, there is
no significant relevance for the subtitle and the various details
mentioned in the said 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 ‘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 have to be necessarily examined in detail. The first 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’
inasmuch as the price quoted would be valid for 52 weeks from the date of
acceptance of the proposal. Condition No.3 also is an ancillary
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 within two weeks from the date of
the agreement, all required data for performance of the contract, that the
PURCHASER TO AGREE 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 for installation and adjustment of
the elevator. It also mentions that if the electric power supply is not
provided, the installation 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 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 the Purchaser in making the Preparatory Work 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 Petitioner 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
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 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. Condition No.9 specifies that
the title to each elevator would pass on to the Purchaser when payment for
such elevators are fully paid to the Petitioner and in the event of
default being committed by the Purchaser, the right of the Petitioner to
retrieve the elevator in full or in part and also its right to recover
from the Purchaser, the value of the elevator supplied, can be initiated
by appropriate legal proceedings. Condition No.10 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 prescription of the
defect liability period, which would be 18 months from the date of initial
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 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 the Purchaser 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 between the parties and finalized. As
per Condition No.14, the Petitioner wants to call 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 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 specifications varied with
the 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 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 level and on its failure to go in for Arbitration. Condition
No.21 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
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 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 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 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
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.
. 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 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.
. 20. Before adverting to the other statutory provisions, which 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 by the Petitioner with its customers,
based on the above Annexure 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 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
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 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, 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 mainly
related to the nature of the LIFT to be supplied and as to how the
technology involved in the LIFT would be 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 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 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 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
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 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 hoist/structure 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 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 only highlights the overall
responsibility of the customer to undertake the main work of providing
a solid hoist/structure 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
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 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 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 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 under the provisions of the Central Excise Legislation as well as
the provisions brought out by various States for charging tax 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.
. 22. Under Article 366(29A), tax on the sale or purchase 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 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 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 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 prescriptions brought to our
notice. Mr. Salve, learned Senior Counsel brought to our notice the
definition of ‘Works Contract’ under Section 2(jj) of the Orissa Sales Tax
Act, 1947. The said provision reads as under:
“works contract includes any agreement for carrying out for 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.”
. 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 of a place intending to install a LIFT after
the commencement of the said Act, should make an application to the
concerned authority of the State Government for permission to erect such a
LIFT and while seeking for such a permission, the obligation is on the
applicant to furnish the various details about the LIFT 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 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 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 operated without a licence. The corresponding rules,
namely, 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, Rules 3, 4, 5, 6, 9
and 9(a), what is specified is the detailed procedure to be followed by
approaching the concerned 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 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 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 be installed and some basic details about the LIFT which is
to be installed. Under Form A-1, the LIFT 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 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,
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
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 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) 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 definition of ‘Erection, Commissioning and Installation’
as was inserted as sub-section (39a) to Section 65 by the 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 (zzzza) to sub-
section (105) of Section 65, which was inserted by the Finance Act, 2008
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 in respect of roads,
airports, railways, transport terminals, bridges, tunnels and dams.
Explanation-For the purposes of this sub-clause, “works contract” means a
contract wherein-
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,-
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, 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
b) construction of a new building or a civil structure or a part
thereof, or of a pipeline or conduit, primarily for the
purposes of commerce or industry; or
c) construction of a new residential complex or a part thereof; or
d) completion and finishing services, repair, alteration,
renovation or restoration of, or similar services, in relation
to (b) and (c) or
e) turnkey projects including engineering, procurement and
construction or commissioning (EPC) projects:”
. 28. Before referring to the details of the above provisions brought to
our notice, it is relevant to mention at this juncture 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 which the First
Respondent wanted to re-open the assessment for the Assessment Years 1999-
2000 (C.S.T. No. 631067/1999-2000) under the Central 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
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
referred to us will have to be made, keeping in mind the statutory
provisions relating to charging of tax vis-à-vis the impact of Article 366
(29A)(b) of the Constitution.
. 29. Sub-section (29) of Section 65 of the Finance Act, 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
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-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-section 39(a) was also
introduced by Finance Act (No.2) of 2004 w.e.f. 10.09.2004, which further
defined the expression ‘erection, 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 expression ‘erection’
was added along with the other expressions ‘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, commissioning or
installation’, an elaborate definition came to 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 staircases or travelators or such
other similar services, which came into operation w.e.f. 16.06.2005.
However, the definition of Taxable Service under sub-section 105(zzd)
remained unaltered.
. 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 ‘Works 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 meant that a transfer of property in goods
involved in the execution of such contract would be leviable to tax as
sale of 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 alia for the erection, commissioning or
installation of LIFT and Escalator, fire escape staircases or elevators.
It is very relevant to note that 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 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 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 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, the question for consideration is
what is the legal position with reference to the nature of contract of the
Petitioner vis-à-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-à-vis the 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 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 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 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 Purchaser. 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 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 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 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 relating to the time
within which the LIFT will be commissioned, namely, within 52 weeks and if
for any reason any delay is caused beyond the control of the Petitioner,
even then there 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 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 decision of this Court in Kone Elevators
(India) Pvt. Ltd. (supra), the various States who were earlier contending
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 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
Governments. The learned Senior Counsel by referring to the definition of
‘Works Contract’ under Section 2(jj) of the Orissa 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-founded. In support of his submissions,
the 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.
. 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 attention 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 as to the various parts of the LIFT and
how these parts are to be assembled and also the safety measures to be
followed, submitted 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 Elevators (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 installation of a LIFT, the said
activity cannot be called as a mere ‘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. 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 A1, the learned Senior Counsel contended
that the said provisions in the Acts and the Rules, 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 contract for supply and erection of the LIFT to the
customer and the erection part of it is so intertwined with the supply of
the LIFT, 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 Co. (India) Ltd. (1981) ELT
720 in support of his submissions. That was a decision of the Government
of India in an appeal 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 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 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 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 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.
. 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 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 composite 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 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
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 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 (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-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 and the other for the purpose of Sales Tax. The submission of
the learned Senior Counsel was adopted by all other counsel who appeared
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 as between the
Petitioner and its Purchaser, going by its terms, 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 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 be 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 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, 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 decisions in M/s Patnaik and Company
(supra), M/s 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. (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, 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 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 our attention to the definition of
‘Sale’ and ‘Works Contract’ under the Andhra Pradesh General Sales Tax
Act, 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 would 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
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
between a contract by which one party agrees to supply a product as
compared to a party agreeing to carry out a work such as construction of
building, erection, installation or commissioning of movable or immovable
property. In other words, according to the learned Senior Counsel going by
the terms of the contract between the Petitioner and the prospective
Purchasers, what is agreed to between the parties is the supply of LIFTS
and the act of installation is not the contract for which the parties were
ad idem. Therefore, if the contract distinctly discloses that it is one
for supply of a LIFT and the same is effected by erecting it in the
premises of the Purchaser, it cannot be held that the act of erection
alone should be taken into account and on that basis hold that the
contract 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 that by installation,
the LIFT in its full form is brought out and handed over to the Purchaser.
In other words, according to the 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 M/s. Patnaik and Company (supra), T.V.
Sundaram Iyengar & Sons (supra), have all laid down the correct principles
and, therefore, the decision in Kone Elevators (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 submission
learned Senior Counsel relied upon the decision in Dell Inc. vs. Superior
Court No.A118657 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 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 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 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 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
Contract’. According to the 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 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 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.
. 47 Mr. Preetesh Kumar, learned Standing Counsel for the State 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 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 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.
. 48. Mr. Darius Khambata, learned Advocate General for Maharashtra and Mr.
K.N. Bhatt, learned Senior Counsel for Karnataka actually conceded to the
effect that the question posed for consideration has been fully answered
in the decision in Larsen & Toubro Ltd. (supra).
. 49. Mr. Malhotra, learned Additional Solicitor General for Union of India
contended that the Union of India has nothing to 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.
. 50. Mr. Salve, learned Senior Counsel in his submissions referred to the
decisions in M/s 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
Correct Engineering Works and others reported in (2010) 5 SCC 122. The
learned Senior Counsel attempted to distinguish the decision in M/s
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 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 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 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 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, 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. 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/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.
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 basis of the Contract that emerged between the Petitioners and the
Purchasers in regard to the supply of the LIFTS/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 manufacture, 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.
. 53. Therefore, in 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 is a ‘Works Contract’. Therefore, at the
risk of repetition, it will 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 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 way of
acknowledgement of the order of the proposed features of the LIFT 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 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 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 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 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, 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 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 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/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 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 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 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, 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 Petitioner claims to carry out in effecting the
supply is virtually very insignificant as compared to the element of sale,
which is 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.
. 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:
“Order Acknowledgment for One (1) No. OTIS Electric Traction
Passenger Elevator for your Building at “BAPU NAGAR, JAIPUR,
RAJASTHAN”.”
. 58. The contents of the letter also states that the Petitioner 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
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 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 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 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 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 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 the Petitioner to
supply its LIFT and locate it. It contains as many as 21 different 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 necessary including, grouting of all bolts, sills,
members indicator and button boxes, etc. and a steel scaffolding to be
made in the course of erection, which the Petitioner undertakes to
provide.
. 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 not involve
any work to be performed. Similarly, provision 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 service to be rendered. The provision relating to
cutting of walls, floors or partitions together with any repairs to be
made necessary including grouting 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 directed to prepare the hoist
way, which is a solid structure in 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 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, 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. 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 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 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 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-à-vis the caption ‘Elevator Works Contract’. 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 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 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
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 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 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 ‘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 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 and to
call it an indivisible one, is contrary to its own terms.
. 63. With this, the ‘Conditions of the Contract’ can be referred to, which
contains as many as 27 conditions. These conditions have been elaborately
discussed in paragraph 18 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, 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 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. 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 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 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 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 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
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 LIFT and installation costs are separately
worked out in order to ensure 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
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 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 terms have downright been agreed upon between the
parties only to mandate the Purchaser to pay 90% of the contracted amount
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 for dispatch at the premises of the Petitioner.
In that situation also what all the Petitioner will have to ensure is that
such 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 premises, the Purchaser is bound 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 payment
are discernable 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 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.
. 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 responsibility on
the Petitioner to carry out such execution and thereby, any corresponding
liability being fastened on the Petitioner in the event of its failure to
carry out the erection/installation part of it will not become
attributable. It will 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 Petitioner to retain such 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 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 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 under 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 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’.
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 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 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 with the submissions made
by the learned Senior Counsel for the Petitioners. Mr. Salve, learned
Senior Counsel in his opening submission relied upon Section 2(jj) of the
Orissa Sales Tax Act, 1947 and contended that applying the said definition
of ‘Works Contract’ to the present contract, the same would squarely fall
within the said definition. When examining 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 2(jj) of the Orissa 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.
. 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 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 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
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 2(jj).
. 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 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:
“An agreement enforceable by law is a contract.”
The first part of Section 10 reads as under:
“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 the lawful object and are not hereby
expressly declared to 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 with a lawful object. It is
needless to state that for any 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 ‘Works Contract’ under
Section 2(jj) of the Orissa Sales Tax Act to the case 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,
installation of any movable or immovable property. Further, such an
agreement should also be one for cash or deferred payment or other
valuable consideration.
. 74. Keeping the above statutory prescriptions in mind, the same can 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 been examined, in particular the
consideration part of it, it is found that the majority of the
consideration was payable to the Petitioner within one month from the date
of commissioning or within 90 days of keeping the materials ready for
supply in 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 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 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, 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, 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 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, 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 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 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 of the contract,
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
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.
. 76. On 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 works related,
obligations to be performed on its part, the Petitioner has retained every
right to charge interest for such delay, if any, caused at the instance of
the Purchaser and in the event of 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 based on the
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’. When that is 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 Section 2(jj) of the Orissa Sales Tax Act
to the case on hand and hold that the manufacture, supply and 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 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 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 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 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 Contract’ under Section 2(jj), 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 2(jj) 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 contained in the Field
Installation Manual show that what was agreed as between the parties would
fall within the definition of ‘Works Contract’ and therefore, be held as
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
of the LIFT and the agreement is not in any way conditional to the
installation 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 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 installation 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 advance the case of the
Petitioner. Therefore, for the very same reasons, the said contention of
the learned Senior Counsel is also liable to be rejected.
. 79. I have also highlighted how 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 paid along with our final invoice.’
In fact the copy of the two invoices dated 17.12.2009 and 20.09.2010,
clearly explains the fact that 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 petitioners in
paragraph 25 and have extensively dealt with them in paragraph 37 of this
judgment. Based on such examination 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 operation or
in the course of the maintenance of the LIFT, no 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 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 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 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
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 Section 37B 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 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) 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
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 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 an answer to the question whether
manufacture, supply and erection of a LIFT, will fall under the category
of ‘Sale’ or ‘Works Contract’ for the purpose of a levy under the Sales
Tax Act. Section 65(29), 65(39a) and 65(105) (zzd) and (zzzza) are all
provisions for the levy of Service Tax. It is well known that while
interpreting taxing statutes, strict and literal interpretation should be
made. For this proposition of law, reference can be made to one of the
earliest decisions of England in Cape Brand Syndicate vs. Inland Revenue
Commissioner, 1921-1 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 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 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 person by erection, commissioning or installation agency
in relation to commissioning and installation. Therefore, reading the
above provisions together, what emerges is that any service provided by
way of commissioning and installation of LIFT and 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 excludes
‘Works Contract’ in respect of roads, airports, railways, transport
terminals, bridges, tunnels and dams obviously because those are services
of the State. The said sub-clause, however, contains a definition of
‘Works Contract’ in the explanation part. It, however, refers to a
contract which 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 includes
erection, commissioning or installation of LIFT and 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 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 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 independently
attract tax liability under the relevant Sales Tax Statutes. However, it
is not the concern 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 provisions under the Service Tax Act
are of no assistance to the Petitioner 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-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
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
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 to comply with the provisions relating to Sales Tax. The said
submission of the learned Counsel is, 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 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’. The Division Bench of the Bombay High Court posed 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 Manak and Co. was a composite and
divisible contract, one for the sale of goods in which the property
has passed 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.”
. 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:
“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.”
. 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 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 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 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.”
. 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 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 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 into between the
parties.”
. 91. The Division Bench then felt it necessary to examine the terms of the
contract and the surrounding circumstances and ultimately reached its
conclusion as under:
“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 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 the reasons beyond their control.
This is more consistent with and all-inclusive price being fixed
irrespective of the materials 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:
“In the result, we answer the questions referred to us as
follows:-
Question No.(1) in the negative.
Question No.(2) in the affirmative.”
. 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 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 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 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 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 decision will no longer hold good.
. 94. Before analyzing the various other decisions relied 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 made to the reasoning, which
weighed with the learned Judges in the judgment rendered in Kone Elevators
(India) Pvt. 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 01.06.1995 to 31.07.1995, provisional
assessments were made by 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 5F of 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 appeal to the
Tribunal was allowed in favour of the 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), Hindustan 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 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 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. 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, “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 work connected in keeping the site ready for
installation as per the drawings. In view of the contractual
obligations of the customer and the fact that the assessee undertook
exclusive installation of the lifts manufactured and brought to the
site in knocked-down state to be assembled by the assessee, it is
clear that the transaction in question was a contract of “sale” and
not a “works contract”. Moreover, on perusal of the brochure of the
assessee Company, one finds that the assessee is in the business of
manufacturing of various types of lifts, namely, passenger lifts,
freight elevators, transport elevators and scenic lifts. A combined
study of the above models, mentioned in the brochure, indicates 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 were 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, the
transactions in question constitute “sale” in terms of Entry 82 of
the First Schedule to the said Act and, therefore, Section 5-G of
the said Act was not applicable.”
. 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 assigned, having regard to the nature of the
contract and the relevant provision of law that would apply to such a
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 in the manufacture, supply
and installation of LIFT/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 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 19.08.2008,
the two judge Bench after noticing the relevant provisions of 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
Development (supra), in particular, paragraph 20, inasmuch as 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
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 R.M. Lodha).
. 97. Before referring to the various reasons in the 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:
“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 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, 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
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 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 executed in favour of the intended 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 monetary consideration so far as the
contract between the Developer was concerned and the owner 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 prospective Purchaser. Hence, it was
claimed that the agreement can only be construed as ‘Sale’ and not a
‘Works Contract’. It was also contended on the above footing as under:
“21. ….Conversely a suit by an owner/developer against the flat
Purchaser would be for payment of consideration of the flat/
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, thus, submitted that
the judgment in Raheja Development does 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 Contract’ and that Article 366(29A)(b) takes
care of such situations where the goods are transferred in the form of
immovable property.
. 100. While dealing with the reference, the various contentions were
noted in the first instance and while examining the implication of Article
366(29A)(b), it was observed in paragraph 60:
“60.….in other words goods which have by incorporation become part
of immovable property or deemed as goods the definition of Tax on
the sale and purchase 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 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 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 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:
. (ii) Contract for Sale of Goods involved in the works contract
and
. (ii) For supply of the labour and service.
. 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.
. 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 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, immovable
property in the form of a building ultimately emerged in the land in
question where substantial use of materials in the form of goods was
involved for which equal amount of labour was also employed. It was in
that context the said judgment came to 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.
. 105. 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 within the four
corners of the expression ‘Works Contract’. Therefore, the endeavour is to
find out the principles that have been stated 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 reading of
the decision in Larsen & Toubro Ltd. (supra) can be made.
. 106 In paragraph 65 of the said decision reference was made to Bharat
Sanchar (supra), wherein sub-clause (d) of Clause 29A of Article 366 came
to be considered. It was laid down therein that all the sub-clauses of
Article 366(29A) serve to bring transactions where essential ingredients
of a ‘Sale’ as defined in the Sale of Goods Act, 1930 are absent, within
the ambit of sale or purchase for the purposes of levy sales tax. The said
proposition stated in Bharat Sanchar (supra) would only go to show that
before invoking Article 366 (29A), the concerned transactions ought 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 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 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. 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 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 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 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 ‘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 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)
. 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 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 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 said contract, namely, supply
of the goods certain services are to be rendered, 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’.
. 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 the goods employed in the course of execution of such
contract, 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 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’ 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 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-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, 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’ as defined in the Sale of Goods Act are 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 (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
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 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.
. 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 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.
. 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 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 ultimate building units constructed. In
that context, whatever held in paragraph 76 to the effect that 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 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 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 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’.
. 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
following effect:
“94. For sustaining the levy of tax on the goods deemed 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 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 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 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. (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 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 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 & 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) 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 Contract’ or not. Reliance was placed upon the decision of this
Court in Richardson Cruddas Ltd. (supra). In order to note the 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
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 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 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 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 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 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 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 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 State of
Orissa in support of his submission relied upon the Constitution Bench
decision of this Court in M/s. Patnaik and Company (supra). In paragraph
28 as a proposition of law, the Constitution Bench has held as under:
“28. In Commissioner of Sales Tax, U.P. 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., 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 one operation.”
. 118 Thereafter, while repelling the contention made on behalf of the
Appellant in that case, it was held as under:
“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, however, not sufficient: to constitute a sale there
must be an agreement — express or implied — relating to sale of
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 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 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 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.
. 120. The learned Senior Counsel also relied upon the decision in
M/s. 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 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 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 delivery of
the possession of, a chattel as a chattel to the buyer. Where the
main object of work 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 the materials, nor 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 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’.
. 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 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 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
surrounding circumstances. In this case the salient features of the
contract are as follows:
‘(1) ……..
(2) ………
(3) ………
(4) ………
(5) ………
(6) ………
(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 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 of this Court in State of Gujarat v. Kailash
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 inter alia 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
‘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 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 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 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 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 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 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 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 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 product
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.
32. Be that as it may clause (1) of Standard Condition 15 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 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 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 to
the facts of this case. In fact, in the said decision the Constitution
Bench decision of this Court in M/s. 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 Contract’.
. 126. Mr. Salve, learned Senior Counsel in his submissions placed
reliance upon a Division Bench judgment of this Court in M/s Vanguard
Rolling Shutters and Steel Works (supra). 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 of rolling
shutters and steel works who used to manufacture iron shutters according
to specifications given by the parties 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’.
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 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 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 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…….”
(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 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 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 M/s. 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 said decision is of no assistance to the Petitioner except
to the 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 (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 and thereafter,
supply them to the South-Eastern Railway. Dealing with the said contract,
it was held that it was a ‘Works Contract’ 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 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 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 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 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’.
. 130. Dr. Singhvi, learned Additional Advocate 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 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:
“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 in Article 366(29-A) operate. By introducing
separate categories of “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 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 does not give a licence, for example, to
assume that a transaction is a sale and then to look around for
what could 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 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)
. 131. I am in full agreement with the proposition of law 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, M/s. 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’, is justified.
. 132. Dr. Singhvi, learned Additional Advocate General also relied
upon the decision of this Court in Hindustan Shipyard Ltd. (supra) wherein
reference to Halsbury’s Laws of England (4th Edn. Vol.41, para 603) has
been noted to understand the 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 revert back to analysing the abovesaid 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 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 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 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 ownership of the materials, nor 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 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 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’.
. 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 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 SCC 645, which is also a
Constitution Bench judgment, wherein in paragraph 41 it was held as under:
“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’ represented by
‘building contracts’ in the context of the expanded concept of
‘tax on the sale or purchase 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 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.
. 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 ‘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 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 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 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 decision of
this Court in Commissioner of Sales Tax, Gujarat vs. M/s. Sabarmati Reti
Udyog Sahakari 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 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 upon the intention of
the parties executing the contract. As we have observed in our
judgment in Civil Appeal Nos. 1492 and 1493 of 1971 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 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 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 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
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 contract for sale, it cannot be held to be a ‘Works
Contract’.
. 139. In support of my conclusion, reliance can also be 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 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 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 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 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 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 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 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 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) Pvt. Ltd. (supra) has been correctly decided. The
Reference is, therefore, answered on the above terms.
………..…………………………………..J.
[Fakkir Mohamed Ibrahim Kalifulla]
New Delhi
May 06, 2014
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL/APPELLATE JURISDICTION
WRIT PETITION (C) NO. 232 OF 2005
M/S. Kone Elevator India Pvt. Ltd. … Petitioner
Versus
State of Tamil Nadu and Ors. … Respondents
WITH
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,
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, 1098/2013,
WITH
Civil Appeal Nos. 5116-5121 of 2014
(Arising out of SLP (C) Nos. 14148-14153/2005)
WITH
Civil Appeal Nos. 5135-5141 of 2014
(Arising out of SLP (C) Nos. 14961-14967/2005)
WITH
Civil Appeal Nos. 5142-5147 of 2014
[Arising out of SLP (C) Nos. 17842-17847/2005
WITH
Civil Appeal No. 5152 of 2014
[Arising out of SLP (C) No. 5377/2006
WITH
Civil Appeal No. 5153 of 2014
[Arising out of SLP (C) No. 7037/2006
WITH
Civil Appeal No. 5154 of 2014
[Arising out of SLP (C) No. 30272/2008
WITH
Civil Appeal No. 5156 of 2014
[Arising out of SLP (C) No. 30279/2008
WITH
Civil Appeal No. 5157 of 2014
[Arising out of SLP (C) No. 5289/2009
WITH
Civil Appeal Nos. 5159-5160 of 2014
[Arising out of SLP (C) Nos. 6520-6521/2009
WITH
Civil Appeal Nos. 5162-5164 of 2014
[Arising out of SLP (C) Nos. 4469-4471/2010
WITH
Civil Appeal No. 5165 of 2014
[Arising out of SLP (C) No. 11258/2010
WITH
Civil Appeal No. 5166 of 2014
[Arising out of SLP (C) No. 17228/2010
WITH
Civil Appeal Nos. 5167-5168 of 2014
[Arising out of SLP (C) Nos. 17236-17237/2010
WITH
Civil Appeal Nos. 5170-5172 of 2014
[Arising out of SLP (C) Nos. 23259-23261/2010
WITH
Civil Appeal No. 5174 of 2014
[Arising out of SLP (C) No. 15732/2011
WITH
Civil Appeal No. 5175 of 2014
[Arising out of SLP (C) No. 16466/2011
WITH
Civil Appeal No. 5178 of 2014
[Arising out of SLP (C) No. 16137/2011
WITH
Civil Appeal No. 5179 of 2014
[Arising out of SLP (C) No. 5503/2011
WITH
Civil Appeal No. 5180 of 2014
[Arising out of SLP (C) No. 11147/2011
WITH
Civil Appeal Nos. 5181-5192 of 2014
[Arising out of SLP (C) Nos. 11227-11238/2012
WITH
Civil Appeal No. 5193 of 2014
[Arising out of SLP (C) No. 19901/2013
WITH
Civil Appeal Nos. 5195-5206 of 2014
[Arising out of SLP (C) Nos. 36001-36012/2013 and
WITH
Civil Appeal No. 6285/2010
O R D E R
Keeping in view the conclusions of the majority, expressed in
the judgment of Dipak Misra, J., it is held that the decision rendered
in State of A.P. v. Kone Elevators[46] 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, 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 the assessments are challenged in appeal or
revision, the same shall be decided in accordance with the decision
rendered by us.
3. The writ petitions and the civil appeals are disposed of with no
order as to costs.
………………………………….....…CJI.
[R.M. Lodha]
…………………………………….………J.
[A.K. Patnaik]
……………………………………….……J.
[Sudhansu Jyoti Mukhopadhaya]
……………………………………….……J.
[Dipak Misra]
……………………………………….……J.
[F.M. Ibrahim Kalifulla]
New Delhi;
May 06, 2014.
-----------------------
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[2] (2005) 3 SCC 389
[3] (1969) 1 SCC 567
[4] (1970) 26 STC 268 (SC)
[5] (1977) 2 SCC 250
[6] (2006) 3 SCC 1
[7] (2014) 1 SCC 708
[8] (1969) 24 STC 525 (Bom)
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[44] (1875) LR 10 CP 271
[45] (1989) 1 SCC 172
[46] (2005) 3 SCC 389
