2005 (2) TMI 519 - SC - VAT and Sales Tax

Court rules transactions as sales, not works contracts, under entry 82. Department's appeal allowed, judgments set aside.

State of Andhra Pradesh Versus Kone Elevators (India) Ltd.

The court determined that the transactions constituted 'sale' under entry 82 of the First Schedule and not a 'works contract.' The department's appeal was ... Whether contracts entered into and executed by the assessee were contracts for sale and not works contract? Held that:- Department's appeal is allowed. In the present case, on facts, it is find that the major component of the end-product is the material consumed in producing the lift to be delivered and the skill and labour employed for converting the main components into the end-product was only incidentally used and, therefore, the delivery of the end-product by the assessee to the customer constituted a 'sale' and not a 'works contract'. Hence, transactions in question constitute 'sale' in terms of entry 82 of the First Schedule to the said Act and, therefore, section 5G of the said Act was not applicable. Issues Involved1. Whether the contracts entered into and executed by the assessee were contracts for sale or works contracts.Detailed AnalysisIssue 1: Nature of the Contracts - Sale vs. Works ContractBackground and Lower Court Decisions:The assessee, M/s. Kone Elevators (India) Ltd., filed monthly returns and was assessed under the Andhra Pradesh General Sales Tax Act, 1957. The assessee claimed deductions for labour charges under sections 5G and 5F, asserting that their work constituted a 'works contract' involving manufacture, supply, installation, and commissioning of elevators. However, the assessing authority did not allow these deductions, treating the turnover as falling under entry 82 of the First Schedule to the Act, which led to appeals by the assessee. The Sales Tax Appellate Tribunal ruled in favor of the assessee, but the High Court dismissed the department's revision case, leading to this civil appeal.Arguments by the Department:The department argued that the main object of the contract was to sell the lifts, with installation being incidental to the sale. They contended that the Legislature classified 'lift' under entry 82, implying that installation was ancillary to the sale.Arguments by the Assessee:The assessee argued that their contracts involved manufacture, supply, erection, installation, and commissioning of lifts, which required skill and technical know-how, thus qualifying as a works contract. They emphasized that lifts could not be delivered as standard units and required on-site assembly and installation.Legal Principles and Tests:The court reiterated that distinguishing a 'contract for sale' from a 'works contract' depends on the terms of the contract, the nature of obligations, and the surrounding circumstances. The essence of the contract, the predominant object, and the custom of the trade are crucial in deciding whether a transaction is a 'sale' or a 'works contract.' The court emphasized that the substance, not the form, of the contract is material.Relevant Provisions:- Section 2(1)(n) defines 'sale' as the transfer of property in goods for valuable consideration.- Section 2(1)(t) defines 'works contract' as an agreement for various types of work, including erection and installation.- Entry 82 of the First Schedule specifies lifts as taxable at the point of first sale in the State.Court's Analysis:The court examined the contractual obligations, noting that the customer was responsible for preparing the site for installation, while the assessee's obligation was to supply and install the lift. The court concluded that the transaction was divided into 'work' (customer's responsibility) and 'supply' (assessee's responsibility), indicating a contract of sale rather than a works contract. The court also considered the assessee's business model, which involved selling various models of lifts, reinforcing the conclusion that the transactions were sales.Conclusion:The court held that the transactions constituted 'sale' under entry 82 of the First Schedule and not a 'works contract.' The department's appeal was allowed, and the judgments of the High Court and the Sales Tax Appellate Tribunal were set aside.Final Judgment:The appeal was allowed, and the impugned judgments were set aside. No order as to costs was made.Appeal allowed.