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

Pre-manufactured lift contracts treated as sales, not works contracts; fall under entry 82, section 5G inapplicable

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

SC held the contracts were contracts of sale, not works contracts, because substance over form and contractual terms showed manufacture and exclusive ... Nature of the Contracts - Sale Or Works Contract - deductions of labour charges for composition of tax under section 5G read with section 5F - Whether contracts entered into and executed by the assessee were contracts for sale and not works contract? Held that:- 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. 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 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. Department's appeal is allowed. 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.