2014 (5) TMI 265 - SC - VAT / Sales Tax

Nature of contract - sales or works contract - whether a contract for manufacture, supply and installation of lifts in a building is a contract for sale of goods or a works contract . - Decision by constitution bench by majority order - Held that - the principles stated in Larsen and Toubro 2013 (9) TMI 853 - SUPREME COURT 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. 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 2005 (2) TMI 519 - SUPREME COURT OF INDIA , 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 2005 (2) TMI 519 - SUPREME COURT OF INDIA does not correctly lay down the law and it is, accordingly, overruled. 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 2005 (2) TMI 519 - SUPREME COURT OF INDIA does not correctly lay down the law and it is accordingly overruled. 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. - Decided in favor of assessee.

Summary

Issues Involved:

1. Whether the manufacture, supply, and installation of lifts should be treated as a "sale" or a "works contract."
2. The applicability of Article 366(29A)(b) of the Constitution concerning works contracts.
3. The interpretation of statutory provisions under various state sales tax laws and the Finance Act, 1994.
4. The impact of the Supreme Court's previous decision in Kone Elevators (India) Pvt. Ltd. and its correctness.

Detailed Analysis:

1. Whether the manufacture, supply, and installation of lifts should be treated as a "sale" or a "works contract":

The primary issue was whether the contract for the manufacture, supply, and installation of lifts constitutes a "contract for sale of goods" or a "works contract." The distinction is crucial because, in a sale, the entire sale consideration is taxable under state sales tax or value-added tax laws. In contrast, a works contract requires the exclusion of labor and service elements from the taxable amount. The Supreme Court examined the nature of the contract, the intent of the parties, and the statutory framework to determine the classification.

2. Applicability of Article 366(29A)(b) of the Constitution concerning works contracts:

Article 366(29A)(b) was introduced by the 46th Amendment to the Constitution, allowing states to levy sales tax on the transfer of property in goods involved in the execution of a works contract. The Court emphasized that the dominant nature test or overwhelming component test is not applicable post the amendment. Instead, the focus should be on whether the contract involves a transfer of property in goods, whether as goods or in some other form, involved in the execution of a works contract. The Court concluded that the installation of lifts involves a composite contract for both supply and installation, meeting the criteria for a works contract under Article 366(29A)(b).

3. Interpretation of statutory provisions under various state sales tax laws and the Finance Act, 1994:

The Court analyzed various state laws, including the Andhra Pradesh General Sales Tax Act, the Orissa Sales Tax Act, and the Finance Act, 1994, which defines "works contract" and "taxable service." The Court noted that the statutory framework supports the classification of contracts involving the supply and installation of lifts as works contracts. The Finance Act's definition of "works contract" includes contracts for the erection, commissioning, or installation of lifts, further supporting this interpretation.

4. Impact of the Supreme Court's previous decision in Kone Elevators (India) Pvt. Ltd. and its correctness:

The Supreme Court overruled its previous decision in Kone Elevators (India) Pvt. Ltd., which had classified the supply and installation of lifts as a sale. The Court found that the earlier decision incorrectly applied the dominant nature test and failed to consider the implications of Article 366(29A)(b). The Court emphasized that the contract's composite nature, involving both supply and installation, aligns with the constitutional definition of a works contract.

Separate Judgment by Justice Fakkir Mohamed Ibrahim Kalifulla:

Justice Kalifulla dissented, arguing that the contract should be treated as a sale. He emphasized that the primary intent of the contract was the sale of the lift, with installation being incidental. He relied on the terms of the contract, which specified payment for the lift as a whole, and argued that the contract did not meet the criteria for a works contract. He maintained that the decision in Kone Elevators was correctly decided and should not be overruled.

Conclusion:

The majority held that the manufacture, supply, and installation of lifts constitute a works contract, overruling the decision in Kone Elevators. The Court quashed show-cause notices and set aside assessment orders based on the earlier decision, directing that pending assessments be decided in accordance with the new ruling. The dissenting opinion, however, maintained that the contract should be classified as a sale, supporting the earlier decision.