Case Note & Summary
The matter stems from multiple writ petitions and civil appeals challenging the classification of contracts for manufacture, supply and installation of lifts as either a 'sale' or a 'works contract' for the purpose of levy of sales tax or value added tax. The lead petition was filed by M/s Kone Elevator India Pvt. Ltd. under Article 32 of the Constitution. The petitioner, engaged in the business of manufacturing, supplying and installing lifts, had initially succeeded before the Sales Tax Appellate Tribunal and the High Court of Andhra Pradesh, which treated the transaction as a works contract. However, the Supreme Court in State of A.P. v. Kone Elevators (India) Ltd. (2005) 3 SCC 389 overturned that view and held such a contract to be a sale, thereby subjecting the entire consideration to sales tax. Following this decision, tax authorities in various states initiated proceedings or issued show cause notices demanding tax on the entire contract value, prompting the petitioners to approach the Supreme Court by way of writ petitions under Article 32 and special leave petitions. A three-judge bench of the Supreme Court, by order dated 13.2.2008 in Kone Elevator India Private Limited v. State of Tamil Nadu and others, noted that the earlier three-judge bench decision in Kone Elevators (supra) had not considered certain prior rulings, including State of Rajasthan v. Man Industrial Corporation Ltd., State of Rajasthan v. Nenu Ram, and Vanguard Rolling Shutters and Steel Works v. Commissioner of Sales Tax. Perceiving a manifest discord, the bench referred the matter to a larger bench. Several connected matters from various states, including Maharashtra, Karnataka, Orissa, and others, were tagged together. The core legal issue before the Court was whether such composite contracts, involving supply of components and skilled installation, constitute a contract for the sale of goods, where the entire consideration is taxable as a sale, or a works contract, where the value of labour and services is excludible from the taxable turnover. During arguments, learned senior counsel for the petitioners contended that the 'predominant intention test' has been rendered obsolete after the decisions in Bharat Sanchar Nigam Ltd. v. Union of India and Larsen & Toubro Ltd. v. State of Karnataka, and that installation of lifts involves substantial skill and service, making it a works contract. Reliance was placed on the Bombay Lifts Act, 1939 and its regulations to demonstrate that lifts are not mere goods but become operational only after installation and commissioning. The State of Maharashtra argued that while a pure sale of a lift without installation is possible, the taxing of composite contracts should allow deduction for service elements, and if the earlier ruling is overruled, it should be given prospective effect. The State of Karnataka supported the works contract classification, emphasizing customization and assembly. The State of Orissa contended that the contract is essentially a sale, with installation being part of the manufacturing process. The case was heard by a five-judge bench comprising R.M. Lodha, C.J., A.K. Patnaik, Sudhansu Mukhopadhaya, and Dipak Misra, JJ. The judgment, authored by Dipak Misra, J., is incomplete in the provided text. The final determination and ratio are not included in this excerpt.
Issue of Consideration
Whether a contract for manufacture, supply and installation of lifts is a 'contract for sale of goods' or a 'works contract', impacting taxability under sales tax/VAT laws.
Final Decision
Decision not clearly stated
Law Points
- Legal points not extracted
Case Details
2014 LawText (SC) (05) 61
Writ Petition (C) No. 232 of 2005 and connected matters
R.M. Lodha, A.K. Patnaik, Sudhansu Mukhopadhaya, Dipak Misra
Harish Salve, Khambatta, K.N. Bhat, Rakesh Dwivedi
M/S. Kone Elevator India Pvt. Ltd.
State of Tamil Nadu and Ors.
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Nature of Litigation
Challenge to show cause notices and assessment orders treating manufacture, supply and installation of lifts as 'sale' rather than 'works contract' for sales tax purposes.
Remedy Sought
Petitioners sought quashing of demands and a declaration that the contract is a works contract, not liable to tax on entire consideration as sale.
Filing Reason
Following a Supreme Court decision in Kone Elevators (2005) treating such contracts as sale, state authorities demanded tax on entire consideration, prompting petitions under Article 32 and appeals.
Previous Decisions
In Kone Elevators (India) Ltd. v. State of AP (2005), a three-judge bench of Supreme Court held the contract to be a sale. Earlier, the Andhra Pradesh High Court and Tribunal had held it to be works contract. The reference order noted conflict with other Supreme Court decisions and referred the matter to larger bench.
Issues
Whether a contract for manufacture, supply and installation of lifts is a 'contract for sale of goods' or a 'works contract'.
Submissions/Arguments
Mr. Harish Salve, for petitioners: The 'predominant intention test' is no longer relevant after BSNL and Larsen & Toubro. Lift installation involves assembly of components with immense skill, rendering service; without installation there is no lift. The Bombay Lifts Act, 1939, regulates erection and operation, demonstrating that it is not a mere sale of goods but a regulated activity requiring skill and compliance.
Mr. Khambatta, Advocate General for Maharashtra: A pure sale of lift without installation is possible, and the contract can be exclusively for sale. Composite contracts should allow deduction for service element. The State had earlier followed Otis Elevator (Bom) treating it as works contract, but later adopted Kone Elevators. If overruled, prospective effect should be given.
Mr. K.N. Bhat, for Karnataka: The contract is a works contract as lifts are customized and not sold off-the-shelf; only the value of goods used is taxable, while labour and service are not. He relied on Builders' Association and Larsen & Toubro.
Mr. Rakesh Dwivedi, for Orissa: Based on quotation, payment terms, and preparatory civil works by customer, it is a contract for sale. Installation is part of manufacturing process, and skill deployed is incidental to manufacture of the final lift.
Ratio Decidendi
Ratio not explicitly mentioned
Judgment Excerpts
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” (Para 2)
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”. (Para 3)
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. (Para 5)
the installation of these components/parts with immense skill is rendition of service, for without installation in the building, there is no lift. (Para 5)
Procedural History
The petitioner initially challenged sales tax assessments treating lift contracts as works contract. The Sales Tax Appellate Tribunal and the High Court of Andhra Pradesh ruled in its favour. The Supreme Court in State of A.P. v. Kone Elevators (India) Ltd. (2005) 3 SCC 389 reversed this and held the contract to be a sale, subjecting entire consideration to tax. Following this, state authorities issued show cause notices for reassessment. The petitioner and others filed writ petitions under Article 32 and special leave petitions. On 13.2.2008, a three-judge bench in Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu (2010) 14 SCC 788 referred the matter to a larger bench, noting a conflict between earlier Supreme Court rulings and the Kone Elevators decision. Subsequently, all connected matters from various states were tagged and listed before the five-judge bench.
Acts & Sections
- Bombay Lifts Act, 1939: 3(c), 4, 5, 7
- Bombay Lifts Rules, 1958:
- Bombay Lifts (Amendment) Rules, 2010:
- Constitution of India: Article 32
