Case: M/S. Kone Elevator India Pvt. Ltd Vs. State Of T.N.


Decision:
1[ds]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, onefor sale ofgoods, and the other for supply of labour and services; (ii) the concept ofor, for that matter, theng componentfor treating a contract as a works contract is not applicable; (iii) the termas 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.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.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 theobligation 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