Case: State Of A.P Vs. M/S.Kone Elevators (I)Ltd

the customer shall approve the drawings and shall make machine room Hoistway and the Lift Shaft including power supply for the assessee to commence installation at the time of the delivery of the lift. The contractual obligations of the assessee regarding installation included employing labour to complete the mechanical erection, electrical wiring testing and commissioning of the lift. The assessee agreed that it shall commence installation only after the lifts arrived at the site and upon intimation from the customer that the site was ready as per the drawings. As soon as the lift stood installed, the customer was to take over. It was further agreed that any material supplied by the assessee shall remain their property till the lift was handed over to the customer. The contract in question consisted of certain obligations on the part of the customers under the heading Customers Contractual Obligations. Under this clause, the customer was obliged to undertake the work of civil constructions consisting of:- a) A properly enclosed lift Hoistway.b) A lift pit of proper depth;c) Properly lighted machine room; andd) Private pockets on the lift well walls. 11. Further, certain obligations were passed on the customer under the Delivery Schedule which are reproduced herein below:- "The General Agreement Drawing in triplicate will be forwarded to you in approximately six weeks from the date of receipt of complete site details along with the order and advance payment. The purpose of this drawing is to clearly indicate to you pertinent dimensional details of the lift shaft, pit, machine room, car and landing entrances etc. if any modification is required by you in our General Arrangement Drawing it is advisable to hold on construction till the revised General Arrangement Drawing is approved by you.Within six weeks from the date of receipt of all the site details, the same should be returned to us within two weeks from the date of submission, duly approved by you. We reserve the rights to charge extra for subsequent GAD revisions if full site particulars are not made available to us at the time of placing of the order (or) any modification is desired regarding the building structure resulting in revision of GADs.We shall deliver the materials for each Elevator by the end of 6 months from the date of receipt of approved General Arrangement Drawing and shall complete the installation thereafter by the end of 2 months provided the lift shall including power supply as per our requirements is made ready for us to commence installations at the time of delivery of materials.We shall commence the installation after the materials arrive at the job site and upon intimation from you that the site is ready as per the approved General Arrangement Drawing. If the site is not ready for taking up installation when the materials arrive at the job site, we shall depute an installation team on hearing from you that the site, is ready in all respects as required by us." 12. On a careful study of the aforestated clause in the Delivery Schedule, it is clear that the customer was required to do the actual work at site for installation of lift. On reading the above clause, it may be observed that the entire onus of preparation and making ready of the site for installation of lift was on the customer. It was agreed that under no circumstances, the assessee shall undertake installation of lift if the site is not kept ready by the customer. Under Clause 4(g) of the Customers Contractual Obligations", the assessee reserved the right to charge the customer for delays in providing the required facilities. These facts clearly indicate that the assessee divided the execution of the contract into two parts, namely, the work to be initially done in accordance with the specifications laid down by the assessee and the supply of lift by the assessee. The work part in the contract was assigned to the customer and the supply part was assigned to the assessee This supply part included installation of lift. Therefore, contractual obligation of the assessee was only to supply and install the lift, while the customers obligation was to undertake the word connected in keeping the site ready for installation as per the drawings. 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, indicate 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 for 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]5. It can be treated as well settled that there is no standard formula by which one can distinguish a contract for sale from a works-contract. The question is largely one of fact depending upon the terms of the contract including the nature of the obligations to be discharged thereunder and the surrounding circumstances. If the intention is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a contract of sale, the main object is the transfer of property and delivery of possession of the property, whereas the main object in a contract for work is not the transfer of the property but it is one for work and labour. Another test often to be applied to is: when and how the property of the dealer in such a transaction passes to the customer; is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a sale, if it is the latter, it is a works-contract. Therefore, in judging whether the contract is for a sale or for work and labour, the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The pre-dominant object of the contract, the circumstances of the case and the custom of the trade provides a guide in deciding whether transaction is a sale or a works-contract. Essentially, the question is of interpretation of the contract. 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 the case of Hindustan Shipyard Ltd. vs. State of Andhra Pradesh reported in (2001) 119 STC 533), this Court held that if the during to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. If the bulk of material used in construction belongs to the manufacture who sells the end-product for a price, then it is a strong pointer to the conclusion that the contract is in substance one for the sale of goods and not one for labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, still and labour of the payee which also has to be seen. If the major component of the end-product is the material consumed in producing the chattel to be delivered and skill and labour are employed for converting the main components into the end-products, the skill and labour are only incidentally used, the delivery of the end-product by the seller to the buyer would constitute a sale. On the other hand, if the main object of the contract is to avail the skill and labour of the seller though some material or components may be incidentally used during the process of the end-product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour.10. Applying the above tests, we may now proceed to notice the relevant recitals of the contracts in questions. Under the price schedule the assessee agreed to supply and install a Kone Elevator for Rs. 3,30,000/-. It was agreed that the customer shall approve the drawings and shall make machine room Hoistway and the Lift Shaft including power supply for the assessee to commence installation at the time of the delivery of the lift. The contractual obligations of the assessee regarding installation included employing labour to complete the mechanical erection, electrical wiring testing and commissioning of the lift. The assessee agreed that it shall commence installation only after the lifts arrived at the site and upon intimation from the customer that the site was ready as per the drawings. As soon as the lift stood installed, the customer was to take over. It was further agreed that any material supplied by the assessee shall remain their property till the lift was handed over to the customer. The contract in question consisted of certain obligations on the part of the customers under the heading Customers Contractual Obligations. Under this clause, the customer was obliged to undertake the work of civilOn a careful study of the aforestated clause in the Delivery Schedule, it is clear that the customer was required to do the actual work at site for installation of lift. On reading the above clause, it may be observed that the entire onus of preparation and making ready of the site for installation of lift was on the customer. It was agreed that under no circumstances, the assessee shall undertake installation of lift if the site is not kept ready by the customer. Under Clause 4(g) of the Customers Contractual Obligations", the assessee reserved the right to charge the customer for delays in providing the required facilities. These facts clearly indicate that the assessee divided the execution of the contract into two parts, namely, the work to be initially done in accordance with the specifications laid down by the assessee and the supply of lift by the assessee. The work part in the contract was assigned to the customer and the supply part was assigned to the assessee This supply part included installation of lift. Therefore, contractual obligation of the assessee was only to supply and install the lift, while the customers obligation was to undertake the word connected in keeping the site ready for installation as per the drawings. 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, indicate 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 for 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.