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

2. M/s. Kone Elevators (India) Ltd. (hereinafter referred to as the assessee) is a unit of M/s. Kone Corporation, Finland who are one of the pioneers in the manufacture of Hi-tech New Generation Elevators in the words. M/s. Kone Corporation, Finland has its operations spread over 37 countries in the world. The assessee herein is a registered dealer falling in the jurisdiction of the Commercial Tax Officer, R.P. Road Circle, Secunderabad, having its head office at 50, Vanagaram Road, Aynambakkam, Madras, with branches at Vijaywada and Vizag. The assessee filed monthly returns in form A-2 for the months of April and May, 1995. It was assessed by the said Commercial Tax Officer provisionally for the period 1.4.1995 to 31.5.1995 and for the period from 1.6.1995 to 31.7.1995 under the Andhra Pradesh General Sales Tax Act, 1957 (hereinafter referred to for the sake of brevity as the 1957 Act). The said two provisional assessments were made by the Commercial Tax Officer vide orders dated 19.8.1995 and 5.9.1995 respectively. The assessee claimed deductions of labour charges for composition of tax under section 5G read with section 5F of the said Act saying that nature of the work undertaken by it constituted works-contract involving manufacture, supply, installation and commissioning of elevators and lifts. The assessing authority however did not allow the deduction sought for and passed the provisional assessment orders giving rise to two appeals against the said assessment orders. By judgment and order dated 9.10.1995, the Deputy Commissioner, Secunderabad Division Bench, Hyderabad in turn dismissed the appeals filed by the assessee and thereby confirmed the aforestated assessment orders. Both the lower authorities treated the disputed turnover of the assessee as falling under Entry 82 of the First Schedule to the said 1957 Act, which was objected to by the assessee by filing two separate appeals bearing T.A. Nos. 676 and 677 of 1995 before the Sales Tax Appellate Tribunal, Hyderabad. The point that arose before the Tribunal in the aforestated two appeals, heard and disposed of jointly, was - whether the transactions related to work-contract or to sale of lifts. By judgment and order dated 22.12.1995, the said appeals bearing T.A. Nos. 676 and 677 of 1995 were allowed in favour of the assessee setting aside the impugned orders of the lower authorities by holding that the disputed turnover related to the manufacture, supply, fabrication and erection involved in the works-contract and that the said transaction did not amount to a contract of sale. The original assessing authority was accordingly directed to allow the deduction of labour charges and to complete the assessment under section 5G read with section 5F of the 1957 Act, as amended, without treating it under Entry 82 of the first schedule to the Act. Aggrieved by the decision of the Tribunal dated 22.12.1995, the department preferred Tax Revision Case No. 129 of 1999 under section 22(1) of the 1957 Act, to the High Court. By impugned judgment and order dated 2.7.1999, the Tax Revision Case filed by the department was dismissed. Hence, this civil appeal.

Reasoning: 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.